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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 SEPTEMBER 30, 2000
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 October 31, 2000, there were 24,513,631 and 39,350,000 shares of the
Registrant's Class A and Class B Common Stock outstanding, respectively.
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2
DIGEX, INCORPORATED
INDEX
PAGE
NO.
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations --
Three and nine months ended September 30, 2000 and
1999...................................................... 1
Condensed Consolidated Balance Sheets --
September 30, 2000 and December 31, 1999................ 2
Condensed Consolidated Statements of Cash Flows --
Nine months ended September 30, 2000 and 1999........... 3
Notes to Condensed Consolidated Financial Statements........ 4
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 19
ITEM 2. Changes in Securities and Use of Proceeds................... 19
ITEM 3. Defaults Upon Senior Securities............................. 19
ITEM 4. Submission of Matters to a Vote of Security Holders......... 19
ITEM 5. Other Information........................................... 19
ITEM 6. Exhibits and Reports on Form 8-K............................ 20
SIGNATURES............................................................ 21
3
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGEX, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenues.................................. $ 46,531 $ 16,111 $ 116,727 $ 38,132
Costs and expenses:
Cost of operations...................... 4,237 2,698 17,275 7,044
Cost of services........................ 21,256 6,331 49,480 13,761
Selling, general and administrative..... 38,880 20,119 101,872 46,846
Deferred compensation................... 1,087 509 3,077 509
Depreciation and amortization........... 21,883 8,146 52,435 18,112
----------- ----------- ----------- -----------
Total costs and expenses.................. 87,343 37,803 224,139 86,272
----------- ----------- ----------- -----------
Loss from operations...................... (40,812) (21,692) (107,412) (48,140)
Other income (expense):
Interest expense........................ (523) (373) (1,395) (612)
Interest and other income............... 2,838 1,293 10,239 1,293
Merger-related expenses................. (2,708) -- (2,708) --
----------- ----------- ----------- -----------
Total Interest and other income......... 130 1,293 7,531 1,293
----------- ----------- ----------- -----------
Net loss before income tax benefit........ (41,205) (20,772) (101,276) (47,459)
Income tax benefit........................ -- -- -- 4,839
----------- ----------- ----------- -----------
Net loss.................................. $ (41,205) $ (20,772) $ (101,276) $ (42,620)
=========== =========== =========== ===========
Net loss per common share -- basic and
diluted................................. $ (0.65) $ (0.36) $ (1.60) $ (0.81)
=========== =========== =========== ===========
Shares used in computing basic and diluted
net loss per share...................... 63,616,765 57,250,000 63,248,403 52,443,223
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
1
4
DIGEX, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 142,732 $ 88,778
Restricted investments.................................... 2,000 --
Accounts receivable, net of allowance of $3,586 and $4,362
in 2000 and 1999, respectively......................... 32,569 17,271
Due from Intermedia....................................... -- 3,110
Prepaid expenses and other current assets................. 9,072 1,496
--------- ---------
Total current assets.............................. 186,373 110,655
--------- ---------
Property and equipment, net................................. 326,783 205,903
Intangible assets, net...................................... 24,220 27,213
Other assets................................................ 1,184 538
--------- ---------
Total assets...................................... $ 538,560 $ 344,309
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 49,837 $ 33,619
Deferred revenue.......................................... -- 222
Due to Intermedia......................................... 326 --
Current portion of note payable........................... 2,730 1,235
Current portion of capital lease obligations.............. 1,694 801
--------- ---------
Total current liabilities......................... 54,587 35,877
Note payable................................................ 1,405 2,477
Capital lease obligations................................... 27,204 15,766
--------- ---------
Total liabilities................................. 83,196 54,120
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; 100,000 designated as Series A Convertible;
100,000 shares issued and outstanding in 2000.......... 1 --
Class A common stock, $.01 par value; 100,000,000 shares
authorized; 24,492,510 and 11,500,000 shares issued and
outstanding in 2000 and 1999, respectively............. 245 115
Class B common stock, $.01 par value; 50,000,000 shares
authorized; 39,350,000 and 50,000,000 shares issued and
outstanding in 2000 and 1999, respectively............. 393 500
Additional paid-in capital................................ 620,593 354,553
Accumulated deficit....................................... (154,044) (52,768)
Deferred compensation..................................... (11,824) (12,211)
--------- ---------
Total stockholders' equity........................ 455,364 290,189
--------- ---------
Total liabilities and stockholders' equity........ $ 538,560 $ 344,309
========= =========
See accompanying notes to condensed consolidated financial statements.
2
5
DIGEX, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
OPERATING ACTIVITIES:
Net loss.................................................. $(101,276) $ (42,620)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization.......................... 52,434 18,112
Provision for doubtful accounts........................ 4,739 3,918
Amortization of deferred compensation.................. 3,113 509
Loss on sale/disposals of telecommunications
equipment............................................. 732 94
Deferred income taxes.................................. -- (4,839)
Accretion of interest on note payable and capital lease
obligations........................................... 395 --
Changes in operating assets and liabilities:
Accounts receivable.................................... (20,070) (12,115)
Prepaid expenses and other current assets.............. (7,576) (340)
Other assets........................................... (646) (19)
Accounts payable, accrued expenses and other
liabilities........................................... 16,374 8,228
Due from Intermedia.................................... 3,439 947
Deferred revenue....................................... (222) --
--------- ---------
Net cash used in operating activities..................... (48,564) (28,125)
INVESTING ACTIVITIES:
Purchases of property and equipment....................... (156,707) (119,426)
Purchase of restricted investments........................ (2,000) --
--------- ---------
Net cash used in investing activities..................... (158,707) (119,426)
FINANCING ACTIVITIES:
Proceeds from subsequent public offering, net of costs.... 171,645 --
Proceeds from issuance of preferred stock................. 85,000 --
Proceeds from exercise of common stock options............ 5,244 --
Principal payments on long-term note payable and capital
leases................................................. (664) (1,273)
Proceeds from initial public offering, net of costs....... -- 179,244
Net contributions from Intermedia......................... -- 102,424
--------- ---------
Net cash provided by financing activities................. 261,225 280,395
Net increase in cash and cash equivalents................. 53,954 132,844
Cash and cash equivalents at beginning of the period...... 88,778 --
--------- ---------
Cash and cash equivalents at end of period................ $ 142,732 $ 132,844
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Assets purchased under capital lease obligations.......... $ 12,857 $ 17,111
Assets purchased by issuance of note payable.............. -- 4,672
Interest Paid............................................. 1,315 528
See accompanying notes to condensed consolidated financial statements.
3
6
DIGEX, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Digex, Incorporated ("Digex") was incorporated on April 26, 1999, under the
laws of the State of Delaware. Digex's business was operated as the Web site
hosting unit of Intermedia Communications Inc. ("Intermedia") since its
acquisition by Intermedia on July 7, 1997. On that date, Intermedia acquired
Business Internet, Inc. (previously known as DIGEX, Incorporated), including the
Web site hosting unit (the "Predecessor"), in a business combination accounted
for as a purchase. The Web site hosting unit presented in the accompanying
financial statements had no legal status or existence prior to the incorporation
of Digex on April 26, 1999. Prior to April 30, 1999, the Registrant had no
assets or liabilities.
Digex's operations began in January 1996 to provide managed Web hosting
services, principally to Fortune 2000 companies. Digex's services include
implementing and maintaining secure, scalable, high-performance Web sites on the
Internet 24 hours a day. In addition, Digex provides a comprehensive suite of
Web management services, including business process solutions and value-added
testing services directed toward improving its customers' overall Internet
performance.
On July 11, 2000, Intermedia announced that it is exploring strategic
alternatives with regard to Digex, including, without limitation, the possible
sale of its ownership position in Digex. On September 1, 2000, Intermedia
entered into a merger agreement with WorldCom, Inc. ("WorldCom") whereby, upon
consummation of the merger, a subsidiary of WorldCom will be merged with and
into Intermedia and Intermedia will become a subsidiary of WorldCom. As a result
of the merger, WorldCom will beneficially own a majority of the capital stock of
Digex and will have voting control of Digex. The merger is expected to be
consummated in the first half of 2001.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated interim financial statements have
been prepared by Digex, 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 condensed
consolidated interim financial statements should be read in conjunction with the
financial statements, notes thereto and other information included in the Form
10-K of Digex for the year ended December 31, 1999. Certain prior period amounts
have been reclassified to conform to the current period presentation.
The accompanying unaudited condensed consolidated interim financial
statements include the accounts of Digex and its wholly-owned European
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying unaudited condensed consolidated interim 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.
4
7
DIGEX, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The financial statements for periods prior to April 30, 1999 represent the
carved-out operations of the managed Web and application hosting unit of
Intermedia. Digex's accumulated deficit of $154.0 million arose after April 30,
1999. Accumulated losses and capital contributions from Intermedia were included
in owner's net investment prior to April 30, 1999 and were transferred to
additional paid-in capital upon the capitalization of Digex. Intermedia
contributed approximately $115.1 million in assets and certain liabilities on
April 30, 1999. Intermedia also contributed additional capital of $48.1 million
to Digex beginning May 1 through August 4, 1999, principally by way of
contributions of telecommunications assets. These contributions were accounted
for at Intermedia's underlying book values on the date of contribution.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. On June 26, 2000, the SEC deferred
the effective date of SAB 101 to require adoption of SAB 101 by the fourth
quarter of the first fiscal year beginning after December 15, 1999. On October
12, 2000, the SEC released its Frequently Asked Questions and Answers ("Q&A")
document to serve as additional guidance for revenue recognition in financial
statements. Digex is currently analyzing the Q&A document and determining the
impact of SAB 101 on its various revenue recognition policies, including those
pertaining to non-refundable installation fees which Digex currently recognizes
as revenue upon completion of service.
Based upon the expected implementation of SAB 101, Digex does not
anticipate a material effect on its consolidated financial statements. Digex has
preliminarily determined that it will record a decrease of approximately $6.0 to
$8.0 million in revenue and an increase in deferred revenue during the fourth
quarter as a result of the implementation. Digex also expects a decrease in
costs of approximately $6.0 to $8.0 million during the fourth quarter and an
increase in deferred costs as a result of the implementation. Digex will
recognize the deferred revenue and deferred costs over the remaining term of the
applicable agreements in 2001 and 2002. With the adoption of SAB 101, Digex does
not expect there to be any economic impact to its business operations or cash
flows.
In June 2000, the Financial Accounting Standards Board ("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. Digex anticipates that the adoption of SFAS No.
133, as amended, will not have a significant effect on its consolidated
financial statements.
4. STOCKHOLDERS' EQUITY
On January 12, 2000, Digex sold 100,000 shares of its preferred stock,
designated as Series A Convertible Preferred Stock (the "Preferred Stock"), with
detachable warrants to purchase 1,065,000 shares of its Class A Common Stock
(the "Warrants"), for an aggregate of $100.0 million, of which $15.0 million was
in the form of equipment purchase credits. Of the $15.0 million of equipment
purchase credits, approximately $1.5 million was used for equipment purchases in
the second quarter of 2000. The remaining credit of $13.5 million is netted
against equity as of September 30, 2000. The Preferred Stock has an aggregate
liquidation preference of $100.0 million, and is convertible into approximately
1,462,000 shares of Class A Common Stock. The Warrants can be exercised at any
time over their three-year term at a price of $57.00 per share (the fair value
of Digex's Class A Common Stock on the transaction commitment date). The
proceeds from the offering were allocated between the Preferred Stock and the
Warrants based upon their relative fair values.
5
8
DIGEX, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
On February 16, 2000, Digex completed a public offering of 12,650,000
shares of Class A Common Stock. Digex sold 2,000,000 shares of Class A Common
Stock and received net proceeds of approximately $171.6 million. Intermedia sold
10,650,000 shares of Class B Common Stock. The Class B Common Stock sold by
Intermedia automatically converted into Class A Common Stock at the closing of
the offering. Each share of Class B Common Stock is entitled to 10 votes while
each share of Class A Common Stock is entitled to one vote. As a result, while
Intermedia owns approximately 61.6% of Digex's equity interests, it controls
approximately 94.1% of Digex's voting interest as of September 30, 2000.
5. DEFERRED COMPENSATION
Since July 29, 1999, Digex granted options to purchase 1,288,125 shares
(net of 154,375 forfeited options) of Class A Common Stock under the Digex
Long-Term Incentive Plan to certain employees of Digex at exercise prices below
market value. During the nine months ended September 30, 2000, Digex recorded
$2.7 million of deferred compensation (net of forfeitures), a separate component
of stockholders' equity, to be expensed over the four-year vesting period of the
options. Deferred compensation was reduced by $0.7 million in the third quarter
of 2000 for forfeited stock options. There were no additional grants of options
at exercise prices below market value in the third quarter. Deferred
compensation expense of approximately $1.1 million and $3.1 million was expensed
during the three and nine months ended September 30, 2000, respectively.
6. LOSS PER SHARE
The following table presents the computation of basic and diluted loss per
share of common stock:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net loss, as reported..................... $ (41,205) $ (20,772) $ (101,276) $ (42,620)
=========== =========== =========== ===========
Weighted average number of common
shares.................................. 63,616,765 57,250,000 63,248,403 52,443,223
=========== =========== =========== ===========
Loss per share:
Basic................................... $ (0.65) $ (0.36) $ (1.60) $ (0.81)
=========== =========== =========== ===========
Diluted................................. $ (0.65) $ (0.36) $ (1.60) $ (0.81)
=========== =========== =========== ===========
Convertible securities were excluded in the computation of diluted loss per
share because assumed exercise or conversion would be anti-dilutive.
7. COMMITMENTS
On June 29, 2000, Digex entered into a ten-year lease commencing in
September 2000 for its new corporate headquarters facility in Laurel, Maryland.
The lease agreement requires an initial security deposit of $2.0 million in the
form of a letter of credit. This letter of credit may be reduced at the
commencement of the seventh lease year to an amount equal to the then current
one month's base rent if certain conditions are met annually prior to the
seventh year of the lease. Property and equipment include the present value of
the capital lease which is amortized over the term of the lease.
6
9
DIGEX, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
8. RELATED PARTY AGREEMENTS
On April 30, 1999, Digex entered into a General and Administrative Services
Agreement (the "G&A Agreement") with Intermedia. Under the terms of the G&A
Agreement, as amended to date, Intermedia provides Digex with back office and
administrative services such as human resources, finance and accounting, tax
services, investor relations, and information management services. The initial
term of the agreement is two years, and the charge for these services was $3.0
million and $13.0 million for the three and nine months ended September 30,
2000, respectively.
Digex also entered into three two-year Network Services Agreements with
Intermedia. Under the terms of these agreements, Intermedia provides Digex with
east and west coast Internet transit, Internet access and managed firewall
services. The charges for these services amounted to $1.5 million and $5.0
million for the three and nine months ended September 30, 2000, respectively.
On June 1, 2000, Digex entered into an Asset Migration Agreement with
Intermedia. Under the terms of the agreement, Digex purchased certain assets,
including certain licensed third-party software, machinery, and equipment from
Intermedia at cost to provide independent managed firewall services. In
connection with the purchase of firewall-related assets from Intermedia, the
Managed Firewall Services Agreement between Digex and Intermedia was terminated.
Digex paid a purchase price of $4.5 million for the net book value of these
assets and services on June 30, 2000, the closing date of the agreement. Under
the Asset Migration Agreement, Digex will also be making equal monthly
installments amounting to $0.9 million for Intermedia's support and consultation
for the six month period ending on December 31, 2000. The charges for these
services amounted to $0.5 million for the three and nine months ended September
30, 2000.
Digex entered into three agreements with Intermedia to sell to Intermedia
certain telecommunications related assets that are purchased by Digex with the
net proceeds of certain offerings of Digex securities. The assets are sold to
Intermedia at Digex's cost. The proceeds from the sale of telecommunications
related assets to Intermedia were approximately $5.0 million and $40.5 million
during the three and nine months ended September 30, 2000, respectively. These
proceeds were unrestricted and were used to fund Digex's operating expenses.
