Prospectus Summary
This summary highlights the key information contained in this prospectus. Because it is a summary, it does not contain all of the information you should consider before making an investment decision. You should read the entire prospectus carefully, including the section titled "Risk Factors" and the financial statements and the notes relating to those statements. We will refer to Digex, Incorporated and our predecessors as "Digex," "we," "us" and "our." We will refer to our parent company, Intermedia Communications Inc., and its subsidiaries, as "Intermedia."
Digex
Our Company
Digex is a leading provider of Internet hosting services to businesses and institutions implementing complex, interactive Web sites and Web-based applications. Our offerings include Web site and application hosting, enterprise and consulting services. From major corporations to Internet start- ups, our customers leverage our services to rapidly and cost-effectively deploy secure and reliable business solutions including on-line banking, on-line procurement and electronic retailing. We provide the computer hardware, software, network technology, and systems management necessary to offer our customers comprehensive outsourced Web site hosting solutions.
We believe our singular focus on delivering mission-critical Web site and application hosting solutions has been the major contributor to our growth. Digex currently provides hosting services to over 550 customers, including American Century Investments, Budget Rent-A-Car, Forbes, J. Crew, Kraft, Universal Studios and Nike. We operate two state-of-the-art data centers strategically positioned on the east and west coasts of the United States. In these data centers, we house over 1,300 Windows NT and UNIX-based servers which we own and manage. Our revenues have grown at a compounded annual growth rate of 184% over the past two years from $2.8 million in 1996 to $22.6 million in 1998. Our revenue for the three months ended March 31, 1999 was $9.4 million. The following are among the key factors that we believe will continue to drive our growth:
. a highly scalable operating platform which was designed to facilitate the rapid, cost-efficient implementation and expansion of customers' Web site hosting initiatives;
. an experienced management team and technical experts, who in the aggregate hold over 200 technical certifications from leading companies such as Cisco Systems, Microsoft and Sun Microsystems;
. a highly skilled research and development organization dedicated to identifying the best available tools, technologies and processes;
. a growing, geographically distributed direct sales force; and . a network of over 120 business partnership alliances which provide complementary design, development and integration services for our customers and which represent a significant source of new customer referrals for Digex.
Our Market Opportunity According to Forrester Research, Inc., the Web site hosting market is projected to increase to over $10.5 billion by 2002, of which $8.0 billion is expected to be complex Web site management services. In addition to the overall expansion and ever-increasing ubiquity of the Internet, we believe one of the key drivers of growth in the Web hosting industry is the increasing number of businesses that have elected to outsource the management of their Web sites and related operations. Web sites are mission-critical for virtually all Web- centric companies and are becoming increasingly strategic for many mainstream enterprises. At the same time, these operations and applications are becoming more complex and challenging to operate. We offer customers a comprehensive outsourcing solution designed to reduce costs, speed implementation, reduce technology risks and provide guaranteed operating performance. Key advantages we offer our customers include:
. a comprehensive suite of Web site and application hosting services;
. high-performance Internet and private network connectivity;
. responsive, 24-hour a day customer care and technical support;
. secure, state-of-the-art, fault-tolerant data centers; and . predictable monthly fees.
Our Services
We offer a full range of services to meet the rapidly evolving requirements of complex Web sites, including:
. Web site management services which provide operations support for Windows NT and UNIX dedicated servers, server collocation, and network connectivity;
. integrated business solutions, which involve the hosting of leading Web- enabled business software applications such as electronic commerce, sales force automation and customer care;
. enterprise services such as firewall management, stress testing and customized Web site activity reporting; and . consulting services including capacity planning, disaster recovery planning, migration planning and database optimization.
