<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
WAM!NET INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 7379 41-1795247
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
6100 WEST 110TH STREET,
MINNEAPOLIS, MINNESOTA 55438
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
EDWARD J. DRISCOLL III
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WAM!NET INC.
6100 WEST 110TH STREET
MINNEAPOLIS, MINNESOTA 55438
(612) 886-5100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
WITH A COPY TO:
DANIEL D. RUBINO, ESQ.
WILLKIE FARR & GALLAGHER
787 SEVENTH AVENUE
NEW YORK, NEW YORK 10019
(212) 728-8000
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Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(d) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO AMOUNT TO BE MAXIMUM AGGREGATE OFFERING REGISTRATION
BE REGISTERED REGISTERED(1) OFFERING PRICE(2) PRICE(2)(3) FEE(3)
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<S> <C> <C> <C> <C>
13 1/4% Senior Discount
Notes due 2005,
Series B.............. $208,530,000 100% $69,510,000 $20,505.45
</TABLE>
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(1) The "Amount to be registered" with respect to the 13 1/4% Senior Discount
Notes due 2005, Series B (the "Exchange Notes") represents the maximum
amount at maturity of Exchange Notes that may be issued pursuant to the
exchange offer described in the Registration Statement. The 13 1/4% Senior
Discount Notes due 2005, Series A (the "Original Notes"), into which the
Exchange Notes are hereby offered in exchange, were sold at a substantial
discount from their principal amount at maturity.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act.
(3) The registration fee for the Exchange Notes offered hereby, $20,505.45, is
calculated under Rule 457(f)(2) of the Securities Act as follows: the
product of .000295 and $69,510,000, one third of the aggregate principal
amount at maturity of the outstanding Original Notes, that may be tendered
to the Registrant (which has an accumulated capital deficit) in exchange
for the Exchange Notes. The registration fee was paid on May 28, 1998.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion dated July 10, 1998
PROSPECTUS
[LOGO]
WAM!NET INC.
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF 13 1/4% SENIOR DISCOUNT NOTES
DUE 2005, SERIES B, FOR EACH $1,000 IN PRINCIPAL AMOUNT OF OUTSTANDING 13 1/4%
SENIOR DISCOUNT NOTES DUE 2005, SERIES A, THAT WERE ISSUED AND SOLD IN RELIANCE
ON EXEMPTIONS FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
-----------
WAM!NET, a Minnesota corporation ("WAM!NET" or the "Company"), hereby offers
to exchange (the "Exchange Offer") $208,530,000 in aggregate principal amount
at maturity of its 13 1/4% Senior Discount Notes due 2005, Series B (the
"Exchange Notes") for $208,530,000 in aggregate principal amount at maturity of
its 13 1/4% Senior Discount Notes due 2005, Series A (the "Original Notes" and,
together with the Exchange Notes, the "Notes"), that were issued and sold in
reliance on exemptions from registration under the Securities Act of 1933, as
amended (the "Securities Act").
The terms of the Exchange Notes are substantially similar (including
principal amount, interest rate, maturity and ranking) to the terms of the
Original Notes for which they may be exchanged pursuant to the Exchange Offer,
except that the Exchange Notes (i) are freely transferable by holders thereof
(except as provided below) and are issued without any covenant regarding their
registration. The Exchange Notes will be issued under the indenture governing
the Original Notes. The Exchange Notes will be, and the Original Notes are,
general unsecured obligations of the Company and, as such, will rank pari passu
in right of payment with all existing and future unsecured and unsubordinated
Indebtedness (as defined herein) of the Company. The Exchange Notes will be,
and the Original Notes are, effectively subordinated in right of payment to all
secured Indebtedness of the Company to the extent of the value of the assets
securing such Indebtedness. As of March 31, 1998, the Company had outstanding
approximately $10.4 million of secured Indebtedness (consisting principally of
equipment financing), which would have effectively ranked senior in right of
payment to the Notes, no Indebtedness which would have ranked pari passu in
right of payment with the Notes and $25.9 million of Indebtedness which would
have been subordinated in right of payment to the Notes. The Indenture (as
defined herein) does not limit the amount of secured Permitted Equipment
Financing (as defined herein) that may be incurred by the Company. The Exchange
Notes will be, and the Original Notes are, fully and unconditionally guaranteed
on an unsecured and unsubordinated basis by all Material Restricted
Subsidiaries (as defined herein), which guarantees may be released under
certain circumstances; provided, however, that a Material Restricted Subsidiary
that is a Foreign Subsidiary (as defined herein) cannot become a Subsidiary
Guarantor (as defined herein) if by doing so it would violate applicable law of
its jurisdiction of organization or incorporation. As of the date hereof, the
Company does not have any Material Restricted Subsidiaries that are Subsidiary
Guarantors, and no Subsidiary (as defined herein) of the Company has any
Indebtedness. The Notes are effectively subordinated to the indebtedness,
including trade payables, of the Company's Subsidiaries that are not Subsidiary
Guarantors, which, as of March 31, 1998, was approximately $0.9 million. For a
complete description of the terms of the Exchange Notes, including provisions
relating to the ability of the Company to create indebtedness that is senior or
pari passu to the Exchange Notes, see "Description of the Notes." There will be
no cash proceeds to the Company from the Exchange Offer.
For each Original Note accepted for exchange the holder of such Original Note
will receive an Exchange Note having a principal amount equal to that of the
surrendered Original Note. Original Notes accepted for exchange will cease to
accrete value from and after the date of consummation of the Exchange Offer.
Holders of Original Notes whose Original Notes are accepted for exchange will
not receive any payment of accreted value on such Original Notes. Original
Notes that remain outstanding following the consummation of the Exchange Offer
will continue to accrete value from the Issue Date (as defined herein), as
provided in the Original Notes. The accreted value of the Exchange Notes will
be calculated from the Issue Date, and will be identical to that of the
Original Notes.
The Original Notes were originally issued and sold on March 5, 1998 (the
"Issue Date") in transactions exempt from registration under the Securities
Act, in reliance upon the exemption provided in Section 4(2) of the Securities
Act and Rule 144A of the Securities Act and pursuant to offers and sales that
occurred outside the United States within the meaning of Regulation S of the
Securities Act (collectively, the "Initial Offering"). Accordingly, the
Original Notes may not be reoffered, resold or otherwise pledged, hypothecated
or transferred in the United States unless so registered or unless an
applicable exemption from the registration requirements of the Securities Act
is available. Based upon its view of interpretations provided to third parties
by the Staff (the "Staff") of the Securities and Exchange Commission (the
"Commission"), the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for the Original Notes may be offered for
resale, resold and otherwise transferred by holders thereof (other than any
holder or any such other person which
(continued on next page)
SEE "RISK FACTORS" ON PAGE 12 HEREOF FOR A DESCRIPTION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
The date of this Prospectus is , 1998
<PAGE>
(continued from previous page)
is (i) an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act (an "Affiliate"), (ii) a broker-dealer who acquired Original
Notes directly from the Company or (iii) a broker-dealer who acquired Original
Notes as a result of market making or other trading activities) without
compliance with the registration and prospectus delivery provisions of the
Securities Act provided that such Exchange Notes are acquired in the ordinary
course of business of such holder and any beneficial owner, and such holders
are not engaged in, and do not intend to engage in, and have no arrangement or
understanding with any person to participate in, a distribution of such
Exchange Notes. Each broker-dealer who acquired Original Notes directly from
the Company and is participating in the Exchange Offer may be a statutory
underwriter and must comply with the registration and prospectus delivery
provisions of the Securities Act. Broker-dealers who acquired Original Notes
as a result of market making or other trading activities may use this
Prospectus, as supplemented or amended, in connection with resales of the
Exchange Notes. The Company has agreed that it will make this Prospectus
available to broker-dealers for use in connection with any such resale. Each
broker-dealer who receives Exchange Notes pursuant to the Exchange Offer must
acknowledge that it will deliver a current prospectus meeting the requirements
of the Securities Act in connection with any resale of such Exchange Notes.
The Letter of Transmittal that is filed as an exhibit to the Registration
Statement of which this Prospectus is a part (the "Letter of Transmittal")
states that by so acknowledging and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. Any holder that cannot rely upon such
interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
The Original Notes and the Exchange Notes constitute new issues of
securities with no established public trading market. Any Original Notes not
tendered and accepted in the Exchange Offer will remain outstanding. To the
extent that Original Notes are tendered and accepted in the Exchange Offer, a
holder's ability to sell untendered, and tendered but unaccepted, Original
Notes could be adversely affected. Following consummation of the Exchange
Offer, the holders of Original Notes will continue to be subject to the
existing restrictions on transfer thereof and the Company will have no further
obligation to such holders to provide for the registration under the
Securities Act of the Original Notes except under certain limited
circumstances. (See "Note Registration Rights.") No assurance can be given as
to the liquidity of the trading market for either the Original Notes or the
Exchange Notes.
This Prospectus and the Letter of Transmittal are first being mailed to
holders of Original Notes on , 1998. The Exchange Offer is not
conditioned upon any minimum aggregate principal amount of Original Notes
being tendered or accepted for exchange. The Exchange Offer will expire at
5:00 p.m., New York City time, on , 1998 unless extended (the "Expiration
Date"). The date of acceptance for exchange of the Original Notes (the
"Exchange Date") will be the first business day following the Expiration Date,
upon surrender of the Original Notes. Original Notes tendered pursuant to the
Exchange Offer may be withdrawn at any time prior to the Expiration Date;
otherwise such tenders are irrevocable.
The Original Notes were issued originally in global form (the "Global
Original Notes"). The Global Original Notes were deposited with, or on behalf
of, The Depository Trust Company ("DTC"), as the initial depository with
respect to the Original Notes (in such capacity, the "Depositary"). The Global
Original Notes are registered in the name of Cede & Co. ("Cede"), as nominee
of DTC, and beneficial interests in the Global Original Notes are shown on,
and transfers thereof are effected only through, records maintained by the
Depositary and its participants. The use of the Global Original Notes to
represent certain of the Original Notes permits the Depositary's participants,
and anyone holding a beneficial interest in an Original Note registered in the
name of such a participant, to transfer interests in the Original Notes
electronically in accordance with the Depositary's established procedures
without the need to transfer a physical certificate. Exchange Notes issued in
exchange for the Global Original Notes will also be issued initially as a note
in global form (the "Global Exchange Notes," and, together with the Global
Original Notes, the "Global Notes") and deposited with, or on behalf of, the
Depositary. After the initial issuance of the Global Exchange Notes, Exchange
Notes in certificate form will be issued in exchange for a holder's
proportionate interest in the appropriate Global Exchange Note only as set
forth in the Indenture.
ii
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall include all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and
the rules and regulations promulgated thereunder, covering the Exchange Notes
being offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document referred to in the Registration Statement are not necessarily
complete. With respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified by such reference.
The Registration Statement may be inspected without charge at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Registration Statement may be
obtained from the Commission at prescribed rates at such address, and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center,
Suite 1300, New York, New York 10048. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding companies that file electronically with the Commission. The address
of such site is http://www.sec.gov.
The Company's obligation to file periodic reports with the Commission
pursuant to the Exchange Act may be suspended if the Notes are held of record
by fewer than 300 Holders at the beginning of the fiscal year of the Company,
other than the fiscal year in which the Registration Statement or any Shelf
Registration Statement (as defined) becomes effective. The Company has agreed
that, whether or not it is required to do so by the rules and regulations of
the Commission, for so long as any of the Notes remain outstanding, they will
furnish to the Holders of the Notes and submit to the Commission (unless the
Commission will not accept such materials) (i) all quarterly and annual
financial information that would be required to be contained in filings with
the Commission on Forms 10-Q and 10-K if the Company was required to file such
forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Company' certified independent
accountants, and (ii) all reports that would be required to be filed with the
Commission on Form 8-K if the Company was required to file such reports. In
addition, for so long as any of the Notes remain outstanding, the Company has
agreed to make available upon request to any prospective purchaser of, or
beneficial owner of Notes in connection with any offer or sale thereof, the
information required by Rule 144A(d)(4) under the Securities Act.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
----------------
WAM!NET (R), ! (R) (stylized exclamation mark, design only), WAM!PROOF(TM),
WAM!BASE(TM), Industry Smart(TM), Industry Smart Network(TM), Industry Smart
Application(TM) and 4-Sight are trademarks of the Company or its subsidiaries.
iii
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TABLE OF CONTENTS
<TABLE>
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PAGE
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Available Information.................................................... iii
Prospectus Summary....................................................... 1
Risk Factors............................................................. 12
Use of Proceeds.......................................................... 21
The Exchange Offer....................................................... 22
Capitalization........................................................... 30
Selected Financial Data.................................................. 31
Pro Forma Financial Data................................................. 33
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 37
Business................................................................. 45
Management............................................................... 61
Ownership of the Company................................................. 67
Certain Transactions and Relationships................................... 68
Description of the Company's Securities.................................. 72
Description of Certain Indebtedness...................................... 77
Description of the Notes................................................. 79
Note Registration Rights................................................. 107
Book-Entry; Delivery and Form............................................ 109
Certain Federal Income Tax Considerations................................ 111
Plan of Distribution..................................................... 115
Legal Matters............................................................ 116
Experts.................................................................. 116
Index to Financial Statements............................................ F-1
Glossary................................................................. A-1
</TABLE>
iv
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Certain
capitalized terms used but not defined in this summary are used herein as
defined elsewhere in this Prospectus. Unless the context otherwise requires,
references herein to "WAM!NET" or the "Company" are to WAM!NET Inc. (formerly
known as NetCo Communications Corporation), a Minnesota corporation, and its
subsidiaries. Capitalized terms used in this Prospectus, which are not
otherwise defined herein, have the respective meanings ascribed to them in
"Glossary." All Common Stock share and per share amounts in this Prospectus
have been adjusted to reflect a five-for-one stock split which occurred on
February 26, 1998. See the "Risk Factors" included in this Prospectus for a
description of certain factors that should be considered by participants in the
Exchange Offer.
THE COMPANY
OVERVIEW
WAM!NET provides a managed, high speed digital data delivery network service
(the "WAM!NET(R) Service") that integrates the Company's industry-specific work
flow applications with commercially available computer and telephony
technologies. The Company, an affiliate of WorldCom Inc. ("WorldCom"), offers
an "Industry Smart(TM)" service designed to provide its subscribers with a
turn-key single source solution for the rapid, secure, accurate and reliable
transportation and management of information, with a simple "pay by the
megabyte" pricing plan requiring no capital investment. The WAM!NET Service
provides seamless digital connectivity among "communities of interest," drawing
together customers and trading partners which have collaborative work flows.
The Company has developed advanced WAM!NET Service applications, including an
on-line digital job tracking and billing system (Customer Information System or
"CIS"), an application enabling remote proofing ("WAM!PROOF(TM)") and a remote
data archiving, retrieval and distribution system ("WAM!BASE(TM)"). WAM!PROOF
was commercially released in the second quarter of 1998 and WAM!BASE is
scheduled for commercial release in the second half of 1998.
The Company has initially capitalized on the growing need for managed digital
data delivery services in the printing, publishing, advertising, pre-press,
corporate communication and graphic arts industries (collectively, "Graphic
Arts"). The Company believes that the WAM!NET Service is achieving wide
acceptance among leading firms within the Graphic Arts community of interest,
which in turn encourages those with whom such firms share digital information
to subscribe to the WAM!NET Service. Since it commercially released and
commenced marketing of the WAM!NET Service in March 1996, the Company has
established a subscriber base of more than 1,500 customer locations, including
at Time Inc. ("Time"), R.R. Donnelley & Sons Company ("Donnelley"), The Walt
Disney Company ("Disney"), J.C. Penney Company, Inc. ("J.C. Penney"), Fox
Broadcasting Company ("Fox Broadcasting") and Macy's West (formerly known as
Macy's California) department stores ("Macy's"). In October 1997, the WAM!NET
Service received the Graphic Arts Technical Foundation (an independent trade
association) award for the product or service that will most likely change the
manner in which the Graphic Arts industry conducts business.
MARKET OPPORTUNITY
The Company believes that the increasing digitalization of work product and
work flow in data intensive and time sensitive industries is driving demand for
managed, secure and reliable electronic data transportation and archiving
services. Based on information derived from independent studies, the Company
believes that the Graphic Arts industry will spend approximately $10.0 billion
between 1998 and 2000 on the digitalization of its production and printing
process, including the introduction by commercial printers of computer-to-plate
1
<PAGE>
("CTP") technology, which facilitates a fully digital work product. Despite
this movement toward the digital creation, storage and outputting of data, the
lack of reliable, cost effective electronic transport mechanisms has resulted
in many companies continuing to use overland or air courier services to deliver
magnetic tape or optical disk copies of data to others who desire access to
such data. This non-digital step results in a method of transporting data which
can be inefficient, significantly lengthening production cycle time and leading
to possible errors. The Company believes the potential market for managed
digital data transportation and asset storage services is $4.3 billion and $2.3
billion, respectively, in the Graphic Arts industry alone.
The Company believes that existing electronic means for transporting large
digital data files have proven to be ineffective and/or prohibitively expensive
for most companies. Large files may take up to several days to transport using
the Internet or the fastest standard telephone modems (56,000 bps) and may lose
significant quality in transmission. The use of the Internet and standard
telephone modems can also lead to other significant disadvantages, most notably
high telephone usage charges and a lack of security, accountability and
reliability of transmission. Other non-dedicated technologies offer more speed
than the Internet or a standard telephone modem, but at a significantly higher
cost. Such technologies may also lead to data degradation and integration
obstacles. Large data files can be transported reliably in minutes over
dedicated point to point telephone lines (such as DS1 and DS3); however, the
substantial equipment necessary at each dedicated connecting point and the
sizable costs of leasing a dedicated point to point telephone line makes this
means of transport uneconomical for most companies transporting large data
files.
COMPETITIVE ADVANTAGES
The Company believes it is uniquely positioned to meet the growing need for a
cost-effective and reliable means of electronically transporting, storing and
retrieving digital data due to the following competitive advantages:
. Purpose-Built, Industry Smart Network. The WAM!NET Service operates via a
nationwide network that integrates the Company's proprietary, value-added
Industry Smart applications with a purpose-built network of Company owned
national, regional and local hubs ("Distribution Hubs") interconnected
redundantly with high-bandwidth leased telephone circuits (the "WAM!NET
Network"). The Company currently maintains 23 Distribution Hubs, located in
major United States and Canadian cities, London, England and Paris, France.
The Company operates two mirrored network operations centers ("NOCs") in
Minneapolis and Las Vegas through which it monitors all data transmission on
a 24 hour a day, 7 day a week basis. The Company believes the WAM!NET
Service offers reliable and secure data transmissions with no degradation in
quality and guaranteed delivery and throughput.
. Single Source, Turn-Key Service Solution. The Company provides each
subscriber with all of the hardware, software, transmission facilities and
management services necessary to use the WAM!NET Service. Installation of
the service, which is performed on behalf of the Company by national service
providers, consists of connecting the customer to the nearest Distribution
Hub through a Company-owned network access device ("NAD") and an appropriate
communications link (such as T1, ISDN, frame relay, ADSL or other suitable
facility) matched to the customer's transfer speed and throughput
requirements. The WAM!NET Service is designed for ease of use, with a point
and click e-mail type interface and a simple "pay by the megabyte" pricing
model. The Company's strategy is to offer customers the WAM!NET Service at
rates competitive with overland and air courier services furnished on an
annual or multi-year subscription basis. There is no up-front capital
investment by the customer, who is charged based on a minimum monthly usage
fee and volume of data sent per transaction.
. Industry Smart Applications. The Company collaborates with leading
participants in its target markets and designs applications addressing
industry-specific work product and work flow requirements. These Industry
Smart applications combined with the guaranteed delivery and throughput of
the WAM!NET Service allow work partners in distant geographic locations to
collaborate digitally in real time. The WAM!PROOF
2
<PAGE>
application will allow customers to directly output across the WAM!NET
Network to proofing devices in remote locations, thereby eliminating the
need to deliver physical proofs by overnight courier. The WAM!BASE
application will provide a collaborative digital asset management service
that can eliminate the need for redundant archives and shrink work cycle
time by providing more immediate access to desired data files.
. Customer Support and CIS. The Company has implemented extensive customer
service functions, including customer support technicians who are available
24 hours a day, 7 days a week, are trained extensively in the Company's
service offerings and who understand the industry-specific work flow of the
Company's customers. CIS allows customers to view data files, verify
account information and check the status of transactions on-line, as well
as to log help requests. The Company provides its customers itemized
information regarding the size, cost, and destination of each "shipment"
that may be electronically imported directly into the customer's own
accounting system, which facilitates capturing of project-specific costs
and billing of services on a job-by-job basis.
. First to Market Advantage. By being the first to market a managed, high
speed digital data delivery network with Industry Smart applications, the
Company believes it is becoming the industry standard in the Graphic Arts
industry and is positioned to become the industry standard in its other
target industries. The Company has found that industry leaders such as Time
and Donnelley (early WAM!NET Service customers) actively encourage their
work flow partners to subscribe to the WAM!NET Service to increase work
flow efficiencies. Potential entrants into the managed digital data
delivery field would need to deploy a nationwide, purpose-built network
integrated with customized value-added applications, and simultaneously
convert industry leaders and their work flow partners, more than 900 of
whom have contracted with the Company for the WAM!NET Service at more than
1,500 locations. Customers currently subscribing to the WAM!NET Service
include 11 of the 20 largest publishers, 9 of the 20 largest printers, 16
of the 20 largest advertising agencies, and 10 of the 20 largest pre-press-
graphic arts agencies in the United States, as well as the corporate
communications and advertising departments of many United States
corporations.
. Strategic Relationship with WorldCom. The Company has entered into a
strategic alliance with WorldCom which includes equity and debt investments
and operating loan guarantees totaling approximately $50 million. WorldCom
is currently entitled to designate a majority of the Board of Directors of
the Company and, through its ownership of convertible debt and warrants,
has the right to acquire a majority of the Common Stock of the Company.
WorldCom also provides telecommunication and other services to the Company
on a non-exclusive basis. The Company anticipates that its relationship
with WorldCom will enable it to access the worldwide infrastructure, sales
and marketing work force, telephony technologies, high bandwidth carrier
service and other services of WorldCom and its affiliates, including UUNet
Technologies, Inc. ("UUNet").
BUSINESS STRATEGY
The Company's objective is to become the leading provider of enhanced,
managed digital data delivery and archiving services to industries comprised
of interdependent participants requiring industry specific, high speed digital
connectivity. WAM!NET's strategy to achieve this objective and to build a
long-term sustainable competitive advantage is to:
. Increase its Customer Base to Create Critical Mass. The Company's sales and
marketing strategy has been designed to rapidly penetrate its initial
target market, the Graphic Arts industry. Elements of this strategy
include: (i) creating the WAM!NET Service as a turn-key, single source
service solution; (ii) implementing an easy to understand "pay by the
megabyte" pricing model (which eliminates the need for any capital
investment by customers); (iii) designing aggressive advertising, trade
show, event marketing and direct selling to drive trials, including
introductory risk-free product evaluations for industry leaders; (iv)
building a direct sales force to target leading industry participants who,
in turn, encourage their work
3
<PAGE>
flow partners to subscribe to the WAM!NET Service; and (v) implementing
programs in which large receivers of data (e.g., printers) promote and
market the WAM!NET Service, along with the WAM!NET direct sales force, to
customers and work flow partners. The Company believes that the customer
benefits of the WAM!NET Service will increase exponentially as the total
number of WAM!NET Service subscribers increases.
. Apply Industry Smart Network Model to Other Industries. The Company
believes that the WAM!NET Industry Smart network model can provide the
benefits and advantages it offers the Graphic Arts industry to other
industries with similar data transportation, storage and retrieval
requirements. Some of the Company's customers that are in the entertainment
industry, such as Fox Broadcasting and Disney, currently subscribe to the
WAM!NET Service for their Graphic Arts-related needs. The Company is
presently developing Industry Smart applications suitable to the
entertainment industry and is developing corresponding marketing and sales
strategies. The Company is also collaborating with industry leaders in the
medical imaging industry to develop and implement Industry Smart
applications in connection with marketing to that industry.
. Drive Utilization Through Value-Added Services and Volume Discounts. The
Company incorporates, develops and implements value-added Industry Smart
applications for customers, such as CIS, WAM!PROOF and WAM!BASE, which the
Company believes will provide significant benefits to its customers and
stimulate increased usage of the WAM!NET Service. The Company also offers
volume discounts and a variety of promotional programs for industry leaders
to induce customers to send increasingly large volumes of data traffic
across the WAM!NET Network.
. Expand and Enhance Infrastructure and Develop Worldwide Capabilities. The
Company intends to invest in resources and systems to ensure that the
WAM!NET Network's operating infrastructure and support services provide
optimal digital connectivity to its subscribers in a guaranteed performance
and competitive rate environment. The Company is currently preparing to
expand into parts of Europe and Asia for the purpose of providing its
customers with desired international connectivity. The Company expects to
expand the WAM!NET Network into approximately 10 countries by the end of
1998, and will initially locate additional Distribution Hubs in London,
Frankfurt, Paris, Amsterdam, Milan, Tokyo, Hong Kong, and Sydney. The
London and Paris Distribution Hubs were recently installed and the Company
is currently in the process of installing a Distribution Hub in Amsterdam.
During 1998, the Company expects to further develop its international
service infrastructure by providing installation and customer support via
third parties, developing local sales and distribution relationships and
may establish additional Distribution Hubs and regional NOCs in selected
countries. The Company's acquisition of 4-Sight Limited ("4-Sight") will
permit subscribers, including 4-Sight's 30,000 customers in 44 countries,
to gain remote access to the WAM!NET Network through transmission software
being developed by 4-Sight. The Company may also establish its
international presence through other acquisitions, joint ventures or other
similar business transactions. See "--Recent Developments."