9. CONTINGENCIES
The following 10 purported class actions were filed against Intermedia,
Digex, the directors of Digex, and, in some cases, WorldCom, in the Court of
Chancery of the State of Delaware in and for New Castle County:
- Xxxxxxx Xxxxxx v. Intermedia et al., on September 5, 2000;
- Xxxxxx X. Xxx v. Intermedia et al., on September 5, 2000;
- Taam Associates v. Intermedia et al., on September 6, 2000;
- Xxxxx Xxxxxxxxxx v. Intermedia et al., on September 12, 2000;
- Xxxx X. Xxxxxx v. Intermedia et al., on September 11, 2000;
- Xxxxxx Xxxxxxx v. Intermedia et al., on September 14, 2000;
- Xxxxx Xxxxxx v. Digex et al., on September 8, 2000;
- Xxxxxxx Xxxxxxx v. Digex et al., on September 13, 2000;
- TCW Technology Limited Partnership v. Intermedia et al., on September 20,
2000, which is also a purported derivative suit, as described below; and
7
10
DIGEX, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
- Kansas Public Employee Retirement System (KPER) v. Intermedia et al., on
October 4, 2000, which is also a purported derivative suit as described
below.
These actions purported to be class actions brought on behalf of all
persons, other than the defendants, who own the common stock of Digex, against
Intermedia, Digex, the directors of Digex who are also directors or executive
officers of Intermedia, and in the case of the first six actions listed,
WorldCom and the independent directors of Digex.
Each of the foregoing complaints made substantially similar allegations
that the defendants, other than WorldCom, breached their fiduciary duties to the
class members by acting to further their own interests at the expense of Digex
public stockholders, engaged in self-dealing with and did not act in good faith
towards the Digex public stockholders, and caused irreparable harm to such
stockholders. In addition, in Xxxxxx x. Digex et al., KPER v. Intermedia et al.,
Kalabsa v. Digex et al. and TCW Technology v. Intermedia et al., the plaintiffs
alleged that the Digex board members who are also directors or executive
officers of Intermedia conferred a substantial benefit on Intermedia at the
expense of the Digex public stockholders by voting to waive application of
section 203 of the Delaware General Corporation Law to WorldCom. The foregoing
actions, except for Xxxxxx x. Digex et al., KPER v. Intermedia et al., Kalabsa
v. Digex et al. and TCW Technology v. Intermedia et al., also alleged that
WorldCom aided and abetted Intermedia's and Digex's wrongdoing. The complaints
sought injunctive relief and unspecified damages, including orders:
- preliminarily and permanently enjoining the defendants and all persons
acting in concert with them, from proceeding with, consummating or
closing the contemplated transactions;
- in the event the contemplated transaction is consummated, rescinding it
and setting it aside or awarding rescissory damages to the class members;
- directing the defendants to account to the class members for their
damages sustained as a result of the wrongs complained of;
- awarding the plaintiffs the costs of the actions, including reasonable
allowances for attorneys' and experts' fees; and
- in the case of Xxxxxx x. Digex et al., KPER v. Intermedia et al., Kalabsa
v. Digex et al., and TCW Technology v. Intermedia et al., enjoining the
waiver by the Digex board of directors of section 203 of the Delaware
General Corporation Law's application to WorldCom.
Additionally the following five actions were filed against the directors of
Digex, Intermedia, as the majority stockholder of Digex common stock, and Digex,
as a nominal defendant, in the Court of Chancery of the State of Delaware in and
for New Castle County:
- Xxxxx X. Xxxxxxxxx et al. x. Xxxxxx et al., on September 7, 2000;
- Crandon Capital Partners x. Xxxxxx et al., on September 12, 2000;
- TCW Technology v. Intermedia et al., which was also a purported class
action complaint as described above;
- Sinha x. Xxxxxx et al., on October 4, 2000; and
- KPER v. Intermedia et al., which was also a purported class action
complaint as described above.
These actions purported to be stockholder derivative actions brought on
behalf of Digex. Each of these complaints made substantially similar allegations
that Intermedia breached its fiduciary duties to Digex by usurping an alleged
Digex corporate opportunity for itself, and the Digex directors breached their
fiduciary duty of loyalty to Digex by permitting Intermedia to usurp Digex's
alleged corporate opportunity and
8
11
DIGEX, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
approving the merger. The complaints sought injunctive relief and unspecified
damages, including orders substantially similar to those sought in the purported
class actions described above.
The Court established a schedule to conduct expedited discovery and a
hearing on the preliminary injunctions sought in TCW Technology v. Intermedia et
al. case scheduled for November 29, 2000. The defendants intend to defend
vigorously these actions.
Thereafter, on October 17, 2000, the Court ordered all thirteen purported
derivative and class action lawsuits listed above to be consolidated into a
single action to proceed according to the schedule set for TCW Technology v.
Intermedia, et al. Accordingly, on October 19, 2000, all of the above listed
plaintiffs filed a "Consolidated Class Action and Derivative Complaint." The
claims in the consolidated action are essentially identical to the claims in the
prior thirteen separate actions, except that the consolidated complaint also
alleges that the individual defendants breached fiduciary duties as officers and
directors of Digex by allegedly causing Digex to provide confidential
information to Bear Xxxxxxx with knowledge that the provision of that
information was either contrary to Digex's interests or would not result in any
benefit to Digex. The consolidated action also differs from some of the prior
separate actions insofar as Digex directors Xxxxxxx X. Xxxxxx and Xxxx Xxxxx,
named as defendants in certain of the prior actions, were not named as
defendants in the consolidated action. Following the filing of the consolidated
complaint, plaintiffs also voluntarily dismissed defendant Digex director Xxxx
X. Xxxxx.
9
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes herein, and with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and audited financial statements and related notes included in
Digex's Form 10-K, as filed with the SEC on March 10, 2000.
OVERVIEW
We are a leading provider of managed Web and application hosting services
to businesses operating mission-critical, multi-functional Web sites. In
addition, we provide Web hosting services to the rapidly growing number of
application service providers enabling them to more efficiently deliver their
application services to their customers over the Internet. We provide the
computer hardware, software, network technology, and systems management
necessary to provide our customers comprehensive, managed Web 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 650 customers.
As of September 30, 2000, we managed 3,914 Windows NT and UNIX-based servers in
our state-of-the-art data centers which are strategically positioned on the east
and west coasts of the United States and in Europe. We believe our singular
focus on delivering mission-critical Web and application hosting solutions has
been the major contributor to our growth.
In May 2000, we created European operating entities to support our
international operations and opened our first data center outside of the United
States in Europe. Located in London, our European SmartCenter(SM) gives Digex
customers in Europe the superior level of technology, security, and support
services in Europe they have come to rely on in the United States. The data
center is a leased facility which became operational in July 2000.
We are among the first Web hosting providers to achieve the Statements of
Auditing Standards No. 70 (SAS 70) Type I certification, which focused on our
systems for providing the most reliable and secure environment for conducting on
line transactions to our customers.
On June 1, 2000, we entered into an Asset Migration Agreement with
Intermedia. Under the terms of the agreement, we purchased certain assets,
including certain licensed third-party software, machinery, and equipment from
Intermedia at cost to provide independent managed firewall services. We paid a
purchase price of $4.5 million for net book value of these assets and services
on June 30, 2000, the closing date of the agreement. Under the Asset Migration
Agreement, we will also be making equal monthly installments amounting to $0.9
million for Intermedia's support and consultation for the six month period
ending on December 31, 2000. In connection with the purchase of firewall-related
assets from Intermedia, the Managed Firewall Services Agreement between Digex
and Intermedia was terminated.
On June 29, 2000, we entered into a ten-year lease commencing in September
2000 for our new corporate headquarters facility in Laurel, Maryland. The lease
agreement requires an initial security deposit of $2.0 million in the form of a
letter of credit. This letter of credit may be reduced at the commencement of
the seventh lease year to an amount equal to the then current one month's base
rent if certain conditions are met annually prior to the seventh year of the
lease.
On September 1, 2000, Intermedia entered into a merger agreement with
WorldCom. During the third quarter, we have incurred legal fees, investment
advisory fees, and certain travel expenses associated with due diligence
activities relating to the merger and the possible sale of Digex. Merger-related
costs of $2.7 million were expensed as incurred during the third quarter of 2000
and were included in Interest and Other Income.
In October 2000, we entered into a Prime/Subcontractor Agreement with
WorldCom whereby we have agreed to provide managed hosting services to WorldCom
customers in the United States and in all International locations we presently
serve or in the future for certain service fees. Under the terms of the
agreement, we will provide the computer hardware, software, network technology,
Internet connectivity and systems management necessary to offer WorldCom's
customers comprehensive outsourced Web site and
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application hosting solutions. We expect to generate revenues of at least $6.0
million under the agreement during the fourth quarter of 2000.
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. Revenue earned from the sale of third party
equipment is also included.
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.
Expenses directly attributed to the sale of third party equipment is also
included.
Cost of services consist primarily of facilities administration expenses
including rent, maintenance and utilities to support our data centers and
salaries and related benefits for our technical operations. We expect our cost
of services to increase in dollar amount but to decline as a percentage of
revenue due to economies of scale and expected improvements in technology and
productivity.
Selling, general and administrative expenses consist primarily of salaries
and benefits for our marketing, sales and support personnel, advertising costs,
consultants' fees, provision for doubtful accounts and other miscellaneous
expenses. We expect selling, general and administrative expenses to increase in
dollar amount and to decline as a percentage of revenue over time.
Deferred compensation expense is recorded to amortize the resulting
deferred compensation cost over the four-year vesting period of the options.
Stock options 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. We anticipate that these data centers,
when operating at full capacity, will support servers generating in excess of
$800.0 million in annualized revenue. We believe that the new data centers in
the United States and those we continue to develop in Europe will place us in a
stronger competitive position to successfully provide outsourced solutions of
scalable Web site 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.
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RESULTS OF OPERATIONS
The following table presents certain information derived from our Condensed
Consolidated Statements of Operations for the three and nine months ended
September 30, 2000 and 1999, expressed as a percentage of revenue.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
------- -------- ------- --------
Revenues................................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of operations....................................... 9.1 16.7 14.8 18.4
Cost of services......................................... 45.7 39.3 42.4 36.1
Selling, general and administrative...................... 83.6 124.9 87.3 122.9
Deferred compensation.................................... 2.3 3.1 2.6 1.3
Depreciation and amortization............................ 47.0 50.6 44.9 47.5
----- ------ ----- ------
Total costs and expenses......................... 187.7 234.6 192.0 226.2
----- ------ ----- ------
Loss from operations....................................... (87.7) (134.6) (92.0) (126.2)
Other income (expense):
Interest expense......................................... (1.1) (2.3) (1.2) (1.6)
Interest and other income................................ 0.3 8.0 6.5 3.3
----- ------ ----- ------
Net loss before income tax benefit......................... (88.5) (128.9) (86.7) (124.5)
Income tax benefit......................................... -- -- -- 12.7
----- ------ ----- ------
Net loss................................................... (88.5) (128.9) (86.7) (111.8)
===== ====== ===== ======
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Revenue
Total revenue increased 188.8% to $46.5 million for the third quarter of
2000 compared to $16.1 million for the same period in 1999. The increase in
revenue was due to new customer growth, a significant increase in the number of
managed servers per customer, and a rise of monthly revenue per server. Our
installed base of servers increased 96% to 3,914 at the end of the third quarter
of 2000 from 1,993 at the end of the third quarter of 1999.
Cost of Operations
Cost of operations increased 57.0% to $4.2 million for the third quarter of
2000 compared to $2.7 million for the same period in 1999. The increase was due
to additional network costs resulting from our expanded customer base and
increases in service offerings. As a percentage of revenue, cost of operations
decreased to 9.1% for the third quarter of 2000 compared to 16.7% for the same
period in 1999 due to the net effect of improved network utilization associated
with the revenue improvement.
Cost of Services
Cost of services increased 235.7% to $21.3 million for the third quarter of
2000 compared to $6.3 million for the same period in 1999. The increase was
primarily related to the increased level of operations and 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. As a percentage of revenue, total cost of services
increased to 45.7% for the third quarter of 2000 compared to 39.3% for the same
period in 1999.
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Selling, General and Administrative
Selling, general and administrative expenses increased 93.3% to $38.9
million for the third quarter of 2000 compared to $20.1 million for the same
period in 1999. Through 2000, as part of our growth strategy, we continue to
build up our infrastructure and administrative requirements to operate as a
separate public company. Increases in selling, general and administrative
expenses for 2000 include the costs associated with an increased employee base,
advertising campaigns, back office support (including the G&A Agreement, as
amended, with Intermedia), an increased provision for doubtful accounts
receivable and the addition of key executive management to support the growth of
the business. We expect that our growth strategy will continue to require
significant sales and marketing activities, including an expansion of our sales
force and further development of brand name recognition. In addition, we will
continue to build our personnel base to support our growth strategy in the
managed Web and application hosting industry. As a result, we believe that our
selling, general and administrative expenses will continue to increase in the
future. As a percentage of revenue, total selling, general and administrative
expenses decreased to 83.6% for the third quarter of 2000 compared to 124.9% for
the same period in 1999 due primarily to the significant revenue growth which
decreases the expense as a percentage of revenue.
Deferred Compensation
Deferred compensation expense increased 113.6% to $1.1 million for the
third quarter of 2000 compared to $0.5 million for the same period in 1999. The
increase was due primarily to increases in stock options granted to certain
employees at exercise prices below market value since July 29, 1999. We recorded
approximately $13.5 million of deferred compensation in 1999 and $2.7 million
(net of forfeitures) in the nine months ended September 30, 2000 to be expensed
over a four-year vesting period of the options. Deferred compensation was
reduced by $0.7 million in the third quarter of 2000 for forfeited stock
options. There were no additional grants of options at exercise prices below
market value in the third quarter.
Depreciation and Amortization
Depreciation and amortization expenses increased 168.6% to $21.9 million
for the third quarter of 2000 compared to $8.1 million for the same period in
1999. The increase was principally due to additional servers and other
facilities and equipment placed in service since September 30, 1999. We have
electronics, computer hardware, and computer software with useful lives ranging
from three to five years. As a percentage of revenue, depreciation and
amortization expenses decreased to 47.0% for the third quarter of 2000 compared
to 50.6% for the same period in 1999 due primarily to the significant revenue
growth which decreases the expense as a percentage of revenue. We expect
increases in depreciation charges though 2000 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 40.2% to $0.5 million for the third quarter of
2000 compared to $0.4 million for the same period in 1999. The increase resulted
from the capital leases assigned to us by Intermedia during the second quarter
of 1999 and the capital lease for our new corporate headquarters facility in the
third quarter of 2000. Additionally, a note payable was issued by us to a third
party during the third quarter of 1999.
Interest and Other Income
Interest and other income decreased 89.9% to $0.1 million for the three
months ended September 30, 2000 compared to $1.3 million for the same period in
1999. Expenses associated with due diligence activities relating to the merger
and the possible sale of Digex were included in Interest and Other Income.
Interest and other income excluding merger-related costs, increased 119.5% to
$2.8 million for the nine months ended September 30, 2000 compared to $1.3
million for the same period in 1999. The increase resulted principally from
interest earned on the cash proceeds from the investment in Digex by Microsoft
and a subsidiary of Compaq, an initial and subsequent public equity offering,
and exercised stock options.
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EBITDA
EBITDA, as defined below, increased 36.9% to $(17.8) million in the third
quarter of 2000 compared to $(13.0) million for the same period in 1999. The
change is primarily attributable to costs associated with our growth strategy.