Our Strategy
Our objective is to shape and lead the global market for Web site and application hosting solutions. We intend to achieve this goal through a strategy focused on the following:
. Expanding Our Premier Web Site Hosting Capabilities. We believe our scalable, open architecture will enable us to expand our operations while simultaneously maintaining the highest service levels. In addition, we believe our architecture will allow us to attain higher revenues, lower marginal unit costs and increase operating margins. In conjunction with this expansion, we plan to add additional data center capacity both domestically and internationally as appropriate to meet anticipated customer demand.
. Addressing Industry-Specific Customer Needs. Our marketing and operating strategy is designed to be market-driven. We intend to continue to focus on addressing the unique needs of our targeted customer base. We focus on specific industries which we believe have the highest propensity to outsource the management of complex, mission-critical Web sites.
. Developing Next Generation Service Offerings. As the underlying technology and functionality of the Internet evolves, we believe customers will continuously demand new and increasingly more robust services. Capitalizing on our strong technical skills and delivery platforms, we intend to be a leading provider of next generation Web- based service offerings.
. Expanding Capabilities Through Selective Strategic Partnering and Acquisitions. We intend to expand our network of strategic partnerships and to opportunistically acquire related businesses in order to cost- effectively augment our existing services, technologies, infrastructure, geographic presence or customer base.
Our History
Our business started in 1996, as the Web site hosting unit (the "Predecessor") of Business Internet, Inc. (previously known as DIGEX, Incorporated), a company that was principally an Internet access and Web site hosting services provider. Business Internet (at the time known as DIGEX, Incorporated) went public in October 1996, and was acquired by Intermedia in July 1997. In contemplation of this offering, we were incorporated as Digex, Incorporated on April 27, 1999. On that date, Business Internet contributed our assets to the newly formed Digex, Incorporated in order to effect a recapitalization of our business. As of the date of this prospectus, Business Internet, a wholly-owned subsidiary of Intermedia, owns 100% of our outstanding common stock.
Our Address and Telephone Number The address of our principal executive offices is One Digex Plaza, Beltsville, Maryland 20705 and our telephone number is (301) 847-5000.
The information on any of our Web sites, such as www.digex.net or www.digex.com, is not a part of this prospectus.
Digex and the Digex logo are two of our service marks. This prospectus also contains trademarks and trade names of other companies.
The Offering
Class A Common Stock offered by Digex.......................... shares (1) Common Stock to be outstanding after the offering............. shares of Class A Common Stock shares of Class B Common Stock (2) Use of proceeds................. We intend to use the net proceeds from this offering to purchase or construct Telecommunications Related Assets. (3) Proposed Nasdaq National Market symbol......................... DIGX (1) Excludes shares to be sold by Digex if the underwriters' over-allotment option is exercised in full, as described in "Underwriting."
(2) The Class B Common Stock is fully convertible into Class A Common Stock, on a one-for-one basis, at any time at the option of the holder or upon the transfer of the Class B Common Stock to any person or entity not affiliated with Intermedia.
(3) Due to certain restrictions in the bond indentures of Intermedia, our indirect parent, we will be required to use all of the net proceeds of this offering to purchase or construct Telecommunications Related Assets. The term "Telecommunications Related Assets" is defined under "Risk Factors-- Digex is controlled by Intermedia," and would include data centers and related capital expenditures. In addition, prior to the closing of this offering, we will make arrangements for Intermedia to purchase from us some of the Telecommunications Related Assets purchased with the net proceeds of this offering. We expect to be able to use the proceeds of such sales to Intermedia for working capital purposes and to fund operating losses. This arrangement is explained under "Use of Proceeds."
Except as otherwise indicated, the information in this prospectus assumes that the underwriters' over-allotment option is not exercised.
Summary Financial Data The following table sets forth summary financial information of Digex for the period from July 7, 1997 (date of acquisition) to December 31, 1997 and the year ended December 31, 1998, and of the Predecessor for the year ended December 31, 1996 and the period from January 1, 1997 to July 6, 1997. The selected historical financial information has been derived from Digex's and the Predecessor's financial statements which have been audited by Ernst & Young LLP and are included elsewhere in this prospectus.