. Reduce Costs and Improve Operating Margins. The Company seeks to reduce
costs and improve operating margins by (i) spreading the cost of installing
and operating the WAM!NET Network over a large base of customers; (ii)
designing the network to use more expensive hub equipment in a few national
and regional operational centers and less expensive equipment at each
customer site; (iii) deploying cost-reduced NADs for less volume intense
customers; (iv) pursuing programs to reduce the costs of capital equipment,
including obtaining mass purchasing discounts for network infrastructure
and customer premise equipment; (v) utilizing network management tools to
optimize existing and planned network capacity as volume increases and
traffic patterns begin to emerge; (vi) deploying new, lower-cost last mile
local loop technologies to connect customer sites to Distribution Hubs,
including wireless technologies and remote dial-up capabilities; and (vii)
deriving other incremental revenue from value-added services such as
WAM!BASE, which can be delivered over the existing WAM!NET Network
infrastructure. The Company also believes its operating margins will
improve as a result of anticipated cost reductions associated with
increasing competition in both the local and long distance markets.
4
<PAGE>
RECENT DEVELOPMENTS
On March 13, 1998, the Company purchased the entire share capital of 4-Sight
Limited, a private limited company incorporated under the laws of England and
Wales (the "4-Sight Acquisition"), for $20.0 million in cash, which was paid
out of the proceeds of the Initial Offering, and 2,500,000 shares of Common
Stock which, subject to the satisfaction of certain conditions, may be
increased to 3,250,000 shares of Common Stock.
4-Sight develops and distributes ISDN data transmission software and related
products and applications targeted to the Graphic Arts industry, with
particular emphasis on European, Asian and North American markets. 4-Sight
software users are generally responsible for all software and hardware
installation, procuring an ISDN telephony connection and verifying the
integrity of their files being sent over a public network infrastructure. The
Company believes that there are potential synergies in adapting and integrating
4-Sight's data transmission software into WAM!NET's managed network
infrastructure. At December 31, 1997, 4-Sight's customer base exceeded 30,000
locations, including 3,000 sites in the United States. The Company expects that
the 4-Sight Acquisition will enable the Company to achieve broader market
coverage in the Graphic Arts market by combining 4-Sight's international
presence and penetration of the lower volume user market with the Company's
domestic presence and penetration of the higher volume user market.
COMPANY HISTORY
The Company was incorporated in Minnesota in September 1994. From
incorporation through March 1996, the Company was principally engaged in the
development of the WAM!NET Service. In March 1996, the Company commercially
released and began marketing the WAM!NET Service. Between September and
December 1996, the Company entered into its strategic alliance with WorldCom.
In 1997, the Company expanded its marketing efforts, increased its sales and
installation of the WAM!NET Service, continued development of WAM!PROOF and
WAM!BASE and other advanced applications, and prepared for expansion into
overseas markets and for the application of WAM!NET Services to other targeted
industries. WAM!PROOF was commercially released in the second quarter of 1998
and WAM!BASE is currently scheduled for commercial release in the second half
of 1998. In February 1998, the Company changed its name from NetCo
Communications Corporation to WAM!NET Inc. as part of a strategy to take
advantage of the market presence established by the Company's primary product,
the WAM!NET Service, and to avoid confusion between the more familiar product
name, "WAM!NET," and the less familiar corporate name, "NetCo."
The Company's principal executive offices are located at 6100 West 110th
Street, Minneapolis, Minnesota 55438. The Company's telephone number is (612)
886-5100; its facsimile number is (612) 885-0687; its Internet e-mail address
is [email protected]; and its homepage address on the world wide web is
www.wamnet.com.
5
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer.... The Company is offering to exchange up to $208,530,000
aggregate principal amount at maturity of 13 1/4%
Senior Discount Notes due 2005, Series B, for each
$1,000 in principal amount of outstanding 13 1/4%
Senior Discount Notes due 2005, Series A, that were
issued and sold in reliance upon an exemption from
registration under the Securities Act. The terms of the
Exchange Notes will be substantially identical in all
respects (including principal amount, interest rate,
maturity and ranking) to the terms of the Original
Notes for which they may be exchanged pursuant to the
Exchange Offer, except that (i) the Exchange Notes will
be freely transferable by Holders thereof except as
provided herein (see "The Exchange Offer--Terms of the
Exchange" and "The Exchange Offer--Terms and Conditions
of the Letter of Transmittal") and (ii) the Exchange
Notes will be issued without any covenant regarding
registration under the Securities Act.
Exchange Notes issued pursuant to the Exchange Offer in
exchange for the Original Notes may be offered for
resale, resold and otherwise transferred by Holders
thereof (other than any Holder which is (i) an
"affiliate" of the Company within the meaning of Rule
405 under the Securities Act, (ii) a broker-dealer who
acquired Original Notes directly from the Company or
(iii) broker-dealers who acquired Original Notes as a
result of market making or other trading activities)
without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that
such Exchange Notes are acquired in the ordinary course
of such Holders' business and such Holders are not
engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to
participate in, a distribution of such Exchange Notes.
Minimum Condition..... The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Original Notes being
tendered for exchange.
Expiration Date....... The Exchange Offer will expire at 5:00 p.m., New York
City time, on , 1998 unless extended.
Exchange Date......... The first date of acceptance for exchange for the
Original Notes will be the first business day following
the Expiration Date.
Conditions to the
Exchange Offer.......
The obligation of the Company to consummate the
Exchange Offer is subject to certain conditions. See
"The Exchange Offer--Conditions to the Exchange Offer."
The Company reserves the right to terminate or amend
the Exchange Offer at any time prior to the Expiration
Date upon the occurrence of any such condition.
Withdrawal Rights..... Tenders may be withdrawn at any time prior to the
Expiration Date. Any Original Notes not accepted for
any reason will be returned without expense to the
tendering Holders thereof as promptly as practicable
after the expiration or termination of the Exchange
Offer.
Procedures for
Tendering Original
Notes................ See "The Exchange Offer--How to Tender."
6
<PAGE>
Federal Income Tax
Consequences.........
The exchange of Original Notes for Exchange Notes by
Holders will not be a taxable exchange for federal
income tax purposes, and Holders should not recognize
any taxable gain or loss or any interest income as a
result of such exchange. See "Certain Federal Income
Tax Considerations."
Effect on Holders of
Original Notes.......
As a result of the making of this Exchange Offer, and
upon acceptance for exchange of all validly tendered
Original Notes pursuant to the terms of this Exchange
Offer, the Company will have fulfilled a covenant
contained in the terms of the Original Notes and the
Registration Rights Agreement (the "Registration Rights
Agreement") dated as of March 5, 1998, among the
Company and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Credit Suisse First Boston Corporation
and First Chicago Capital Markets, Inc. (collectively,
the "Initial Purchasers"), and, accordingly, the
Holders of the Original Notes will have no further
registration or other rights under the Registration
Rights Agreement, except under certain limited
circumstances. See "Note Registration Rights." Holders
of the Original Notes who do not tender their Original
Notes in the Exchange Offer will continue to hold such
Original Notes and will be entitled to all the rights
and limitations applicable thereto under the Indenture,
dated as of March 5, 1998 among the Company and U.S.
Bank Trust National Association (f/k/a First Trust
National Association), as Trustee (the "Trustee"),
relating to the Original Notes and the Exchange Notes
(the "Indenture"). All untendered, and tendered but
unaccepted, Original Notes will continue to be subject
to the restrictions on transfer provided for in the
Original Notes and the Indenture. To the extent that
Original Notes are tendered and accepted in the
Exchange Offer, the trading market, if any, for the
Original Notes could be adversely affected. See "Risk
Factors--Consequences of Failure to Exchange." The
Original Notes have been designated for trading in The
PORTAL Market ("PORTAL"), a subsidiary of The Nasdaq
Stock Market, Inc. Original Notes that remain
outstanding following the consummation of the Exchange
Offer will continue to be designated for trading in
PORTAL.
THE NOTES
Notes................. $208,530,000 aggregate principal amount at maturity of
13 1/4% Senior Discount Notes due 2005. The Original
Notes were issued on March 5, 1998 (the "Issue Date")
at a discount to their aggregate principal amount at
maturity and generated gross proceeds to the Company of
approximately $125.0 million. The yield to maturity of
the Notes is 14.59% (computed on a semi-annual bond
equivalent basis).
Maturity.............. March 1, 2005.
Interest.............. Cash interest does not accrue nor is payable on the
Notes prior to March 1, 2002. Thereafter, cash interest
on the Notes will accrue at a rate of 13 1/4% per annum
(calculated on a semi-annual bond equivalent basis) and
will be payable semi-annually in arrears on March 1 and
September 1 of each year, commencing September 1, 2002.
Ranking............... The Notes are general senior obligations of the Company
and, as such, rank pari passu in right of payment with
all existing and future unsecured and
7
<PAGE>
unsubordinated Indebtedness of the Company. The Notes
are effectively subordinated to all secured
Indebtedness of the Company to the extent of the value
of the assets securing such Indebtedness. As of March
31, 1998, the Company had outstanding approximately
$10.4 million of secured Indebtedness (consisting
principally of equipment financing), which effectively
ranked senior in right of payment to the Notes, no
Indebtedness which ranked pari passu in right of
payment to the Notes and $25.9 million of Indebtedness
which would have been subordinated in right of payment
to the Notes. Although the Indenture contains
limitations on the amount of additional Indebtedness
which the Company may incur, under certain
circumstances the amount of such Indebtedness could be
substantial, and the Indenture does not limit the
amount of secured Permitted Equipment Financing that
may be incurred by the Company. See "Description of the
Notes--Ranking."
Subsidiary
Guarantees........... The Indenture provides that each Material Restricted
Subsidiary (as defined herein) will become a guarantor
of the Notes (a "Subsidiary Guarantor"); provided,
however, that a Material Restricted Subsidiary that is
a Foreign Subsidiary shall not become a Subsidiary
Guarantor if by doing so it would violate applicable
law of its jurisdiction of organization or
incorporation. As of the date hereof, the Company has
no Material Restricted Subsidiaries that are Subsidiary
Guarantors. The guarantees of the Subsidiary Guarantors
(collectively, the "Subsidiary Guarantees"), if any,
will be general unsecured senior obligations of the
Subsidiary Guarantors and will rank pari passu in right
of payment with all unsecured and unsubordinated
Indebtedness of the Subsidiary Guarantors and senior in
right of payment to all subordinated Indebtedness of
the Subsidiary Guarantors. The Subsidiary Guarantees
may be released under certain circumstances. See
"Description of the Notes--Certain Covenants--Issuances
of Guarantees by Certain Restricted Subsidiaries;
Release of Guarantees." The Subsidiary Guarantees are
limited to the extent of any payment that would
constitute a fraudulent transfer under federal or state
law. See "Risk Factors--Fraudulent Conveyance
Considerations Relating to Subsidiary Guarantees."
Optional Redemption... The Notes are redeemable at the option of the Company,
in whole or in part, at any time upon not less than 30
nor more than 60 days written notice, on or after March
1, 2002, at the redemption prices set forth herein,
plus accrued and unpaid interest to the date of
redemption. In addition, at any time prior to March 1,
2001 (i) the Company may redeem up to 25% of the
originally issued aggregate principal amount at
maturity of Notes, other than in any circumstance
resulting in a Change of Control, at a redemption price
equal to 113.25% of the Accreted Value of the Notes so
redeemed as of the date of redemption, with the net
cash proceeds of an Initial Public Equity Offering
resulting in gross cash proceeds to the Company of at
least $35.0 million in the aggregate; provided that not
less than 75% of the originally-issued aggregate
principal amount at maturity of Notes is outstanding
immediately following such redemption. See "Description
of the Notes--Redemption--Optional Redemption."
Change of Control..... In the event of a Change of Control, the Company is
required to make an offer to purchase all outstanding
Notes at a purchase price equal to 101% of the Accreted
Value thereof, plus accrued and unpaid interest
thereon, if any,
8
<PAGE>
to the date of purchase. See "Description of the
Notes--Certain Covenants--Change of Control."
Asset Sale Offer...... The Company, subject to certain conditions, is
obligated to make an offer to purchase Notes with the
Net Cash Proceeds of certain Asset Sales at a purchase
price equal to 100% of the Accreted Value thereof, plus
accrued and unpaid interest thereon, if any, to the
date of purchase. See "Description of the Notes--
Certain Covenants--Disposition of Proceeds of Asset
Sales."
Certain Covenants..... The Indenture contains certain covenants, including,
among others, covenants with respect to the following
matters: (i) limitation on additional indebtedness,
(ii) limitation on restricted payments, (iii)
limitation on liens securing certain indebtedness, (iv)
issuance of guarantees by certain Restricted
Subsidiaries; release of guarantees, (v) change of
control, (vi) limitation on dividends and other payment
restrictions affecting Restricted Subsidiaries, (vii)
disposition of proceeds of Asset Sales, (viii)
limitation on issuances and sales of capital stock of
Restricted Subsidiaries, (ix) limitation on
transactions with affiliates, (x) reports, (xi)
limitation on designations of Unrestricted
Subsidiaries, (xii) limitation on status as investment
company, and (xiii) consolidation, merger, sale of
assets, etc. These covenants are subject to important
exceptions and qualifications. See "Description of
Notes--Certain Covenants" and "--Consolidation, Merger,
Sale of Assets, Etc."
Exchange Offer; Note
Registration
Rights...............
Pursuant to the Registration Rights Agreement, the
Company agreed (i) to file a registration statement
(the "Exchange Offer Registration Statement") with
respect to an offer to exchange the Original Notes (the
"Exchange Offer") for senior debt securities of the
Company with terms identical to the Original Notes (
i.e., the Exchange Notes) (except that the Exchange
Notes will not contain terms with respect to transfer
restrictions) on or prior to the 90th day after the
Issue Date, (ii) to use its best efforts to have the
Exchange Offer Registration Statement be declared
effective by the Commission on or prior to the 150th
day after the Issue Date and (iii) commence the
Exchange Offer and use its best efforts to issue the
Exchange Notes on or prior to the 30th day after the
date on which the Exchange Offer Registration Statement
was declared effective by the Commission. In the event
that applicable law or interpretations of the staff of
the Commission do not permit the Company to file the
Exchange Offer Registration Statement or to effect the
Exchange Offer, if the Exchange Offer is not for any
other reason consummated within 180 days after the
Issue Date or if certain holders of the Original Notes
notify the Company they are not permitted to
participate in, or would not receive freely tradable
Notes pursuant to, the Exchange Offer, the Company will
file and will use its best efforts to cause to become
effective a registration statement (the "Shelf
Registration Statement") with respect to the resale of
the Original Notes and to keep the Shelf Registration
effective until up to two years after the effective
date thereof. The Company may be required to make cash
payments to holders of Notes under certain
circumstances if the Company is not in compliance with
its obligations under the Registration Rights
Agreement. See "Note Registration Rights."
RISK FACTORS
Prospective participants in the Exchange Offer should carefully consider all
of the information set forth in this Prospectus and, in particular, should
evaluate the specific risk factors set forth under "Risk Factors," beginning on
page 12, for a discussion of certain risks involved in the Exchange Offer.
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following tables set forth (i) selected historical consolidated financial
data for the Company and its subsidiaries for each of the years in the three
year period ended December 31, 1997, and for the three month periods ended
March 31, 1997 and 1998, (ii) selected historical consolidated financial data
for 4-Sight and its subsidiaries for the year ended August 31, 1996, the month
ended September 30, 1996, the year ended September 30, 1997 and the twelve
months ended December 31, 1997 and (iii) selected pro forma financial data that
gives effect to the Offering and the 4-Sight Acquisition as if they had
occurred on January 1, 1997. The 4-Sight Acquisition occurred on March 13, 1998
and the operating results of 4-Sight are included in the Company's operating
results from that date through March 31, 1998. The Company's summary historical
consolidated financial data as of and for the three months ended March 31, 1997
and 1998 and 4-Sight's selected historical consolidated financial data as of
and for the twelve months ended December 31, 1997 have been derived from the
respective companies' unaudited financial statements and have been prepared on
the same basis as the historical information derived from audited financial
statements. In the opinion of the management of the Company and the management
of 4-Sight, the unaudited financial statements of the respective companies,
from which such data have been derived, contain all adjustments, consisting
only of normal recurring accruals, necessary for the fair presentation of the
results for and as of the end of such periods. The Company's development and
expansion activities during the periods presented below significantly affect
the period-to-period comparability of the historical data presented for the
Company. The historical data with respect to the three months ended March 31,
1998 should not be regarded as necessarily indicative of the results that may
be expected for the entire year. The following information is qualified in its
entirety by, and should be read in conjunction with, the consolidated financial
statements and the notes thereto of the Company and 4-Sight, "Pro Forma
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
WAM!NET INC.
---------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- -------- ------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... $ 180 $ 279 $ 1,555 $ 122 $ 1,880
Operating expenses......... 1,437 7,036 31,037 4,205 25,412
Operating income (loss).... (1,257) (6,757) (29,482) (4,083) (23,532)
Interest income (expense),
net....................... (20) (839) (4,154) (628) (3,151)
Income (loss) before income
taxes..................... (1,277) (7,596) (33,636) (4,711) (26,683)
Net income (loss).......... (1,277) (7,596) (33,636) (4,711) (26,683)
OTHER DATA:
EBITDA(1).................. $(1,226) $(6,310) $(26,814) $(3,796) $(21,611)
Depreciation and
amortization.............. 31 447 2,668 287 1,921
Capital expenditures....... 657 4,244 16,599 3,904 10,143
Net cash used in operating
activities................ (747) (6,218) (23,917) (3,345) (9,743)
Net cash used in investing
activities................ (657) (5,244) (15,599) (2,904) (30,396)
Net cash provided by (used
in) financing activities.. 2,732 24,578 25,346 (1,096) 102,687
Ratio of earnings to fixed
charges(2)................ -- -- -- -- --
BALANCE SHEET DATA (END OF
PERIOD):
Cash and cash equivalents.. $ 1,328 $15,444 $ 274 $ 7,099 $ 66,760
Total assets............... 2,075 20,070 21,086 15,390 137,770
Total debt(3).............. 1,900 20,473 45,778 20,049 143,478
Shareholders' deficit(4)... (371) (2,683) (30,671) (6,412) (15,316)
</TABLE>
Footnotes on the following page.
10
<PAGE>
<TABLE>
<CAPTION>
4-SIGHT LIMITED
----------------------------------------------------------------------------
THREE MONTHS ENDED
DECEMBER 31,
YEAR ENDED MONTH ENDED YEAR ENDED -------------------
AUGUST 31, 1996 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997(5) 1996 1997
--------------- ------------------ --------------------- --------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $11,446 $1,065 $18,264 $ 3,860 $ 4,769
Operating expenses...... 9,380 1,124 15,817 2,352 2,517
Operating income
(loss)................. 2,066 (59) 2,447 118 884
Interest income
(expense), net......... 18 (9) 57 (25) 58
Income (loss) before
income taxes........... 2,084 (68) 2,504 93 942
Net income (loss)....... 1,478 (61) 1,588 71 568
OTHER DATA:
EBITDA(1)............... $ 2,372 $ (20) $ 3,050 $ 279 $ 1,086
Depreciation and
amortization........... 306 39 603 161 202
Capital expenditures.... 465 87 545 165 240
Net cash provided by
(used in) operating
activities............. 380 (759) 707 (492) 382
Net cash used in
investing activities... (327) (87) (540) (165) (240)
Net cash provided by
(used in) financing
activities............. (249) (5) 3,380 665 125
Ratio of earnings to
fixed charges(2)....... 39.6x -- 42.0x 3.7x 135.6x
BALANCE SHEET DATA (END
OF PERIOD):
Cash and cash
equivalents............ $ 1,290 $ 439 $ 3,986 $ -- $ 4,253
Total assets............ 6,927 6.095 10,473 -- 11,382
Total debt(3)........... 225 267 206 -- 332
Shareholders' equity.... 2,565 2,531 2.554 -- 3,165
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA(7)
---------------------------
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ 20,833 $ 5,363
Operating expenses.................................. 53,483 30,064
Operating income (loss)............................. (32,650) (24,707)
Interest income (expense), net...................... (26,828) (6,035)
Net income (loss)................................... (60,756) (30,967)
OPERATING AND OTHER DATA:
EBITDA(1)........................................... $(22,940) $(21,381)
Depreciation and amortization....................... 11,359 3,320
Capital expenditures................................ 17,235 10,143
Ratio of earnings to fixed charges(2)............... -- --
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents........................... $ 84,146 --
Total assets........................................ 149,916 --
Total debt(3)....................................... 146,291 --
Shareholders' equity (deficit)...................... (4,983)(4) --
</TABLE>
- --------
(1) EBITDA represents earnings (loss) from operations before taking into
consideration net interest expense, income tax expense, depreciation
expense and amortization expense. The Company has included information
concerning EBITDA as it is used by certain investors as a measure of a
company's ability to service its debt. EBITDA should not be considered as
an alternative to net income or any other measure of performance or
liquidity as determined in accordance with generally accepted accounting
principles or as an indicator of the Company's overall financial
performance. In addition, the measure of EBITDA presented herein by the
Company may not be comparable to other similarly titled measures of other
companies.
(2) The ratio of earnings to fixed charges is calculated by dividing (i) net
income (loss) before taxes plus fixed charges by (ii) fixed charges. Fixed
charges consist of interest incurred and the portion of rent expense which
is deemed representative of interest. Earnings were insufficient to cover
fixed charges by $1,242, $6,653 and $29,180 for the Company for the years
ended December 31, 1995, 1996 and 1997, and $3,907 and $23,184 for the
three month period ending March 31, 1997 and 1998, and $33,433 for the pro
forma financial data for the year ended December 31, 1997 and $32,448 for
the pro forma financial data for the three month period ended March 31,
1998, respectively. Earnings were insufficient to cover fixed charges by
$0.04 for 4-Sight for the one month period ended September 30, 1996.
(3) Total debt includes long-term debt, current portion of long-term debt and
obligations under capitalized leases, net of the unamortized value of
warrants issued to debtholders.
(4) The estimated value of warrants issued to debtholders and of options issued
to consultants is reflected as both a debt discount and an element of paid
in capital.
(5) 4-Sight changed its fiscal year end to September 30 during 1997.
(6) 4-Sight's fiscal year ends on September 30. The financial data of 4-Sight
for the twelve months ended December 31, 1997 is presented for comparative
purposes and in connection with the pro forma data.
(7) The pro forma financial data is not necessarily indicative of either future
results of operations or the results that might have occurred if the
foregoing transactions had been consummated on the indicated dates.
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RISK FACTORS
Prospective participants in the Exchange Offer should carefully consider the
following risk factors, as well as other information contained in this
Prospectus, before participating in the Exchange Offer.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Original Notes who do not exchange their Original Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Original Notes as set forth in the legend
thereon as a consequence of the issuance of the Original Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Original Notes may not be offered or sold unless registered under
the Securities Act and applicable state securities laws, or pursuant to an
exemption therefrom. Except under certain limited circumstances, the Company
does not intend to register the Original Notes under the Securities Act. In
addition, any Holder of Original Notes who tenders in the Exchange Offer for
the purpose of participating in a distribution of the Exchange Notes may be
deemed to have received restricted securities and, if so, will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. To the extent
Original Notes are tendered and accepted in the Exchange Offer, the trading
market, if any, for the Original Notes not tendered could be adversely
affected. See "Note Registration Rights."
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; NO ASSURANCE OF PROFITABILITY
The Company was formed in September 1994 and has a limited history of
operations. It began operations in March 1995 and has operated at a net loss
since inception. The Company expects to incur substantial losses for the
foreseeable future as it continues to expand the WAM!NET Network, develop
other products and applications and improve and market its services. The
Company incurs significant sales commissions and installation costs as
customers initially subscribe to the WAM!NET Service. As part of its sales and
marketing efforts, the Company offers certain customers, including potentially
influential industry leaders, free service for an initial evaluation period.
Accordingly, management expects that operating costs will remain high as a
percentage of revenue as the Company seeks to continue its rapid growth in
subscribers. Since the Company's inception on September 9, 1994, the Company
has incurred operating losses of $61.0 million and as of March 31, 1998 had a
shareholders' deficit of $15.3 million. Due to the Company's negative cash
flow and need to obtain additional financing to carry out its business plan,
prior to the consummation of the Initial Offering, the report of the Company's
independent auditors included an explanatory paragraph with respect to the
ability of the Company to continue as a going concern. However, the Company's
independent auditors reissued their opinion on the Company's 1997 consolidated
financial statements without such paragraph upon the consummation of the
Initial Offering. The likelihood of the Company achieving profitability must
be considered in light of the problems frequently encountered by a new
business and the competitive environment in which the Company operates. To
keep the price of the WAM!NET Service competitive, the Company must enter into
service contracts with and retain additional customers which will enable the
Company to increasingly spread the fixed costs of the WAM!NET Service over
many customers. There can be no assurance that the Company will develop an
adequate revenue generating customer base or will achieve or sustain
profitability or generate sufficient positive operating cash flow to service
its debt. See "--Requirements for Additional Capital," "--Competition;
Technological Change," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Company's consolidated financial
statements, including the notes thereto, included elsewhere herein.
REQUIREMENTS FOR ADDITIONAL CAPITAL
The Company's ability to meet its projected growth is dependent upon its
ability to secure substantial additional financing in the future. The Company
expects to meet its additional capital needs with the proceeds from sales or
issuance of equity securities, credit facilities and other borrowings, or
additional debt securities, each to the extent permissible under the
Indenture. In addition, although the Indenture permits the Company to
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incur additional indebtedness under certain conditions, including an unlimited
amount of secured equipment financing, the Indenture could serve to restrict
the financing options available to the Company to fulfill its expansion plans.