Costs associated with the administration and maintenance of our expanded data
centers and increased selling, general and administrative costs will continue to
represent a large portion of 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 consists of earnings (loss) before interest expense, interest and
other income, merger-related expenses, foreign exchange gains (losses), income
tax benefit, deferred compensation, and depreciation and amortization. EBITDA
does not represent funds available for management's discretionary use and is not
intended to represent cash flow from operations. EBITDA 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 is not a term defined by generally accepted
accounting principles and as a result our measure of EBITDA might not be
comparable to similarly titled measures used by other companies. However, we
believe that EBITDA 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
unaudited condensed consolidated financial statements and notes thereto
contained elsewhere in this report for more detailed information.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenue
Total revenue increased 206.1% to $116.7 million for the nine months ended
September 30, 2000 compared to $38.1 million for the same period in 1999. The
increase in revenue was due to new customer growth, a significant increase in
the number of managed servers per customer, and a rise of monthly revenue per
server. Our installed base of servers increased 96% to 3,914 at the end of the
nine months ended September 30, 2000 from 1,993 at the end of the nine months
ended September 30, 1999. In addition to revenue from managed Web and
application hosting services, Digex recognized $5.0 million of third party
equipment sales revenue in the second quarter of 2000.
Cost of Operations
Cost of operations increased 145.2% to $17.3 million for the nine months
ended September 30, 2000 compared to $7.0 million for the same period in 1999.
The increase was due to additional network costs resulting from our expanded
customer base and increases in service offerings. As a percentage of revenue
excluding second quarter equipment sales, cost of operations excluding the
second quarter cost of third party equipment decreased to 12.0% for the nine
months ended September 30, 2000 compared to 18.4% for the same period in 1999
due to the net effect of improved network utilization associated with the
revenue improvement. Expenses directly attributed to the sale of third party
equipment in the second quarter is included in the cost of operations.
Cost of Services
Cost of services increased 259.6% to $49.5 million for the nine months
ended September 30, 2000 compared to $13.8 million for the same period in 1999.
The increase was primarily related to the increased level of operations and 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
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growth. As a percentage of revenue, total cost of services increased to 42.4%
for the nine months ended September 30, 2000 compared to 36.1% for the same
period in 1999.
Selling, General and Administrative
Selling, general and administrative expenses increased 117.5% to $101.9
million for the nine months ended September 30, 2000 compared to $46.8 million
for the same period in 1999. Through 2000, as part of our growth strategy, we
continue to build up our infrastructure and administrative requirements to
operate as a separate public company. Increases in selling, general and
administrative expenses for 2000 include the costs associated with an increased
employee base, advertising campaigns, back office support (including the G&A
Agreement, as amended, with Intermedia), an increased provision for doubtful
accounts receivable and the addition of key executive management to support the
growth of the business. We expect that our growth strategy will continue to
require significant sales and marketing activities, including an expansion of
our sales force and further development of brand name recognition. In addition,
we will continue to build our personnel base to support our growth strategy in
the managed Web and application hosting industry. As a result, we believe that
our selling, general and administrative expenses will continue to increase in
the future. As a percentage of revenue, total selling, general and
administrative expenses decreased to 87.3% for the nine months ended September
30, 2000 compared to 122.9% for the same period in 1999 due primarily to the
significant revenue growth which decreases the expense as a percentage of
revenue.
Deferred Compensation
Deferred compensation expense increased 504.5% to $3.1 million for the
third quarter of 2000 compared to $0.5 million for the same period in 1999. The
increase was primarily due to increases in stock options granted to certain
employees at exercise prices below market value since July 29, 1999. We recorded
approximately $13.5 million of deferred compensation in 1999 and $2.7 million
(net of forfeitures) in the nine months ended September 30, 2000 to be expensed
over a four-year vesting period of the options. Deferred compensation was
reduced by $0.7 million in the third quarter of 2000 for forfeited stock
options. There were no additional grants of options at exercise prices below
market value in the third quarter.
Depreciation and Amortization
Depreciation and amortization expenses increased 189.5% to $52.4 million
for the nine months ended September 30, 2000 compared to $18.1 million for the
same period in 1999. The increase was principally due to additional servers and
other facilities and equipment placed in service since September 30, 1999. We
have electronics, computer hardware, and computer software with useful lives
ranging from three to five years. As a percentage of revenue, depreciation and
amortization expenses decreased to 44.9% for the nine months ended September 30,
2000 compared to 47.5% for the same period in 1999 due primarily to the
significant revenue growth which decreases the expense as a percentage of
revenue. We expect increases in depreciation charges though 2000 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 127.9% to $1.4 million for the nine months ended
September 30, 2000 compared to $0.6 million for the same period in 1999. The
increase resulted from the capital leases assigned to us by Intermedia during
the second quarter of 1999 and the capital lease for our new corporate
headquarters facility in the third quarter of 2000. Additionally, a note payable
was issued by us to a third party during the third quarter of 1999.
Interest and Other Income
Interest and other income increased 482.4% to $7.5 million for the nine
months ended September 30, 2000 compared to $1.3 million for the same period in
1999. Expenses associated with due diligence activities relating to the merger
and the possible sale of Digex were included in Interest and Other Income.
Interest and
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other income excluding merger-related costs, increased 691.9% to $10.2 million
for the nine months ended September 30, 2000 compared to $1.3 million for the
same period in 1999. The increase resulted principally from interest earned on
the cash proceeds from the investment in Digex by Microsoft and a subsidiary of
Compaq, an initial and subsequent public equity offering, and exercised stock
options.
EBITDA
EBITDA, as defined below, increased 75.9% to $(51.9) million in the nine
months ended September 30, 2000 compared to $(29.5) million for the same period
in 1999. The change is primarily attributable to costs associated with our
growth strategy. Costs associated with the administration and maintenance of our
expanded data centers and increased selling, general and administrative costs
will continue to represent a large portion of 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 consists of earnings (loss) before interest expense, interest and
other income, merger-related expenses, foreign exchange gains (losses), income
tax benefit, deferred compensation, and depreciation and amortization. EBITDA
does not represent funds available for management's discretionary use and is not
intended to represent cash flow from operations. EBITDA 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 is not a term defined by generally accepted
accounting principles and as a result our measure of EBITDA might not be
comparable to similarly titled measures used by other companies. However, we
believe that EBITDA 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
unaudited condensed 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 $48.6 million and $28.1 million
during the nine months ended September 30, 2000 and 1999, 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 nine months ended
September 30, 2000 and 1999 was $158.7 million and $119.4 million, respectively.
Net cash used for investing activities in each of these periods was primarily
the result of capital expenditures for data center infrastructure which includes
servers purchased for customer use, as well as leasehold improvements, furniture
and fixtures, computers, and other equipment, including a $2.0 million letter of
credit pursuant to a ten-year lease entered into by us on June 29, 2000 for our
new corporate headquarters facility in Laurel, Maryland. Although we have plans
to invest significantly in property and equipment, we have no material
commitments for such items at this time.
On January 12, 2000, we sold 100,000 shares of our Preferred Stock and
Warrants to purchase 1,065,000 shares of Class A Common Stock to Microsoft and a
subsidiary of Compaq for aggregate gross proceeds of $100.0 million, of which
$85.0 million was paid in cash and $15.0 million was paid in the form of
equipment credits from Compaq. The Preferred Stock has an aggregate liquidation
preference of $100.0 million and is convertible into approximately 1,462,000
shares of Class A Common Stock. The Warrants can be exercised at any time over
their three-year term at a price of $57.00 per share (the fair value of our
Class A Common Stock on the transaction commitment date). The proceeds from the
offering were allocated between the Preferred Stock and the Warrants based upon
their relative fair values.
To the extent necessary to perform our obligations under our agreement with
Compaq, the proceeds from the investment by a subsidiary of Compaq will be used
toward the development of a platform for the delivery
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of high-performance application hosting services, which will include capital
expenditures and research and development expenditures. Therefore, we do not
expect the proceeds of the investment by a subsidiary of Compaq to be available
for general corporate purposes. We also intend to use the proceeds of the
investment by Microsoft to fund this development project.
On February 16, 2000, Digex completed a public offering of 12,650,000
shares of Class A Common Stock. We sold 2,000,000 shares of Class A Common Stock
and received net proceeds of approximately $171.6 million. Intermedia sold
10,650,000 shares of Class B Common Stock. The Class B Common Stock sold by
Intermedia automatically converted into Class A Common Stock at the closing of
the offering.
The net proceeds of our public offerings and the cash proceeds of the
investments by Microsoft and a subsidiary of Compaq must be used to purchase
telecommunications related assets due to restrictions in Intermedia's debt
instruments. Therefore, to provide for the funding of our operating expenses, we
have made arrangements with Intermedia to sell to Intermedia certain
telecommunications related assets that are purchased by Digex with the net
proceeds of these offerings. The assets are sold to Intermedia for cash at our
cost. For the nine months ended September 30, 2000, we had received
approximately $40.5 million from Intermedia related to the sale of
telecommunications related assets. These proceeds were unrestricted and were
used to fund our operating expenses. Cash payments for capital assets for the
nine months ended September 30, 2000 were approximately $156.7 million.
In June 2000, the Department of Business and Economic Development of
Maryland received approval from the Maryland General Assembly Legislative Policy
Committee to provide $3.0 million in funding to Digex for the development of a
Web hosting facility in Prince George's County, Maryland under the Sunny Day
Fund initiative. The funds will initially be provided to Digex in the form of a
conditional loan which will accrue deferred interest at 5%. If certain
conditions are met, the conditional loan and accrued interest will convert to a
grant. The Committee also approved Digex's eligibility to seek an additional
$1.0 million in such funding.
In accordance with the Digex Long-Term Incentive Plan, stock options
granted to employees of Digex and Intermedia became vested and exercisable
during the second and third quarters of 2000. Cash proceeds of $5.2 million were
received from exercised stock options during the nine months ended September 30,
2000. Digex may continue to receive cash proceeds from stock options in the
future as an increasing number of options will become exercisable according to
each optionee's respective vesting schedule.
On September 1, 2000, Intermedia entered into a merger agreement with
WorldCom whereby, upon consummation of the merger, a subsidiary of WorldCom will
be merged with and into Intermedia and Intermedia will become a subsidiary of
WorldCom. As a result of the merger, WorldCom will beneficially own a majority
of our capital stock and will have voting control of us. The merger is expected
to be consummated in the first half of 2001.
On October 31, 2000, Intermedia increased the commitments available to it
under its Revolving Credit Facility ("Credit Facility") from $100.0 million to
$350.0 million. The Credit Facility is fully guaranteed by WorldCom. As a
subsidiary of Intermedia, we will be a limited guarantor under the Credit
Facility. Through Intermedia, we expect to have access to the proceeds available
under the Credit Facility to fund our operations, working capital needs and
capital expenditures as liquidity needs arise consistent with our projections.
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. Through Intermedia, we expect the
proceeds from these financings will be available to fund our operations, working
capital needs and capital expenditures as liquidity needs arise.
We anticipate we will have significant cash requirements for several years
as we expand our data center capacity, increase servers under management,
increase our employee base, 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
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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. With our existing cash
resources and financing available from Intermedia, and subject to the
limitations discussed under the caption "Market for Registrant's Common Equity
and Related Stockholder Matters -- Use of Proceeds from a Sale of Registered
Securities" on our Form 10-K for the period ended December 31, 1999 as filed
with the SEC on March 10, 2000, we believe we have sufficient capital to sustain
our current operations and capital expenditure plans into mid 2001.
We intend to continue to seek funding from external sources to meet our
cash needs subsequent to that time period. There can be no assurance that such
funding will be available on terms satisfactory to us.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. On June 26, 2000, the SEC deferred
the effective date of SAB 101 to require adoption of SAB 101 by the fourth
quarter of the first fiscal year beginning after December 15, 1999. On October
12, 2000, the SEC released its Frequently Asked Questions and Answers ("Q&A")
document to serve as additional guidance for revenue recognition in financial
statements. We are currently analyzing the Q&A document and determining the
impact of SAB 101 on our various revenue recognition policies, including those
pertaining to non-refundable installation fees which we currently recognize as
revenue upon completion of service.
Based upon the expected implementation of SAB 101, we do not anticipate a
material effect on our consolidated financial statements. We have preliminarily
determined that we will record a decrease of approximately $6.0 to $8.0 million
in revenue and an increase in deferred revenue during the fourth quarter as a
result of the implementation. We also expect a decrease in costs of
approximately $6.0 to $8.0 million during the fourth quarter and an increase in
deferred costs as a result of the implementation. We will recognize the deferred
revenue and deferred costs over the remaining term of the applicable agreements
in 2001 and 2002. With the adoption of SAB 101, we do not expect there to be any
economic impact to our business operations or cash flows.
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. We
anticipate that the adoption of SFAS No. 133, as amended, will not have a
significant effect on our consolidated financial statements.
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, 1999 as filed
with the SEC on March 10, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We expect to continue recognizing revenue from international sales
denominated in foreign currency. As a global concern, we could face exposure to
adverse movements in foreign currency exchange rates on the financial results of
foreign subsidiaries that are translated into U.S. dollars upon consolidation.
These exposures may change over time as business practices evolve and could
affect our financial results. Currently, we do not hedge against any foreign
currency risk and, as a result, could incur gains or losses.
18
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The legal proceedings discussed in Note 9 of the Notes to the Condensed
Consolidated Financial Statements in Part I, Item 1, above, are hereby
incorporated by reference herein. We do not believe that there are any other
pending or threatened legal proceedings that, if adversely determined, would
have a material adverse effect on us.
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.
19
22
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 to 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 to
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 to Digex's
registration statement on Form S-1 (File No. 333-94879)
filed with the SEC on January 18, 2000.
10.1 -- Letter Agreement dated July 31, 2000 between Digex and
Xxxxx X. Xxxxx. (1)
10.2 -- Amended and Restated Guaranty Agreement, dated as of
October 31, 2000, by Digex, as Guarantor, on behalf of
Bank of America, N.A., as Administrative Agent for
Lenders, amending and restating the Guaranty Agreement,
dated as of December 22, 1999, by Digex, as Guarantor, on
behalf of Bank of America N.A., as Administrative Agent
for Lenders.
10.3 -- Amended and Restated Security Agreement, dated as of
October 31, 2000, between Digex, as Debtor, and Bank of
America, N.A., as the Secured Party on behalf of Lenders,
amending and restating the Security Agreement, dated as
of December 22, 1999, between Digex, as Debtor, and Bank
of America, N.A., as the Secured Party on behalf of
Lenders.
10.4 -- Amendment, dated as of October 24, 2000, to the Use of
Proceeds Agreement between Digex and Intermedia, dated as
of January 24, 2000.
27.1 -- Financial Data Schedule (For SEC Use Only).
---------------
(1) Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The following reports on Form 8-K of Digex were filed during the third
quarter of 2000:
Digex filed a Current Report on Form 8-K, dated August 1, 2000,
reporting under Item 5 the issuance of a press release discussing Digex's
second quarter results. Digex also reported under Item 7 the filing of the
press releases as an exhibit to the Form 8-K.
Digex filed a Current Report on Form 8-K, dated September 7, 2000,
reporting under Item 5 the issuance of a press release announcing that a
subsidiary of WorldCom will be merged with and into Intermedia. Digex also
reported under Item 7 the filing of the merger agreement as an exhibit to
the Form 8-K.
Digex filed a Current Report on Form 8-K, dated September 18, 2000,
reporting under Item 5 the complaints that have been filed in connection
with the merger agreement between Intermedia and WorldCom. Digex also
reported under Item 7 the filing of the complaints as exhibits to the Form
8-K.
20
23
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: November 14, 2000
21
24
EXHIBIT 10.1
July 31, 0000
XXXXX XXXXX
Xxx Xxxxx Xxxxx
Xxxxxxxxxx, XX 00000
Dear Lemis:
This is to confirm your promotion to the position of Vice President of
Business Operations, reporting to Xxxx Xxxxx, President & Chief Executive
Officer of Digex, Inc. This position is a regular, full time position located
in our Beltsville campus.
BASE SALARY
Your annual base salary is $160,000 (based on 52 weeks of service). This
position is exempt and is not eligible for overtime. Salaries are reviewed
annually, and increases are granted in accordance with Company policy.
COMPENSATION
You are eligible to participate in Digex's Executive Management Incentive
Compensation Plan. In this position, you are eligible for a bonus of up to
40% of your base salary. At 100% of personal objective achievement and
Executive Corporate Goals achievement your annual potential cash compensation
is $224,000. (based upon base salary plus full bonus compensation)
This incentive is prorated on the base pay received during the current
fiscal calendar year. This incentive opportunity is contingent upon the
achievement of corporate and individual objectives as determined by your
management. This bonus is evaluated and paid on an annual basis.