The following table also sets forth our pro forma financial information for the year ended December 31, 1997. The pro forma financial information gives effect to the purchase by Intermedia of Business Internet as if such acquisition had occurred on January 1, 1997, but only includes financial information for the Predecessor. The presentation of pro forma financial information is made to permit useful comparison of results of operations between periods presented. This pro forma financial information is not necessarily indicative of the operating results we would have achieved if the Predecessor had been acquired on January 1, 1997. The relationship between Business Internet and the Predecessor is more fully described in note 1 to the financial statements.
You should read the summary financial and other data below in conjunction with our audited financial statements and the related notes and the Predecessor's audited financial statements included elsewhere in this prospectus. You should also read the Selected Financial Data and the accompanying "Management's Discussion and Analysis of Financial Condition and Results of Operations," also contained in this prospectus.
Predecessor Digex
Historical
Historical Period from Pro Forma Historical
---------------------------- July 7, 1997 ------------ ------------
(date of Year ended
Year ended Period from acquisition) to December 31, Year ended
December 31, January 1, 1997 December 31, 1997 December 31,
1996 to July 6, 1997 1997 (unaudited) 1998
(In thousands, except pro forma share and per share data)
Statement of Operations Data: Revenues................ $ 2,803 $ 4,420 $ 7,192 $ 11,612 $ 22,635 Costs and expenses: Cost of operations..... 2,002 4,149 1,739 2,808 6,710 Cost of services....... 684 1,817 1,611 3,428 7,044 Selling, general and administrative........ 3,194 7,001 6,087 13,088 17,512 Depreciation and amortization.......... 591 519 2,753 4,850 8,109 Charge off of purchased in-process research and development....... -- -- 15,000 (1) 15,000 (1) -- Total costs and expenses............... 6,471 13,486 27,190 39,174 39,375 Loss before income taxes.................. (3,668) (9,066) (19,998) (27,562) (16,740) Income tax benefit...... -- -- 1,440 4,710 159 Net loss................ $(3,668) $(9,066) $(18,558) $(22,852) $(16,581) Pro forma net loss per common share (2): Basic................. -- -- $ (18.56) $ (22.85) $ (16.58) Diluted............... -- -- $ (18.56) $ (22.85) $ (16.58) Shares used in computing pro forma basic and diluted net loss per share.................. -- -- 1,000 1,000 1,000 Other Financial Data: EBITDA before certain charges (3)............ $(3,077) $(8,547) $ (2,245) $ (7,712) $ (8,631) Capital expenditures.... 1,445 1,004 8,016 9,020 30,969
December 31, 1998 Actual As Adjusted (4) (In thousands) Balance Sheet Data: Cash and cash equivalents (5)......................... $ -- Working capital....................................... 1,231 Property and equipment, net........................... 39,059 Total assets.......................................... 77,739 Capital lease obligations, including current maturi- ties................................................. 2,089 Total owner's equity.................................. 70,845 (1) This amount represents a one-time charge to operations for the charge off of purchased in-process research and development related to the Predecessor in connection with Intermedia's purchase of Business Internet on July 7, 1997.
(2) Pro forma basic and diluted net loss per share have been calculated assuming that the common shares issued in connection with our recapitalization in April 1999 were outstanding for all periods of Digex presented.
(3) EBITDA, before certain charges, consists of earnings (loss) before tax benefit, depreciation and amortization and the charge off of purchased in- process research and development. EBITDA, before certain charges, does not represent funds available for management's discretionary use and is not intended to represent cash flow from operations. EBITDA, before certain charges, should be considered only as an alternative to net loss as an indication of operating performance or cash flows as a measure of liquidity.
(4) As Adjusted gives effect to the offering as if it had occurred on December 31, 1998.
(5) We have historically participated in a centralized cash management system of Intermedia and, as a result, have not carried cash balances on our financial statements. With the closing of this offering, we will be maintaining and reporting cash balances in our financial statements.