See "Description of the Notes--Certain Covenants." The Company also intends to
pursue one or more financings in 1998 totalling approximately $100.0 million,
for which it has received indications of interest from certain financial
institutions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources." The Company
believes that the net proceeds of the Initial Offering and such financings,
together with expected cash from operations, will be sufficient to fund the
Company's operations through September 30, 1999 (through March 31, 1999
without such financing). There can be no assurance that the Company will be
able to obtain such financing if and when it is needed or that, if available,
such financing will be on terms acceptable to the Company. Further, there can
be no assurance that expenses will not exceed the Company's estimates or that
the financing need will not likewise be higher. If the Company is unable to
obtain additional financing when needed, it may be required to significantly
scale back expansion plans and, depending upon cash flow from its existing
business, reduce the scope of its plans and operations. Any additional debt
financing, if available, may involve restrictive covenants that attempt to
address interests different than those of the holders of the Notes. Further,
there can be no assurance that such covenants will not adversely affect the
Company's ability to finance its future operations or capital needs or to
engage in other business activities that may be in the interest of the
Company. The Company's financing needs may vary significantly from its current
expectations if it is unable to generate anticipated cash flows or if the
Company requires more funds for equipment investments than it currently
anticipates, particularly as a result of future network infrastructure
installation requirements. No assurance can be given that the Company's
current expectations regarding its cash needs will prove accurate, and there
can be no assurance that the Company's operations will produce positive cash
flow in sufficient amounts to service the Notes. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
LEVERAGE AND DEBT SERVICE
The Company is highly leveraged. As of March 31, 1998, the Company had
approximately $161.5 million of Indebtedness. As a result of the substantial
indebtedness of the Company following the Initial Offering, fixed charges are
expected to exceed its operating cash flow for the foreseeable future and
there can be no assurance that the Company's operating cash flow will be
sufficient to pay cash debt service on the Notes when cash interest begins to
accrue on the Notes commencing 2002. In addition, the Indenture permits the
Company to incur additional indebtedness under certain conditions, including
an unlimited amount of secured equipment financing. The leveraged nature of
the Company could limit the ability of the Company to effect future financings
or may otherwise restrict the Company's activities. Substantial leverage poses
the risk that the Company may not be able to generate sufficient cash flow to
service its indebtedness, including the Notes, and to adequately fund its
operations. See "Description of the Notes--Ranking."
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may
be impaired in the future; (ii) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of debt service, thereby
reducing the funds available to the Company for other purposes; (iii) the
Company's leverage may hinder its ability to adjust rapidly to changing market
conditions; and (iv) the Company's leverage could make the Company more
vulnerable in the event of a downturn in general economic conditions or in its
business.
RISKS ASSOCIATED WITH A CHANGE OF CONTROL
The Indenture contains provisions relating to certain events constituting a
"change of control" of the Company. Upon the occurrence of such a change of
control, the Company would be obligated to make an offer to purchase all of
the Notes then outstanding at a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest to the date of purchase.
There can be no assurance that the Company would have sufficient funds, or be
able to obtain such funds on commercially reasonable terms, to purchase all of
the
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Notes tendered pursuant to such an offer. A failure by the Company to purchase
all Notes validly tendered pursuant to such an offer would result in an Event
of Default under the Notes and could result in an event of default under other
indebtedness of the Company. In addition, a change of control could result in
the acceleration of existing or future indebtedness of the Company that is
senior to the Notes, and, as such, may adversely affect the ability of the
Company to repay the Notes. See "Description of the Notes--Certain Covenants--
Change of Control."
RISK OF NETWORK FAILURE; LIABILITY FOR DATA
The Company's operations are dependent upon its ability to protect its
network infrastructure against damage from natural disasters, power loss,
telecommunications failures and similar events. Despite the current redundancy
of the WAM!NET Service's infrastructure (other than from a customer's NAD to a
Distribution Hub), and other precautions taken by the Company, the occurrence
of a natural disaster or other unanticipated problem could cause interruptions
to the WAM!NET Service. Additionally, failure of the Company's
telecommunications providers to provide the telephony capacity required by the
Company as a result of operational disruption or for any other reason could
cause interruptions in the services provided by the Company.
The WAM!NET Service uses an assemblage of telecommunications equipment,
software, operating protocols and proprietary applications for high speed
transportation of large quantities of digital data among multiple locations.
Given the complexity of the WAM!NET Service, it is possible that data files
may be lost or distorted. Moreover, most of the Company's customers' needs are
extremely time sensitive, and delays in data delivery may cause significant
losses to a customer using the WAM!NET Service. The WAM!NET Service and future
enhancements or adaptations may contain undetected design faults and software
"bugs" that, despite testing by the Company, are discovered only after the
WAM!NET Service has been installed and used by customers. The failure of any
equipment or facility on the WAM!NET Network could result in the interruption
of service to the customers serviced by such equipment or facility until
necessary repairs are effected or replacement equipment is installed. Such
failures, faults or errors could cause delays or require modifications that
could have a material adverse effect on the Company's business, financial
condition, competitive position and results of operations.
Although the Company's contracts with most WAM!NET Service subscribers limit
the Company's liability for damages resulting from any failure in the
transportation of data to $100 per transmission, with a maximum liability
equal to the subscriber's monthly maximum subscription rate, the Company may
nevertheless be subject to significant claims for data losses or delays in the
transportation of data over the WAM!NET Network. In addition to general
business liability coverage, the Company presently maintains errors and
omissions insurance coverage in the amount of $1.0 million per occurrence and
$5.0 million for all occurrences relating to the transportation of data over
the WAM!NET Network. In addition, the Company presently maintains $1.0
million of business interruption insurance coverage against losses from
floods, earthquakes and other natural disasters. There can be no assurance
that this amount of insurance coverage will be adequate to cover all data loss
claims, or that additional coverage will be available on affordable terms to
the Company. See "Business--Liability and Insurance."
SECURITY RISKS
Despite the WAM!NET Service's extensive security measures, including audit
software that constantly monitors security breaches or tampering, the WAM!NET
Service is vulnerable to unauthorized access, computer viruses and other
disruptive problems. Eliminating computer viruses and alleviating other
security problems may require interruptions, delays or cessation of service to
the Company's customers which could have a material adverse effect on the
Company's business, financial condition, competitive position and results of
operations.
DEPENDENCE UPON NETWORK INFRASTRUCTURE AND AVAILABLE BANDWIDTH
The Company's ability to generate positive cash flows from operations will
depend upon its ability to increase its existing subscriber base, which is a
function, in part, of its ability to expand its national network
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infrastructure and support services in order to supply enhanced capacity,
reliability and security to subscribers at an acceptable cost. The continued
development and expansion of the Company's national network will require that
it enter into additional agreements, on acceptable terms and conditions, with
various providers of infrastructure capacity and equipment and support
services. No assurance can be given that any or all of the requisite
agreements can be obtained on satisfactory terms and conditions.
The Company anticipates that future expansions and adaptation of its network
infrastructure may be necessary in order to respond to growth in the number of
customers served, increased demands to transmit larger amounts of data and
changes to its customers' service requirements as customers become more
familiar and comfortable with the WAM!NET Service and its various
applications. The expansion and adaptation of the Company's network
infrastructure will require substantial financial, operational and managerial
resources. There can be no assurance that the Company will be able to expand
or adapt its network infrastructure to meet the evolving standards or demands
of its targeted industries and customers and changing requirements on a timely
basis, at a commercially reasonable cost, if at all, or that the Company will
be able to deploy successfully any expanded and adapted network
infrastructure.
REGULATORY MATTERS
North America. The Company purchases telephone equipment, routers and relays
that are used in the WAM!NET Network from manufacturers and combines that
equipment with Company provided software and telephone circuits provided by
common carriers regulated by the Federal Communications Commission ("FCC"),
the Canadian Radio-Television and Telecommunications Commission ("CRTC") and
various state regulatory agencies. The Company believes that under the FCC's
interpretation of the Communications Act of 1934, as amended, the services
which it offers to its customers are interstate information (enhanced)
services. Consequently, it is not required to obtain licenses or other
approvals from the FCC or state regulatory agencies to offer such services. If
the Company's services were deemed to be intrastate services, certain state
regulatory agencies might seek to assert jurisdiction over the Company's
offerings. If that were to occur, the Company could be required to expend
substantial time and money to acquire the appropriate licenses and to comply
with state regulations. The Company also believes that under the CRTC's
interpretation of Canadian law, the services that the Company offers do not
require it to obtain telecommunications permits or approvals in Canada.
Worldwide. The Company believes that European Union directives require that
member states permit the provision of the Company's services on a competitive
basis. Bilateral agreements have been negotiated between the United States and
Japan and the United States and Hong Kong which encourage cross-border
provision of enhanced services like those offered by the Company. Pursuant to
commitments in the World Trade Organization's ("WTO") General Agreement on
Trade in Services, over 50 governments have agreed to permit provision of
enhanced services (i.e., value-added) by nationals of WTO member countries.
Nevertheless, certain other countries in Europe, Asia and elsewhere might seek
to license and regulate the Company's services. Any such license or regulation
may limit, delay or increase the costs of operations associated with
international locations to which the Company may desire to expand.
Medical Imaging. The Company intends to offer its WAM!NET Service and
WAM!BASE service as medical imaging applications for transmitting, storing and
retrieving medical data for primary diagnostic purposes. The Company is
currently participating in a test of the medical image transmission
application of the WAM!NET Service between a hospital and a remotely located
clinic, and intends to commence testing of the WAM!BASE storage and retrieval
functions during the fourth quarter of 1998. Any medical imaging applications
offered for primary diagnostic purposes are required to comply with the Food,
Drug and Cosmetic Act, as amended (the "Food and Drug Act"), and regulations
promulgated thereunder by the Food and Drug Administration (the "FDA"). Under
recently adopted FDA regulations, both the WAM!NET Service's data transmission
application and the WAM!BASE data storage and retrieval application are
classified as Class I devices that do not perform "irreversible data
compression." Prior to adoption of those regulations, both the transmission
and storage functions were classified as Class II devices, and the Company had
received marketing
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clearance from the FDA for data transmission pursuant to a 510(k) Premarket
Notification filing. The Company's medical image transmission, storage and
retrieval applications conform to the Digital Imaging and Communications in
Medicine ("DICOM") industry standards, which are the industry accepted
standards utilized by major medical imaging equipment manufacturers in the
domestic health care industry. The Company works with medical imaging
equipment manufacturers to ensure compatibility of the WAM!NET Service and
WAM!BASE applications with their medical imaging equipment. See "Business--
Government Regulation, Standards."
DEPENDENCE ON MANAGEMENT
The Company is dependent primarily on the services of Edward J. Driscoll
III, its Chief Executive Officer, and is also dependent on the services of
certain of its other officers and significant employees. The loss of the
services of any of these persons could have a material adverse effect on the
Company. The Company has employment agreements with substantially all of its
officers and significant employees, including Mr. Driscoll, and has purchased
life insurance policies on certain employees, including Mr. Driscoll. See
"Management." The Company believes its future success will depend in large
part on its ability to retain the services of these personnel and to attract
and retain qualified technical and marketing personnel. There can be no
assurance that the Company will be able to continue to attract and retain the
personnel necessary for the successful conduct of its business.
RAPID EXPANSION; MANAGEMENT OF GROWTH
The Company rapidly expanded its distribution network and added subscribers
to the WAM!NET Service during fiscal 1997, and must continue to aggressively
expand its network and add subscribers in order to achieve its business
objectives. During 1998, the Company intends to expand the WAM!NET Service
into international markets. Whether the Company can meet its goal of
increasing its customer base while maintaining its price structure and
managing costs will depend upon, among other things, the Company's ability to
manage its growth effectively. To manage growth effectively, the Company must
continue to develop its sales force, external installation capability,
customer service teams and information systems, and must maintain its
relationships with third-party vendors. The Company's management will also be
required to assume greater levels of responsibility. If the Company is unable
to manage its growth effectively, the Company's business and results of
operations could be materially adversely affected.
The 4-Sight Acquisition will require the management of the Company and 4-
Sight to spend substantial time integrating the network operations of the
Company with the software transmission and services business of 4-Sight. 4-
Sight's transmission software and services are sold primarily to customers
with lower bandwidth and throughput requirements than that needed by most
current subscribers to the WAM!NET Service. Also, the use of 4-Sight's current
products requires the use of ISDN lines.
DEPENDENCE ON THIRD-PARTY SUPPLIERS FOR EQUIPMENT AND SERVICES
The Company is dependent on its third-party local and long distance carriers
and on third-party suppliers of the computers, software, routers and related
components that the Company assembles and integrates into the WAM!NET Service.
Most of these supplier arrangements are for terms of less than one year and
are terminable by the other party in certain circumstances. The Company is
also dependent on the services of third parties with whom it has contracted or
may contract in the future for customer site installations, routine
maintenance and on-call repair services. While the Company believes that its
relationships with these vendors and suppliers are satisfactory, and that
suitable alternative products and services are available, the Company may
experience delays and additional costs if any of these relationships is
terminated and the Company is unable to reach suitable agreements with
alternate vendors, suppliers or carriers in a timely manner. Furthermore, to
the extent that the Company is unable to secure suitable installation,
maintenance or on call repair services from third-party vendors, the Company
may be required to substantially increase its own work force to perform these
services, and the Company's growth may be constrained while it builds and
trains that work force. See "Business--Supplier Relationships."
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The Company has historically experienced a 60 to 90 day delay in obtaining
telephone line extensions at subscriber premises following the execution of a
WAM!NET Service contract. There can be no assurance that the Company will be
able to obtain such telephone lines on the scale and within the time frames
required by the Company at a commercially reasonable cost, or at all.
AFFILIATION OF WORLDCOM
Through its ownership of debt and equity securities of the Company, as well
as its designation of a majority of the directors of the Board of Directors of
the Company, WorldCom has the ability to exercise considerable influence and
control over the affairs of the Company. Other than as required under
Minnesota law, no formal policies or guidelines have been adopted by the Board
of Directors of the Company to deal with Board actions that may involve actual
or potential conflicts of interest between the Company and WorldCom. No
assurance can be given that any conflict of interest that may arise will not
be resolved in a manner adverse to the holders of Notes. In addition, WorldCom
and its affiliates are non-exclusive suppliers of telecommunication and other
services to the Company. The Company has no contractual right to obtain
technological assistance from WorldCom. WorldCom has no obligation to
contribute funds to the Company (except with respect to its obligations in
connection with the Company's contractual relationship with Time and under the
Company's revolving credit facility (the "Revolving Credit Facility"), which
obligations are described herein under "Certain Transactions and
Relationships"), maintain its equity interest in the Company or support any
obligation of the Company with respect to the Notes. Further, a loss of its
strategic relationship with WorldCom could have a materially adverse effect on
the business and operations of the Company and on the market for the Notes.
See "Certain Transactions and Relationships."
COMPETITION; TECHNOLOGICAL CHANGE
The Company operates in a highly competitive industry which includes many
companies that have greater resources and market presence than the Company.
The Company's potential competitors have invested and continue to invest
substantial sums in research and development which may result in products and
services that have a competitive advantage over the WAM!NET Service. A new
service called the Graphic Arts Digital Network, which will be a direct
competitor of the WAM!NET Service, has been announced but not yet released. As
announced, the service will be provided by a joint venture between British
Telecommunications and Scytek Inc. ("Scytek"). There are relatively few
barriers to entry into the marketplace for the high speed delivery of digital
data files, and additional competitors could enter the market at any time. The
Company is also at risk from fundamental technological changes in the way
connectivity solutions are marketed and delivered. As is typical in the case
of a new and evolving industry characterized by rapidly changing technology,
evolving industry standards and new product and service introductions, demand
and market acceptance for recently introduced products and services are
subject to uncertainty of customer acceptance. There can be no assurance that
the Company will be able to adapt to future technological changes or that
developments by competitors will not render the WAM!NET Service and related
services obsolete or noncompetitive. See "Business--Competition" and "--
Intellectual Property and Proprietary Rights."
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success may depend, in part, on its ability to maintain its
proprietary rights in certain technology underlying the WAM!NET Service and
related applications. The Company has applications for three United States
patents pending for certain aspects of its technology. To protect its
proprietary rights in the technology utilized in the WAM!NET Service, the
Company relies on a combination of trade secret and copyright protection as
well as patents. The Company also relies on trademark protection concerning
various names, marks, logos and other devices which serve to identify the
Company as the source for and originator of the WAM!NET Service and related
applications. The Company may choose not to apply for patent protection in all
foreign countries in which it eventually markets the WAM!NET Service.
Consequently, the Company's proprietary rights in the technology underlying
the WAM!NET Service and related applications will be protected only to the
extent that trade secret, copyright or other non-patent protection is
available in such countries and to the extent the Company is able to enforce
such rights.
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Given the recent acquisition of 4-Sight, with its substantial international
presence, the Company will increasingly offer its products and services in
foreign countries. However, some of these countries may lack intellectual
property protection that is comparable to that afforded by the intellectual
property laws of the United States. There can be no assurance that the steps
taken by the Company to protect its intellectual property and proprietary
rights will be adequate to deter misappropriation of its technology or
independent development by others of technologies that are substantially
equivalent or superior to the Company's technology. Any such misappropriation
of the Company's technology or development of competitive technologies could
have a material adverse effect on the Company's business, operating results
and financial conditions. The Company could incur substantial expense in
protecting and enforcing its intellectual property rights in foreign
countries.
Intellectual property litigation is complex and there can be no assurance of
the outcome of any such litigation. Any future litigation, regardless of
outcome, could result in substantial expense to the Company and significant
diversion of the efforts of the Company's technical and management personnel.
An adverse determination in any such proceeding could subject the Company to
significant liabilities to third parties, require disputed rights to be
licensed from such parties, if licenses to such rights could be obtained,
and/or require the Company to cease using such technology. There can be no
assurance that any such license would or could be obtained at costs reasonable
to the Company. If forced to cease using such technology, there can be no
assurance that the Company would be able to develop or obtain alternate
technology. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could
prevent the Company from manufacturing, using or selling certain of its
products, which could have a material adverse effect on the Company's
financial condition and business results of operations. See "Business--
Intellectual Property and Proprietary Rights."
DEPENDENCE UPON SIGNIFICANT CUSTOMERS
During fiscal 1997, Time and WorldColor Press Inc. ("WorldColor") were the
Company's largest customers, representing 10.9% and 9.6%, respectively, of the
Company's total net sales. In the event Time or WorldColor significantly
reduced, for any reason, or terminated (at the end of its current service
contract or otherwise), its use of the WAM!NET Service, the Company's
financial condition and business results of operations could be materially
adversely affected, both as a direct result of such reduction or termination
and through the potential reduction of use of the WAM!NET Service by Time or
WorldColor's work flow partners that are, or potentially would be, subscribers
to the WAM!NET Service.
DISCRETIONARY AUTHORITY OVER USE OF NET PROCEEDS
The Company retains a significant amount of discretion over the application
of the net proceeds of the Initial Offering. Because of the number and
variability of factors that determine the Company's use of the net proceeds of
the Initial Offering, there can be no assurance that such applications will
not vary substantially from the Company's current intentions. Pending such
utilization, the Company invests the net proceeds of the Offering in short-
term investment grade and government securities. See "Use of Proceeds."
ABSENCE OF PUBLIC MARKET; RESTRICTION ON RESALE
The Exchange Notes are a new issue of securities for which there is
currently no established market. There can be no assurance as to (i) the
liquidity of any such market that may develop, (ii) the ability of the holders
of Exchange Notes to sell any of their Exchange Notes, or (iii) the price at
which the holders of Exchange Notes would be able to sell any of their
Securities. The Company does not presently intend to apply for listing of any
of the Exchange Notes on any national securities exchange or on The Nasdaq
Stock Market. The Initial Purchasers have advised the Company that they
presently intend to make a market in Exchange Notes, if and when issued. The
Initial Purchasers are not obligated, however, to make a market in the
Exchange Notes and any such market-making may be discontinued at any time at
the sole discretion of the Initial Purchasers and without notice. Accordingly,
no assurance can be given as to the development or liquidity of any market for
any
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of the Exchange Notes. If a market for any of the Exchange Notes were to
develop, such Exchange Notes could trade at prices that may be higher or lower
than reflected by their initial offering price depending on many factors,
including prevailing interest rates, the Company's operating results and
prospects for its performance, the market for similar securities and general
economic conditions. Historically, the market for securities such as the Notes
has been subject to disruptions that have caused substantial volatility in the
prices of similar securities. There can be no assurance that if a market for
any of the Notes were to develop, such a market would not be subject to
similar disruptions.
FRAUDULENT CONVEYANCE CONSIDERATIONS RELATING TO SUBSIDIARY GUARANTEES
The Company's obligations under the Notes will be guaranteed on an unsecured
senior basis by the Subsidiary Guarantors, if any. Various fraudulent
conveyance laws have been enacted for the protection of creditors and may be
utilized by a court of competent jurisdiction to subordinate or avoid any
Subsidiary Guarantee issued by a Subsidiary Guarantor. It is also possible
that under certain circumstances a court could hold that the direct
obligations of a Subsidiary Guarantor could be superior to the obligations
under its Subsidiary Guarantee. There are currently no Subsidiary Guarantors.
To the extent that a court were to find that (x) a Subsidiary Guarantee was
incurred by a Subsidiary Guarantor with the intent to hinder, delay or defraud
any present or future creditor or that the Subsidiary Guarantor contemplated
insolvency with a design to favor one or more creditors to the exclusion in
whole or in part of others or (y) a Subsidiary Guarantor did not receive fair
consideration or reasonably equivalent value for issuing a Subsidiary
Guarantee and, at the time it issued such Subsidiary Guarantee, the Subsidiary
Guarantor (i) was insolvent or rendered insolvent by reason of the issuance of
the Subsidiary Guarantee, (ii) was engaged or about to engage in a business or
transaction for which the remaining assets of such Subsidiary Guarantor
constituted unreasonably small capital or (iii) intended to incur, or believed
that it would incur, debts beyond its ability to pay such debts as they
matured, the court could avoid or subordinate such Subsidiary Guarantee in
favor of the Subsidiary Guarantor's other creditors. Among other things, a
legal challenge of a Subsidiary Guarantee issued by a Subsidiary Guarantor on
fraudulent conveyance grounds may focus on the benefits, if any, realized by
such Subsidiary Guarantor as a result of the issuance by the Company of the
Notes. To the extent any Subsidiary Guarantee is avoided as a fraudulent
conveyance or held unenforceable for any other reason, the holders of the
Notes would cease to have any claim in respect of the applicable Subsidiary
Guarantor and would be creditors solely of the Company.
RISKS OF FOREIGN INVESTMENT
Primarily through the acquisition of 4-Sight, the Company has expanded its
operations into Europe, and, to a lesser extent, Asia, in the first half of
1998. Risks inherent in foreign operations include loss of revenue, property
and equipment from expropriation, nationalization and confiscatory taxation.
The Company is also exposed to the risk of changes to laws and policies that
govern foreign investment in countries where it has operations as well as, to
a lesser extent, changes in United States laws and regulations relating to
investing in or trading with countries in which the Company may have
investments.
Certain of the countries in which the Company operates or may operate may be
subject to a substantially greater degree of social, political and economic
instability than is the case in other countries. Such instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, and changes in
government through coups or other extra-constitutional means; (ii) social
unrest associated with demands for improved economic, social and political
conditions; (iii) internal insurgencies and terrorist activities; and (iv)
hostile relations with neighboring countries. Risks associated with social,
political and economic instability in a particular country could materially
adversely affect the results of operations and financial condition of the
Company and could result in the loss of the Company's assets in such country.
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During 1997 the Company, on a pro forma basis after giving effect to the 4-
Sight Acquisition, received less than 5% of its total revenue from sales and
operations in Asian countries. As a result, the Company had limited exposure
to the particular risks attendant to doing business in Asia and did not
experience any material adverse effects from the Asian economic crisis;
however, the Company presently intends to expand its operations in that
region. The Company is currently unable to determine the effect, if any, that
recent economic downturns in Asia, particularly Japan, will have on the
Company's future business, operating results or liquidity, although the
Company intends to exercise prudence and sound business judgment prior to
making any future investments in Asia.
FOREIGN CURRENCY EXCHANGE RATES; REPATRIATION
As the Company expands its operations into countries outside of the United
States, its results of operations and the value of its assets will be affected
by the currency exchange rates between the U.S. dollar and the functional
currency of countries in which it has assets. The Company may also sell
products and services in certain countries in the local functional currency or
in a currency other than the U.S. dollar. As a result, the Company may
experience an economic loss solely as a result of foreign currency exchange
rate fluctuations, which include foreign currency devaluations against the
dollar. The Company may in the future acquire interests in companies that
operate in countries where the removal or conversion of currency is
restricted. There can also be no assurance that countries that do not have
such restrictions at the time the Company establishes operations in those
countries will not subsequently impose them, especially in situations where
there is a deterioration in a country's balance of payments or where the local
currency is being heavily converted into other currencies. Currently, the
Company does not employ currency hedging strategies to reduce the risks
associated with the fluctuation of foreign currency exchange rates. The
Company presently denominates all of its contracts in U.S. dollars. 4-Sight
denominates all of its contracts in pounds sterling except for its U.S. sales,
which are denominated in U.S. dollars, and its German sales, which are
denominated in German marks. In addition, the Company is unable to determine
what effect, if any, the adoption and use of the euro, the single European
currency to be introduced in January of 1999, will have on the Company's
business, operating results, liquidity and financial condition.
ORIGINAL ISSUE DISCOUNT CONSEQUENCES OF THE NOTES
The Original Notes were, and the Exchange Notes will be, sold with original
issue discount ("OID") for United States federal income tax purposes. Thus,
although cash interest will not be payable on the Notes prior to 2002, the
holders of the Notes (including cash basis holders) that are subject to U.S.
federal income taxation will be required to include such OID in income, on a
constant yield to maturity method basis, in advance of the receipt of the cash
payments to which such income is attributable. See "Certain Federal Income Tax
Considerations" for a more detailed discussion of the U.S. federal income tax
consequences to the U.S. Holders of the Notes of the purchase, ownership and
disposition of the Notes.