STOCKS
This position includes an increase in stock options bringing you to a total of
75,000 total shares of DIGX Stock Options, contingent upon approval by the
Compensation Committee of the Board of Directors. The option price of the award
is the market price of Digex, Inc. common stock on the date that the grant
is approved.
Vesting of the award will begin with the approval of the grant and will
continue over a four-year period. 25% of the shares covered by the options
will vest one year following the date of grant. The balance of the shares will
vest in equal quarterly installments over the next three years so long as you
continue to be employed by Digex. Additionally, upon a change in control of
the company, this grant will fully vest one year following such change.
Details were provided in your Grant Agreement upon approval by the Board of
Directors. The option is issued pursuant to the Company's long term
Incentive Plan and will be subject to all the terms and conditionals of that
plan.
25
JULY 31, 2000
XX. XXXXX ALTAN
PAGE 2
BENEFITS
As an employee of Digex you are entitled to all employee benefits: Medical
insurance, medical and prescription drug card, dental insurance, short and
long-term disability, life insurance, 401(k) plan, educational reimbursement,
holidays, sick leave, vacation time, military leave, bereavement leave, voting
time off and jury duty leave. Your medical benefits will be effective the
first day of the month following your start of employment. An outline of these
benefits is attached. Should you have any benefit questions, please contact
Ms. Xxxxx Xxxxx, Benefits Manager, (000)000-0000.
As you know, in the ordinary course of business, pay and benefits plans evolve
as laws, employee, and / or business need change. If, in the future, it
becomes necessary to change any of the benefit or compensation plans currently
in effect, these changes will apply to you as they do to other eligible
employees. Furthermore, while this letter is our commitment to employ you in
the previously mentioned position, it does not constitute a contract for a
specific length of employment.
Kindly acknowledge the accuracy of this letter by signing and dating the
enclosed copy of this letter and returning it, hard copy or fax 000-000-0000 to
Human Resources at your earliest convenience.
If you have any questions or need additional information, please feel free to
call Xxxxx Xxx, Director Employment, at (000) 000-0000 or fax at (240)
000-0000. I wish you success in the continuation of your career with Digex.
Sincerely yours,
/s/ XXXX XXXXX
Xxxx Xxxxx
CEO & President of Digex, Inc.
Encl.
/s/ XXXXX XXXXX 8/01/00
---------------------------- --------------
Accepted: Xxxxx Xxxxx Date:
26
EXHIBIT 10.2
EXHIBIT C-2
AMENDED AND RESTATED GUARANTY
(Limited)
THIS AMENDED AND RESTATED GUARANTY (this "GUARANTY") is executed as of
October 31, 2000, by the undersigned ("GUARANTOR"), for the benefit of BANK OF
AMERICA, N.A., a national banking association (in its capacity as Administrative
Agent for the Lenders).
A. WHEREAS, Intermedia Communications Inc. ("BORROWER"), Bank of America,
N.A., as Administrative Agent (including its permitted successors and assigns in
such capacity, "ADMINISTRATIVE AGENT"), and Lenders now or hereafter party to
the Credit Agreement (including their respective permitted successors and
assigns, "LENDERS") have entered into a Revolving Credit Agreement, dated as of
December 22, 1999 (as amended, modified, supplemented, or restated from time to
time, the "CREDIT AGREEMENT"); and
B. WHEREAS, provisions of the Credit Agreement permit Guarantor to directly
or indirectly receive proceeds of Borrowings made pursuant thereto; and
C. WHEREAS, Guarantor executed a Guaranty in connection with the Credit
Agreement guaranteeing the Guaranteed Debt; and
D. WHEREAS, Guarantor has requested that Lenders amend this Guarantor's
Guaranty to limit the Guaranteed Debt under such Guaranty and Lenders have
consented to such request.
ACCORDINGLY, for adequate and sufficient consideration, the receipt and
adequacy of which are hereby acknowledged, Guarantor guarantees to
Administrative Agent and the Lenders the prompt payment of the Guaranteed Debt
(defined below), as follows:
1. DEFINITIONS. Terms defined in the Credit Agreement have the same
meanings when used, unless otherwise defined, in this Guaranty. As used in this
Guaranty:
BORROWER means Borrower, Borrower as a debtor-in-possession, and
any receiver, trustee, liquidator, conservator, custodian, or similar
party appointed for Borrower or for all or substantially all of
Borrower's assets under any Debtor Relief Law.
CREDIT AGREEMENT is defined in the recitals to this Guaranty.
GUARANTEED DEBT means, collectively, (a) the Obligation and (b)
all present and future costs, attorneys' fees, and expenses reasonably
incurred by Administrative Agent or any Lender to enforce Borrower's,
Guarantor's, or any other obligor's payment of any of the Guaranteed
Debt, including, without limitation (to the extent lawful), all present
and future amounts that would become due but for the operation of
Sections 502 or 506 or any other provision of Title 11 of the United
States Code and all present and future accrued and unpaid interest
(including, without limitation, all post-maturity interest and any
post-petition interest in any proceeding under Debtor Relief Laws to
which Borrower or Guarantor becomes subject).
GUARANTOR is defined in the preamble to this Guaranty.
DIGEX A&R GUARANTY GUARANTY
27
LENDER means, individually, or LENDERS means, collectively, on
any date of determination, the Administrative Agent, the Lead Arranger,
the Syndication Agent, Documentation Agent, Arranging Agents, and the
Lenders.
MAXIMUM GUARANTOR LIABILITY means the greater of either (a)
$90,000,000 less any amounts paid by any Subsidiary of Guarantor under
any Loan Document or (b) the aggregate amount of any loan, advance,
extension of credit, or capital contribution from any Company to
Guarantor or any of Guarantor's Subsidiaries made on or after the date
of this Guaranty, or any investment in Guarantor or any of Guarantor's
Subsidiaries by any Company made on or after the date of this Guaranty,
less (x) any repayment of any such loan, advance, extension of credit,
capital contribution, or investment by Guarantor or any of Guarantor's
Subsidiaries, (y) the amount of all dividends and distributions received
by any Company from Guarantor or any of Guarantor's Subsidiaries, and
(z) any amounts paid by any Subsidiary of Guarantor under any Loan
Document.
SUBORDINATED DEBT means all present and future obligations of
any Company to Guarantor, whether those obligations are (a) direct,
indirect, fixed, contingent, liquidated, unliquidated, joint, several,
or joint and several, (b) due or to become due to Guarantor, (c) held by
or are to be held by Guarantor, (d) created directly or acquired by
assignment or otherwise, or (e) evidenced in writing.
2. GUARANTY. Subject to the limitation in PARAGRAPH 3 below, this
is an absolute, irrevocable, and continuing guaranty, and the circumstance that
at any time or from time to time the Guaranteed Debt may be paid in full does
not affect the obligation of Guarantor with respect to the Guaranteed Debt
incurred after that. This Guaranty remains in effect until the Guaranteed Debt
is fully paid and performed, all commitments to extend any credit under the Loan
Documents have terminated, and all Financial Xxxxxx with any Lender have
expired. Guarantor may not rescind or revoke its obligations with respect to the
Guaranteed Debt. Notwithstanding any contrary provision, and in addition to the
limitations set forth in PARAGRAPH 3 below, it is the intention of Guarantor,
Lenders, and Administrative Agent that the amount of the Guaranteed Debt
guaranteed by Guarantor by this Guaranty shall be, but not in excess of, the
maximum amount permitted by fraudulent conveyance, fraudulent transfer, or
similar Laws applicable to Guarantor. Accordingly, notwithstanding anything to
the contrary contained in this Guaranty or any other agreement or instrument
executed in connection with the payment of any of the Guaranteed Debt, the
amount of the Guaranteed Debt guaranteed by Guarantor by this Guaranty shall be
limited to an aggregate amount equal to the largest amount that would not render
Guarantor's obligations hereunder subject to avoidance under Section 548 of the
United States Bankruptcy Code or any comparable provision of any applicable
state law.
3. LIMITED GUARANTY AND TERMINATION. Notwithstanding anything in
this Guaranty to the contrary, Guarantor's maximum liability to Administrative
Agent and Lenders hereunder with respect to the Guaranteed Debt shall not exceed
the Maximum Guarantor Liability, and in the event of a Default by Borrower in
payment of all or any part of the Guaranteed Debt, Administrative Agent shall
seek no judgment against Guarantor hereunder for payment of any amounts in
excess of the Maximum Guarantor Liability. The Maximum Guarantor Liability shall
not be reduced or affected by any payments, prepayments, releases, or discharges
of any part of the Guaranteed Debt, except to the extent such payments,
prepayments, releases, or discharges result from payments made to Administrative
Agent (for the ratable benefit of the Lenders) by Guarantor hereunder. The
obligations of Guarantor under this Guaranty shall remain in full force and
effect until payment in full of the Guaranteed Debt or the payment in full of
the Maximum Guarantor Liability and termination of all Lenders' commitments or
obligations to make Borrowings under the Credit Agreement. If at any time any
payment of the principal of or interest on any Note or any other amount payable
by any Company or Guarantor under any Loan Document is rescinded or must be
otherwise restored or returned upon
DIGEX A&R GUARANTY GUARANTY
2
28
the insolvency, bankruptcy, or reorganization of such Person, the obligations of
such Person under the Loan Documents with respect to such payment shall be
reinstated as though such payment had been due but not made at such time.
4. CONSIDERATION. Guarantor represents and warrants that its
liability under this Guaranty may reasonably be expected to directly or
indirectly benefit it.
5. CUMULATIVE RIGHTS. If Guarantor becomes liable for any
indebtedness owing by Borrower to Administrative Agent or any Lender, other than
under this Guaranty, that liability may not be in any manner impaired or
affected by this Guaranty. The rights of Administrative Agent or Lenders under
this Guaranty are cumulative of any and all other rights that Administrative
Agent or Lenders may ever have against Guarantor. The exercise by Administrative
Agent or Lenders of any right under this Guaranty or otherwise does not preclude
the concurrent or subsequent exercise of any other right.
6. PAYMENT UPON DEMAND. If a Default exists, Guarantor shall, on
demand and without further notice of dishonor and without any notice having been
given to any Guarantor previous to that demand of either the acceptance by
Administrative Agent or Lenders of this Guaranty or the creation or incurrence
of any Guaranteed Debt, pay the amount of the Guaranteed Debt then due and
payable to Administrative Agent and Lenders, subject to PARAGRAPH 3 above. It is
not necessary for Administrative Agent or Lenders, in order to enforce that
payment by any Guarantor, first or contemporaneously to institute suit or
exhaust remedies against Borrower or others liable on any Guaranteed Debt or to
enforce Rights against any collateral securing any Guaranteed Debt.
7. SUBORDINATION. The Subordinated Debt is expressly subordinated
to the full and final payment of the Guaranteed Debt. Guarantor agrees not to
accept any payment of any Subordinated Debt from any Company if a Default
exists. If Guarantor receives any payment of any Subordinated Debt in violation
of the foregoing, Guarantor shall hold that payment in trust for Administrative
Agent and Lenders and promptly turn it over to Administrative Agent, in the form
received (with any necessary endorsements), to be applied to the Guaranteed
Debt.
8. SUBROGATION AND CONTRIBUTION. Until payment in full of the
Guaranteed Debt, the termination of the Obligation of Lenders to extend credit
under the Loan Documents, and expiration of all Financial Xxxxxx, (a) Guarantor
may not assert, enforce, or otherwise exercise any right of subrogation to any
of the Rights or Liens of Administrative Agent or Lenders or any other
beneficiary against Borrower or any other obligor on the Guaranteed Debt or any
collateral or other security or any right of recourse, reimbursement,
subrogation, contribution, indemnification, or similar right against Borrower or
any other obligor on any Guaranteed Debt or any guarantor of it, (b) Guarantor
defers all of the foregoing rights (whether they arise in equity, under
contract, by statute, under common law, or otherwise), and (c) Guarantor defers
the benefit of, and subordinates any right to participate in, any collateral or
other security given to Administrative Agent or Lenders or any other beneficiary
to secure payment of any Guaranteed Debt.
9. NO RELEASE. Guarantor's obligations under this Guaranty may not
be released, diminished, or affected by the occurrence of any one or more of the
following events: (a) any taking or accepting of any other security or assurance
for any Guaranteed Debt; (b) any release, surrender, exchange, subordination,
impairment, or loss of any collateral securing any Guaranteed Debt; (c) any full
or partial release of the liability of any other obligor on the Obligation,
except for any final release resulting from payment in full of such Obligation;
(d) the modification of, or waiver of compliance with, any terms of any other
Loan Document; (e) the insolvency, bankruptcy, or lack of corporate or
partnership power of any other obligor at any time liable
DIGEX A&R GUARANTY GUARANTY
3
29
for any Guaranteed Debt, whether now existing or occurring in the future; (f)
any renewal, extension, or rearrangement of any Guaranteed Debt or any
adjustment, indulgence, forbearance, or compromise that may be granted or given
by Administrative Agent or any Lender to any other obligor on the Obligation;
(g) any neglect, delay, omission, failure, or refusal of Administrative Agent or
any Lender to take or prosecute any action in connection with the Guaranteed
Debt or to foreclose, take, or prosecute any action in connection with any Loan
Document; (h) any failure of Administrative Agent or any Lender to notify
Guarantor of any renewal, extension, or assignment of any Guaranteed Debt, or
the release of any security or of any other action taken or refrained from being
taken by Administrative Agent or any Lender against Borrower or any new
agreement between Administrative Agent, any Lender, and Borrower; it being
understood that neither Administrative Agent nor any Lender is required to give
Guarantor any notice of any kind under any circumstances whatsoever with respect
to or in connection with any Guaranteed Debt, other than any notice required to
be given to Guarantor by law or elsewhere in this Guaranty; (i) the
unenforceability of any Guaranteed Debt against any other obligor or any
security securing same because it exceeds the amount permitted by Law, the act
of creating it is ultra xxxxx, the officers creating it exceeded their authority
or violated their fiduciary duties in connection with it, or otherwise; or (j)
any payment of the Obligation to Administrative Agent or any Lender is held to
constitute a preference under any Debtor Relief Law or for any other reason
Administrative Agent or any Lender is required to refund that payment or make
payment to someone else (and in each such instance this Guaranty will be
reinstated in an amount equal to that payment).
10. WAIVERS. To the maximum extent lawful, Guarantor waives all
rights by which it might be entitled to require suit on an accrued right of
action in respect of any Guaranteed Debt or require suit against Borrower or
others.
11. LOAN DOCUMENTS. By execution hereof, Guarantor covenants and
agrees that certain representations, warranties, terms, covenants, and
conditions set forth in the Loan Documents are applicable to Guarantor and shall
be imposed upon Guarantor, and Guarantor reaffirms that each such representation
and warranty is true and correct and covenants and agrees to promptly and
properly perform, observe, and comply with each such term, covenant, or
condition. Moreover, Guarantor acknowledges and agrees that this Guaranty is
subject to the offset provisions of the Loan Documents in favor of
Administrative Agent and Lenders. In the event the Credit Agreement shall cease
to remain in effect for any reason whatsoever during any period when any part of
the Guaranteed Debt remains unpaid, the terms, covenants, and agreements
incorporated herein by reference shall nevertheless continue in full force and
effect as obligations of Guarantor under this Guaranty.
12. RELIANCE AND DUTY TO REMAIN INFORMED. Guarantor confirms that it
has executed and delivered this Guaranty after reviewing the terms and
conditions of the Loan Documents and such other information as it has deemed
appropriate in order to make its own credit analysis and decision to execute and
deliver this Guaranty. Guarantor confirms that it has made its own independent
investigation with respect to Borrower's creditworthiness and is not executing
and delivering this Guaranty in reliance on any representation or warranty by
Administrative Agent or any Lender as to that creditworthiness. Guarantor
expressly assumes all responsibilities to remain informed of the financial
condition of Borrower and any circumstances affecting Borrower's ability to
perform under the Loan Documents to which it is a party or any collateral
securing any Guaranteed Debt.
