Digex plans to lay off 20% of work force

Move part of plan to gain financial independence from bankrupt WorldCom

$9 million borrowed last quarter

200 jobs to be cut by Beltsville company

August 07, 2002|By Stacey Hirsh | Stacey Hirsh,SUN STAFF

Digex Inc. said yesterday that it is laying off 200 employees, about 20 percent of its work force, in an effort to become less dependent on its biggest shareholder, bankrupt telephone giant WorldCom Inc.

The Beltsville company, which hosts Web sites and other business applications, such as e-mail, said the job cuts are part of a plan to become financially independent. Digex borrowed $9 million from WorldCom during the second quarter.

Digex spokeswoman Secret Wherrett said the amount of cash Digex has to borrow from WorldCom "is decreasing quarter over quarter, but the goal is to not need to borrow and to be self-sustaining."

Digex has borrowed money from WorldCom every quarter since a funding agreement began Aug. 1 last year. Wherrett said Digex has received a total of about $112 million from WorldCom and that future funding will not be jeopardized by WorldCom's bankruptcy filing.

WorldCom's debt-financing agreement says the company can fund Digex at up to $10 million a month and that funding has been approved by the court, Wherrett said, adding that WorldCom has said it plans to keep funding Digex until the first quarter of next year.

Digex is laying off workers at a time when Maryland has lost thousands of jobs. Scott Hoyt, an economist at Economy.com in West Chester, Pa., said that as of June, Maryland had eight-tenths of a percent - or 19,000 - fewer jobs than it did a year earlier. Nationwide, the number of jobs was down about 1 percent, according to the U.S. Bureau of Labor Statistics and Economy.com.

"Maryland's been losing jobs pretty consistently since late last year," Hoyt said.

The state benefits from being near Washington because government spending is picking up, Hoyt said. However, the manufacturing and high-technology sectors are losing jobs, and tourist areas near Washington are struggling, he said. "So it's not a terrific environment, and clearly what's going on on Wall Street is slowing down the process of recovery as corporations are more focused on their accounting than investment and hiring," Hoyt said.

Digex cut 86 jobs in June and said it expects to finish this round of layoffs by the end of the week. Workers will receive severance packages relative to the amount of time they have been at the company. Digex had 1,068 workers at the end of the second quarter, Wherrett said.

Though WorldCom is Digex's largest shareholder, the Beltsville company is not a subsidiary of WorldCom. WorldCom agreed to acquire a controlling interest in Digex in 2000 through its merger with Intermedia Communications Inc. The deal became final last year.

"These decisions are all made by Digex management," Wherrett said.

When WorldCom announced in June that it had hidden billions of dollars of losses from investors and would cut tens of thousands of jobs, Digex said it was not affected.

Wherrett said Digex borrows from WorldCom cash that it needs to operate the business. Yesterday's layoffs, she said, were "an action taken to move toward financial independence."

Digex has still been losing money. The company reported a net loss of $50.4 million, or 80 cents a share, for the first quarter. That's up from a loss of $44.2 million, or 71 cents a share, a year earlier. Revenue was $51.8 million for the quarter that ended March 31, down from $53.1 million in the comparable quarter of last year.

The company said last month that it had received notification from the Nasdaq stock market that its shares had traded below $1 for longer than regulations allow and that it has to comply with listing rules or it could be delisted. The company said it plans to apply for listing on the Nasdaq SmallCap Market.

Shares of Digex closed yesterday at 18 cents, up 4 cents. In March 2000, shares of Digex traded at more than $152.

"Digex has three top priorities: customer focus, expanding our value proposition and financial independence. This initiative is one of several actions we're taking to ensure expenses are aligned with revenues," George Kerns, Digex's president and chief executive, said in a statement.

"These are difficult decisions, and much effort has been made to ensure that these actions will not impact delivery of services to our customers. Digex remains committed to retaining its market leadership and providing the highest quality hosting solutions and services."

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