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USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer. The net
proceeds of the Initial Offering were approximately $120.6 million. The net
proceeds were or are expected to be used as follows: (i) $20.0 million was
used to pay the cash portion of the 4-Sight Acquisition, (ii) approximately
$25.0 million was used to repay the Revolving Credit Facility and (iii) the
balance is being, and will be, used to further the Company's business
development and expansion strategy, to enhance the WAM!NET Service
infrastructure and develop additional value-added features and services, to
optimize marketing, sales and customer support and service capabilities, and
for working capital and other general corporate purposes. The Revolving Credit
Facility matures and becomes payable on September 23, 2000. At December 31,
1997, the aggregate principal amount outstanding under the Revolving Credit
Facility was $18.8 million, which bore interest at a rate equal to LIBOR (as
defined herein) plus 55 basis points per annum (6.27% at December 31, 1997).
The proceeds of the Revolving Credit Facility were used for equipment
purchases and working capital purposes. As of June 30, 1998, the aggregate
principal amount outstanding under the Revolving Credit Facility was $0. The
Company believes that the net proceeds of the Initial Offering and currently
contemplated financings, together with expected cash from operations, will be
sufficient to fund the Company's operations through September 30, 1999
(through March 31, 1999 without such financings). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Description of Certain Indebtedness" for a discussion of the Company's
funding requirements.
Pending such utilization, the Company invests the net proceeds of the
Initial Offering in short-term investment grade and government securities.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The sole purpose of the Exchange Offer is to fulfill the obligations of the
Company with respect to the Registration Rights Agreement.
The Original Notes were originally issued and sold on March 5, 1998. Such
sales were not registered under the Securities Act (i) in reliance upon the
exemption provided by Section 4(2) of the Securities Act and Rule 144A of the
Securities Act, and (ii) pursuant to offers and sales that occurred outside
the United States within the meaning of Regulation S under the Securities Act.
Pursuant to the Registration Rights Agreement, the Company agreed to file with
the Commission the Exchange Offer Registration Statement on an appropriate
form under the Securities Act with respect to an offer to exchange the
Original Notes for the Exchange Notes. Upon the effectiveness of the Exchange
Offer Registration Statement, the Company will offer to the holders of
Original Notes who are able to make certain representations the opportunity to
exchange their Original Notes for Exchange Notes. If (i) the Company is not
permitted to file the Exchange Offer Registration Statement or to consummate
the Exchange Offer because the Exchange Offer is not permitted by applicable
law or Commission policy, (ii) the Exchange Offer is not for any other reason
consummated within 180 days after the Issue Date, (iii) any holder of Original
Notes notifies the Company within a specified time period that (a) due to a
change in law or policy it is not entitled to participate in the Exchange
Offer, (b) due to a change in law or policy it may not resell the Exchange
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and (x) the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales by such holder and
(y) such prospectus is not promptly amended or modified in order to be
suitable for use in connection with such resales for such holder and all
similarly situated holders or (c) it is a broker-dealer and owns Original
Notes acquired directly from the Company or an affiliate of the Company or
(iv) the holders of a majority of the Original Notes may not resell the
Exchange Notes acquired by them in the Exchange Offer to the public without
restriction under the Securities Act and without restriction under applicable
blue sky or state securities laws, the Company will file with the Commission
the Shelf Registration Statement to cover resales of the Transfer Restricted
Notes (as defined below) by the holders thereof. The Company agreed to use its
best efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. For purposes of the
foregoing, "Transfer Restricted Notes" means each Original Note until (i) the
date on which such Original Note has been exchanged by a person other than a
broker-dealer for an Exchange Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of an Original Note for an
Exchange Note, the date on which such Exchange Note is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a copy
of the prospectus contained in the Exchange Offer Registration Statement,
(iii) the date on which such Original Note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement, (iv) the date on which such Original Note is
distributed to the public pursuant to Rule 144(k) under the Securities Act (or
any similar provision then in force, but not Rule 144A under the Securities
Act), (v) such Original Note shall have been otherwise transferred by the
holder thereof and a new Note not bearing a legend restricting further
transfer shall have been delivered by the Company and subsequent disposition
of such Note shall not require registration or qualification under the
Securities Act or any similar state law then in force or (vi) such Original
Note ceases to be outstanding.
The Registration Rights Agreement provides that: (i) unless the Exchange
Offer would not be permitted by applicable law or Commission policy, the
Company will file the Exchange Offer Registration Statement with the
Commission on or prior to the 90th day after the Issue Date, (ii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will use its best efforts to have the Exchange Offer Registration
Statement declared effective by the Commission on or prior to the 150th day
after the Issue Date (the "Target Effectiveness Date"), (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to
issue, on or prior to the date which is 30 days after the date on which the
Exchange Offer Registration Statement was declared effective by the
Commission, Exchange Notes in Exchange for all Original Notes tendered prior
thereto
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in the Exchange Offer and (iv) if obligated to file the Shelf Registration
Statement, the Company will use its best efforts to file prior to the later of
(a) the 90th day after the Issue Date or (b) the 30th day after such filing
obligation arises and will use its best efforts to cause the Shelf
Registration Statement to be declared effective by the Commission on or prior
to the 60th day after such obligation arises; provided that if the Company has
not consummated the Exchange Offer within the date which is 180 days after the
Issue Date, then the Company will file the Shelf Registration Statement with
the Commission on or prior to the 30th day after such date. The Company shall
use its best efforts to keep such Shelf Registration Statement continuously
effective, supplemented and amended until the earlier of (i) the second
anniversary of the effective date of the Shelf Registration Statement and (ii)
such time as all of the Transfer Restricted Notes covered by the Shelf
Registration Statement have been sold thereunder or otherwise cease to be
Transfer Restricted Notes. If (i) the Company fails to file any of the
registration statements required by the Registration Rights Agreement on or
before the date specified for such filing, (ii) any of such registration
statements is not declared effective by the Commission on or prior to the
Target Effectiveness Date (subject to certain limited exceptions), (iii) the
Company fails to consummate the Exchange Offer within 30 days of the Target
Effectiveness Date with respect to the Exchange Offer Registration Statement,
or (iv) the Shelf Registration Statement or the Exchange Offer Registration
Statement is declared effective but thereafter, subject to certain limited
exceptions, ceases to be effective or usable in connection with the Exchange
Offer or resales of Transfer Restricted Notes, as the case may be, during the
periods specified in the Registration Rights Agreement (each such event
referred to in clauses (i) through (iv) above, a "Registration Default"), then
the Company shall pay as liquidated damages interest on the Transfer
Restricted Notes as to which any Registration Default exists. If a
Registration Default exists with respect to Transfer Restricted Notes, the
Company will, with respect to the first 90-day period (or portion thereof)
while such Registration Default is continuing immediately following the
occurrence of such Registration Default, make cash payments at a rate of .50%
per annum multiplied by the Accreted Value of the Transfer Restricted Notes as
of the date such payment is required to be made. The rate of such cash payment
shall increase by an additional .50% per annum at the beginning of each
subsequent 90-day period (or portion thereof) while such Registration Default
is continuing until such Registration Default is cured, up to a maximum rate
of 1.5% per annum. Following the cure of all Registration Defaults, the making
of cash payments with respect to the Notes will cease and the interest rate on
the Notes will revert to zero. See "Note Registration Rights."
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal, $1,000 in
principal amount of Exchange Notes for each $1,000 in principal amount of the
Original Notes. The terms of the Exchange Notes are identical in all respects
to the terms of the Original Notes for which they may be exchanged pursuant to
this Exchange Offer, except that the Exchange Notes will generally be freely
transferable by holders thereof ("Holders"), and the Holders of the Exchange
Notes (as well as remaining Holders of any Original Notes) will not be
entitled to registration rights under the Registration Rights Agreement. The
Exchange Notes will evidence the same debt as the Original Notes and will be
entitled to the benefits of the Indenture. See "Description of the Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Original Notes being tendered for exchange.
Based on interpretations by the Staff set forth in no-action letters issued
to third parties, the Company believes that Exchange Notes issued pursuant to
the Exchange Offer in exchange for the Original Notes may be offered for
resale, resold and otherwise transferred by Holders thereof (other than any
Holder which is (i) an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act, (ii) a broker-dealer who acquired Original Notes
directly from the Company or (iii) broker-dealers who acquired Original Notes
as a result of market making or other trading activities) without compliance
with the registration and prospectus delivery provisions of the Securities Act
provided that such Exchange Notes are acquired in the ordinary course of such
Holder's business, and such Holders are not engaged in, and do not intend to
engage in, and have no arrangement or understanding with any person to
participate in, a distribution of such Exchange Notes. If a Holder is not a
broker-dealer, it will be required to represent that it is not engaged in, and
does not intend to engage in,
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a distribution of the Exchange Notes. Each broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer may be a statutory underwriter
and, therefore, must acknowledge that it will deliver a current prospectus
meeting the requirements of the Securities Act in connection with any resale
of such Exchange Notes. The Letter of Transmittal states that by so
acknowledging, and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Broker-dealers who acquired Original Notes as a result of
market making or other trading activities may use this Prospectus, as
supplemented or amended, in connection with resales of the Exchange Notes. The
Company have agreed that, for a period not to exceed 180 days after the
Exchange Date, they will make this Prospectus available to any broker-dealer
for use in connection with any such resale. Any Holder that cannot rely upon
such interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
Tendering Holders of Original Notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Original Notes
pursuant to the Exchange Offer.
Accreted value on the Exchange Notes will accrue from the Issue Date.
Holders whose Original Notes are accepted for exchange will not receive
accreted value thereon, but because the accreted value of the Exchange Notes
is calculated from the date of issuance of the Original Notes, there will be
no forfeiture of accreted value, or interest (which does not begin accruing
until March 1, 2002), by the holders of Original Notes whose Notes are
accepted for exchange in the Exchange Offer.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer expires on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., New York City time, on , 1998, unless the Company
in its sole discretion extend the period during which the Exchange Offer is
open, in which event the term "Expiration Date" means the latest time and date
on which the Exchange Offer, as so extended by the Company, expires. The
Company reserves the right to extend the Exchange Offer at any time and from
time to time prior to the Expiration Date by giving written notice to U.S.
Bank Trust National Association (f/k/a First Trust National Association) (the
"Exchange Agent") and by timely public announcement communicated, unless
otherwise required by applicable law or regulation, by making a release to the
Dow Jones News Service. During any extension of the Exchange Offer, all
Original Notes previously tendered pursuant to the Exchange Offer will remain
subject to the Exchange Offer.
The initial Exchange Date will be the first business day following the
Expiration Date. The Company expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Original Notes for any reason,
including if any of the events set forth below under "--Conditions to the
Exchange Offer" shall have occurred and shall not have been waived by the
Company and (ii) amend the terms of the Exchange Offer in any manner, whether
before or after any tender of the Original Notes. If any such termination or
amendment occurs, the Company will notify the Exchange Agent in writing and
will either issue a press release or give written notice to the Holders of the
Original Notes as promptly as practicable. Unless the Company terminates the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date,
the Company will exchange the Exchange Notes for the Original Notes on the
Exchange Date.
If the Company waives any material condition to the Exchange Offer, or amend
the Exchange Offer in any other material respect, and if at the time that
notice of such waiver or amendment is first published, sent or given to
Holders of Original Notes in the manner specified above, the Exchange Offer is
scheduled to expire at any time earlier than the expiration of a period ending
on the fifth business day from, and including, the date that such notice is
first so published, sent or given, then the Exchange Offer will be extended
until the expiration of such period of five business days.
This Prospectus and the related Letter of Transmittal and other relevant
materials will be mailed by the Company to record Holders of Original Notes
and will be furnished to brokers, banks and similar persons whose names, or
the names of whose nominees, appear on the lists of Holders for subsequent
transmittal to beneficial owners of Original Notes.
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HOW TO TENDER
The tender to the Company of Original Notes by a Holder thereof pursuant to
one of the procedures set forth below will constitute an agreement between
such Holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
General Procedures. A Holder of an Original Note may tender the same by (i)
properly completing and signing the Letter of Transmittal or a facsimile
thereof (all references in this Prospectus to the Letter of Transmittal shall
be deemed to include a facsimile thereof) and delivering the same, together
with the certificate or certificates representing the Original Notes being
tendered and any required signature guarantees (or a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") pursuant to the procedure
described below), to the Exchange Agent at its address set forth on the back
cover of this Prospectus on or prior to the Expiration Date or (ii) complying
with the guaranteed delivery procedures described below.
If tendered Original Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Original Notes are to be reissued) in the
name of the registered Holder, the signature of such signer need not be
guaranteed. In any other case, the tendered Original Notes must be endorsed or
accompanied by written instruments of transfer in form satisfactory to the
Company and duly executed by the registered Holder and the signature on the
endorsement or instrument of transfer must be guaranteed by a firm (an
"Eligible Institution") that is a member of a recognized signature guarantee
medallion program within the meaning of Rule 17Ad-15 under the Exchange Act.
If the Exchange Notes and/or Original Notes not exchanged are to be delivered
to an address other than that of the registered Holder appearing on the note
register for the Original Notes, the signature on the Letter of Transmittal
must be guaranteed by an Eligible Institution.
Any beneficial owner whose Original Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Original Notes should contact such Holder promptly and instruct such
Holder to tender Original Notes on such beneficial owner's behalf. If such
beneficial owner wishes to tender such Original Notes himself, such beneficial
owner must, prior to completing and executing the Letter of Transmittal and
delivering such Original Notes, either make appropriate arrangements to
register ownership of the Original Notes in such beneficial owner's name or
follow the procedures described in the immediately preceding paragraph. The
transfer of record ownership may take considerable time.
Book-Entry Transfer. The Exchange Agent will make a request to establish an
account with respect to the Original Notes at The Depository Trust Company
(the "Book-Entry Transfer Facility") for purposes of the Exchange Offer within
two business days after receipt of this Prospectus, and any financial
institution that is a participant in the Book-Entry Transfer Facility's
systems may make book-entry delivery of Original Notes by causing the Book-
Entry Transfer Facility to transfer such Original Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with the
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Original Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address specified on
the back cover page of this Prospectus on or prior to the Expiration Date or
the guaranteed delivery procedures described below must be complied with.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND ALL OTHER DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE
OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION
DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION
DATE.
Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of federal income tax, the Exchange Agent will
be required to withhold, and will withhold, 31% of the gross proceeds
otherwise payable to a Holder pursuant to the Exchange Offer if the Holder
does not provide his taxpayer identification number (social security number or
employer identification number) and certify that such
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number is correct. Each tendering Holder should complete and sign the main
signature form and the Substitute Form W-9 included as part of the Letter of
Transmittal, so as to provide the information and certification necessary to
avoid backup withholding, unless an applicable exemption exists and is proved
in a manner satisfactory to the Company and the Exchange Agent.
Guaranteed Delivery Procedures. If a Holder desires to accept the Exchange
Offer and time will not permit a Letter of Transmittal or Original Notes to
reach the Exchange Agent before the Expiration Date, a tender may be effected
if the Exchange Agent has received at its office listed on the back cover
hereof on or prior to the Expiration Date a letter, telegram or facsimile
transmission from an Eligible Institution setting forth the name and address
of the tendering Holder, the names in which the Original Notes are registered
and, if possible, the certificate numbers of the Original Notes to be
tendered, and stating that the tender is being made thereby and guaranteeing
that within five New York Stock Exchange trading days after the date of
execution of such letter, telegram or facsimile transmission by the Eligible
Institution, the Original Notes, in proper form for transfer, will be
delivered by such Eligible Institution together with a properly completed and
duly executed Letter of Transmittal (and any other required documents). Unless
Original Notes being tendered by the above-described method (or a timely Book-
Entry Confirmation) are deposited with the Exchange Agent within the time
period set forth above (accompanied or preceded by a properly completed Letter
of Transmittal and any other required documents), the Company may, at its
option, reject the tender. Copies of a Notice of Guaranteed Delivery which may
be used by Eligible Institutions for the purposes described in this paragraph
are being delivered with this Prospectus and the related Letter of
Transmittal.
A tender will be deemed to have been received as of the date when the
tendering Holder's properly completed and duly signed Letter of Transmittal
accompanied by the Original Notes (or a timely Book-Entry Confirmation) is
received by the Exchange Agent. Issuances of Exchange Notes in exchange for
Original Notes tendered pursuant to a Notice of Guaranteed Delivery or letter,
telegram or facsimile transmission to similar effect (as provided above) by an
Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Original Notes
(or a timely Book-Entry Confirmation).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Original Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptances for exchange of which may, in the opinion of counsel
to the Company, be unlawful. The Company also reserves the absolute right to
waive any of the conditions of the Exchange Offer or any defect or
irregularities in tenders of any particular Holder whether or not similar
defects or irregularities are waived in the case of other Holders. None of the
Company, the Exchange Agent or any other person will be under any duty to give
notification of any defects or irregularities in tenders or shall incur any
liability for failure to give any such notification. The Company's
interpretation of the terms and conditions of the Exchange Offer (including
the Letter of Transmittal and the instructions thereto) will be final and
binding.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Original Notes for exchange (the "Transferor")
exchanges, assigns and transfers the Original Notes to the Company and
irrevocably constitutes and appoints the Exchange Agent as the Transferor's
agent and attorney-in-fact to cause the Original Notes to be assigned,
transferred and exchanged. The Transferor represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the Original
Notes and to acquire Exchange Notes issuable upon the exchange of such
tendered Original Notes, and that, when the same are accepted for exchange,
the Company will acquire good and unencumbered title to the tendered Original
Notes, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim. The Transferor also warrants that it will,
upon request, execute and deliver any additional documents deemed by the
Company to be necessary or desirable to complete the exchange, assignment and
transfer of
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tendered Original Notes. The Transferor further agrees that acceptance of any
tendered Original Notes by the Company and the issuance of Exchange Notes in
exchange therefor shall constitute performance in full by the Company of its
obligations under the Registration Rights Agreement and that the Company shall
have no further obligations or liabilities thereunder (except in certain
limited circumstances). All authority conferred by the Transferor will survive
the death or incapacity of the Transferor and every obligation of the
Transferor shall be binding upon the heirs, legal representatives, successors,
assigns, executors and administrators of such Transferor.
By tendering Original Notes, the Transferor certifies (a) that it is not an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act, that it is not a broker-dealer that owns Original Notes acquired directly
from the Company or an affiliate of the Company, that it is acquiring the
Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement with any person to
participate in the distribution of such Exchange Notes or (b) that it is an
"affiliate" (as defined) of the Company or of the initial purchasers in the
Initial Offering of the Original Notes, and that it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable to it.
WITHDRAWAL RIGHTS
Original Notes tendered pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date.
For a withdrawal to be effective, a written or facsimile transmission notice
of withdrawal must be timely received by the Exchange Agent at its address set
forth on the back cover of this Prospectus. Any such notice of withdrawal must
specify the person named in the Letter of Transmittal as having tendered
Original Notes to be withdrawn, the certificate numbers of Original Notes to
be withdrawn, the principal amount of Original Notes to be withdrawn (which
must be an authorized denomination), a statement that such Holder is
withdrawing his election to have such Original Notes exchanged, and the name
of the registered Holder of such Original Notes, and must be signed by the
Holder in the same manner as the original signature on the Letter of
Transmittal (including any required signature guarantees) or be accompanied by
evidence satisfactory to the Company that the person withdrawing the tender
has succeeded to the beneficial ownership of the Original Notes being
withdrawn. The Exchange Agent will return the properly withdrawn Original
Notes promptly following receipt of notice of withdrawal. All questions as to
the validity of notices of withdrawals, including time of receipt, will be
determined by the Company, and such determination will be final and binding on
all parties.
ACCEPTANCE OF ORIGINAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Original Notes validly tendered and not withdrawn
and the issuance of the Exchange Notes will be made on the Exchange Date. For
the purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange validly tendered Original Notes when, as and if the
Company has given written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering Holders of Original
Notes for the purposes of receiving Exchange Notes from the Company and
causing the Original Notes to be assigned, transferred and exchanged. Upon the
terms and subject to the conditions of the Exchange Offer, delivery of
Exchange Notes to be issued in exchange for accepted Original Notes will be
made by the Exchange Agent promptly after acceptance of the tendered Original
Notes. Original Notes not accepted for exchange by the Company will be
returned without expense to the tendering Holders (or in the case of Original
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the procedures described above, such
non-exchanged Original Notes will be credited to an account maintained with
such Book-Entry Transfer Facility) promptly following the Expiration Date or,
if the Company terminates the Exchange Offer prior to the Expiration Date,
promptly after the Exchange Offer is so terminated.
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CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to issue Exchange
Notes in respect of any properly tendered Original Notes not previously
accepted and may terminate the Exchange Offer (by oral or written notice to
the Exchange Agent and by timely public announcement communicated, unless
otherwise required by applicable law or regulation, by making a release to the
Dow Jones News Service) or, at its option, modify or otherwise amend the
Exchange Offer, if (a) there shall be threatened, instituted or pending any
action or proceeding before, or any injunction, order or decree shall have
been issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain or
prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, (ii) assessing or seeking any
damages as a result thereof, or (iii) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of the
Original Notes pursuant to the Exchange Offer; (b) any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of the
transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the sole judgment of the Company
might directly or indirectly result in any of the consequences referred to in
clauses (a)(i) or (ii) above or, in the sole judgment of the Company, might
result in the Holders of Exchange Notes having obligations with respect to
resales and transfers of Exchange Notes which are greater than those described
in the interpretations of the Commission referred to on the cover page of this
Prospectus, or would otherwise make it inadvisable to proceed with the
Exchange Offer; or (c) a material adverse change shall have occurred in the
business, condition (financial or otherwise), operations, or prospects of the
Company.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by it with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the
Company) giving rise to such condition or may be waived by the Company in
whole or in part at any time or from time to time in its sole discretion. The
failure by the Company at any time to exercise any of the foregoing rights
will not be deemed a waiver of any such right, and each right will be deemed
an ongoing right which may be asserted at any time or from time to time. In
addition, the Company has reserved the right, notwithstanding the satisfaction
of each of the foregoing conditions, to terminate or amend the Exchange Offer.
Any determination by the Company concerning the fulfillment or non-
fulfillment of any conditions will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Original Notes
tendered and no Exchange Notes will be issued in exchange for any such
Original Notes, if at such time any stop order shall be threatened or in
effect with respect to the Registration Statement of which this Prospectus
constitutes a part or qualification of the Indenture under the Trust Indenture
Act of 1939 (the "Trust Indenture Act").
EXCHANGE AGENT
U.S. Bank Trust National Association (formerly First Trust National
Association) has been appointed as the Exchange Agent for the Exchange Offer.
Letters of Transmittal must be addressed to the Exchange Agent at its address
set forth on the back cover page of this Prospectus.
Delivery to an address other than as set forth herein, or transmissions of
instructions via a facsimile number other than the ones set forth herein, will
not constitute a valid delivery.
SOLICITATION OF TENDERS; EXPENSES
The Company has have not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The
Company will, however, pay the Exchange Agent reasonable and customary fees
for its services and
28
<PAGE>
will reimburse it for reasonable out-of-pocket expenses in connection
therewith. The Company will also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by
them in forwarding tenders for their customers. The expenses to be incurred in
connection with the Exchange Offer, including the fees and expenses of the
Exchange Agent and printing, accounting and legal fees, will be paid by the
Company and are estimated at approximately $500,000.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those
contained in this Prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made
hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the respective dates as
of which information is given herein. The Exchange Offer is not being made to
(nor will tenders be accepted from or on behalf of) Holders of Original Notes
in any jurisdiction in which the making of the Exchange Offer or the
acceptance thereof would not be in compliance with the laws of such
jurisdiction. However, the Company may, at their discretion, take such action
as it may deem necessary to make the Exchange Offer in any such jurisdiction
and extend the Exchange Offer to Holders of Original Notes in such
jurisdiction. In any jurisdiction the securities laws or blue sky laws of
which require the Exchange Offer to be made by a licensed broker or dealer,
the Exchange Offer is being made on behalf of the Company by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
APPRAISAL RIGHTS
HOLDERS OF ORIGINAL NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL
RIGHTS IN CONNECTION WITH THE EXCHANGE OFFER.
FEDERAL INCOME TAX CONSEQUENCES
The exchange of Original Notes for Exchange Notes by Holders will not be a
taxable exchange for U.S. federal income tax purposes, and Holders should not
recognize any taxable gain or loss or any interest income as a result of such
exchange.
OTHER
Participation in the Exchange Offer is voluntary and Holders should
carefully consider whether to accept. Holders of the Original Notes are urged
to consult their financial and tax advisors in making their own decisions on
what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Original Notes pursuant to the terms of this Exchange Offer,
the Company will have fulfilled a covenant contained in the terms of the
Original Notes and the Registration Rights Agreement. Holders of the Original
Notes who do not tender their certificates in the Exchange Offer will continue
to hold such certificates and will be entitled to all the rights, and
limitations applicable thereto, under the Indenture, except for any such
rights under the Registration Rights Agreement, which by their terms terminate
or cease to have further effect as a result of the making of this Exchange
Offer. See "Description of the Notes." All untendered Original Notes will
continue to be subject to the restriction on transfer set forth in the
Indenture. To the extent that Original Notes are tendered and accepted in the
Exchange Offer, the trading market, if any, for the Original Notes could be
adversely affected. See "Risk Factors--Consequences of Failure to Exchange."
The Company may in the future seek to acquire untendered Original Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plan to acquire any Original
Notes which are not tendered in the Exchange Offer.