13. NO REDUCTION. The Guaranteed Debt may not be reduced,
discharged, or released because or by reason of any existing or future offset,
claim, or defense (except for the defense of complete and final payment of the
Guaranteed Debt) of Borrower or any other obligor against Administrative Agent
or any Lender or against payment of the Guaranteed Debt, whether that offset,
claim, or defense arises in connection with
DIGEX A&R GUARANTY GUARANTY
4
30
the Guaranteed Debt or otherwise. Those claims and defenses include, without
limitation, failure of consideration, breach of warranty, fraud, bankruptcy,
incapacity/infancy, statute of limitations, lender liability, accord and
satisfaction, usury, forged signatures, mistake, impossibility, frustration of
purpose, and unconscionability.
14. COMMUNICATIONS ACT. Notwithstanding any other provision of this
Guaranty, any action taken or proposed to be taken by Administrative Agent or
any Lender under this Guaranty which would affect the operational, voting, or
other control of Borrower or Guarantor, shall be pursuant to Section 310(d) of
the Communications Act of 1934 (as amended), applicable state Law, and the
applicable rules and regulations thereunder, and, if and to the extent required
thereby, subject to the prior consent of the FCC or any applicable PUC.
15. INSOLVENCY OF GUARANTOR. Should Guarantor become insolvent, or
fail to pay Guarantor's debts generally as they become due, or voluntarily seek,
consent to, or acquiesce in, the benefit or benefits of any Debtor Relief Law
(other than as a creditor or claimant), or become a party to (or be made the
subject of) any proceeding provided for by any Debtor Relief Law (other than as
a creditor or claimant) that could suspend or otherwise adversely affect the
Rights of Administrative Agent or any Lender granted hereunder, then, in any
such event, the Guaranteed Debt shall be, as among Guarantor, Administrative
Agent, and Lenders, a fully matured, due, and payable obligation of Guarantor to
Administrative Agent and Lenders (without regard to whether Borrower is then in
default under the Loan Documents or whether the Obligation, or any part thereof,
is then due and owing by Borrower to any Lender), payable in full by Guarantor
to Lenders upon demand, and the amount thereof so payable shall be the estimated
amount owing in respect of the contingent claim created hereunder.
16. LOAN DOCUMENT. This Guaranty is a Loan Document and is subject
to the applicable provisions of SECTIONS 1 and 13 of the Credit Agreement,
including, without limitation, the provisions relating to GOVERNING LAW,
JURISDICTION, VENUE, SERVICE OF PROCESS, AND WAIVER OF JURY TRIAL, all of which
are incorporated into this Guaranty by reference the same as if set forth in
this Guaranty verbatim.
17. NOTICES. For purposes of SECTION 13.3 of the Credit Agreement,
Guarantor's address and telecopy number are as set forth next to Guarantor's
signature on the signature page hereof.
18. AMENDMENTS, ETC. No amendment, waiver, or discharge to or under
this Guaranty is valid unless it is in writing and is signed by the party
against whom it is sought to be enforced and is otherwise in conformity with the
requirements of SECTION 13.11 of the Credit Agreement.
19. ADMINISTRATIVE AGENT AND LENDERS. Administrative Agent is
Administrative Agent for each Lender under the Credit Agreement. All rights
granted to Administrative Agent under or in connection with this Guaranty are
for each Lender's ratable benefit. Administrative Agent may, without the joinder
of any Lender, exercise any Rights in Administrative Agent's or Lenders' favor
under or in connection with this Guaranty. Administrative Agent's and each
Lender's Rights and obligations vis-a-vis each other may be subject to one or
more separate agreements between those parties. However, Guarantor is not
required to inquire about any such agreement or is subject to any terms of it
unless Guarantor specifically joins it. Therefore, neither Guarantor nor its
successors or assigns is entitled to any benefits or provisions of any such
separate agreement or is entitled to rely upon or raise as a defense any party's
failure or refusal to comply with the provisions of it.
DIGEX A&R GUARANTY GUARANTY
5
31
20. PARTIES. This Guaranty benefits Administrative Agent, Lenders,
and their respective successors and assigns and binds Guarantor and its
successors and assigns. Upon appointment of any successor Administrative Agent
under the Credit Agreement, all of the Rights of Administrative Agent under this
Guaranty automatically vest in that new Administrative Agent as successor
Administrative Agent on behalf of Lenders without any further act, deed,
conveyance, or other formality other than that appointment. The Rights of
Administrative Agent and Lenders under this Guaranty may be transferred with any
assignment of the Guaranteed Debt. The Credit Agreement contains provisions
governing assignments of the Guaranteed Debt and of Rights and obligations under
this Guaranty.
21. RESTATEMENT. The parties hereto agree that this Amended and
Restated Guaranty is intended to, and hereby does, restate, renew, amend,
modify, supercede, and replace the existing Guaranty in its entirety provided,
however that the execution and delivery of this Guaranty and the other Loan
Documents shall not in any circumstances be deemed to have terminated,
extinguished, or discharged the obligations and expenses under the existing
Guaranty other than as set forth herein.
REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE(s) TO FOLLOW.
DIGEX A&R GUARANTY GUARANTY
6
32
EXECUTED as of October 31, 2000.
GUARANTOR: DIGEX, INCORPORATED
Address:
---------------------
By: /s/ XXXXXXX X. XXXXX
---------------------------------
Name: Xxxxxxx X. Xxxxx
--------------------------
Telephone: Title: Chief Financial Officer
--------------------- --------------------------
Facsimile:
---------------------
DIGEX A&R GUARANTY GUARANTY SIGNATURE PAGE
33
EXHIBIT 10.3
AMENDED AND RESTATED SECURITY AGREEMENT
THIS AMENDED AND RESTATED SECURITY AGREEMENT (the "SECURITY
AGREEMENT") is executed as of October 31, 2000, by the undersigned Debtor,
whose address is Xxx Xxxxx Xxxxx, Xxxxxxxxxx, Xxxxxxxx 00000 (whether doing
business in its own name or in one or more of the tradenames listed on ANNEX A
hereto, "DEBTOR"), and BANK OF AMERICA, N.A., a national banking association,
(in its capacity as "Administrative Agent" for the Lenders (hereafter
defined)), as "SECURED PARTY."
A. WHEREAS, Intermedia Communications Inc. ("BORROWER"), Bank of
America, N.A., as Administrative Agent (including its permitted successors and
assigns in such capacity, "ADMINISTRATIVE AGENT"), and Lenders now or
hereafter party to the Credit Agreement (including their respective permitted
successors and assigns, "LENDERS") have entered into a Revolving Credit
Agreement, dated as of December 22, 1999 (as amended, modified, supplemented,
or restated from time to time, the "CREDIT AGREEMENT"); and
B. WHEREAS, Debtor executed a Security Agreement in connection with the
closing of the Credit Agreement which was integral to the transactions
contemplated by the Loan Documents, and the execution and delivery thereof was
a condition precedent to Lenders' continuing obligations to extend credit
under the Loan Documents; and
C. WHEREAS, Debtor has requested that Lenders amend this Debtor's
Security Agreement to limit the Obligation of Debtor and Secured Party has
consented to such request.
NOW THEREFORE, for valuable consideration, the receipt and adequacy
of which are hereby acknowledged, Debtor and Secured Party hereby agree as
follows:
1. REFERENCE TO CREDIT AGREEMENT. The terms, conditions, and
provisions of the Credit Agreement are incorporated herein by reference, the
same as if set forth herein verbatim, which terms, conditions, and provisions
shall continue to be in full force and effect hereunder so long as Lenders are
obligated to lend under the Credit Agreement and thereafter until the
Obligation is paid and performed in full.
2. CERTAIN DEFINITIONS. Unless otherwise defined herein, or the
context hereof otherwise requires, each term defined in either of the Credit
Agreement or in the UCC is used in this Security Agreement with the same
meaning; provided that (a) if the definition given to such term in the Credit
Agreement conflicts with the definition given to such term in the UCC, the
Credit Agreement definition shall control to the extent legally allowable; and
(b) if any definition given to such term in Chapter 9 of the UCC conflicts
with the definition given to such term in any other chapter of the UCC, the
Chapter 9 definition shall prevail. As used herein, the following terms have
the meanings indicated:
COLLATERAL has the meaning set forth in PARAGRAPH 4 hereof.
DIGEX OBLIGATION means the Obligation (as defined below) to
the extent of the greater of either (a) $90,000,000 less any amounts
paid by any Subsidiary of Debtor under any Loan Document, or (b) the
aggregate amount of all loans, advances, extensions of credit, or
capital contributions from any Company to Debtor or any of Debtor's
Subsidiaries on or after the date of this Security Agreement or any
investments in Debtor or any of Debtor's Subsidiaries on or after the
date of this Security Agreement by any Company, less (x) any
repayment of any such loan, advance, extension of credit, or
investment by Debtor or any of Debtor's Subsidiaries, (y) the amount
of all dividends and distributions received by any Company by Debtor
or any of Debtor's Subsidiaries, and (z) any amounts paid by any
Subsidiary of Debtor under any Loan Document.
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FCC LICENSES means all authorizations, licenses, and permits
issued by the FCC to Debtor.
LENDER means, individually, or LENDERS means, collectively,
on any date of determination, the Administrative Agent, the Sole Lead
Arranger and Book Manager, the Syndication Agent, Documentation
Agent, Arranging Agents, and the Lenders.
OBLIGATION means, collectively, (a) the "Obligation" as
defined in the Credit Agreement, and (b) all indebtedness,
liabilities, and obligations of Debtor arising under this Security
Agreement; it being the intention and contemplation of Debtor and
Secured Party that future advances will be made by Secured Party or
one or more Lenders to Borrower for a variety of purposes, that
Debtor may guarantee (or otherwise become directly or contingently
obligated with respect to) the obligations of others to Secured Party
or to one or more Lenders, that from time to time overdrafts of
Borrower's accounts with Secured Party or with other Lenders may
occur, and that Secured Party or one or more Lenders may from time to
time acquire from others obligations of Borrower to such others, and
that payment and repayment of all of the foregoing are intended to
and shall be part of the Obligation secured hereby. The Obligation
shall include, without limitation, future, as well as existing,
advances, indebtedness, liabilities, and obligations owed by Debtor
and Borrower to Secured Party or to any Lender arising under the Loan
Documents or otherwise.
OBLIGOR means any Person obligated with respect to any of
the Collateral, whether as an account debtor, obligor on an
instrument, issuer of securities, or otherwise.
PARTNERSHIP means any partnership issuing a Partnership
Interest except Financial Place Communications Company to the extent
it is not a Subsidiary.
PLEDGED INTERESTS means, collectively, the Partnership
Interests (whether or not a security), and any other Collateral
constituting securities.
PUC CERTIFICATES means all authorizations, licenses, and
permits issued by any state PUC to Debtor.
SECURITY INTEREST means the security interest granted and
the pledge and assignment made under PARAGRAPH 3 hereof.
UCC means the Uniform Commercial Code as enacted in the
State of New York or other applicable jurisdiction, as amended at the
time in question.
3. SECURITY INTEREST. In order to secure the full and complete
payment and performance of the Digex Obligation when due, Debtor hereby grants
to Secured Party a Security Interest in all of Debtor's rights, titles, and
interests in and to the Collateral and pledges, collaterally transfers, and
assigns the Collateral to Secured Party, all upon and subject to the terms and
conditions of this Security Agreement. Such Security Interest is granted and
pledge and assignment are made as security only and shall not subject Secured
Party to, or transfer or in any way affect or modify, any obligation of Debtor
with respect to any of the Collateral or any transaction involving or giving
rise thereto. The grant contained herein is intended to confer upon Secured
Party all rights that a secured creditor may obtain and that may be granted in
the FCC Licenses or PUC Certificates under applicable Law as from time to time
in effect. If the Law is subsequently changed or clarified, or if the FCC's or
PUC's interpretation of existing Law is changed, to permit or further permit
the granting of such security interests in licenses issued by the FCC or PUC,
then Debtor's FCC Licenses and PUC Certificates, whether now held or
hereinafter acquired, shall automatically become subject to the Secured
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Party's Security Interest to the maximum extent permitted by the Law as then
in effect. If the grant, pledge, or collateral transfer or assignment of any
specific item of the Collateral is expressly prohibited by any contract, then
the Security Interest created hereby nonetheless remains effective to the
extent allowed by UCC Section 9-318 or other applicable Law, but is otherwise
limited by that prohibition. Notwithstanding anything to the contrary herein
or in any other Loan Document, the liability of Debtor to the Administrative
Agent and Lenders under any Loan Documents shall not exceed the Digex
Obligation.
4. COLLATERAL. As used herein, the term "COLLATERAL" means the
following items and types of property now owned or in the future acquired by
such Debtor:
(a) All present and future accounts, contract rights,
general intangibles, chattel paper, documents, instruments,
inventory, investment property, equipment, fixtures, other goods,
minerals, and money, wherever located, now owned or hereafter
acquired by Debtor, and any and all present and future Tax refunds of
any kind whatsoever to which Debtor is now or shall hereafter become
entitled.
(b) All rights, titles, and interests of Debtor in and
to all promissory notes and other instruments payable to such Debtor,
now or hereafter existing, including, without limitation, any
inter-company notes listed on ANNEX B (collectively, the "COLLATERAL
NOTES"), all rights, titles, interests, and Liens Debtor may have,
be, or become entitled to under all present and future security
agreements, pledge agreements, deeds of trust, mortgages, guarantees,
or other documents assuring or securing payment of the Collateral
Notes (the "COLLATERAL NOTE SECURITY") in, to, and under all other
loan and collateral documents relating to such instruments.
(c) All present and future rights, titles, interests,
and Liens (but none of the obligations) now owned or hereafter
acquired by Debtor in any partnership or joint venture (except
Financial Place Communications Company to the extent it is not a
Subsidiary), including, without limitation, the partnerships listed
on ANNEX B hereof (collectively, the "PARTNERSHIP INTERESTS").
(d) All present and future rights, titles, interests,
and Liens (but none of the obligations) now owned or hereafter
acquired by Debtor, as lessee or landlord, in and to each lease
covering real property or any interest therein, and equipment or
other personal property or any interest therein (each such lease
herein called an "ASSIGNED LEASE").
(e) All present and future rights, awards, and
judgments to which Debtor is entitled under any Litigation (whether
arising in equity, contract, or tort) now existing or hereafter
arising.
(f) All present and future rights (including, without
limitation, the right to xxx for past, present, or future
infringements), titles, and interests of Debtor in and to all
trademark applications, trademarks, corporate names, company names,
tradenames, business names, fictitious business names, tradestyles,
service marks, logos, other source of business identifiers,
copyrights, designs, rights or licenses to use any trademarks, and
all registrations and recordings thereof, including, without
limitation, such Debtor's trademarks listed on ANNEX B hereto
(collectively, the "TRADEMARKS"), and the goodwill of each business
to which each Trademark relates.
(g) All present and future rights (including, without
limitation, the right to xxx for past, present, and future
infringements), titles, and interests of Debtor in and to all
patents, patent applications, utility models, industrial models,
designs, and any other forms of industrial intellectual property,
including all grants, applications, reissues, continuations, and
divisions with respect thereto
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and any rights to use, manufacture, or sell any patent, including,
without limitation, the patents listed on ANNEX B hereto
(collectively, the "PATENTS").
(h) All Authorizations, licenses, and permits issued by
the FCC or any PUC, to the extent that the grant of a security
interest in any such license or permit does not result in the
forfeiture of, or default under, any such license or permit, and the
right of Debtor to apply to the FCC or PUC for approval of transfers
of licenses issued by the FCC or PUC.
(i) All proceeds of any sale or other disposition of
any Authorization, license, or permit issued by the FCC or any PUC,
whether or not any such license or permit may lawfully be included as
Collateral and whether or not the grant of a security interest in any
such Authorization, license, or permit is otherwise prohibited.
(j) All present and future increases, profits,
combinations, reclassifications, improvements, and products of,
accessions, attachments, and other additions to, tools, parts, and
equipment used in connection with, and substitutes and replacements
for, all or part of the Collateral heretofore described.
(k) All present and future accounts, contract rights,
general intangibles, chattel paper, documents, instruments, cash and
noncash proceeds, and other rights arising from or by virtue of, or
from the voluntary or involuntary sale or other disposition of, or
collections with respect to, or insurance proceeds payable with
respect to, or proceeds payable by virtue of warranty or other claims
against the manufacturer of, or claims against any other Person with
respect to, all or any part of the Collateral heretofore described in
this clause or otherwise.
(l) All present and future security for the payment to
any Company of any of the Collateral heretofore described and goods
which gave or will give rise to any of such Collateral or are
evidenced, identified, or represented therein or thereby.
The description of the Collateral contained in this PARAGRAPH 4 shall not be
deemed to permit any action prohibited by this Security Agreement or by the
terms incorporated in this Security Agreement. Furthermore, notwithstanding
any contrary provision, Debtor agrees that, if, but for the application of
this paragraph, granting a Security Interest in the Collateral would
constitute a fraudulent conveyance under 11 U.S.C. Section 548 or a fraudulent
conveyance or transfer under any state fraudulent conveyance, fraudulent
transfer, or similar Law in effect from time to time (each a "FRAUDULENT
CONVEYANCE"), then the Security Interest remains enforceable to the maximum
extent possible without causing such Security Interest to be a fraudulent
conveyance, and this Security Agreement is automatically amended to carry out
the intent of this paragraph.
5. REPRESENTATIONS AND WARRANTIES. Debtor represents and
warrants to Secured Party that:
(a) Credit Agreement. Certain representations and
warranties in the Credit Agreement are applicable to it or its assets
or operations, and each such representation and warranty is true and
correct.
(b) Binding Obligation. This Security Agreement creates
a legal, valid, and binding Lien in and to the Collateral in favor of
Secured Party and enforceable against Debtor. For Collateral in which
the Security Interest may be perfected by the filing of Financing
Statements, once those Financing Statements have been properly filed
in the jurisdictions described on ANNEX A hereto, the Security
Interest in that Collateral will be fully perfected. Once perfected
and, in the case of investment property or instruments, upon
possession or "control" (within the meaning of Sections 8-
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106 and 9-115 of the UCC) by Secured Party, the Security Interest
will constitute a first-priority Lien on the Collateral, subject only
to Permitted Liens. The creation of the Security Interest does not
require the consent of any Person that has not been obtained.
(c) Location. Debtor's place of business and chief
executive office is where Debtor is entitled to receive notices
hereunder; the present and foreseeable location of Debtor's books and
records concerning any of the Collateral that is accounts is as set
forth on ANNEX A hereto, and the location of all other Collateral,
including, without limitation, Debtor's inventory and equipment, is
as set forth on ANNEX A hereto (but the failure of such description
to be accurate or complete shall not impair the Security Interest in
such Collateral); and, except as noted on ANNEX A hereto, all such
books, records, and Collateral are in Debtor's possession.
(d) Partnerships and Partnership Interests. Each
Partnership issuing a Partnership Interest is duly organized,
currently existing, and in good standing under all applicable Laws;
there have been no amendments, modifications, or supplements to any
agreement or certificate creating any Partnership or any material
contract relating to the Partnerships, of which Secured Party has not
been advised in writing; no default or potential default has occurred
under the terms of any material contract relating to any Partnership;
and no approval or consent of the partners of any Partnership is
required as a condition to the validity and enforceability of the
Security Interest created hereby or the consummation of the
transactions contemplated hereby which has not been duly obtained by
Debtor. Debtor has good title to the Partnership Interests free and
clear of all liens and encumbrances (except for the Security Interest
granted hereby). The Partnership Interests are validly issued, fully
paid, and nonassessable and are not subject to statutory,
contractual, or other restrictions governing their transfer,
ownership, or control, except as set forth in applicable securities
Laws.
(e) Governmental Authority. No authorization, approval,
or other action by, and no notice to or filing with, any Governmental
Authority is required either (i) for the execution, delivery, or
performance of this Security Agreement by Debtor, or (ii) for the
exercise by Secured Party of the voting or other rights provided for
in this Security Agreement or the remedies in respect of the
Collateral pursuant to this Security Agreement (except as may be
required in connection with the transfer of control of FCC Licenses
and PUC Certificates).
(f) Accounts. Except as the same may be incurred in the
ordinary course of business, all Collateral that is accounts,
contract rights, chattel paper, instruments, or general intangibles
is free from any claim for credit, deduction, or allowance of an
Obligor and free from any defense, dispute, setoff, or counterclaim,
and there is no extension or indulgence with respect thereto.
(g) Instruments, Chattel Paper, Collateral Notes, and
Collateral Note Security. All instruments and chattel paper,
including, without limitation, the Collateral Notes, have been
delivered to Secured Party, together with corresponding endorsements
duly executed by Debtor in favor of Secured Party, and such
endorsements have been duly and validly executed and are binding and
enforceable against Debtor in accordance with their terms. Each
Collateral Note and the documents evidencing the Collateral Note
Security are in full force and effect; there have been no renewals or
extensions of, or amendments, modifications, or supplements to, any
thereof about which the Secured Party has not been advised in
writing; and no default or potential default has occurred and is
continuing under any such Collateral Note or documents evidencing the
Collateral Note Security, except as disclosed on ANNEX C hereto and
except those which could not be or result in a Material Adverse
Event.
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(h) Assigned Leases. All Collateral that is an Assigned
Lease is in full force and effect; Debtor is in possession of the
property covered by each such Assigned Lease; and no default or
potential default exists under any such Assigned Lease except those
which could not be or result in a Material Adverse Event.
(i) Maintenance of Collateral. All tangible Collateral
is in good repair and condition, ordinary wear and tear excepted.
(j) Liens. Debtor owns all presently existing
Collateral, and will acquire all hereafter-acquired Collateral, free
and clear of all Liens, except Permitted Liens.
The foregoing representations and warranties will be true and correct in all
respects with respect to any additional Collateral or additional specific
descriptions of certain Collateral delivered to Secured Party in the future by
Debtor.
The failure of any of these representations or warranties to be
accurate and complete does not impair the Security Interest in any Collateral.
6. COVENANTS. So long as Lenders are committed to extend
credit under the Credit Agreement and until the Obligation is paid and
performed in full, Debtor covenants and agrees with Secured Party that Debtor
will:
(a) Credit Agreement. (i) Comply with, perform, and be
bound by all covenants and agreements in the Credit Agreement that
are applicable to it, its assets, or its operations, each of which is
hereby ratified and confirmed (INCLUDING, WITHOUT LIMITATION, THE
INDEMNIFICATION AND RELATED PROVISIONS IN SECTION 11.12 OF THE CREDIT
AGREEMENT); AND (II) CONSENT TO AND APPROVE THE VENUE, SERVICE OF
PROCESS, AND WAIVER OF JURY TRIAL PROVISIONS OF SECTION 13.10 OF THE
CREDIT AGREEMENT.
(b) Record of Collateral. Maintain, at the place where
Debtor is entitled to receive notices under the Loan Documents, a
current record of where all Collateral is located, permit
representatives of Secured Party at any time during normal business
hours to inspect and make abstracts from such records, and furnish to
Secured Party, at such intervals as Secured Party may request, such
documents, lists, descriptions, certificates, and other information
as may be necessary or proper to keep Secured Party informed with
respect to the identity, location, status, condition, and value of
the Collateral.
(c) Perform Obligations. Fully perform all of Debtor's
duties under and in connection with each transaction to which the
Collateral, or any part thereof, relates, so that the amounts thereof
shall actually become payable in their entirety to Secured Party.
(d) Notices. (i) Promptly notify Secured Party of (A)
any material change in any fact or circumstances represented or
warranted by Debtor with respect to any of the Collateral or
Obligation, and (B) any material claim, action, or proceeding
affecting title to all or any of the Collateral or the Security
Interest and, at the request of Secured Party, appear in and defend,
at Debtor's expense, any such action or proceeding; and (ii) give
Secured Party thirty (30) days written notice before any proposed (A)
relocation of its principal place of business or chief executive
office, (B) change of its name, identity, or corporate structure, (C)
relocation of the place where its books and records concerning its
accounts are kept, and (D) relocation of any Collateral (other than
delivery of inventory
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in the ordinary course of business to third party contractors for
processing and sales of inventory in the ordinary course of business
or as permitted by the Credit Agreement) to a location not described
on the attached ANNEX A. Prior to making any of the changes
contemplated in clause (ii) preceding, Secured Party shall execute
and deliver all such additional documents and perform all additional
acts as Secured Party, in its sole discretion, may request in order
to continue or maintain the existence and priority of the Security
Interests in all of the Collateral.
(e) Collateral in Trust. Hold in trust (and not
commingle with other assets of Debtor) for Secured Party all
Collateral that is chattel paper, instruments, Collateral Notes, or
documents at any time received by Debtor, and promptly deliver same
to Secured Party, unless Secured Party at its option (which may be
evidenced only by a writing signed by Secured Party stating that
Secured Party elects to permit Debtor to so retain) permits Debtor to
retain the same, but any chattel paper, instruments, Collateral
Notes, or documents so retained shall be marked to state that they
are assigned to Secured Party; each such instrument shall be endorsed
to the order of Secured Party (but the failure of same to be so
marked or endorsed shall not impair the Security Interest thereon).
(f) Further Assurances. At Debtor's expense and Secured
Party's request, before or after a Default or Potential Default, (i)
file or cause to be filed such applications and take such other
actions as Secured Party may request to obtain the consent or
approval of any Governmental Authority to Secured Party's rights
hereunder, including, without limitation, the right to sell all the
Collateral upon a Default or Potential Default without additional
consent or approval from such Governmental Authority (and, because
Debtor agrees that Secured Party's remedies at Law for failure of
Debtor to comply with this provision would be inadequate and that
such failure would not be adequately compensable in damages, Debtor
agrees that its covenants in this provision may be specifically
enforced); (ii) from time to time promptly execute and deliver to
Secured Party all such other assignments, certificates, supplemental
documents, and financing statements, and do all other acts or things
as Secured Party may reasonably request in order to more fully
create, evidence, perfect, continue, and preserve the priority of the
Security Interest; and (iii) pay all filing fees in connection with
any financing, continuation, or termination statement or other
instrument with respect to the Security Interests, including, without
limitation, any filing fee required in connection with any procedure
hereafter developed for the recordation or registration of liens or
security interests in FCC Licenses or PUC Certificates.
(g) Estoppel and Other Agreements and Matters. Either
(upon request of Secured Party in its sole judgment without requiring
approval of any other Lender) (i) use commercially reasonable efforts
to cause the landlord or lessor for each location where any of its
inventory or equipment is maintained to execute and deliver to
Secured Party an estoppel and subordination agreement in such form as
may be reasonably acceptable to Secured Party and its counsel, or
(ii) deliver to Secured Party a legal opinion or other evidence (in
each case that is reasonably satisfactory to Secured Party and its
counsel) that neither the applicable lease nor the Laws of the
jurisdiction in which that location is situated provide for
contractual, common law, or statutory landlord's Liens that is senior
to or pari passu with the Security Interest.
(h) Impairment of Collateral. Not use any of the
Collateral, or permit the same to be used, for any unlawful purpose,
in any manner that is reasonably likely to adversely impair the value
or usefulness of the Collateral, or in any manner inconsistent with
the provisions or requirements of any policy of insurance thereon nor
affix or install any accessories, equipment, or device on the
Collateral or on any component thereof if such addition will impair
the original intended function or use of the Collateral or such
component.
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(i) Modifications to Agreements. Not modify or
substitute, or permit the modification or substitution of, any
Collateral Note or any document evidencing the Collateral Note
Security or contract to which any of the Collateral which is accounts
relates, nor extend or grant indulgences regarding any account which
is Collateral, other than such modifications or indulgences as are
reasonable and customary in the industry in which Debtor is engaged.
(j) Partnerships and Partnership Interests. (i)
Promptly perform, observe, and otherwise comply with each and every
material covenant, agreement, requirement, and condition set forth in
the contracts and agreements creating or relating to any Partnership;
(ii) do or cause to be done all things necessary or appropriate to
keep the Partnerships in full force and effect and the rights of
Debtor and Secured Party thereunder unimpaired; (iii) not consent to
any Partnership selling, leasing, or disposing of substantially all
of its assets in a single transaction or a series of transactions,
except to Debtor or any other Subsidiary or to Borrower; (iv) notify
Secured Party of the occurrence of any default under any material
contract or agreement creating or relating to the Partnerships; and
not consent to the amendment, modification, surrender, impairment,
forfeiture, cancellation, dissolution, or termination of any
Partnership, or material agreement relating thereto; (v) not
transfer, sell, or assign any of the Partnership Interests or any
part thereof, except to Debtor or any other Subsidiary or to
Borrower; (vi) cause each Partnership to refrain from granting any
partnership interests in addition to or in substitution for the
Partnership Interests granted by the Partnerships, except to Debtor;
(vii) pledge hereunder, immediately upon Debtor's acquisition
(directly or indirectly) thereof, any and all additional Partnership
Interests of any Partnership granted to Debtor; and (viii) take any
action necessary, required, or requested by Secured Party to allow
Secured Party to fully enforce its Security Interest in the
Partnership Interests, including, without limitation, the filing of
any claims with any court, liquidator, trustee, custodian, receiver,
or other like person or party.
7. DEFAULT; REMEDIES. If a Default or a Potential Default
exists, Secured Party may, at its election (but subject to the terms and
conditions of the Credit Agreement), exercise any and all rights available to
a secured party under the UCC, in addition to any and all other rights
afforded by the Loan Documents, at Law, in equity, or otherwise, including,
without limitation, (a) requiring Debtor to assemble all or part of the
Collateral and make it available to Secured Party at a place to be designated
by Secured Party which is reasonably convenient to Debtor and Secured Party,
(b) surrendering any policies of insurance on all or part of the Collateral
and receiving and applying the unearned premiums as a credit on the Digex
Obligation, and (c) applying by appropriate judicial proceedings for
appointment of a receiver for all or part of the Collateral (and Debtor hereby
consents to any such appointment), and (d) applying to the Digex Obligation
any cash held by Secured Party under this Security Agreement, including,
without limitation, any cash in the Cash Collateral Account. Notwithstanding
the foregoing, Secured Party will not exercise any remedies against the assets
of Debtor unless it has given at least ten days written notification to Debtor
and to the FCC, to the extent such notice is required under 47 C.F.R.
22.937(f).
(a) Notice. Reasonable notification of the time and
place of any public sale of the Collateral, or reasonable
notification of the time after which any private sale or other
intended disposition of the Collateral is to be made, shall be sent
to Debtor and to any other Person entitled to notice under the UCC;
provided, that if any of the Collateral threatens to decline speedily
in value or is of the type customarily sold on a recognized market,
Secured Party may sell or otherwise dispose of the Collateral without
notification, advertisement, or other notice of any kind. It is
agreed that notice sent or given not less than ten (10) Business Days
prior to the taking of the action to which the notice relates is
reasonable notification and notice for the purposes of this
subparagraph.
(b) Application of Proceeds. Secured Party shall apply
the proceeds of any sale or other disposition of the Collateral under
this PARAGRAPH 7 in the following order: first, to the payment of all
expenses incurred in retaking, holding, and preparing any of the
Collateral for sale(s) or other
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disposition, in arranging for such sale(s) or other disposition, and
in actually selling or disposing of the same (all of which are part
of the Obligation); and second, toward repayment of amounts expended
by Secured Party under PARAGRAPH 8. Any surplus remaining shall be
delivered to Debtor or as a court of competent jurisdiction may
direct. If the proceeds are insufficient to pay the Digex Obligation
in full, Debtor shall remain liable for any deficiency.