29
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company as of December 31, 1997, (ii) the pro forma capitalization of the
Company, adjusted to give effect to the 4-Sight Acquisition and (iii) the pro
forma capitalization of the Company, as further adjusted to give effect to the
Initial Offering as if it had occurred on December 31, 1997 and the
application of the estimated net proceeds therefrom as described under "Use of
Proceeds," and (iv) the historical capitalization of the Company as of March
31, 1998. The 4-Sight Acquisition was consummated on March 13, 1998. The
table, including the notes thereto, should be read in conjunction with the
Company's and 4-Sight's respective consolidated financial statements included
elsewhere in this Offering Memorandum, "Pro Forma Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." See the footnotes included in "Pro Forma Financial Data" for an
explanation of adjustments made to arrive at the pro forma amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
--------------------------------- --------------
ACTUAL PRO PRO FORMA
WAM!NET FORMA (1) AS ADJUSTED(2) ACTUAL
------- --------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Cash and cash
equivalents.............. $ 274 $ 4,527 $ 84,146(3) 66,760
======= ======= ======== ========
Current portion of long-
term debt................ $ 3,129 $ 3,367 $ 3,129 3,541
------- ------- -------- --------
Long-term debt:
13 1/4% Senior Discount
Notes.................. -- -- $114,944(3)(4) 110,686
WorldCom Subordinated
Note................... 16,784 16,784 16,784(5) 17,115(5)
WorldCom Convertible
Note................... 5,000 5,000 5,000(5) 5,253(5)
Revolving Credit
Facility............... 14,431 14,525 -- --
Equipment financing..... 6,434 6,434 6,434 6,883
------- ------- -------- --------
Total long-term debt,
net of
current portion...... 42,649 42,743 143,162 139,937
------- ------- -------- --------
Total debt.......... 45,778 46,110 146,291 143,478
------- ------- -------- --------
Redeemable 7% Preferred
Stock, Class A,
$10 par value, 100,000
authorized, issued,
and outstanding(6)....... 1,000 1,000 1,000 1,000
------- ------- -------- --------
Stockholders' equity (def-
icit)(4):................ (30,671) (10,671) (4,983) (15,316)
------- ------- -------- --------
Total
capitalization..... $16,107 $36,439 $142,308 $129,162
======= ======= ======== ========
</TABLE>
- --------
(1) Gives effect to the 4-Sight Acquisition as if it had occurred on December
31, 1997. See "Pro Forma Financial Data."
(2) Adjusts the pro forma information to give effect to the Initial Offering
and the application of the estimated net proceeds therefrom as described
under "Use of Proceeds."
(3) Reflects the gross proceeds of $125,001, net of expenses of $5,750
incurred in connection with the offering of the Notes, offset by the
repayment of $18,800 of the line of credit and the repayment of the 4-
Sight mortgage of $332, and the payment of $20,000 to shareholders of 4-
Sight and $500 for related expenses in connection with the acquisition of
4-Sight.
(4) The estimated value of warrants issued to debtholders and of options
issued to consultants is reflected as both a debt discount and an element
of additional paid-in capital.
(5) Interest is payable semiannually in kind. WorldCom has agreed to defer all
cash payments on such indebtedness until a date that is 180 days following
the Stated Maturity of the Notes. See "Description of Certain
Indebtedness."
(6) Dividends are payable quarterly in kind. WorldCom has agreed that no cash
dividends or distributions will be payable by the Company on the Class A
Preferred Stock owned by WorldCom, and the Class A Preferred Stock owned
by WorldCom will not be redeemed by the Company for cash, until a date
that is 180 days following the Stated Maturity of the Notes. WorldCom is
the sole holder of shares of Class A Preferred Stock. See "Description of
Certain Indebtedness."
30
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth (i) selected historical consolidated
financial data for the Company and its subsidiaries for each of the years in
the three year period ended December 31, 1997, and for the three month periods
ended March 31, 1997 and 1998 and (ii) selected historical consolidated
financial data for 4-Sight and its subsidiaries for the year ended August 31,
1996, the month ended September 30, 1996, the year ended September 30, 1997,
and the twelve months ended December 31, 1997. The 4-Sight Acquisition
occurred on March 13, 1998 and the operating results of 4-Sight are included
in the Company's operating results from that date through March 31, 1998. The
Company's selected historical consolidated financial data as of and for the
three months ended March 31, 1997 and 1998 and 4-Sight's selected historical
consolidated financial data as of and for the twelve months ended December 31,
1997 have been derived from the respective companies' unaudited financial
statements and have been prepared on the same basis as the historical
information derived from audited financial statements. In the opinion of the
management of the Company and the management of 4-Sight, the unaudited
financial statements of the respective companies, from which such data have
been derived, contain all adjustments, consisting only of normal recurring
accruals, necessary for the fair presentation of the results for and as of the
end of such periods. The historical data with respect to the three months
ended March 31, 1998 should not be regarded as necessarily indicative of the
results that may be expected for the entire year. The Company's development
and expansion activities during the periods presented below significantly
affect the period-to-period comparability of the historical data presented for
the Company. The following information is qualified in its entirety by, and
should be read in conjunction with, the consolidated financial statements and
the notes thereto of the Company and 4-Sight and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
<TABLE>
<CAPTION>
WAM!NET INC.
---------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- -------- ------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $ 180 $ 279 $ 1,555 $ 122 $ 1,880
Operating expenses............. 1,437 7,036 31,037 4,205 25,412
Interest income (expense),
net........................... (20) (839) (4,154) (628) (3,151)
Income (loss) before income
taxes......................... (1,277) (7,596) (33,636) (4,711) (26,683)
Net income (loss).............. (1,277) (7,596) (33,636) (4,711) (26,683)
OTHER DATA:
EBITDA(1)...................... $(1,226) $(6,310) $(26,814) $(3,796) $(21,611)
Depreciation and amortization.. 31 447 2,668 287 1,921
Capital expenditures........... 657 4,244 16,599 3,904 10,143
Net cash used in operating
activities.................... (747) (6,218) (23,917) (3,345) (9,743)
Net cash used in investing
activities.................... (657) (5,244) (15,599) (2,904) (30,396)
Net cash provided by (used in)
financing activities.......... 2,732 24,578 25,346 1,096 102,687
Ratio of earnings to fixed
charges(2).................... -- -- -- -- --
BALANCE SHEET DATA (END OF
PERIOD):......................
Cash and cash equivalents...... $ 1,328 $15,444 $ 274 $ 7,099 $ 66,760
Total assets................... 2,075 20,070 21,086 15,390 137,770
Total debt(3).................. 1,900 20,473 45,778 20,049 143,478
Shareholders' deficit(4)....... (371) (2,683) (30,671) (6,412) (15,316)
</TABLE>
Footnotes on following page.
31
<PAGE>
<TABLE>
<CAPTION>
4-SIGHT LIMITED
------------------------------------------------------
THREE MONTHS
ENDED
YEAR ENDED MONTH ENDED YEAR ENDED DECEMBER 31,
AUGUST 31, SEPTEMBER 30, SEPTEMBER 30, ---------------
1996 1996 1997(5) 1996 1997
---------- ------------- ------------- ------ -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $11,446 $1,065 $18,264 $3,860 $ 4,769
Operating expenses...... 9,380 1,124 15,817 2,352 2,517
Interest income
(expense), net......... 18 (9) 57 (25) 58
Income (loss) before
income taxes........... 2,084 (68) 2,504 93 942
Net income (loss)....... 1,478 (61) 1,588 71 568
OTHER DATA:
EBITDA(1)............... $ 2,372 $ (20) $ 3,050 $ 279 $ 1,086
Depreciation and
amortization........... 306 39 603 161 202
Capital expenditures.... 465 87 545 165 240
Net cash provided by
(used in) operating
activities............. 380 (759) 707 (492) 382
Net cash used in
investing activities... (327) (87) (540) (165) (240)
Net cash provided by
(used in) financing
activities............. (249) (5) 3,380 665 125
Ratio of earnings to
fixed charges(2)....... 39.6x -- 42.0x 3.7x 135.6x
BALANCE SHEET DATA (END
OF PERIOD): -- $ 4,253
Cash and cash
equivalents............ $ 1,290 $ 439 $ 3,986 -- 11,382
Total assets............ 6,927 6,095 10,473 -- 332
Total debt(3)........... 225 267 206 -- 3,165
Redeemable preferred
stock.................. -- -- 5,157 -- --
Shareholders' equity.... 2,565 2,531 2,554 -- --
</TABLE>
- --------
(1) EBITDA represents earnings (loss) from operations before taking into
consideration net interest expense, income tax expense, depreciation
expense and amortization expense. The Company has included information
concerning EBITDA here as it is used by certain investors as a measure of
a company's ability to service its debt. EBITDA should not be considered
as an alternative to net income or any other measure of performance or
liquidity as determined in accordance with generally accepted accounting
principles or as an indicator of the Company's overall financial
performance. In addition, the measure of EBITDA presented herein by the
Company may not be comparable to other similarly titled measures of other
companies.
(2) The ratio of earnings to fixed charges is calculated by dividing (i) net
income (loss) before taxes plus fixed charges by (ii) fixed charges. Fixed
charges consist of interest incurred and the portion of rent expense which
is deemed representative of interest. The Company's earnings were
insufficient to cover fixed charges by $1,242, $6,653 and $29,180 for the
years ended December 31, 1995, 1996 and 1997, and $3,907 and $23,184 for
the three month periods ended March 31, 1997 and 1998, respectively.
Earnings were insufficient to cover fixed charges by $0.04 for 4-Sight for
the one month period ended September 30, 1996.
(3) Total debt includes long-term debt, current portion of long-term debt and
obligations under capitalized leases, net of the unamortized value of
warrants ($3,679) issued to debtholders.
(4) The estimated value of warrants issued to debtholders and of options
issued to consultants is reflected as both a debt discount and an element
of paid in capital.
(5) 4-Sight changed its fiscal year end to September 30 during 1997.
(6) 4-Sight's fiscal year ends on September 30. The financial data of 4-Sight
for the twelve months ended December 31, 1997 is presented for comparative
purposes.
32
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data (the "Pro Forma Financial
Data") of the Company has been derived from and should be read in conjunction
with (i) the audited consolidated financial statements of the Company and the
related notes thereto, included elsewhere herein, which statements have been
audited by Ernst & Young LLP, independent auditors, whose report is included
elsewhere herein, and (ii) the audited consolidated financial statements of 4-
Sight and the related notes thereto included elsewhere herein, which
statements have been audited by Ernst & Young, Chartered Accountants,
independent auditors, whose report is included elsewhere herein. The unaudited
financial statements of 4-Sight for the twelve month period ended December 31,
1997 have been derived by removing the unaudited results of the three month
period ended December 31, 1996 from the audited statement of operations for
the year ended September 30, 1997 and adding the unaudited results for the
three month period ended December 31, 1997. The Pro Forma Financial Data has
been prepared to illustrate the effects of the 4-Sight Acquisition and the
Initial Offering, including the application of the net proceeds therefrom.
This Pro Forma Financial Data does not necessarily present the financial
position or results of operations as they would have been if the companies
involved had constituted one entity for the period presented. See "Prospectus
Summary--Recent Developments" and "Use of Proceeds."
The pro forma statement of operations data for the twelve month period ended
December 31, 1997 and the three month period ended March 31, 1998 gives effect
to the 4-Sight Acquisition and the Initial Offering as if they had occurred at
the beginning of the respective period. The Pro Forma Financial Data is not
necessarily indicative of either future results of operations or the results
that might have occurred if the foregoing transactions had been consummated on
the indicated date.
The acquisition of 4-Sight was accounted for using the purchase method.
After the acquisition, the total purchase price of the acquisition was
allocated to the assets and liabilities based upon the estimated fair value of
the assets and liabilities acquired. The actual purchase accounting
adjustments were not materially different from the pro forma adjustments.
33
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
4-SIGHT
WAM!NET TWELVE MONTHS
YEAR ENDED ENDED PRO FORMA PRO FORMA
DECEMBER 31, 1997 DECEMBER 31, 1997 ADJUSTMENTS COMBINED
----------------- ----------------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
<S> <C> <C> <C> <C>
Gross Revenues........ $ 1,628 $ 19,278 $ -- $ 20,906
Less rebates.......... (150) -- -- (150)
--------- --------- -------- ---------
Net revenues.......... 1,478 19,278 -- 20,756
Other service fees.... 77 -- -- 77
--------- --------- -------- ---------
Total revenues...... 1,555 19,278 -- 20,833
Cost of revenues........ -- 5,013 -- 5,013
Operating expenses:
Network communication
fees................. 7,364 -- -- 7,364
Network operations.... 7,478 -- -- 7,478
Sales and marketing... 9,207 5,989 -- 15,196
General and
administrative....... 4,320 5,029 6,415 (2) 15,764
Depreciation and
amortization......... 2,668 -- -- 2,668
--------- --------- -------- ---------
Total operating ex-
penses............. 31,037 11,018 6,415 48,470
--------- --------- -------- ---------
(Loss) income from oper-
ations................. (29,482) 3,247 (6,415) (32,650)
Other income (expenses):
Interest income....... 202 168 -- 370
Interest (expense).... (4,356) (28) (22,814)(1) (27,198)
--------- --------- -------- ---------
(Loss) income before
income taxes........... (33,636) 3,387 (29,229) (59,478)
Income taxes............ -- 1,278 -- 1,278
--------- --------- -------- ---------
(Loss) income before
preferred stock
dividend............... (33,636) 2,109 (29,229) (60,756)
Preferred stock
dividend............... (70) (-- ) (-- ) (70)
--------- --------- -------- ---------
(Loss) income related to
common shareholders.... $ (33,706) $ 2,109 $(29,229) $ (60,826)
========= ========= ======== =========
Net income (loss) per
common share........... $ (5.19) $ .84 -- $ (6.76)
========= ========= ======== =========
Weighted average number
of common shares
outstanding............ 6,496,345 2,500,000 -- 8,996,345
========= ========= ======== =========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
34
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
WAM!NET 4-SIGHT FOR THE
THREE MONTHS PERIOD FROM
ENDED JANUARY 1, 1998 PRO FORMA PRO FORMA
MARCH 31, 1998 TO MARCH 12, 1998 ADJUSTMENTS COMBINED
-------------- ----------------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
<S> <C> <C> <C> <C>
Gross Revenues........ $ 1,320 $4,305 $ -- $ 5,625
Less rebates.......... (271) -- -- (271)
--------- ------ ------- ---------
Net revenues.......... 1,049 4,305 -- 5,354
Other service fees.... 9 -- -- 9
--------- ------ ------- ---------
Total revenues...... 1,058 4,305 -- 5,363
Cost of revenues........ -- 1,364 -- 1,364
Operating expenses:
Network communication
fees................. 3,152 -- -- 3,152
Network operations.... 3,259 -- -- 3,254
Sales and marketing... 2,352 -- -- 2,352
General and
administrative....... 13,947 2,670 -- 16,617
Depreciation and
amortization......... 1,867 157 1,296 (3) 3,320
--------- ------ ------- ---------
Total operating ex-
penses............. 24,577 2,827 1,296 28,700
--------- ------ ------- ---------
(Loss) income from oper-
ations................. (23,519) 114 (1,296) (24,701)
Other income (expenses):
Interest income....... 277 74 -- 351
Interest (expense).... (3,417) (5) (2,964)(4) (6,386)
--------- ------ ------- ---------
(Loss) income before
income taxes........... (26,659) 183 (4,260) (30,736)
Income taxes............ -- (231) -- (231)
--------- ------ ------- ---------
(Loss) income before
preferred stock
dividend............... (26,659) (48) (4,260) (30,967)
Preferred stock
dividend............... (18) -- -- (18)
--------- ------ ------- ---------
(Loss) income related to
common shareholders.... $ (26,677) $ (48) $(4,260) $ (30,985)
========= ====== ======= =========
Net income (loss) per
common share........... $ (3.65) $ (4.24)
========= =========
Weighted average number
of common shares
outstanding............ 7,305,734 7,305,734
========= =========
</TABLE>
See Notes to Pro Forma Financial Statements.
35
<PAGE>
WAM!NET INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<C> <S> <C>
(1) Represents the incremental interest expense to be incurred by
the Company related to the Notes offered hereby plus
amortization of deferred financing costs, offset by interest
expense related to the repayment of the Line of Credit and the
repayment of the 4-Sight mortgage as follows:
Write off of unamortized portion of value assigned to Class A
warrants..................................................... $ 4,369
Interest on Notes offered hereby.............................. 17,111
Amortization of value of Warrants............................. 1,049
Amortization of deferred financing costs...................... 600
Interest on Line of Credit--principal to be paid upon
completion of the Offering................................... (315)
-------
Incremental interest expenses................................. $22,814
=======
(2) Additional amortization expense with respect to intangible
assets purchased in the 4-Sight Acquisition using the straight
line method over a period of 5 years for the year ended
December 31, 1997.............................................. $ 6,415
=======
(3) Additional amortization expense with respect to intangible
assets purchased in the 4-Sight Acquisition using the straight
line method over a period of five years for the three month
period ended March 31, 1998.................................... $ 1,296
=======
(4) Represents the incremental interest expense to be incurred by
the Company related to the Initial Offering of the Notes for
the quarter ended March 31, 1998............................... $ 2,964
=======
</TABLE>
The Company allocated the purchase price to the assets acquired and
liabilities assumed based upon the historical carrying value of the respective
items, which the Company determined approximated fair value. The excess
purchase price over the net assets acquired was recorded as goodwill, which is
being amortized over a five year period.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is based on the historical and pro
forma results of the Company and should be read in conjunction with the
Company's Financial Statements and "Pro Forma Financial Data" included herein.
OVERVIEW
The Company was organized in September 1994 and commenced operations in
March 1995. From March 1995 through February 1996, the Company was engaged
primarily in the design and development of the WAM!NET Network and the WAM!NET
Service. The Company announced the commercial release of the WAM!NET Service
in February 1996 at a major Graphic Arts industry trade show. Through March
31, 1998, approximately 830 customers had contracted for the WAM!NET Service
at a total of 1,370 customer sites. As of that date, the WAM!NET Service had
been installed at 816 customer sites, with the balance of the contracted sites
expected to be installed during the first half of 1998.
The Company has entered into a strategic alliance with WorldCom that
includes equity and debt investments and operating loan guarantees totaling
approximately $50 million. WorldCom is currently entitled to designate a
majority of the Board of Directors of the Company and, through its ownership
of convertible debt and warrants, has the right to acquire a majority of the
Common Stock of the Company. WorldCom also provides telecommunication and
other services to the Company on a nonexclusive basis. The Company anticipates
that its relationship with WorldCom will enable it to access the worldwide
infrastructure, sales and marketing work force, telephony technologies, high
bandwidth carrier service and other services of WorldCom and its affiliates,
including UUNet.
On March 13, 1998, the Company consummated the purchase of 4-Sight. 4-Sight
develops and distributes ISDN data transmission software and related products
and applications targeted to the Graphic Arts industry, with particular
emphasis on European, Asian and North American markets. At December 31, 1997,
4-Sight's customer base exceeded 30,000 locations, including 3,000 sites in
the United States. The Company expects that the 4-Sight Acquisition will
enable the Company to achieve broader market coverage in the Graphic Arts
market by combining 4-Sight's international presence and penetration of the
lower volume user market with the Company's domestic presence and penetration
of the higher volume user market.
Due to costs associated with the design, development, installation and
operation of the WAM!NET Network and its related applications, the Company has
operated at a loss since inception and expects to incur substantial operating
losses for the years ending December 31, 1998 and 1999. The Company has
incurred an accumulated deficit of approximately $69,192 million through March
31, 1998.
Revenue. The Company's revenue is derived primarily from WAM!NET Service
contracts which are usually annual, automatically renewable service contracts
with a minimum monthly fee and additional charges for usage exceeding the
monthly minimum. The Company offers the WAM!NET Service at scaled minimum
usage fees, generally ranging from $250 per month to $3,000 per month. Service
installation typically lags contract signing by approximately 90 days due to
the time required to obtain telephone service installation from local
telephone companies. The Company begins to earn gross revenue following
installation of service at a customer's premise. The Company also incurs
service rebates that offset the gross revenue generated by the Company. Free
trial periods under the Company's various promotional programs have ranged
from 60 days to six months and have been extended to 47.9% of the Company's
customer base to date. As a result, the Company's generation of net revenue
from any customer may lag contract signing by a period of three to nine
months, a practice that is not customary in the digital data delivery industry
but is a key component in the Company's market penetration strategy. The
Company's experience with promotional programs has been favorable to date,
with approximately 97% of customers continuing to subscribe to the WAM!NET
Service following expiration of the promotional period extended to them. The
Company expects the use of promotional programs in the Graphic Arts industry
to decline with increasing penetration of the market, but the Company
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will likely use similar promotional programs to introduce the WAM!NET Service
to its other targeted industries. The Company also plans to continue to
develop new, Industry Smart applications to increase the volume of files
transferred over the network.
Revenue is primarily driven by the number of installed customer locations,
the length of time a customer has been using the service, the number of work
flow partners with whom a customer exchanges data and the size of the files
exchanged.
Network Communications Fees. Network communications fees include both the
costs of the high bandwidth carrier services interconnecting the Company's
national infrastructure of NOCs and Distribution Hubs and the costs of local
telephone circuits connecting NADs to the nearest Distribution Hub. Local
telephone circuit ("last mile") connections account for approximately 60% of
these charges, with significant differences between urban and rural connection
costs. National carrier service, provided primarily by WorldCom, accounts for
most of the balance of these charges. Network communication fees are generally
a fixed monthly cost per circuit. The excess of these fees over revenue
represents excess capacity costs which the Company expects will decline with
increasing utilization of the WAM!NET Network. The Company actively seeks to
obtain and deploy technologies that will reduce the costs of last mile
connections, including wireless technologies and remote dial-up capabilities.
The Company also intends to use its network management tools to optimize
existing and planned network capacity as volume increases and traffic patterns
begin to emerge. The Company plans to consider new pricing for its services
which take into account the significant cost differential between urban and
rural last mile connections. The Company also believes it may benefit from
growing competition among telephony and communications providers for the
provision of last mile connectivity.
Network Operations Expense. Network operations expense represents costs
directly associated with developing, maintaining, managing and servicing the
WAM!NET Network. Such costs include direct labor, vendor service fees, point-
of-presence charges and research and development charges which are often
incurred in advance of receiving revenue. The Company's currently installed
NOCs, which account for the substantial majority of direct labor and network
operating costs, are capable of providing for and managing the Company's
current and planned North American operations. Costs associated with the
development of WAM!BASE, WAM!PROOF and other network applications are also
contained in network operations expense and are incurred in advance of revenue
receipt. The Company expects that network operations costs will increase as
the WAM!NET Network expands; however, the cost of network operations as a
percentage of revenue is expected to decline.
Sales and Marketing Expense. The Company's sales and marketing efforts are
intended to create awareness of the WAM!NET Service, communicate its potential
for work flow enhancement, demonstrate its reliability and establish strong
brand recognition. As a result, the Company aggressively markets the WAM!NET
Service through a combination of trade journal advertising, trade show
attendance, promotional programs, direct field sales, tele-sales, cooperative
sales presentations and active participation in industry sponsored seminars
and publications. The Company expects to continue to incur significant sales
and marketing expenses to obtain increased penetration of the Graphic Arts
industry, to generate increased traffic among customers and to market the
WAM!NET Service to other targeted industries.
General and Administrative Expense. The Company's general and administrative
expense includes administrative salaries, related overhead and professional
service fees. These costs reflect expenditures related to the rapid growth and
expansion of the Company's administrative infrastructure necessary to manage
its expanding operations, costs incurred in 1997 for relocation to its new
administrative and network operations facility and professional service fees
for financing activities, contract negotiations and acquisitions. The Company
expects to continue to incur substantial general and administrative expense as
the Company deploys the WAM!NET Service internationally.
Depreciation and Amortization. To facilitate entry into its target markets,
the Company furnishes its customers with all the hardware and software
necessary for them to use the WAM!NET Service on a turn-key,
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pay-by-use basis. As a result, the Company retains ownership of the NADs it
furnishes to customers for their use of the WAM!NET Service. Accordingly, the
Company does not anticipate selling NADs (or other hardware and non-4-Sight
software) as a means of raising revenues. Depreciation and amortization
expense includes depreciation of NADs, Distribution Hubs and equipment located
in the NOCs. The Company's network infrastructure is organized to use the most
expensive equipment in the NOCs, less expensive equipment for Distribution
Hubs and the least expensive equipment in the NADs. The Company anticipates
substantial capital investments for additional Distribution Hubs to be located
in North America and internationally, WAM!BASE storage facilities to be
located in the existing NOCs and NADs to be located at customer premises. As a
result, the Company anticipates that depreciation and amortization expense
will continue to increase in future periods commensurate with future equipment
purchases.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 1998 COMPARED WITH THREE MONTH PERIOD ENDED
MARCH 31, 1997
Revenue
Revenue from the WAM!NET Service for the three month period ended March 31,
1998 was $1,320,026, compared to $116,678 for the three month period ended
March 31, 1997, an increase of $1,203,348, or 1,031%. This increase was due to
a 486.3% increase in the number of subscribers to the WAM!NET Service from
approximately 153 installed customer sites on March 31, 1997 to approximately
744 installed customer sites on March 31, 1998. At March 31, 1998, the Company
had contracts to install NAD's at 625 customer sites awaiting installation of
telephony services. Service rebates for the three month period ended March 31,
1998 were $271,000, or 20.5% of revenue. Service rebates for the three month
period ended March 31, 1997 were $0.
Revenue from software and hardware sales for the three month period ended
March 31, 1998 was $822,000, compared to $0 for the three month period ended
March 31, 1997. Revenues from software and hardware sales are a result of the
Company's acquisition of 4-Sight, which was consummated as of March 13, 1998.
Other service fee revenue for the three month period ended March 31, 1998
was $9,000, compared to $5,108 for the three month period ending March 31,
1997, an increase of $3,892, or 76.2%. Other service fees revenue is primarily
derived from ancillary transactions with existing WAM!NET Service customers
which includes consulting services and hardware sales. The increase reflects a
minor increase in customer consulting hours during the three month period
ended March 31, 1998.