8. OTHER RIGHTS OF SECURED PARTY.
(a) Performance. If Debtor fails to keep the Collateral
in good repair, working order, and condition, as required in this
Security Agreement, or fails to pay when due all Taxes on any of the
Collateral in the manner required by the Loan Documents, or fails to
preserve the priority of the Security Interest in any of the
Collateral, or fails to keep the Collateral insured as required by
this Security Agreement, or otherwise fails to perform any of its
obligations under the Loan Documents with respect to the Collateral,
then Secured Party may, at its option, but without being required to
do so, make such repairs, pay such Taxes, prosecute or defend any
suits in relation to the Collateral, or insure and keep insured the
Collateral in any amount deemed appropriate by Secured Party, or take
all other action which Debtor is required, but has failed or refused,
to take under the Loan Documents. Any sum which may be expended or
paid by Secured Party under this subparagraph (including, without
limitation, court costs and attorneys' fees) shall bear interest from
the dates of expenditure or payment at the Default Rate until paid
and, together with such interest, shall be payable by Debtor to
Secured Party upon demand and shall be part of the Obligation.
(b) Collection. If a Default or Potential Default
exists and upon notice from Secured Party, each Obligor with respect
to any payments on any of the Collateral (including, without
limitation, dividends and other distributions with respect to
securities, payments on Collateral Notes, or insurance proceeds
payable by reason of loss or damage to any of the Collateral) is
hereby authorized and directed by Debtor to make payment directly to
Secured Party, regardless of whether Debtor was previously making
collections thereon. Subject to PARAGRAPH 8(e) hereof, until such
notice is given, Debtor is authorized to retain and expend all
payments made on Collateral. If a Default or Potential Default
exists, Secured Party shall have the right in its own name or in the
name of Debtor to compromise or extend time of payment with respect
to all or any portion of the Collateral for such amounts and upon
such terms as Secured Party may determine; to demand, collect,
receive, receipt for, xxx for, compound, and give acquittances for
any and all amounts due or to become due with respect to Collateral;
to take control of cash and other proceeds of any Collateral; to
endorse the name of Debtor on any notes, acceptances, checks, drafts,
money orders, or other evidences of payment on Collateral that may
come into the possession of Secured Party; to sign the name of Debtor
on any invoice or xxxx of lading relating to any Collateral, on any
drafts against Obligors or other Persons making payment with respect
to Collateral, on assignments and verifications of accounts or other
Collateral and on notices to Obligors making payment with respect to
Collateral; to send requests for verification of obligations to any
Obligor; and to do all other acts and things necessary to carry out
the intent of this Security Agreement. If a Default or Potential
Default exists and any Obligor fails or refuses to make payment on
any Collateral when due, Secured Party is authorized, in its sole
discretion, either in its own name or in the name of Debtor, to take
such action as Secured Party shall deem appropriate for the
collection of any amounts owed with respect to Collateral or upon
which a delinquency exists. Regardless of any other provision hereof,
however, Secured Party shall never be liable for its failure to
collect, or for its failure to exercise diligence in the collection
of, any amounts owed with respect to Collateral, nor shall it be
under any duty whatsoever to anyone except Debtor to account for
funds that it shall actually receive hereunder. Without limiting the
generality of the foregoing, Secured Party shall have no
responsibility for ascertaining any maturities, calls, conversions,
exchanges, offers, tenders, or similar matters relating to any
Collateral, or for informing
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Debtor with respect to any of such matters (irrespective of whether
Secured Party actually has, or may be deemed to have, knowledge
thereof). The receipt of Secured Party to any Obligor shall be a full
and complete release, discharge, and acquittance to such Obligor, to
the extent of any amount so paid to Secured Party.
(c) Use and Operation of Collateral. Should any
Collateral come into the possession of Secured Party, Secured Party
may use or operate such Collateral for the purpose of preserving it
or its value pursuant to the order of a court of appropriate
jurisdiction or in accordance with any other rights held by Secured
Party in respect of such Collateral. Debtor covenants to promptly
reimburse and pay to Secured Party, at Secured Party's request, the
amount of all reasonable expenses (including, without limitation, the
cost of any insurance and payment of Taxes or other charges) incurred
by Secured Party in connection with its custody and preservation of
Collateral, and all such expenses, costs, Taxes, and other charges
shall bear interest at the Default Rate until repaid and, together
with such interest, shall be payable by Debtor to Secured Party upon
demand and shall become part of the Obligation. However, the risk of
accidental loss or damage to, or diminution in value of, Collateral
is on Debtor, and Secured Party shall have no liability whatever for
failure to obtain or maintain insurance, nor to determine whether any
insurance ever in force is adequate as to amount or as to the risks
insured. With respect to Collateral that is in the possession of
Secured Party, Secured Party shall have no duty to fix or preserve
rights against prior parties to such Collateral and shall never be
liable for any failure to use diligence to collect any amount payable
in respect of such Collateral, but shall be liable only to account to
Debtor for what it may actually collect or receive thereon. The
provisions of this subparagraph are applicable whether or not a
Default exists.
(d) Power of Attorney. Debtor hereby irrevocably
constitutes and appoints Secured Party as Debtor's attorney-in-fact,
with full irrevocable power and authority in the place and stead of
Debtor and in the name of Debtor, Secured Party, Lenders, or
otherwise, from time to time in Secured Party's discretion, for the
sole purpose of carrying out the terms of this Security Agreement
and, to the extent permitted by applicable Law, to take any action
and to execute any document and instrument which Secured Party may
deem necessary or advisable to accomplish the following when a
Default exists:
(x) to receive, endorse, and collect any
drafts or other instruments or documents in connection with
CLAUSE (b) above and this CLAUSE (d);
(y) to use the Patents and Trademarks or to
grant or issue any exclusive or non-exclusive license under
the Patents and Trademarks to anyone else, and to perform
any act necessary for the Secured Party to assign, pledge,
convey, or otherwise transfer title in or dispose of the
Patents and Trademarks to any other Person; and
(z) to execute on behalf of Debtor any
continuation statement with respect to the Security
Interests created hereby, and to do any and all acts and
things to protect and preserve the Collateral, including,
without limitation, the protection and prosecution of all
rights included in the Collateral.
(e) Purchase Money Collateral. To the extent that
Secured Party or any Lender has advanced or will advance funds to or
for the account of Debtor to enable Debtor to purchase or otherwise
acquire rights in Collateral, Secured Party or such Lender, at its
option, may pay such funds (i) directly to the Person from whom
Debtor will make such purchase or acquire such rights, or (ii) to
Debtor, in which case Debtor covenants to promptly pay the same to
such Person, and forthwith furnish to Secured Party evidence
satisfactory to Secured Party that such payment has been made from
the funds so provided.
10
43
(f) Subrogation. If any of the Obligation is given in
renewal or extension or applied toward the payment of indebtedness
secured by any Lien, Secured Party shall be, and is hereby,
subrogated to all of the rights, titles, interests, and Liens
securing the indebtedness so renewed, extended, or paid.
(g) Indemnification. Debtor hereby assumes all
liability for the Collateral, for the Security Interest, and for any
use, possession, maintenance, and management of, all or any of the
Collateral, including, without limitation, any Taxes arising as a
result of, or in connection with, the transactions contemplated
herein, and agrees to assume liability for, and to indemnify and hold
Secured Party and each Lender harmless from and against, any and all
claims, causes of action, or liability, for injuries to or deaths of
Persons and damage to property, howsoever arising from or incident to
such use, possession, maintenance, and management, whether such
Persons be agents or employees of Debtor or of third parties, or such
damage be to property of Debtor or of others. Debtor agrees to
indemnify, save, and hold Secured Party and each Lender harmless from
and against, and covenants to defend Secured Party and each Lender
against, any and all losses, damages, claims, costs, penalties,
liabilities, and expenses (collectively, "CLAIMS"), including,
without limitation, court costs and attorneys' fees, AND ANY OF THE
FOREGOING ARISING FROM THE NEGLIGENCE OF SECURED PARTY OR ANY LENDER,
OR ANY OF THEIR RESPECTIVE OFFICERS, EMPLOYEES, AGENTS, ADVISORS,
EMPLOYEES, OR REPRESENTATIVES, howsoever arising or incurred because
of, incident to, or with respect to Collateral or any use,
possession, maintenance, or management thereof; provided, however,
that the indemnity set forth in this PARAGRAPH 8(g) will not apply to
Claims caused by the gross negligence or willful misconduct of
Secured Party or any Lender.
9. ACKNOWLEDGMENT OF REGULATORY CONSIDERATIONS
(a) No Prohibited Transfers. It is hereby acknowledged
that assignment or transfer of control of the FCC Licenses without
the prior approval of the FCC may constitute a prohibited transfer in
violation of FCC rules and regulations. Similarly, assignments or
transfer of control over certifications or authorizations issued by
state PUC's ("PUC CERTIFICATES") may require approval or
notification, as may certain other transactions. Secured Party agrees
that exercise of its rights hereunder, including, but not limited to,
assignment or transfer of FCC Licenses or PUC Certificates upon the
occurrence of a Default or Potential Default, shall be effected only
after obtaining any necessary approvals for such exercise.
(b) Actions by Debtor. If counsel to Secured Party
reasonably determines that the consent of the FCC or a state PUC is
required in connection with any of the actions which may be taken by
Secured Party on behalf of the Lenders in the exercise of their
rights hereunder or under the Loan Documents, then Debtor, at its
sole cost and expense, agrees to use its best efforts to secure such
consent and to cooperate with Secured Party and Lenders in any
actions commenced by Secured Party to secure such consent. In such
case Debtor shall retain control of its respective FCC Licenses and
PUC Certificates until the FCC and each such state PUC's shall have
granted their consent to the transfer of the FCC Licenses and related
permits and the PUC Certificates. Upon the occurrence and during the
continuation of a Default or Potential Default, Debtor shall promptly
execute or cause the execution of all applications, certificates,
instruments, and other documents and papers that the Secured Party
may be required to file in order to obtain any necessary governmental
consent, approval, or authorization, and if Debtor fails or refuses
to execute such documents, then, on the order of any court of
competent jurisdiction, the Clerk of the Court with jurisdiction may
execute such documents on behalf of Debtor. In addition, Debtor shall
execute such applications and other documents and will take such
other action as may be required in order for Secured Party to obtain
from the FCC consent
11
44
to operate the system, through a receiver or otherwise, during the
time the Secured Party seeks to obtain a purchaser for the System and
to submit any sale of the System to the FCC or state PUC's for
approval. Debtor recognizes that FCC Licenses, PUC Certificates,
franchises, and other similar agreements or authorizations are unique
assets which (or the control of which) may have to be transferred in
order for the Lenders adequately to realize the value of their
Security Interests. Debtor further recognizes that a violation of
this covenant would result in irreparable harm to Lenders for which
monetary damages are not readily ascertainable and which might not
fully compensate such Lenders. Therefore, in addition to any other
remedy which may be available to the Lenders, at Law or in equity,
Secured Party on behalf of Lenders shall have the remedy of specific
performance of the provisions of this subsection.
(c) FCC/PUC Approval. Notwithstanding anything to the
contrary contained in the Security Agreement, Secured Party will not
take any action pursuant to this Security Agreement or any of the
documents executed pursuant hereto which, either because it would
constitute an assignment or transfer of control of an FCC License or
PUC Certificate or otherwise, would require under then-existing Law
(including the written rules and regulations promulgated by the FCC
or such other regulatory authority with jurisdiction) the prior
approval of the FCC or such other regulatory authority with
jurisdiction, without first obtaining such approval. Debtor agrees to
take or cause to be taken, any action which Secured Party may
reasonably request in order to obtain and enjoy the full rights and
benefits granted to Secured Party by this Security Agreement and any
other instruments or agreements executed pursuant hereto, including,
without limitation, at Debtor's cost and expense, the exercise of its
best efforts to cooperate in obtaining FCC and any necessary PUC
approval of any action or transaction contemplated by this Security
Agreement or any other instrument or agreement executed pursuant
hereto which is then required by Law.
(d) Subsequent Actions by Debtor. Debtor agrees that
if, for any reason, the FCC, state PUC or any such other regulatory
authority with jurisdiction does not approve within a reasonable
period of time the initial application for approval of the assignment
or transfer of control of the FCC Licenses or a PUC Certificate, then
PARAGRAPHS 9(b) and (c) above hereof shall be applicable to any
subsequent application for assignment or transfer of the FCC Licenses
or PUC Certificate pursuant to action taken by Secured Party in the
exercise of its rights hereunder or under the Loan Documents. With
respect to each subsequent proposed purchaser(s), Debtor agrees to
execute all such applications and other documents and take all such
other action as may be reasonably requested by Secured Party at any
time and from time to time in order to obtain the approval by the FCC
or any other regulatory authorities. Exercise by Secured Party of the
right to such cooperation shall not be exhausted by the initial or
any subsequent exercise thereof.
10. MISCELLANEOUS.
(a) Continuing Security Interest. This Security
Agreement creates a continuing security interest in the Collateral
and shall (i) remain in full force and effect until the termination
of the obligations of the Lenders to fund Borrowings under the Credit
Agreement, the payment in full of the Obligation, and the expiration
of all Financial Xxxxxx or until payment in full of the Digex
Obligation; (ii) be binding upon Debtor, its successors, and assigns;
and (iii) inure to the benefit of and be enforceable by the Secured
Party, Lenders, and their respective successors, transferees, and
assigns. Without limiting the generality of the foregoing CLAUSE
(iii), the Secured Party and Lenders may assign or otherwise transfer
any of their respective rights under this agreement to any other
Person in accordance with the terms and provisions of SECTION 13.13
of the Credit Agreement, and to the extent of such assignment or
transfer such Person shall thereupon become vested with all the
rights and benefits in respect thereof granted herein or otherwise to
the Secured Party or the Lenders, as the case
12
45
may be. Upon payment in full of the Obligation, the termination of
the commitment of Lenders to extend credit, and the expiration of all
Financial Xxxxxx or upon payment in full of the Digex Obligation,
Debtor shall be entitled to the return, upon its request and at its
expense, of such of the Collateral as shall not have been sold or
otherwise applied pursuant to the terms hereof.
(b) Reference to Miscellaneous Provisions. This
Security Agreement is one of the "Loan Documents" referred to in the
Credit Agreement, and all provisions relating to Loan Documents set
forth in SECTION 13 of the Credit Agreement, other than the
provisions set forth in SECTION 13.7, are incorporated herein by
reference, the same as if set forth herein verbatim.
(c) Term. Upon full and final payment and performance
of the Obligation or the Digex Obligation, this agreement shall
thereafter terminate upon receipt by Secured Party of Debtor's
written notice of such termination; provided that no Obligor, if any,
on any of the Collateral shall ever be obligated to make inquiry as
to the termination of this agreement, but shall be fully protected in
making payment directly to Secured Party until actual notice of such
total payment of the Obligation is received by such Obligor.
(d) Actions Not Releases. The Security Interest and
Debtor's obligations and Secured Party's rights hereunder shall not
be released, diminished, impaired, or adversely affected by the
occurrence of any one or more of the following events: (i) the taking
or accepting of any other security or assurance for any or all of the
Obligation; (ii) any release, surrender, exchange, subordination, or
loss of any security or assurance at any time existing in connection
with any or all of the Obligation; (iii) the modification of,
amendment to, or waiver of compliance with any terms of any of the
other Loan Documents without the notification or consent of Debtor,
except as required therein (the right to such notification or consent
being herein specifically waived by Debtor); (iv) the insolvency,
bankruptcy, or lack of corporate or trust power of any party at any
time liable for the payment of any or all of the Obligation, whether
now existing or hereafter occurring; (v) any renewal, extension, or
rearrangement of the payment of any or all of the Obligation, either
with or without notice to or consent of Debtor, or any adjustment,
indulgence, forbearance, or compromise that may be granted or given
by Secured Party or any Lender to Debtor; (vi) any neglect, delay,
omission, failure, or refusal of Secured Party or any Lender to take
or prosecute any action in connection with any other agreement,
document, guaranty, or instrument evidencing, securing, or assuring
the payment of all or any of the Obligation; (vii) any failure of
Secured Party or any Lender to notify Debtor of any renewal,
extension, or assignment of the Obligation or any part thereof, or
the release of any security, or of any other action taken or
refrained from being taken by Secured Party or any Lender against
Debtor or any new agreement between or among Secured Party or one or
more Lenders and Debtor, it being understood that neither Secured
Party nor any Lender shall be required to give Debtor any notice of
any kind under any circumstances whatsoever with respect to or in
connection with the Obligation, including, without limitation, notice
of acceptance of this Security Agreement or any Collateral ever
delivered to or for the account of Secured Party hereunder; (viii)
the illegality, invalidity, or unenforceability of all or any part of
the Obligation against any party obligated with respect thereto by
reason of the fact that the Obligation, or the interest paid or
payable with respect thereto, exceeds the amount permitted by Law,
the act of creating the Obligation, or any part thereof, is ultra
xxxxx, or the officers, partners, or trustees creating same acted in
excess of their authority, or for any other reason; or (ix) if any
payment by any party obligated with respect thereto is held to
constitute a preference under applicable Laws or for any other reason
Secured Party or any Lender is required to refund such payment or pay
the amount thereof to someone else.