Operating Expenses
Network communications fees for the three month period ended March 31, 1998
were $3,151,571, compared to $862,369 for the three month period ended March
31, 1997, an increase of $2,289,202 or 376.7%. Network operations expense for
the three month period ended March 31, 1998 was $3,259,126, compared to
$848,834 for the three month period ended March 31, 1997, an increase of
$2,410,292 or 283.9%. These increases were primarily due to the 386.3%
increase in customers that subscribed to the WAM!NET Service during the three
month period ending March 31, 1998.
Cost of software and hardware sales for the three month period ended March
31, 1998 was $261,000, compared to $0 for the three month period ended March
31, 1997. Costs of software and hardware sales are a result of the Company's
acquisition of 4-Sight, which was consummated as of March 13, 1998.
Sales and marketing expenses for the three month period ended March 31, 1998
were $2,352,529, compared to $1,229,345 for the three month period ended March
31, 1997, an increase of $1,123,184, or 91.4%. This increase primarily
resulted from the costs associated with building the Company's direct sales
force and marketing department, and higher outside advertising agency and
trade show expenditures.
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General and administrative expense for the three month period ended March
31, 1998 was $14,466,910, compared to $977,318 for the three month period
ended March 31, 1997, an increase of $13,489,592, or 1,380.3%. This increase
is primarily due to a $11,423,502 non-cash charge relating to officer
compensation expense arising from the Company's election to accelerate the
vesting period for options granted to selected officers. The additional
increase in general and administrative expenses of $2,066,090 during the three
month period ended March 31, 1998 as compared to the three month period ending
March 31, 1997 was due to increased operational support requirements due to
the rapid expansion of the Company's services and corporate facilities.
Depreciation and amortization for the three month period ended March 31,
1998 was $1,921,248, compared to $287,302 for the three month period ended
March 31, 1997, an increase of $1,633,946, or 568.72%. As a percentage of
gross WAM!NET Service revenue, depreciation and amortization was 246.2% in
1997, compared to 68.7% for the same period in 1998. This increase is
primarily due to an increase in the installed customer premise and
communications backbone equipment as a result of the increase in the number of
customers that are being provided with the WAM!NET Service.
Interest expense for the three month period ended March 31, 1998 was
$3,444,282, compared to $778,297 for the three month period ended March 31,
1997, an increase of $2,665,985, or 342.5%. The increase was primarily due to
the Company's financing of its 1997 and 1998 operations through the issuance
of various debt instruments including $24 million of long-term subordinated
notes to WorldCom, $9.6 million of equipment financing and $208.5 million of
Notes issued in the Initial Offering.
Income Taxes
For the three months ended March 31, 1998, the Company experienced net
losses of $26,682,969 and paid no income taxes. These losses are available to
offset future taxable income through the year 2013 and are subject to the
limitations of Section 382 of the Internal Revenue Code of 1986, as amended.
These limitations may result in expiration of net operating loss carryforwards
before they can be utilized.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Revenue
Revenue for the year ended December 31, 1997 was $1,627,590 compared to
$110,424 for the year ended December 31, 1996, an increase of $1,517,166, or
1,373.9%. This was primarily due to a 1,375.8% increase in the number of
subscribers to the WAM!NET Service from approximately 33 installed customer
sites on December 31, 1996 to approximately 487 installed customer sites on
December 31, 1997. At December 31, 1997, the Company had contracts to install
NADs at 578 customer sites awaiting installation of telephony services.
Service rebates for the year ended December 31, 1997 were $150,400, or 9.2% of
revenue. Service rebates for the year ended December 31, 1996 were $0.
Other service fees revenue for the year ended December 31, 1997 was $77,748,
compared to $168,290 for the year ended December 31, 1996, a decrease of
$90,542, or 53.8%. Other service fees revenue is primarily derived from minor
transactions with currently existing WAM!NET Service customers which includes
consulting services and hardware sales. The decrease was primarily due to the
expiration of a contractual consulting relationship that the Company had in
place with a customer during 1996.
Operating Expenses
Network communications fees for the year ended December 31, 1997 were
$7,363,667, compared to $816,403 for the year ended December 31, 1996, an
increase of $6,547,264, or 802.0%. Network operations expense for the year
ended December 31, 1997 was $7,477,753, compared to $1,108,807 for the year
ended December 31, 1996, an increase of $6,368,946, or 574.4%. These increases
were primarily due to the 1,375.8% increase in customers that subscribed to
the WAM!NET Service during 1997.
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Sales and marketing expense for the year ended December 31, 1997 was
$9,207,486, compared to $2,052,860 for the year ended December 31, 1996, an
increase of $7,154,626, or 348.5%. This increase primarily resulted from costs
associated with building the Company's direct sales force and marketing
department, and higher outside advertising agency and trade show expenditures.
General and administrative expense for the year ended December 31, 1997 was
$4,320,128, compared to $2,609,879 for the year ended December 31, 1996, an
increase of $1,710,249, or 65.5%. General and administrative expense increased
during 1997 as operational support requirements intensified due to the rapid
expansion of the Company's services and corporate facilities.
Depreciation and amortization for the year ended December 31, 1997 was
$2,668,177, compared to $447,233 for the year ended December 31, 1996, an
increase of $2,220,944, or 496.6%. As a percentage of total revenue,
depreciation and amortization was 171.6% in 1997 compared to 160.5% in 1996.
This increase is primarily due to an increase in the installed customer
premise and communications backbone equipment as a result of the increase in
the number of customers.
Interest expense for the year ended December 31, 1997 was $4,355,676,
compared to $903,443 for the year ended December 31, 1996, an increase of
$3,452,233, or 382.1%. The increase was primarily due to the Company's
financing of its 1997 operations through the issuance of various debt
instruments, including $24 million of long term subordinated notes to
WorldCom, $18.8 million in borrowings from the Revolving Credit Facility and
$9.6 million of equipment financing.
Income Taxes
For the year ended December 31, 1997, the Company experienced net losses of
$33,636,000 and paid no income taxes. These losses are available to offset
future taxable income through the year 2013 and are subject to the limitations
of Section 382 of the Internal Revenue Code of 1986, as amended. These
limitations may result in expiration of net operating loss carryforwards
before they can be utilized.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenue
Revenue for the year ended December 31, 1996 was $110,424, compared to
$20,480 for the year ended December 31, 1995, an increase of $89,944 or
439.2%. This was due primarily to the increase in the number of customers
using the WAM!NET Service. On December 31, 1995, the Company serviced
approximately 6 installed customer sites and on December 31, 1996 serviced 33
installed customer sites.
Other service fees revenue for the year ended December 31, 1996 was
$168,290, compared to $159,851 for the year ended December 31, 1995, an
increase of $8,439 or 5.3%. Other service fees revenue is primarily derived
from minor transactions with currently existing WAM!NET Service customers
which includes consulting services and hardware sales.
Operating Expenses
Network communication fees for the year ended December 31, 1996 were
$816,403, compared to $46,267 for the year ended December 31, 1995, an
increase of $770,136, or 1,664.5%. Network operations expense for the year
ended December 31, 1996 was $1,108,807, compared to $539,003 for the year
ended December 31, 1995, an increase of $569,804, or 105.7%. These increases
were primarily due to the 450.0% increase in the number of WAM!NET Service
customers during 1996 and the installation of certain Distribution Hubs
throughout the United States.
Sales and marketing expense for the year ended December 31, 1996 was
$2,052,860, compared to $93,832 for the year ended December 31, 1995, an
increase of $1,959,028, or 2,087.8%. This increase, to a large extent,
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represents the significant costs associated with building and supporting a
dedicated direct sales force and product marketing organization.
General and administrative expense for the year ended December 31, 1996 was
$2,609,879, compared to $727,434 for the year ended December 31, 1995, an
increase of $1,882,445, or 258.8%. General and administrative expense
increased during 1996 as operational support requirements intensified due to
the expansion of the Company's services and corporate facilities.
Depreciation and amortization for the year ended December 31, 1996 was
$447,233, compared to $30,677 for the year ended December 31, 1995, an
increase of $416,556, or 1,357.9%. As a percentage of gross revenue,
depreciation and amortization was 160.5% in 1996 compared to 17.0% in 1995.
This increase is primarily due to the intense expansion of the WAM!NET Network
during 1996 and the corresponding requirement for both customer premise and
communications backbone equipment.
The Company's results of operations for the years ended December 31, 1996
and 1997 are not necessarily indicative of future periods. The Company's
principal focus during such time was the selection and hiring of personnel for
sales, marketing operations, customer service, development, network
infrastructure implementation and maintenance necessary to conduct its
activities, and the development and release of various proprietary WAM!NET
Service products. The Company expects that future results will reflect the
commercial operations of the WAM!NET Service.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1998, the Company has derived substantially
all of its operating capital from the issuance of short- and long-term debt
instruments. At March 31, 1998, the Company had a total of approximately
$143.4 million in long-term debt, of which approximately $2.7 million becomes
payable during 1998.
The Company's source of liquidity since inception has primarily come from
the issuance of debt and equity instruments and from credit facilities and
other borrowings. The Company has received approximately $154.7 million net
cash proceeds from the issuance of long- and short-term debt and
collateralized equipment financing. An additional $1.8 million of net cash
proceeds has been received from the sale of equity securities. The Company has
utilized these proceeds by investing $31.7 million into its global WAM!NET
Network and investing $20.3 million to acquire 4-Sight. Since inception the
Company has also expended $40.7 million to fund its operating activities. To
date the Company has not generated cash from operating activities and remains
dependent upon its ability to generate operating capital for its global
expansion from credit facilities or other borrowings, or the issuance of
additional long- and short-term debt and equity instruments.
During September of 1997, the Company established the Revolving Credit
Facility, the proceeds of which are being used by the Company to fund its
operations and purchase WAM!NET Network equipment. The maximum amount that can
be borrowed under the Revolving Credit Facility is $25.0 million. The
Revolving Credit Facility was established under an agreement with WorldCom, by
which WorldCom guaranteed the Company's obligations under the Revolving Credit
Facility. At March, 1998, the Company had $0 borrowed under the Revolving
Credit Facility. Interest and principal on the Revolving Credit Facility
become payable in July 1999. Borrowings by the Company under the Revolving
Credit Facility require the prior consent of WorldCom.
In December 1997, the Company acquired the outstanding common stock of
FreeMail, Inc. ("FreeMail"). In connection with the acquisition the Company
issued 125,000 shares of Common Stock, with a fair value of approximately
$488,000, as consideration. The Company is also obligated to pay the former
shareholders of FreeMail as additional contingent consideration on a quarterly
basis amounts equal to five percent of the gross collected revenue derived by
the Company from certain identified FreeMail products; however, the total
amounts of the quarterly payments shall not exceed $3,012,500. As of March 31,
1998, the Company did not record a liability relating to the FreeMail revenue
since no revenue was collected.
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On March 5, 1998, the Company consummated the Initial Offering, and received
net proceeds therefrom of approximately $120.6 million. Cash interest does not
accrue nor is payable on the Notes prior to March 1, 2002. Thereafter, cash
interest on the Notes will accrue at a rate of 13 1/4% per annum (calculated
on a semi-annual bond equivalent basis) and will be payable semi-annually in
arrears on March 1 and September 1 of each year, commencing September 1, 2002.
The Company used the proceeds of the Initial Offering as follows: (i) $20.0
million to pay the cash portion of the 4-Sight Acquisition, (ii) approximately
$25.0 million to repay the borrowings under the Revolving Credit Facility and
(iii) the balance to be used further the Company's business development and
expansion strategy, to enhance the WAM!NET Service infrastructure and develop
additional value-added features and services, to optimize marketing, sales and
customer support and service capabilities, and for working capital and other
general corporate purposes.
The Company intends to pursue one or more financings in 1998, totalling
approximately $100.0 million, for which it has received indications of
interest from certain financial institutions. The Company believes that the
net proceeds of the Initial Offering and such financings together with
expected cash from operations will be sufficient to finance the Company's
operations through September 30, 1999. This includes the purchase and
installation of all necessary WAM!NET Network and WAM!BASE equipment required
for both national and international operations, marketing and sales
activities, continued development of enhancements to the WAM!NET Service and
service of its debt obligations. The Company believes that the net proceeds
from the Initial Offering together with expected cash from operations will be
sufficient to finance the Company's operations through March 31, 1999. The
Company intends to invest an additional $30.0 million in its global WAM!NET
Network infrastructure by December 31, 1998 and an additional $45.0 million in
its global WAM!NET Network infrastructure by December 31, 1999. These
investments are necessitated by the need to grow the global communications
network to provide contracted services to the Company's rapidly expanding
customer base. The Company's inability to secure an additional $100.0 million
in funding by March 31, 1999 would adversely affect its ability to expand the
WAM!NET Network during 1999 to meet rapidly growing demand for global network
services. If the Company is unable to obtain additional financing when needed,
it may be required to significantly scale back expansion plans and, depending
upon cash flow from its existing business, reduce the scope of its plans and
operations.
Pursuant to an agreement with WorldCom, if the Company is not publicly held
by 2000, under certain circumstances and subject to certain conditions, the
Company may be required to buy and WorldCom may be required to sell, the
WorldCom Securities (as defined herein) pursuant to a tender offer and pricing
methodology described herein under "Certain Transactions and Relationships."
If the Company fails to timely pay the purchase price for the WorldCom
Securities, WorldCom will be relieved of all obligations to sell such
securities to the Company, the Company will have no right to cause WorldCom to
sell such securities and the Company will not be obligated to pay the purchase
price for such securities. See "Certain Transactions and Relationships."
During 1997 the Company, on a pro forma basis after giving effect to the 4-
Sight Acquisition, received less than 5% of its total revenue from sales and
operations in Asian countries. As a result, the Company had limited exposure
to the particular risks attendant to doing business in Asia and did not
experience any material adverse effects from the Asian economic crisis;
however, the Company presently intends to expand its operations in that
region. The Company is currently unable to determine the effect, if any, that
recent economic downturns in Asia, particularly Japan, will have on the
Company's future business, operating results or liquidity, although the
Company intends to exercise prudence and sound business judgment prior to
making any future investments in Asia.
Currently, the Company does not employ currency hedging strategies to reduce
the risks associated with the fluctuation of foreign currency exchange rates.
The Company presently denominates all of its contracts in U.S. dollars. 4-
Sight denominates all of its contracts in pounds sterling except for its U.S.
sales, which are denominated in U.S. dollars, or its German sales, which are
denominated in German marks. The Company is unable to determine what effect,
if any, the adoption and use of the euro, the single European currency to be
introduced in January of 1999, will have on the Company's business, operating
results, liquidity and financial condition.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income." Statement 130 is effective for financial statements for fiscal years
beginning after December 15, 1997. This standard defines comprehensive income
as the changes in equity of an entity except those resulting from shareholder
transactions. All components of comprehensive income are required to be
reported in a new financial statement. The adoption of Statement 130 did not
have a material effect on the Company's financial statements.
In June 1997, the FASB also issued Statement 131, "Disclosures about
Segments of an Enterprise and Related Information." Statement 131 is effective
for financial statements for periods beginning after December 31, 1997.
Statement 131 establishes standards for disclosures about operating segments,
products and services, geographic areas and major customers. The adoption of
Statement 131 did not have a material effect on the Company's financial
statements.
In October 1997, the AICPA issued Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"), which superseded Statement of Position 91-1
for periods beginning after December 15, 1997. The adoption of SOP 97-2 did
not have a material effect on the timing of the Company's revenue recognition
or cause changes to its revenue recognition policies.
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BUSINESS
OVERVIEW
WAM!NET provides a managed, high speed digital data delivery network
service, the WAM!NET Service, that integrates the Company's industry-specific
work flow applications with commercially available computer and telephony
technologies. The Company, an affiliate of WorldCom, offers an Industry Smart
service designed to provide its subscribers with a turn-key single source
solution for the rapid, secure, accurate and reliable transportation and
management of information, with a simple "pay by the megabyte" pricing plan
requiring no capital investment. The WAM!NET Service provides seamless digital
connectivity among "communities of interest," drawing together customers and
trading partners which have collaborative work flows. The Company has
developed advanced WAM!NET Service applications, including an on-line digital
job tracking and billing system, CIS, an application enabling remote proofing,
WAM!PROOF, and a remote data archiving, retrieval and distribution system
WAM!BASE. WAM!PROOF was commercially released in the second quarter of 1998
and WAM!BASE is scheduled for commercial release in the second half of 1998.
The Company has initially capitalized on the growing need for managed
digital data delivery services in the printing, publishing, advertising, pre-
press, corporate communication and graphic arts industries (collectively,
"Graphic Arts"). The Company believes that the WAM!NET Service is achieving
wide acceptance among leading firms within the Graphic Arts community of
interest, which in turn encourages those with whom such firms share digital
information to subscribe to the WAM!NET Service. Since it commercially
released and commenced marketing of the WAM!NET Service in March 1996, the
Company has established a subscriber base of more than 1,500 customer
locations, including Time, Donnelley, Disney, J.C. Penney, Fox Broadcasting
and Macy's. In October 1997, the WAM!NET Service received the Graphic Arts
Technical Foundation (an independent trade association) award for the product
or service that will most likely change the manner in which the Graphic Arts
industry conducts business.
MARKET OPPORTUNITY
The Company believes that the increasing digitalization of work product and
work flow in data intensive and time sensitive industries is driving demand
for managed, secure and reliable electronic data transportation and archiving
services. Based on information derived from independent studies, the Company
believes that the Graphic Arts industry will spend approximately $10.0 billion
between 1998 and 2000 on the digitalization of its production and printing
process, including the introduction by commercial printers of CTP technology,
which facilitates a fully digital work product. Despite this movement toward
the digital creation, storage and outputting of data, the lack of reliable,
cost effective electronic transport mechanisms has resulted in many companies
continuing to use overland or air courier services to deliver magnetic tape or
optical disk copies of data to others who require access to such data. This
non-digital step results in a method of transporting data which can be
inefficient, significantly lengthening production cycle time and leading to
possible errors. The Company believes the potential market for managed digital
data transportation and asset storage services is $4.3 billion and $2.3
billion, respectively, in the Graphic Arts industry alone.
The Company believes that existing electronic means for transporting large
digital data files have proven to be ineffective and/or prohibitively
expensive for most companies. Large files may take up to several days to
transport using the Internet or the fastest standard telephone modems (56,000
bps) and may lose significant quality in transmission. The use of the Internet
and standard telephone modems can also lead to other significant
disadvantages, most notably high telephone usage charges and a lack of
security, accountability and reliability of transmission. Other non-dedicated
technologies such as point to point telephone lines offer more speed than the
Internet, which is not managed, or a standard telephone modem, but at a
significantly higher cost. Such technologies may also lead to data degradation
and integration obstacles. Large data files can be transported reliably in
minutes over dedicated point to point telephone lines (such as DS1 and DS3);
however, the substantial equipment necessary at each dedicated connecting
point and the sizable costs of leasing a dedicated point to point telephone
line makes this means of transport uneconomical for most companies
transporting large data files.
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COMPETITIVE ADVANTAGES
The Company believes it is uniquely positioned to meet the growing need for
a cost-effective and reliable means of electronically transporting, storing
and retrieving digital data due to the following competitive advantages:
. Purpose-Built, Industry Smart Network. The WAM!NET Service operates via a
nationwide network that integrates the Company's proprietary, value-added
Industry Smart applications with a purpose-built network of Company owned
Distribution Hubs interconnected redundantly with high-bandwidth leased
telephone circuits. The Company currently maintains 23 Distribution Hubs,
located in major United States and Canadian cities, London, England and
Paris, France. The Company operates two NOCs in Minneapolis and Las Vegas
through which it monitors all data transmission on a 24 hour a day, 7 day a
week basis. The Company believes the WAM!NET Service offers reliable and
secure data transmissions with no degradation in quality and guaranteed
delivery and throughput.
. Single Source, Turn-Key Service Solution. The Company provides each
subscriber with all of the hardware, software, transmission facilities and
management services necessary to use the WAM!NET Service. Installation of
the service, which is performed on behalf of the Company by national
service providers, consists of connecting the customer to the nearest
Distribution Hub through a Company-owned NAD and an appropriate
communications link (such as T1, ISDN, frame relay, ADSL or other suitable
facility) matched to the customer's transfer speed and throughput
requirements. The WAM!NET Service is designed for ease of use, with a point
and click e-mail type interface and a simple "pay by the megabyte" pricing
model. The Company's strategy is to offer customers the WAM!NET Service at
rates competitive with overland and air courier services furnished on an
annual or multi-year subscription basis. There is no up-front capital
investment by the customer, who is charged based on a minimum monthly usage
fee and volume of data sent per transaction.
. Industry Smart Applications. The Company collaborates with leading
participants in its target markets and designs applications addressing
industry-specific work product and work flow requirements. These Industry
Smart applications combined with the guaranteed delivery and throughput of
the WAM!NET Service allow work partners in distant geographic locations to
collaborate digitally in real time. The WAM!PROOF application will allow
customers to directly output across the WAM!NET Network to proofing devices
in remote locations, thereby eliminating the need to deliver physical
proofs by overnight courier. The WAM!BASE application will provide a
collaborative digital asset management service that can eliminate the need
for redundant archives and shrink work cycle time by providing more
immediate access to desired data files.
. Customer Support and CIS. The Company has implemented extensive customer
service functions, including customer support technicians who are available
24 hours a day, are trained extensively in the Company's service offerings
and who understand the industry-specific work flow of the Company's
customers. CIS allows customers to view data files, verify account
information and check the status of transactions on-line, as well as to log
help requests. The Company provides its customers itemized information
regarding the size, cost, and destination of each "shipment" that may be
electronically imported directly into the customer's own accounting system,
which facilitates capturing of project-specific costs and billing of
services on a job-by-job basis.
. First to Market Advantage. By being the first to market a managed, high
speed digital data delivery network with Industry Smart applications, the
Company believes it is becoming the industry standard in the Graphic Arts
industry and is positioned to become the industry standard in its other
target industries. The Company has found that industry leaders such as Time
and Donnelley (early WAM!NET Service customers) actively encourage their
work flow partners to subscribe to the WAM!NET Service to increase work
flow efficiencies. Potential entrants into the managed digital data
delivery field would need to deploy a nationwide, purpose-built network
integrated with customized value-added applications, and simultaneously
convert industry leaders and their work flow partners, more than 900 of
whom have contracted with the Company for the WAM!NET Service at more than
1,500 locations. Customers currently subscribing to the WAM!NET Service
include 11 of the 20 largest publishers, 9 of the 20 largest printers,
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16 of the 20 largest advertising agencies, and 10 of the 20 largest pre-
press-graphic arts agencies in the United States, as well as the corporate
communications and advertising departments of many United States
corporations.
. Strategic Relationship with WorldCom. The Company has entered into a
strategic alliance with WorldCom which includes equity and debt investments
and operating loan guarantees totaling approximately $50.0 million.
WorldCom is currently entitled to designate a majority of the Board of
Directors of the Company and, through its ownership of convertible debt and
warrants, has the right to acquire a majority of the Common Stock of the
Company. WorldCom also provides telecommunication and other services to the
Company on a non-exclusive basis. The Company anticipates that its
relationship with WorldCom will enable it to access the worldwide
infrastructure, sales and marketing work force, telephony technologies,
high bandwidth carrier service and other services of WorldCom and its
affiliates, including UUNet.
BUSINESS STRATEGY
The Company's objective is to become the leading provider of enhanced,
managed digital data delivery and archiving services to industries comprised
of interdependent participants requiring industry specific, high speed digital
connectivity. WAM!NET's strategy to achieve this objective and to build a
long-term sustainable competitive advantage is to:
. Increase its Customer Base to Create Critical Mass. The Company's sales and
marketing strategy has been designed to rapidly penetrate its initial
target market, the Graphic Arts industry. Elements of this strategy
include: (i) creating the WAM!NET Service as a turn-key, single source
service solution; (ii) implementing an easy to understand "pay by the
megabyte" pricing model (which eliminates the need for any capital
investment by customers); (iii) designing aggressive advertising, trade
show, event marketing and direct selling to drive trials, including
introductory risk-free product evaluations for industry leaders; (iv)
building a direct sales force to target leading industry participants who,
in turn, encourage their work flow partners to subscribe to the WAM!NET
Service; and (v) implementing programs in which large receivers of data
(e.g., printers) promote and market the WAM!NET Service, along with the
WAM!NET direct sales force, to customers and work flow partners. The
Company believes that the customer benefits of the WAM!NET Service will
increase exponentially as the total number of WAM!NET Service subscribers
increases.
. Apply Industry Smart Network Model to Other Industries. The Company
believes that the WAM!NET Industry Smart network model can provide the
benefits and advantages it offers the Graphic Arts industry to other
industries with similar data transportation, storage and retrieval
requirements. Some of the Company's customers that are in the entertainment
industry, such as Fox Broadcasting and Disney, currently subscribe to the
WAM!NET Service for their Graphic Arts-related needs. The Company is
presently developing Industry Smart applications suitable to the
entertainment industry and is developing corresponding marketing and sales
strategies. The Company is also collaborating with industry leaders in the
medical imaging industry to develop and implement Industry Smart
applications in connection with marketing to that industry.
. Drive Utilization Through Value-Added Services and Volume Discounts. The
Company incorporates, develops and implements value-added Industry Smart
applications for customers, such as CIS, WAM!PROOF and WAM!BASE, which the
Company believes will provide significant benefits to its customers and
stimulate increased usage of the WAM!NET Service. The Company also offers
volume discounts and a variety of promotional programs for industry leaders
to induce customers to send increasingly large volumes of data traffic
across the WAM!NET Network.
. Expand and Enhance Infrastructure and Develop Worldwide Capabilities. The
Company intends to invest in resources and systems to ensure that the
WAM!NET Network's operating infrastructure and support services provide
optimal digital connectivity to its subscribers in a guaranteed performance
and competitive rate environment. The Company is currently preparing to
expand into parts of Europe and Asia for the purpose of providing its
customers with desired international connectivity. The Company expects to
expand the WAM!NET Network into approximately 10 countries by the end of
1998, and will initially locate
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additional Distribution Hubs in London, Frankfurt, Paris, Amsterdam, Milan,
Tokyo, Hong Kong, and Sydney. The London and Paris Distribution Hubs were
recently installed and the Company is currently in the process of
installing a Distribution Hub in Amsterdam. During 1998, the Company
expects to further develop its international service infrastructure by
providing installation and customer support via third parties, developing
local sales and distribution relationships and may establish additional
Distribution Hubs and regional NOCs in selected countries. The Company's
acquisition of 4-Sight will permit subscribers, including 4-Sight's 30,000
customers in 44 countries, to gain remote access to the WAM!NET Network
through transmission software being developed by 4-Sight. The Company may
also establish its international presence through other acquisitions, joint
ventures or other similar business transactions.
. Reduce Costs and Improve Operating Margins. The Company seeks to reduce
costs and improve operating margins by (i) spreading the cost of installing
and operating the WAM!NET Network over a large base of customers; (ii)
designing the network to use more expensive hub equipment in a few national
and regional operational centers and less expensive equipment at each
customer site; (iii) deploying cost-reduced NADs for less volume intense
customers; (iv) pursuing programs to reduce the costs of capital equipment,
including obtaining mass purchasing discounts for network infrastructure
and customer premise equipment; (v) utilizing network management tools to
optimize existing and planned network capacity as volume increases and
traffic patterns begin to emerge; (vi) deploying new, lower-cost last mile
local loop technologies to connect customer sites to Distribution Hubs,
including wireless technologies and remote dial-up capabilities; and (vii)
deriving other incremental revenue from value-added services such as
WAM!BASE, which can be delivered over the existing WAM!NET Network
infrastructure. The Company also believes its operating margins will
improve as a result of anticipated cost reductions associated with
increasing competition in both the local and long distance markets.
TARGET MARKET OVERVIEW
The WAM!NET Service has been designed to support a community of interest
among interdependent participants in time sensitive and data intensive
industries with highly collaborative work flows. The Company is currently
actively marketing its services to the Graphic Arts industry, and is preparing
to market the WAM!NET Service to other communities of interest with similar
data transportation and archiving needs as those found in the Graphic Arts
industry, including the entertainment and medical imaging industries. The
Company believes it can apply its business strategy to these other industries
by capitalizing on the network, operations, service, application engineering
and sales/marketing infrastructure already developed by the Company and by
developing and offering "Industry Smart" applications that are tailored to the
work flow requirements of those industries.
Graphic Arts. The Graphic Arts industry is comprised of printers, pre-press
production firms, advertising agencies, publishing firms, graphic artists and
list management firms who design, prepare and produce printed materials. Based
on industry information and research performed for the Company, the Company
estimates the total potential size of the managed data delivery service and
the digital asset storage markets for the Graphic Arts industry in the United
States to be $4.3 billion and $2.3 billion, respectively. The Company's
estimate of the number of potential sites in key segments of the Graphic Arts
industry is outlined below, based on information contained in industry
research reports.
POTENTIAL SITES BY MARKET SEGMENT AND FIRM SIZE
<TABLE>
<CAPTION>
LARGE MEDIUM SMALL TOTAL
----- ------ ------- -------
<S> <C> <C> <C> <C>
Printers(1)..................................... 1,088 4,169 64,830 70,087
Pre-Press(1).................................... 108 427 4,584 5,119
Publishers(2)................................... 597 3,031 39,522 43,150
Ad Agencies/Graphic Designers(3)................ 1,615 10,742 68,478 80,835
Corporate Communications(4)..................... 2,402 5,405 112,294 120,101
List Management(4).............................. 103 231 649 983
----- ------ ------- -------
Total Sites.................................... 5,913 24,005 290,357 320,275
</TABLE>
Footnotes on the following page.
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- --------
(1) Large, medium and small means having at least 100, at least 25 but less
than 100 or less than 25 employees, respectively.
(2) Large, medium and small means having at least 250, at least 50 but less
than 250 or less than 50 employees, respectively.
(3) Large, medium and small means (i) advertising agencies having at least
100, at least 25 but less than 100 or less than 25 employees,
respectively; and (ii) direct mail advertising, commercial photography and
graphic art design firms having at least 25, at least 5 but less than 25
or less than 5 employees, respectively.
(4) Large, medium and small means having at least 25, at least 5 but less than
25 or less than 5 employees, respectively.
The materials created and printed by the Graphic Arts industry include
books, magazines, newspapers, catalogues, circular advertisements, billboard
advertisements, marketing materials, brochures, packaging and multi-media
materials. According to industry data, approximately 50% of content in the
Graphic Arts industry currently created in a digital format using specialized
software applications such as Adobe PhotoShop and Quark Express, and by the
year 2000, more than 64% of the Graphic Arts industry is expected to be using
digital page/imaging software. File assembly and printing preparation
activities are also becoming digital with the increasing use of digital
scanners and cameras. Analog images, including photographs, can now be easily
scanned and digitally incorporated into the production process. Additionally,
adoption of CTP technologies by large- and medium-sized printers facilitates a
fully digital work flow throughout the entire creation and printing process.
The digitalization of the printing process has resulted in the need for
higher bandwidth connectivity to move data intensive printing jobs through the
print production process and storage solutions which provide asset management
capabilities and collaborative access to the stored digital assets. Today, the
majority of work files are stored on magnetic or optical disks and transported
via local or overnight couriers, such as Federal Express and United Parcel
Service. The Company anticipates that large portions of data will increasingly
be delivered via digital networks, driven primarily by the need to compress
time schedules and reduce production costs. The Company expects that once
market leaders and other influential participants in these industries become
significant users of managed data delivery services, other industry
participants will follow in an effort to remain competitive.
The Company believes it is positioned to take advantage of the following
factors, identified by industry research reports, which indicate that between
1996 and the year 2000: (i) the percentage of print jobs transferred across
networks will quadruple, representing over 40% of all print jobs and two
thirds of print job revenue; (ii) more than 50% of all publishing work flow
and more than 60% of all creative services workflow will be conducted almost
entirely over networks; (iii) businesses with the equivalent of TI wide area
connectivity will increase 5 times; (iv) manufacturers will integrate CTP
equipment creating a total digital pre-press work flow; (v) high resolution
digital cameras will be affordable for most Graphic Arts users; and (vi) most
medium to large printers and pre-press firms will offer digital content
management services to support re-purposing of digital data into other
products.
Entertainment Industry. The entertainment industry, which is closely related
to the Graphic Arts industry, provides another potential community of interest
for the expansion of the WAM!NET Service. This industry consists of many
subsectors, including feature films, broadcast, cable and satellite video,
high-definition television, home video, video games and video applications on
the Internet. An adjunct market to the entertainment industry is the distance
learning market, which includes corporate (training, marketing and
communications) and educational distance learning. Each of these subsectors is
moving away from traditional analog media, such as film, photographs and other
physical media expression, and toward digital media. Digital tools previously
available only to large media customers (such as television networks and major
film studios) are now widely available to the entire industry. The Company
believes the WAM!NET Service will be affordable to a wide spectrum of
customers, including the independent contractor/artist and small, medium or
large production and post-production studios, as well as to global media
conglomerates.
In contrast to the Graphic Arts industry, however, which involves the
creation of static or still imagery, the entertainment industry principally
produces motion imagery coupled with digital audio. As a comparison, a 30-
second television advertisement is comprised of approximately 500 times the
amount of digital data found in the
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typical full page magazine advertisement. The Company believes the WAM!NET
Network is sufficiently scalable and robust to accommodate the high-speed data
transfer rates necessary to transport motion imaging in the entertainment
industry.
The Company's strategy is to enable remote collaboration throughout all
phases of production, including pre-production (planning, CAD and
previsualization), to production (filming and "video dailies"), post
production (picture and sound editing and special effects creation) and
eventually distribution services. The Company believes that the WAM!NET
Service, by speeding up the iterative cycle of collaborative production, will
provide significant creative advantages and cost savings to existing
production processes.
Medical Imaging. The emergence of digital medicine disciplines has created
another community of interest that may have promising applications for the
WAM!NET Service. The increasing availability of advanced computer technology
combined with continued pressures to contain health care costs is resulting in
significant portions of the medical imaging work flow being completely
digitized, including output from medical scanning equipment such as Computed
Tomography ("CT") and Magnetic Resonance Imaging ("MRI") devices. These
devices capture and display patient data in digital formats, generating data
files often in excess of 35 megabytes per file.
The Company has identified multiple steps in the medical imaging work flow
process which may effectively be addressed by the WAM!NET Service. For
example, radiologists and other healthcare professionals who examine the
output generated by CT and MRI devices are often located in facilities
separate from the facilities where the digital images are created.
Furthermore, the increasing prominence of health maintenance organizations and
other provider alliances, where member patients can go to any facility within
the provider's network, may necessitate the increased ability to retrieve and
transport data, including medical imaging data, between physically separate
facilities. Currently, most files are either printed to film or copied to
optical disks and then physically transported via courier services between
facilities. In cases where digital images are printed to film, healthcare
professionals lose the ability to do real time reads of the images. Current
methods of storing medical images also present file transportation and storage
problems. Analog files need to be manually located, copied and couriered to
the healthcare professional for examination. It is estimated that 10%-25% of
images stored in a (non-digital) film format are misplaced after they are
stored. Digital file storage is emerging as an option, but optical disks still
need to be located, copied and then transported to remote sites.
As a result, real-time remote imaging and archiving among hospitals is
gaining momentum and may create efficiencies by allowing radiologists to
collaborate more effectively. As documented in the January 1998 Journal of
Diagnostic Imaging, Hammersmith Hospital in London, England, found that the
change from hardcopy to digital archiving reduced staffing requirements by 8
positions, saved an estimated $0.7 million per year, and increased workload by
4,500 exams per year without adding additional radiologists. The Company
believes the industry will need to eliminate multiple archives to adopt full
digital implementation and provide affordable long-term on-line storage.
The Company believes that medical service providers, particularly those of
substantial size or that span a number of separate facilities, have
significant medical imaging requirements. It is estimated that the current
medical imaging storage costs of medical institutions in the United States is
$7.5 billion per year.
4-SIGHT BUSINESS
On March 13, 1998, the Company consummated the purchase of the entire share
capital of 4-Sight, a private limited company incorporated under the laws of
England and Wales, for $20.0 million in cash and up to 3,250,000 shares of the
Company's Common Stock. 4-Sight is a provider of data transmission software
and related products and applications targeted to the Graphic Arts industry,
primarily utilizing ISDN lines, with particular emphasis on European, Asian
and North American markets and is engaged primarily in software development
and distribution. The software user is generally responsible for all software
and hardware installation, procuring an ISDN telephony connection and
verifying the integrity of their files being sent over a
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public network infrastructure. The Company believes that there are potential
synergies in coupling 4-Sight's data transportation software with WAM!NET's
managed, network infrastructure and that the 4-Sight Acquisition will enable
the Company to achieve broader market coverage in the Graphic Arts market by
combining 4-Sights international presence and penetration of the lower volume
user market with the Company's domestic presence and penetration of the higher
volume user market. At December 31, 1997, 4-Sight had a customer base of more
than 30,000 customer locations, including 3,000 sites in the United States.
4-Sight's current set of products has been designed to work with public ISDN
telephony infrastructures used widely in Europe and Japan and to a lesser
extent in the United States. 4-Sight does not provide managed network services
to deliver files. 4-Sight employs developers to design and distributes its
software products on a global basis through resellers. 4-Sight currently has 4
offices located in the United Kingdom, the United States and Germany. In
addition, 4-Sight has formal sales agreements with resellers who distribute 4-
Sight's products in 19 countries. 4-Sight's software products are installed at
over 12,000 sites in the United Kingdom, where 4-Sight estimates it has a 90%
market share in the Graphic Arts market segment. Key users of 4-Sight software
in the United States include Xerox Corporation ("Xerox"), Ogilvy & Mather
Worldwide, Inc., McCann-Erickson Worldwide and National Geographic Society.
4-Sight Product Description. 4-Sight engages solely in software development
and distribution and does not provide data transportation services with any of
its products. The software user is responsible for all software and hardware
installation, procuring an ISDN connection and verifying the integrity of
their files being sent over a public network infrastructure. iSDN Manager is
4-Sight's flagship product for ISDN file transfer. The current release, iSDN
Manager (4), comes in a MacIntosh ("Mac") version and a PC version, which
supports Windows 95 and Windows NT platforms. iSDN Manager supports cross
platform file exchanges between Mac and PC desktops and is compatible with
over 75,000 ISDN systems world-wide. iSDN Manager supports different ISDN
cards with various throughput capabilities. The majority of software sales are
bundled with an ISDN card. The software functions like an e-mail application,
where the user selects one or more sites to which files are to be sent from an
address book, attaches files and then transmits the data via the public, dial-
up ISDN network to other 4-Sight compatible sites. In addition, 4-Sight offers
a less powerful version of iSDN Manager and other products and services,
including a version of iSDN Manager that is customized for the newspaper
advertisement delivery market and desktop fax software.
Key Benefits from the 4-Sight Acquisition. The Company expects to realize
multiple benefits from the 4-Sight Acquisition including:
Providing Additional Network Access: 4-Sight's current software applications
can be modified to allow access to the WAM!NET Network. New versions of 4-
Sight software can be introduced which are WAM!NET Service compatible and can
be used to send to and receive data from other WAM!NET and 4-Sight sites. The
Company believes this will significantly improve its ability to attract and
retain customers at the lower end of the market segment where ISDN lines are
most common. The Company expects that the 4-Sight Acquisition will enable the
Company to achieve broader market coverage in the Graphic Arts market by
combining 4-Sight's international presence and penetration of the lower volume
user market with the Company's domestic presence and penetration of the higher
volume user market. In addition, many of the Company's current customers have
work flow partners who use 4-Sight's software. Modifying 4-Sight technology
will allow 4-Sight customers to transmit data to WAM!NET Service customers
with whom they require periodic data exchange and thereby increase traffic
over the WAM!NET Network.
Facilitating 4-Sight Customer Upgrades: 4-Sight software upgrades that are
WAM!NET Service compatible can be marketed to existing 4-Sight customers and
bundled with WAM!NET Service contracts. In addition, the Company could
potentially re-provision local loop ISDN lines for the current 4-Sight
customer base or upgrade higher traffic sites to NADs.
Accelerating International Expansion: 4-Sight has already invested in
developing distribution channels in the United Kingdom, Germany, Benelux,
Scandinavia and Japan and has plans to expand distribution capabilities
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in France and other Asian markets. The 4-Sight investment is represented by
the formal working relationships 4-Sight has developed with dealers, by the
people it employs to manage dealer relationships in these international
markets and by the working knowledge 4-Sight employees have developed
regarding unique business practices in these international markets. The
Company believes that it can utilize 4-Sight's existing distribution
infrastructure and investment to bundle the WAM!NET Services with new versions
of 4-Sight's transmission software. By utilizing 4-Sight's infrastructure and
investment, the Company also believes that it can reduce the time that it will
take to enter certain international markets by nine to twelve months.
Accelerate Development Activities: 4-Sight has invested significant
resources to build software development competencies in data transmission user
applications. In addition, 4-Sight has developed capabilities to localize its
software applications for use in specific international markets including the
French, German, Benelux and Japanese markets. These capabilities may augment
the Company's development staff and help increase application development
staffing expertise.
PRODUCTS AND SERVICES
The WAM!NET Service. To send or receive a data file over the WAM!NET
Network, a customer uses a proprietary software program designed and furnished
by the Company. The WAM!NET Service appears as a icon on the customer's
desktop, like a multi-layered e-mail or fax application. Clients can use the
application to manage an address book of WAM!NET users with whom they send and
receive packages of files and to set application default parameters. To send a
package, the user "highlights" and "drags" a file to the appropriate address
"hot tile" which appears across the top of the user interface. Once a file is
dropped onto an address tile, a packing slip is automatically opened and the
user is prompted to fill out basic packing slip information. Additional files
can be added to the package to be included in the transmission. Similarly,
additional sites can be identified for simultaneous package delivery. The user
then selects the send button and the package is automatically delivered to the
user's NAD for processing, coding and routing. Once a package has been
delivered to a NAD, the package will be transported regardless of whether the
sending or receiving computer is operating. If the destination computer is
unavailable, the package will be held for delivery until the destination
computer becomes available to receive the file. Unlike a dial-up network,
where both computers need to be on and available at either end or there will
be a busy signal, the WAM!NET Service's store and forward function holds the
file in transit until the file can be delivered. To receive a package,
customers are prompted on screen to view packages that have been received by
their NAD. Files can be transferred from the NAD to the client's LAN either by
dragging and dropping files from the NAD icon to the local network or by using
a file retrieval menu.
Each transaction over the WAM!NET Service is tracked and accounted for as an
individual "shipment" of data. On a monthly basis, the Company furnishes its
customers with an invoice summarizing the customer's WAM!NET Service use and
charges. If requested by a customer, the Company will also deliver to such
customer an electronic data file over the WAM!NET Service that contains
itemized information regarding the size, cost and destination of each shipment
as well as information regarding other services used by the customer. This
data file may be imported directly into the customer's own accounting system,
providing what the Company believes to be a valuable service for customers who
need to capture costs and bill for services on a job-by-job basis.
Customer Care and the Customer Information System. The Company has
implemented extensive customer support functions, including customer support
technicians available 24 hours a day, 7 days a week. These technicians are
trained to understand the Company's product and service offerings, and the
industry specific work flow of the Company's customers. Customer support
technicians routinely answer customer questions concerning product functions,
update address books, handle upgrade requests, and resolve product use issues.
In addition, customer calls are logged into call management software for
tracking and analysis purposes.
The Company's CIS application allows customers to verify account information
and check the status of their transactions on-line. The CIS appears as an icon
on the customer's computer desk-top. When activated, the CIS accesses a menu
which provides the customer with several options, including viewing packages,
viewing account information or logging a help request. The "view packages"
option allows customers to view sent and received
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package activity for user definable time periods between one hour and 90 days.
This option also provides key transmission statistics for each package sent or
received including date, time, size, content and file type. The account
information option allows customers to view relevant account information,
including billing information, site contact names and phone numbers and also
enables customers to update account information on-line. The "help" option
allows customers to log a help request by e-mailing questions or requests
directly to the Company's customer support group. See "--Network Management."
WAM!PROOF. The Company has developed an application, "WAM!PROOF," which
allows customers to directly output across the WAM!NET Network to proofing
devices located at remote locations. WAM!PROOF was commercially released in
the second quarter of 1998. Proofs, which are physical representations of
printed output, are created throughout the production process at major check
points. Because work flow participants are often located in geographically
diverse locations, proofs have historically been printed and delivered by
overnight couriers to remote participants. WAM!PROOF enables customers to
print proofs in geographically diverse locations as if they were printing to a
proofer on their LAN, thereby reducing turnaround times and creating work flow
efficiencies. The Company has collaborated with leading manufacturers of
printing/proofing devices to ensure compatibility with WAM!PROOF. "WAM!PROOF
Ready" printing/proofing devices include devices made by Canon, Inc., Hewlett
Packard Company ("HP"), Imation Corp., Eastman Kodak Company, Tektronix, Inc.
and Xerox.
WAM!BASE. The Company has also developed a wide area data repository
service, WAM!BASE, which provides WAM!NET Service users access to a remote
data archive and allows them to store, retrieve and manage data on a per-
megabyte cost basis. WAM!BASE is scheduled for commercial release in the
second half of 1998. The Company believes that the ability to manage and
access digital assets is becoming significantly more challenging due to
increasing digitalization in the Company's target industries. The
implementation of a workable and cost-effective solution requires the
integration of hardware, software and networking in a manner that is
accessible by multiple work flow partners and the reduction of redundant
processes and storage facilities. The implementation of such a system requires
substantial investments in capital equipment, systems integration and archive
management and often takes months to complete. Typical problems that can occur
are inadequate scalabilty, high operations costs and the lack of high-speed
and secure network infrastructure needed to share large digital data files.
The Company believes that WAM!BASE provides a collaborative digital asset
management service that addresses the following significant issues for its
customers, and eliminates the need for investment in capital and archive
management. Given the speed at which technology changes and the need to ensure
reliable access to stored images, many participants are unwilling to make
these investments. Because it has been designed to be scaleable to the needs
of entire industries, WAM!BASE can spread infrastructure and operating costs
across numerous users. WAM!BASE is designed to offer a turn-key archiving
system that is cost competitive in relation to an individual customer's
investment in a local, stand-alone archiving system. Customers send their data
files over the WAM!NET Service to the WAM!BASE repository where files are
stored in customer configurable libraries. Customers will be charged a monthly
per megabyte fee for storage. Since customers are using the WAM!NET Service to
retrieve data from the WAM!BASE repository, they can obtain quick and secure
access to their data.
WAM!BASE will provide collaborative access to stored data files. With
existing systems, industry participants working on the same job often store
multiple copies of the same data files because they do not have a
collaborative means of sharing file access. Participants who use WAM!BASE and
store files in their private library space, can control security access to
each individual file in their library, and can change security access
privileges at any time. This eliminates the need to store redundant copies of
files at multiple participant sites, can shrink cycle time by providing more
immediate access to important data files, and supports the job driven work
flow by enabling customers to control security access to images on a job-by-
job basis.
When commercially released, the WAM!BASE service will use two mirrored
storage facilities linked by dedicated leased high bandwidth data connections.
The initial WAM!BASE storage centers will be located in
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Minneapolis and Las Vegas within the NOCs already located in each city. Each
storage facility will be connected to the WAM!NET Network through redundant
links and customer data files will be stored in both locations. Customers will
use proprietary software provided by the Company to upload data to the storage
facilities and to browse, retrieve and forward files stored in the repository.
Customers will be able to restrict access to individual files, groupings of
files or complete libraries of files, manage the distribution of files, and
will also be able to catalogue, identify and search for stored files using
assigned attributes. The Company intends to locate additional mirrored storage
facilities in Europe and Asia/Pacific to accommodate international storage
requirements as needed.
SERVICE CONTRACTS
The Company believes that the WAM!NET Service is achieving wide acceptance
among leading participants in the Graphic Arts industry, which in turn
encourages those with whom information is shared to subscribe to the WAM!NET
Service. Since it commercially released and commenced marketing of the WAM!NET
Service in March 1996, the Company has established a subscriber base of more
than 1,100 customer locations. As of February 11, 1998, 608 customer locations
were connected to the WAM!NET Network with an additional 561 contracted sites
expected to be installed during the first half of 1998, concurrent with the
installation of customer premise telephony access. As of April 30, 1998, the
Company's mix of service contracts was as follows:
<TABLE>
<CAPTION>
SERVICE LEVEL (IN MEGABYTES PER HOUR) # OF CONTRACTS % OF CONTRACTS
------------------------------------- -------------- --------------
<S> <C> <C>
40 MPH Service.............................. 129 8%
120 MPH Service............................. 756 49
400 MPH Service............................. 532 35
1,000 MPH Service........................... 24 2
Other....................................... 95 6
----- ---
Total..................................... 1,536 100%
===== ===
</TABLE>
The Company's standard WAM!NET service contract is structured to assess
charges based on the minimum throughput capability (i.e., the minimum number
of megabytes per hour of the customer's data that the Company is obligated to
transfer via the WAM!NET Network), the monthly minimum volume and any usage in
excess of such monthly minimum volume. The pricing structure varies depending
on the monthly minimum fee and on volume, with higher minimum fees and higher
volumes generally resulting in lower per megabyte charges. Each WAM!NET
customer typically signs a service contract for a fixed term of one to three
years, at a specified location with minimum monthly fee of $250, $500, $1,000,
or $2,500 per month up to the specified volume. The standard service contract
is automatically renewable for additional one year periods at the Company's
then prevailing pricing structure, unless the customer gives notice of
termination at least 60 days prior to any automatic renewal date.
Each service contract also grants the customer a limited, non-transferable
license to use the Company's proprietary software and certain other
intellectual property solely in connection with the customer's use of the
WAM!NET Service. Under each service contract, a customer generally agrees to
pay all taxes and fees imposed by governmental authorities, to be responsible
for all loss or damage to the NAD, to maintain certain insurance coverage for
the NAD, to preserve the Company's ownership of the licensed intellectual
property, to keep the NAD at the leased location, to return the NAD and all
licensed intellectual property at the termination of the service contract, and
to pay all of the Company's costs of enforcement in the event the customer
breaches the service contract.
In addition to the standard service contract, the Company also negotiates
custom service contracts with large users of the Company's services. These
custom service contracts generally address specific customer work flow
requirements or multi-site installations, and typically contain scheduled
rebates and discounts based upon the number of third party trading-partners
who become connected to the WAM!NET Network and upon the volume
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<PAGE>
of data received from those third parties. These custom service contracts also
typically contain negotiated provisions relating to issues of non-
infringement, indemnification and damages for breach.
The Company plans to offer WAM!BASE and WAM!PROOF services, as add-on
features to the WAM!NET Service. Subscribers for WAM!BASE and WAM!PROOF
services will sign an addendum to their WAM!NET service contract separately
licensing the software necessary to utilize the WAM!BASE or WAM!PROOF
services, as the case may be, and containing other appropriate terms. The
Company intends to furnish the WAM!BASE software without charge to customers
who agree to minimum monthly WAM!BASE storage fees. WAM!PROOF customers will
be charged for usage on a per megabyte basis like any other transmission over
the WAM!NET Network. The Company may require a nominal one-time license fee
covering the costs incurred by the Company to furnish the WAM!PROOF software.