(e) Waivers. Except to the extent expressly otherwise
provided herein or in other Loan Documents and to the fullest extent
permitted by applicable Law, Debtor waives (i) any right to
13
46
require Secured Party or any Lender to proceed against any other
Person, to exhaust its rights in Collateral, or to pursue any other
right which Secured Party or any Lender may have; (ii) with respect
to the Obligation, presentment and demand for payment, protest,
notice of protest and nonpayment, and notice of the intention to
accelerate; and (iii) all rights of marshaling in respect of any and
all of the Collateral.
(f) Financing Statement. Secured Party shall be
entitled at any time to file this agreement or a carbon,
photographic, or other reproduction of this agreement, as a financing
statement, but the failure of Secured Party to do so shall not impair
the validity or enforceability of this agreement.
(g) Amendments. This instrument may be amended only by
an instrument in writing executed jointly by Debtor and Secured
Party, and supplemented only by documents delivered or to be
delivered in accordance with the express terms hereof.
(h) Multiple Counterparts. This Security Agreement has
been executed in a number of identical counterparts, each of which
shall be deemed an original for all purposes and all of which
constitute, collectively, one agreement; but, in making proof of this
Security Agreement, it shall not be necessary to produce or account
for more than one such counterpart.
(i) Parties Bound; Assignment. This Security Agreement
shall be binding on Debtor and Debtor's heirs, legal representatives,
successors, and assigns and shall inure to the benefit of Secured
Party and Secured Party's successors and assigns.
(i) Secured Party is the agent for each Lender
under the Credit Agreement, the Security Interest and all
Rights granted to Secured Party hereunder or in connection
herewith are for the ratable benefit of each Lender, and
Secured Party may, without the joinder of any Lender,
exercise any and all Rights in favor of Secured Party or
Lenders hereunder, including, without limitation, conducting
any foreclosure sales hereunder, and executing full or
partial releases hereof, amendments or modifications hereto,
or consents or waivers hereunder. The Rights of each Lender
vis-a-vis Secured Party and each other Lender may be subject
to one or more separate agreements between or among such
parties, but Debtor need not inquire about any such
agreement or be subject to any terms thereof unless Debtor
specifically joins therein; and consequently, neither Debtor
nor Debtor's heirs, personal representatives, successors,
and assigns shall be entitled to any benefits or provisions
of any such separate agreements or be entitled to rely upon
or raise as a defense, in any manner whatsoever, the failure
or refusal of any party thereto to comply with the
provisions thereof.
(ii) Debtor may not, without the prior written
consent of Secured Party, assign any rights, duties, or
obligations hereunder.
(j) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AS
TO ITS VALIDITY, INTERPRETATION, AND EFFECT IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, EXCEPT AS REQUIRED BY MANDATORY
PROVISIONS OF LAW AND EXCEPT IF THE VALIDITY OR PERFECTION OF THE
SECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF
ANY PARTICULAR COLLATERAL, ARE GOVERNED BY THE LAWS OF A JURISDICTION
OTHER THAN THE STATE OF NEW YORK. UNLESS THE CONTEXT OTHERWISE
REQUIRES, ALL TERMS USED HEREIN WHICH ARE DEFINED IN THE UNIFORM
COMMERCIAL CODE AS
14
47
ENACTED IN THE STATE OF NEW YORK SHALL HAVE THE MEANINGS THEREIN
STATED.
(k) Restatement of Existing Security Agreement. The
parties hereto agree that this Amended and Restated Security
Agreement is intended to, and hereby does, restate, renew, amend,
modify, supercede, and replace the existing Security Agreement in its
entirety, but does not constitute a novation, extinguishment,
discharge, or release in any way of the security interest granted
under the existing Security Agreement, which security interest is
hereby renewed, extended, ratified, and confirmed without lapse or
interruption of creation, attachment, perfection, or priority.
REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE(S) TO FOLLOW.
15
48
EXECUTED as of the day and year first herein set forth.
DIGEX, INCORPORATED, as Debtor
By /s/ XXXXXXX X. XXXXX
--------------------------------------------
Name: Xxxxxxx X. Xxxxx
-----------------------------------
Title: Chief Executive Officer
-----------------------------------
BANK OF AMERICA, N.A.,
as Secured Party on behalf of Lenders from
time to time party to the Credit Agreement
By /s/ XXXXXXX X. XXXXXXX
--------------------------------------------
Name: Xxxxxxx X. Xxxxxxx
-----------------------------------
Title: Vice President
-----------------------------------
16
49
ANNEX A TO SECURITY AGREEMENT
(Digex, Incorporated)
A. DEBTOR'S TRADENAMES
- Any interest the Debtor may have in the tradenames set out
in the Attachment to this Security Agreement marked
"Attachment 1".
B. LOCATION OF BOOKS AND RECORDS
- Xxx Xxxxx Xxxxx, Xxxxxxxxxx, Xxxxxxxx 00000.
C. LOCATION OF COLLATERAL
(i) Xxx Xxxxx Xxxxx, Xxxxxxxxxx, XX 00000; and
(ii) any locations where the Debtor has an interest in any
Collateral in the states listed at "E" below.
D. LOCATION OF REAL PROPERTY
- Any locations where the Debtor has an interest in any leased
real estate in California and Maryland.
E. JURISDICTION FOR FILING FINANCING STATEMENTS
California Maryland
----------------------------------------------------
Florida
----------------------------------------------------
17
50
ANNEX B TO SECURITY AGREEMENT
(Digex, Incorporated)
A. INTERCOMPANY PROMISSORY NOTES
- None
B. PARTNERSHIP INTERESTS
- None
C. TRADEMARKS
- See "Attachment 2"
D. PATENTS
- None
18
51
ANNEX C TO SECURITY AGREEMENT
(Digex, Incorporated)
DEFAULTS OR EVENTS OF DEFAULT UNDER ANY COLLATERAL NOTE
OR DOCUMENTS EVIDENCING THE COLLATERAL NOTE SECURITY
None
19
52
ANNEX D TO SECURITY AGREEMENT
PLEDGE INSTRUCTION
PARTNERSHIP:
-------------------------------
INTEREST OWNER:
--------
BY THIS PLEDGE INSTRUCTION, dated as of __________, 2000, __________
("INTEREST OWNER"), hereby instructs __________ (the "PARTNERSHIP") to register
a pledge in favor of Bank of America, N.A. ("PLEDGEE"), in its capacity as
Administrative Agent for certain Lenders and as Secured Party under that certain
Security Agreement dated as of __________, 2000 (the "SECURITY AGREEMENT"),
against, and a security interest in favor of Pledgee in, all of the Interest
Owner's rights in connection with any partnership interest in the Partnership
now and hereafter owned by the Interest Owner ("PARTNERSHIP INTEREST").
- Pledge Instructions. The Partnership is hereby
instructed by the Interest Owner to register all of
the Interest Owner's right, title, and interest in
and to all of the Interest Owner's Partnership
Interest as subject to a pledge and security
interest in favor of Pledgee who, upon such
registration of pledge, shall become the registered
pledgee of the Partnership Interest with all rights
incident thereto.
- Initial Transaction Statement. The Partnership
is further instructed by the Interest Owner to
promptly inform Pledgee of the registration of the
pledge by sending the initial transaction statement,
in the form attached hereto as EXHIBIT A, to Pledgee
at its office located at __________, with a copy to
Interest Owner.
C. Partnership Distributions, Accounts, and
Correspondence. The Partnership is further instructed by the Interest Owner to
promptly (i) cause the Partnership to pay and remit to the Pledgee all
proceeds, distributions, and other amounts payable to the Interest Owner upon
demand or otherwise, including, without limitation, upon the termination,
liquidation, and dissolution of the Partnership, (ii) cause the Partnership to
hold all funds in deposit accounts for the benefit of Pledgee, and (iii) cause
the Partnership to provide to the Pledgee all future correspondence,
accountings of distributions, and tax returns of the Partnership.
D. Warranties of the Interest Owner. The Interest
Owner hereby warrants that (i) the Interest Owner is an appropriate person to
originate this instruction; (ii) the Interest Owner is entitled to effect the
instruction here given; and (iii) the Interest Owner's taxpayer identification
number is ___________________________.
IN WITNESS WHEREOF, the Interest Owner has caused this
Pledge Instruction to be duly executed and delivered as of the date first
above written.
-------------------------------------------------
By
----------------------------------------
Name:
-------------------------------
Title:
-------------------------------
20
53
CONSENT OF THE GENERAL PARTNER
The undersigned, __________, in its capacity as general
partner of the Partnership (in such capacity, the "GENERAL PARTNER") hereby
acknowledges and consents to, and agrees to cause to be registered on the books
and records of the Partnership, the Pledge of Partnership Interests, and further
agrees that upon receipt of written notice from the Pledgee, the General Partner
shall (i) cause the Partnership to pay and remit to the Pledgee all
distributions and other amounts payable to the Interest Owner upon demand or
otherwise, including, without limitation, upon the termination, liquidation, and
dissolution of the Partnership, (ii) cause the Partnership to hold all funds in
deposit accounts for the benefit of Pledgee, and (iii) cause the Partnership to
provide to the Pledgee all future correspondence, accountings of distributions,
and tax returns of the Partnership.
------------------------------------------------,
as General Partner
By
---------------------------------------
Name:
------------------------------
Title:
------------------------------
21
54
EXHIBIT A TO PLEDGE INSTRUCTION
FORM OF INITIAL TRANSACTION STATEMENT
THIS STATEMENT IS MERELY A RECORD OF THE RIGHTS OF THE ADDRESSEE AS
OF THE TIME OF ISSUANCE. DELIVERY OF THIS STATEMENT, OF ITSELF,
CONFERS NO RIGHTS ON THE RECIPIENT. THIS STATEMENT IS NEITHER A
NEGOTIABLE INSTRUMENT NOR A SECURITY.
NAME AND ADDRESS OF PLEDGOR
Tax ID or Social Security Number:
------------------------
Bank of America, N.A.
ADDRESS
Tax ID Number:
-------------
On ______________, 2000, the undersigned, ________________________,
in its capacity as managing general partner of ________________________ (in
such capacity, the "MANAGING GENERAL PARTNER") caused the pledge of
________________________ (__________%) of the outstanding partnership
interests in ________________________ ("PARTNERSHIP INTEREST") by
________________________ (the "PLEDGOR"), in favor of Bank of America, N.A. on
behalf of Lenders (the "PLEDGEE") to be registered on the books and records of
the Partnership. Except for the pledge in favor of the Pledgee, to the
knowledge of the undersigned (including, without limitation, any information
which may appear on the undersigned's books and records) there are no liens,
restrictions, or adverse claims to which the Partnership Interest is, or may
be, subject as of the date hereof.
-------------------------------------------------
By
----------------------------------------
Name:
-------------------------------
Title:
-------------------------------
22
55
EXHIBIT 10.4
INTERMEDIA COMMUNICATIONS INC.
XXX XXXXXXXXXX XXX
XXXXX, XXXXXXX 00000
October 24, 2000
Digex, Incorporated
Xxx Xxxxx Xxxxx
Xxxxxxxxxx, Xxxxxxxx 00000
Ladies and Gentlemen:
Reference is made to the Letter Agreement dated January 24, 2000 (the
"Letter Agreement") regarding the use of the net proceeds of the public offering
("Offering") of Class A common stock of Digex, Incorporated ("Digex") pursuant
to a Registration Statement on Form S-1 (File #333-94857). Capitalized terms
used herein without definition have the meanings set forth for such terms in the
Letter Agreement.
1. Intermedia Communications Inc. ("Intermedia") and Digex wish to amend
the Letter Agreement by deleting Paragraph 2 of the Letter Agreement and
replacing it with the following:
(A) From time to time after the date hereof, upon receipt of a request
from Intermedia, Digex shall deliver to Intermedia the requested portion
of the net proceeds of the Offering that has not been used by Digex to
purchase or construct Telecommunications Related Assets (the "Requested
Amount") in exchange for an equivalent amount of cash of which at least
70% may be used by Digex for Unrestricted Uses.
(B) If on October 31, 2000 there remains an amount of the net proceeds of
the Offering that has not been used by Digex to purchase or construct
Telecommunications Related Assets and has not been exchanged pursuant to
the first sentence of this Paragraph 2 (the "Remaining Amount"), Digex
shall promptly deliver the Remaining Amount to Intermedia in exchange for
an equivalent amount of cash of which at least 70% may be used by Digex
for Unrestricted Uses.
(C) Intermedia shall promptly advise Digex as to the amount of cash
delivered pursuant to Paragraph 2 which may be used for Unrestricted Uses
(the "Unrestricted Exchange Cash"), which shall be no less than the
amounts as provided above.
56
Digex, Incorporated
Page 2
2. Additional Representations, Warranties and Covenants of Digex and
Intermedia
Intermedia represents and warrants to Digex that Digex's use of the
Unrestricted Exchange Cash for Unrestricted Uses will not violate, or result in
a default by Intermedia under, the provisions of the Indenture.
Digex represents, warrants and covenants to Intermedia that it shall use
the cash received pursuant to Paragraph 2 of the Letter Agreement as amended
hereby, other than the Unrestricted Exchange Cash, only to purchase or construct
Telecommunications Related Assets.
Except as amended by this letter, the Letter Agreement shall remain in
full force and effect.
Please confirm your understanding and acceptance of the foregoing by
signing in the space provided below.
Very truly yours,
INTERMEDIA COMMUNICATIONS INC.
By: /s/ XXXXX X. XXXXXX
------------------------------
Name: Xxxxx X. Xxxxxx
Title: Chairman, President
& Chief Executive Officer
Agreed and Accepted
this 24th day of October, 2000
DIGEX, INCORPORATED
By: /s/ XXXXXXX X. XXXXX
-------------------------
Name: Xxxxxxx X. Xxxxx
Title: Chief Financial Officer
57
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH (B) FINANCIAL STATEMENTS.
[/LEGEND]
[MULTIPLIER] 1,000
[CURRENCY] US DOLLARS
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-2000
[PERIOD-START] JAN-01-2000
[PERIOD-END] SEP-30-2000
[EXCHANGE-RATE] 1
[CASH] 144,732
[SECURITIES] 0
[RECEIVABLES] 36,155
[ALLOWANCES] 3,586
[INVENTORY] 0
[CURRENT-ASSETS] 186,373
[PP&E] 406,971
[DEPRECIATION] 80,188
[TOTAL-ASSETS] 538,560
[CURRENT-LIABILITIES] 54,587
[BONDS] 33,033
[PREFERRED-MANDATORY] 0
[PREFERRED] 1
[COMMON] 638
[OTHER-SE] 454,725
[TOTAL-LIABILITY-AND-EQUITY] 538,560
[SALES] 0
[TOTAL-REVENUES] 116,727
[CGS] 0
[TOTAL-COSTS] 66,755
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 4,739
[INTEREST-EXPENSE] 1,395
[INCOME-PRETAX] (101,276)
[INCOME-TAX] 0
[INCOME-CONTINUING] (101,276)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (101,276)
[EPS-BASIC] (1.60)
[EPS-DILUTED] (1.60)