SALES AND MARKETING
Over the past year, the Company has spent significant time and resources
developing and building national marketing and sales capabilities, including
increasing its sales force from four to 36 people, who are located in New
York, Chicago, Los Angeles, Boston, Washington D.C., Minneapolis, San
Francisco, Dallas, Atlanta, Toronto and other major metropolitan areas. The
Company has created a product marketing organization responsible for the
definition, commercialization and ongoing management of its products and
services, and a direct sales organization responsible for all new sales and
account management functions. The product marketing organization is divided
into six functional groups, based on customer needs and demands, consisting of
a WAM!NET Service product group, a WAM!BASE product group, an Industry Smart
applications product group, a pricing group, a business analysis group and a
co-marketing group. The sales organization has also been split into five
groups, including an account executive group for new sales, a sales consultant
group for telesales support, a business development group for managing large
national accounts, an account management group for increasing utilization
within existing accounts and a product specialist group for new products.
Primary marketing and sales strategies focus on making inroads with major
participants in the Company's target industries. In the Graphic Arts industry,
the Company's initial sales focus was on signing large commercial printers,
the final data destination in the digital work flow. Once several printers
subscribed to the WAM!NET Service, the Company's sales organization sought to
connect the printer's customers (pre-press firms, advertising agencies and
publishers) to the WAM!NET Network using a combination of sales and marketing
strategies. Such strategies include implementing promotional programs in which
printers promoted and marketed the WAM!NET Service to their customers and work
flow partners along with the Company's direct sales force. Similar strategies
are being applied by the Company to its other target industries.
As more customers subscribe to the WAM!NET Service, the Company's strategic
sales focus is expected to shift. While new site acquisition will still be
important, significant resources will also be devoted to increasing inter-
connectivity among WAM!NET Service users and network traffic, in an effort to
embed the WAM!NET Service into an industry's work flow. As a result, the sales
organization may further employ account managers to work with customers to
help them better utilize WAM!NET Services and expand the circle of WAM!NET
users with whom they send and receive data.
The Company's product marketing will focus on commercializing new features
and new products that are also intended to help increase the utilization of
the WAM!NET Network. This will include full scale commercialization of
Industry Smart applications like WAM!PROOF and WAM!BASE and the addition of
new Industry Smart features into existing products, including directory
services with white and yellow pages functionality, and directed billing
capabilities which will enable customers to reverse bill or bill third parties
for data transportation services.
The Company has NADs in 44 states and in Canada. No single state or province
accounted for more than 10% of the Company's revenues for 1997 on a
consolidated basis without giving effect to the 4-Sight Acquisition. For its
fiscal year ended September 30, 1997, 4-Sight derived approximately 56% of its
revenues
55
<PAGE>
from sales in the United Kingdom, 25% from the United States, 10% from the
rest of Europe, and 9% from the rest of the world.
INSTALLATION SERVICES
The Company believes its ability to deliver consistently high quality
installation services will materially affect its ability to attract and retain
customers. The Company, therefore, has expended considerable resources to
build an installation function which coordinates and performs all aspects of
service installation for the customer When a new contract is signed, an
installation project manager is assigned to manage the installation. Site
surveys are completed to capture and confirm key customer information
including NAD placement, appropriate service level, account information and
network connectivity requirements. The project manager coordinates
installation of the NAD with on-site third-party installers and the Company's
circuit engineers, who test and certify connectivity and throughput between
the customer's site and the Distribution Hub.
Installation of the WAM!NET Service consists of installing a simple,
graphical user interface ("GUI") on the customer's computer or LAN, connecting
the customer's computer or network to a NAD, and connecting the NAD through
telephone service to the nearest Distribution Hub. The Company has entered
into an agreement with National Computer Systems ("NCS"), a national provider
of computer installation and maintenance services, to provide installation,
maintenance and repair services on customer sites.
NETWORK ARCHITECTURE
The WAM!NET Network is comprised of national, regional and local
Distribution Hubs that are owned by the Company and interconnected redundantly
with high-bandwidth leased telephone circuits. The Company currently maintains
23 Distribution Hubs, located in major United States and Canadian cities,
London, England and Paris, France. The Company also operates two mirrored NOCs
in Minneapolis and Las Vegas through which it manages and operates all data
transmission. The Company has also contracted with an independent third-party
for the provision of satellite transmission services for added redundancy with
respect to services provided to Time. The Company is currently negotiating to
employ satellite services to add redundancy for the entire WAM!NET Network.
The WAM!NET Service uses technology similar to the Internet, such as ISDN,
DS1 (1.54 megabits per second), DS3 (45 megabits per second), frame relay and
ATM. Because the WAM!NET Service provides managed data package traffic, the
available bandwidth of the WAM!NET Network is not being cluttered with the
large amount of random data traffic that exists on a public network such as
the Internet. The Company has sized aggregation points throughout the WAM!NET
Network to ensure that no backbone connection is smaller than any "last mile"
connection (i.e., from a NAD at a customer site to a Distribution Hub).
The hub infrastructure consists of large Cisco Systems, Inc. ("Cisco")
routers which are co-located with WorldCom points of presence and which
primarily route data traffic across the WAM!NET back-bone. The 23 Distribution
Hubs are interconnected with a meshed DS3 ATM back-bone provided by WorldCom.
Additional network diversity is provided by a layer of private lines leased
from Sprint Corporation ("Sprint") which primarily serve as network back-up.
Local loop connections between Distribution Hubs and NADs at customer sites
are provided almost exclusively by WorldCom and regional bell operating
companies. The Company's policy is to procure local loop lines from the
lowest-cost, highest-quality provider, and the Company has business
relationships with approximately 15 telephony providers in North America.
Network traffic patterns are continuously monitored and the existing network
back-bone infrastructure is operating at approximately 5% to 10% of its
capacity. Operating agreements with WorldCom and MCI Communications
Corporation ("MCI") enable the Company to increase backbone bandwidth to
accommodate planned growth on an as-needed basis.
The WAM!NET Network incorporates multiple firewalls, constant monitoring and
other security features to prevent unauthorized access or tampering with
either the Company's or the customers' data systems. For security purposes,
the WAM!NET Network is designed to prevent customers from gaining unauthorized
access to the
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WAM!NET Network through a NAD, from logging onto any other device attached to
the WAM!NET Network and from exploring the WAM!NET Service or activating or
controlling any of its other functions. The Company's software installed on
the user's computer only delivers files to or from the NAD.
NETWORK MANAGEMENT
The Company provides customers toll-free access to its technical services
support team 24 hours a day, 7 days a week. The Company believes that because
its customers are in time sensitive, data intensive industries, they rely on
the WAM!NET Service to provide guaranteed delivery and throughput. The Company
has sought to build reliability into its network by interconnecting all
Distribution Hubs and NOCs with at least two redundant paths so that in the
event of network line failures data can still be transmitted. In addition,
automated network monitoring software from HP has been installed and
configured to provide continuous monitoring capabilities, including an alarm
system that automatically alerts network engineers of problems. Key aspects of
the WAM!NET Network are continuously monitored, including NOC equipment,
Distribution Hub equipment, backbone lines, local customer connections and the
NADs. The network management team is trained to proactively work with
telephony and on-site service providers using specially developed processes to
identify and resolve network issues quickly and efficiently.
MANUFACTURING
The Company conducts only limited equipment assembly functions. The Company
presently installs proprietary software and assembles standard computer,
router and power management equipment components into steel housings for use
as NADs, Distribution Hubs and equipment in the NOCs. The equipment housing is
manufactured by a third party to the Company's specifications. The Company
contracts with third parties for installation of NADs at customer sites. See
"--Supplier Relationships--Installation and Field Maintenance." The Company
installs Distribution Hubs and equipment in the NOCs. The Company intends to
outsource the assembly of NADs.
SUPPLIER RELATIONSHIPS
Equipment. The Company has procurement arrangements with Silicon Graphics,
Inc. ("SGI"), Cisco and Osicom Technologies, Inc. for certain computer
equipment, routers and computer interface cards used in the WAM!NET Network.
These arrangements qualify the Company for discounts off participant list
pricing for such equipment. The Company is presently negotiating more formal
supply arrangements with Cisco and SGI. The Company also purchases certain
high volume data storage equipment from HP and Hitachi Data Systems
Corporation under supply agreements.
Installation and Field Maintenance. The Company has an agreement with NCS to
provide installation, maintenance and repair services on customer sites.
Telephone Carriage and Infrastructure Support. The Company currently leases
local loop and long distance telephone carriage in the United States from
WorldCom. In addition, the Company has procurement agreements with MCI and
Sprint, and purchases local loop telephony services from approximately 15
local loop providers.
None of the supplier agreements described or contemplated above contains a
long-term commitment on behalf of the supplier. See "Risk Factors--Dependence
on Third-Party Suppliers for Equipment and Services."
COMPETITION
Despite what the Company believes to be meaningful product differentiation,
the Company faces competition in the provision of digital data transportation
and archiving services, including from companies that have substantially
greater financial, technological, marketing, and research and development
resources than the Company and which have an established presence in markets
that the Company serves. The Company's
57
<PAGE>
competitors include major long-distance companies, regional Bell operating
companies, Internet service providers, systems integrators, such as Digital
Art Exchange, and other smaller companies which manage routers as part of more
comprehensive public, private and virtual private wide area network service
offerings. Some companies have begun to offer data communications networks
which use standard communication technology in conjunction with emerging
frame-relay and ATM technology. The architecture of these networks is similar
to that of the WAM!NET Service. These competitors, including the Sprint DRUMS
network, MCI SMDS telecommunications service and a joint venture arrangement
between AT&T Corp. and Xerox, offer some of the services the Company offers or
plans to offer in the future. Additionally, a new competitive service called
the Graphic Arts Digital Network which directly targets the WAM!NET Service
was announced in Spring 1997, but has not yet been released. This service will
be provided by a joint venture between British Telecommunications and Sytek.
Pricing, product and service information are not yet available for that
service. While the Internet is not currently an effective competitor to the
WAM!NET Service, efforts are under way, through a consortium of research
universities, the Federal Government's Very-High-Performance Backbone Network
Service and several major corporations, to create "Internet2." Press stories
on Internet2 suggest that it will include commercial channels through which
large amounts of data can be moved securely between researchers or companies.
The commercial availability of Internet2 is not expected before 2003.
In addition, the Company faces competition from overland and air courier
services, who transport magnetic tape or optical disk copies of digital data
to their desired locations.
The Company believes the major competitive factors in the digital data
delivery industry are price, reliability and capacity. The Company's
technologically higher-end competitors that offer high bandwidth dedicated
lines have the capability of reliably providing high capacity transmission,
but with the comparatively higher user costs involved in leasing dedicated
point to point lines, dedicated equipment costs and attendant information
management fees. Lower-end competitors, such as standard telephone modems or
the Internet, can compete with the Company on a cost basis, but do not provide
the managed reliability or capacity of the WAM!NET System. The Company
believes that it is the only provider of a turn-key, managed digital data
delivery service with a purpose-built network tailored to target industries'
needs which addresses the price, reliability and capacity requirements of data
intensive industries.
GOVERNMENT REGULATION, STANDARDS
North America. The Company purchases telephone equipment, routers and relays
that are used in the WAM!NET Network from telecommunications equipment
manufacturers and combines that equipment with Company-provided software and
telephone circuits provided by common carriers regulated by the FCC the CRTC
and various state regulatory agencies. The Company believes that under the
FCC's interpretation of the Communications Act of 1934, as amended, the
services which it offers to its customers are interstate information
(enhanced) services. Consequently, it is not required to obtain licenses or
other approvals from the FCC or state regulatory agencies to offer such
services. If the Company's services were deemed to be intrastate services,
certain state regulatory agencies might seek to assert jurisdiction over the
Company's offerings. If that were to occur, the Company could be required to
expend substantial time and money to acquire the appropriate licenses and to
comply with state regulations. The Company also believes that, under the
CRTC's interpretation of Canadian law, the services that the Company offers do
not require it to obtain telecommunications permits or approvals in Canada.
Worldwide. The Company believes that European Union directives require that
member states permit the provision of the Company's services on a competitive
basis. Bilateral agreements exist between the United States and Japan and the
United States and Hong Kong which encourage cross-border provision of enhanced
services like those offered by the Company. Pursuant to commitments in the WTO
General Agreement on Trade and Services, over fifty governments have agreed to
permit provision of enhanced services (i.e., value-added) by nationals of WTO
member countries. Nevertheless, certain other countries in Europe, Asia and
elsewhere in the world might seek to license and regulate the Company's
services. Any such license or regulation may limit, delay or increase the
costs of operations as associated with the international locations to which
the Company may desire to expand.
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Medical Imaging. The Company intends to offer its WAM!NET Service and
WAM!BASE service as medical imaging applications for transmitting, storing and
retrieving medical data for primary diagnostic purposes. The Company is
currently participating in a test of the medical image transmission
application of the WAM!NET Service between a hospital and a remotely located
clinic, and intends to commence testing of the WAM!BASE storage and retrieval
functions during the fourth quarter of 1998. Any medical imaging applications
offered for primary diagnostic purposes are required to comply with the Food
and Drug Act, and regulations promulgated thereunder by the FDA. Under
recently adopted FDA regulations, both the WAM!NET Service's data transmission
application and the WAM!BASE data storage and retrieval application are
classified as Class I devices that do not perform "irreversible data
compression." Prior to adoption of those regulations, both the transmission
and storage functions were classified as Class II devices, and the Company had
received marketing clearance from the FDA for data transmission pursuant to a
510(k) Premarket Notification filing. The Company's medical image
transmission, storage and retrieval applications conform to the DICOM industry
standards, which are the industry accepted standards utilized by major medical
imaging equipment manufacturers in the domestic health care industry. The
Company works with medical imaging equipment manufacturers to ensure
compatibility of the WAM!NET and WAM!BASE applications with their medical
imaging equipment.
RESEARCH AND DEVELOPMENT
The Company's employees have significant experience in the research,
development, design, engineering, implementation and management of complex
software and networking systems. Six of the Company's employees hold advanced
computer engineering degrees. The Company's current research and development
activities are focused on completing development of additional functions,
including the next generation of network and transportation management
software and protocols necessary to provide applications such as broadcast
transmissions, queue management, directed billing, directory services and job
ticketing, including integrating such features into the shipping and customer
information management facilities. The Company utilizes its technical
capabilities to monitor and evaluate developments in computer hardware and
software and in relay and telephony equipment and, to the extent possible, to
incorporate appropriate advancements or enhancements into the WAM!NET Service
in a timely fashion.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
It is the Company's policy to protect its intellectual property, to seek
patent protection for those aspects of its technology that the Company
believes may be patentable and to preserve any copyrights or trade secrets (to
the extent not disclosed in any patent) that may be applicable to the WAM!NET
Service, the WAM!PROOF and WAM!BASE services and their related software.
The Company is designing or has designed most of the proprietary software
necessary for the management of the WAM!NET Service, including NAD operations
and the GUI, CIS, WAM!PROOF and WAM!BASE applications. The Company believes
that its proprietary software and trade secrets applicable to the operation of
the WAM!NET Service and the WAM!BASE data archiving system may be of equal or
greater importance to the Company than patent or copyright protection. The
Company is not aware of any claims of infringement of patents or other
intellectual property belonging to others. However, the Company has conducted
only a limited inquiry regarding the possibility of other infringement. Given
the recent acquisition of 4-Sight, with its substantial international
presence, the Company will increasingly offer its products and services in
foreign countries. However, some of these countries may lack intellectual
property protection that is comparable to that afforded by the intellectual
property laws of the United States. See "Risk Factors--Intellectual Property
and Proprietary Rights."
The Company has entered into confidentiality agreements with certain of its
employees, consultants and others to protect the Company's proprietary
information and trade secrets.
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LIABILITY AND INSURANCE
The WAM!NET Service uses an assemblage of telecommunications equipment,
software, operating protocols and proprietary applications for high speed
transmission of large quantities of data among multiple locations. In such
operations, it is possible that data files may be lost, altered or distorted.
Moreover, the Company's targeted industries' businesses are extremely time
sensitive, and delays in delivering data may cause a significant loss to a
customer using the network for managed data delivery service. The WAM!NET
Service, and future enhancements or adaptations, may contain undetected design
faults and software "bugs" that, despite testing by the Company, are
discovered only after the system has been installed and used by customers.
Such faults or errors could cause delays or require design modifications that
could adversely affect the Company's competitive position and results of
operations. The Company obtains contractual agreements from its customers
limiting the Company's liability for damages resulting from errors in the
transportation of data to a maximum of $100 per transmission. Nevertheless,
the Company may still be subject to significant claims for data losses in the
transportation of data over the WAM!NET Service. In addition to general
business liability insurance coverage, the Company presently maintains errors
and omissions insurance coverage issued by St. Paul Fire and Marine Insurance
Company in the amount of $1.0 million per occurrence and $5.0 million for all
occurrences relating to the transportation of data over the WAM!NET Service.
In addition, the Company presently maintains $1.0 million of business
interruption insurance coverage against losses from floods, earthquakes and
other natural disasters.
EMPLOYEES
Including its officers, the Company presently employs 405 persons. The
Company's executive and technical personnel have significant experience in the
design, programming, implementation, marketing, sales and support of complex
data networks and software programs. The Company considers its employee
relations to be good. None of the Company's current employees are subject to a
collective bargaining agreement.
FACILITIES
The Company occupies approximately 45,000 square feet of office space
located in a modern facility in an industrial park complex in Bloomington,
Minnesota, a suburb of Minneapolis. The building is occupied under a 99 month
lease which expires in November 2005. To meet its future space requirements,
the Company is currently considering construction activities to reconfigure
its existing facility for greater space efficiency. The Company's leased
properties also include: (i) an approximately 18,000 square foot manufacturing
and warehousing facility located in Minneapolis, (ii) an approximately 1,540
square foot office facility located in Minneapolis, where one of the Company's
NOCs is located, (iii) an approximately 7,970 square foot facility located in
Las Vegas, Nevada where the Company's other NOC is located and which serves as
a backup customer service center, (iv) an approximately 1,500 square foot
office facility located in Missoula, Montana where the headquarters of
FreeMail, Inc., an entity acquired by the Company in December 1997, is
located, (v) small offices in Toronto, New York, Chicago, and Washington, D.C.
for use by the Company's business development managers and account executives
stationed in those cities, and (vi) an approximately 18,800 square foot office
facility located in Minneapolis, which previously served as the Company's
headquarters and which the Company intends to sub-lease. In addition, 4-Sight
currently leases properties in (i) Bournemouth, Dorset, England, (ii) Hamburg,
Germany, (iii) Woburn, Massachusetts and (iv) West Des Moines, Iowa.
LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
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MANAGEMENT
The Company's executive officers and directors are:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Edward J. Driscoll III........... 37 Chairman of the Board, Chief Executive
Officer, President and Treasurer
Allen L. Witters................. 40 Chief Technology Officer
James R. Clancy.................. 37 Chief Sales and Marketing Officer
David T. Ottinger................ Senior Vice President of Engineering and
49 Operations
John R. Kauffman................. 41 Vice President of Strategic Marketing and
Communications
Raymond Kang..................... 39 Vice President of Product Marketing and
Development
Gary Jader....................... 47 Vice President and General Manager of
Medical Services
David Townend.................... 40 Managing Director, WAM!NET U.K.
Mark Marlow...................... 33 Director of Finance
Charles T. Cannada............... 39 Director
Robert L. Hoffman................ 69 Director
Curtis G. Gray................... 48 Director
K. William Grothe, Jr............ 42 Director
</TABLE>
The Board of Directors of the Company consists of five directors, two of
whom (currently Messrs. Driscoll and Hoffman) are elected by the holders of
the Common Stock and three of whom (currently Messrs. Grothe, Cannada and
Gray) are elected by the holders of the Company's Class A Preferred Stock. See
"Description of the Company's Securities."
Edward J. Driscoll III is a founder and principal shareholder of the Company
and has served as its Chairman of the Board, Chief Executive Officer,
President and Treasurer since inception. Previously, Mr. Driscoll was the
principal shareholder, Chief Executive Officer, and a director of Cybernet
Systems, Inc. ("Cybernet"). Mr. Driscoll founded Cybernet in 1991 to provide
network integration services to the pre-press industry. Prior to founding
Cybernet, he held various marketing and management positions, most recently as
general manager of Roland Marketing, Inc., a regional wholesale produce
marketing and packaging company. He holds a Bachelor of Arts degree in
economics from St. John's University, Minnesota and a Master of Business
Administration degree from the University of St. Thomas.
Allen L. Witters is a founder and principal shareholder of the Company and
has served as its Chief Technology Officer since inception. He is principally
responsible for designing and implementing the WAM!NET Service architecture.
Mr. Witters has been engaged in technical consulting to the computer industry
since 1975, including serving as a technical consultant from 1992 to 1996 for
Cybernet, and has broad experience in the invention, design, engineering and
implementation of software, networks, and network management systems. From
1987 to 1992, Mr. Witters was the Chief Executive Officer and a principal
shareholder of Datamap, Inc., a company that was engaged in the development
and sale of GIS (geographic information systems) software. In 1994, Mr.
Witters filed a petition for bankruptcy under Chapter 7 of the United States
Bankruptcy Code.
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James R. Clancy joined the Company in April 1996 and currently serves as
Chief Marketing and Sales Officer. From 1994 to 1996, Mr. Clancy was employed
by Ceridian Corporation as Director of Marketing and Strategic Planning. From
1988 to 1994, Mr. Clancy was employed by General Mills, Inc., in various
marketing and marketing management capacities, most recently as Marketing
Manager. Prior to General Mills, Mr. Clancy was a founder and senior manager
of two Macintosh supply manufacturing companies. Mr. Clancy holds a Bachelor
of Arts degree in economics from Moorhead State University and a Master of
Business Administration degree from the Wharton School of Business.
David T. Ottinger joined the Company in November 1997 as Vice President of
Engineering & Operations. From April 1997 to November 1997, he served as
President and Chief Executive Officer of NetAccess, Inc., a network security
company. From April 1996 to April 1997, he served as Vice President,
Professional Services of Parallel Technologies, Inc. From October 1993 to
April 1996, he served as Vice President, Network Services of COMDISCO Network
Services. From 1989 to October 1993, he served as Branch Manager for the
Minneapolis, Minnesota office of Cap Gemini America.
John R. Kauffman joined the Company in January 1998 as Vice President of
Strategic Marketing & Communications. From 1991 to December 1997 Mr. Kauffman
was President of Kauffman Marketing Group, Inc. and in that capacity provided
the company's strategic positioning and outside marketing services from
November 1995 to November 1997. Previous to that position Mr. Kauffman was
President of Kauffman Stewart Advertising.
Raymond Kang joined the Company in March 1998 and currently serves as Vice
President of Product Marketing and Development. Prior to joining the Company,
Mr. Kang was employed by MCI Telecommunications for fourteen years in various
management and sales positions, most recently as Director of Broadband and
Multimedia Marketing.
Gary Jader joined the Company in February 1998 and currently serves as Vice
President and General Manager of Medical Services. Prior to joining the
Company, Mr. Jader was employed from 1996 to February 1998 by NeuroMotion
Inc., a medical device company, as Vice President, Marketing and Sales. From
1991 to 1996, Mr. Jader was employed by 3M Corporation as Marketing
Supervisor.
David Townend joined the Company in March 1998 upon the consummation of the
4-Sight Acquisition, and currently serves as Managing Director of WAM!NET U.K.
Mr. Townend served as Managing Director of 4-Sight from more than five years
prior to March 1998.
Mark Marlow joined the Company in May 1995 and currently serves as its
Director of Finance. From 1994 until May 1995, he was employed as an
accounting senior by the public accounting firm of Brunberg, Thorsen and
Associates, Minneapolis, Minnesota. Mr. Marlow is a certified public
accountant. From 1991 to 1994, he was employed as an assistant controller at
Miller, Johnson and Kuehn, Incorporated, a licensed securities brokerage firm.
He holds a Bachelor of Science degree in accounting from the University of
Minnesota, and also holds a general securities license.
Charles T. Cannada has served as a Director of the Company since 1996 and
currently serves as WorldCom's Senior Vice President of Corporate Development
and Real Estate and Facilities Management. Mr. Cannada joined WorldCom in 1989
as WorldCom's Chief Financial Officer. Mr Cannada received his Bachelors of
Business Administration degree in Accounting from the University of
Mississippi.
Robert L. Hoffman has served as a Director of the Company since October
1995. Mr. Hoffman is a founder and shareholder of the law firm of Larkin,
Hoffman, Daly & Lindgren, Ltd, where he has practiced for more than the past
five years, and has served as its Chairman of the Board and President. He has
been extensively involved in land use and development for the past 35 years as
both an attorney and in various elective and appointive offices, including 14
years as a member of the Bloomington City Council, seven years as a member of
the Metropolitan Council, a land use law instructor at Hamline University
School of Law, a member of the
62
<PAGE>
Urban Land Institute Development Policies and Regulations Council, and a
member of the Land Use Advisory Group for the Public Technologies Institute of
Washington, D.C.
Curtis G. Gray has served as a Director of the Company since 1996 and since
November 1991 has served as WorldCom's Vice President of Enhanced Data
Networks. Mr. Gray has more than 20 years of experience in the data
communication arena including his own consulting firm and engineering and
management positions with GTE Laboratories and Blue Cross and Blue Shield
Association. Mr. Gray received his Masters and Bachelors degrees in
Engineering from the University of Wisconsin.
K. William Grothe, Jr. has served as a Director of the Company since 1996
and has served as Vice President of Corporate Development of WorldCom since
January 1996. From July 1990 to January 1996, Mr. Grothe was Senior Vice
President and Chief Financial Officer of MobileCom, a national paging company
headquartered in Jackson Mississippi. Mr. Grothe is a Certified Public
Accountant and received a Bachelor of Science degree in Accounting from the
University of Illinois.
BOARD COMMITTEES
The Company currently has an Executive Committee consisting of Edward J.
Driscoll III and K. William Grothe, Jr., an Audit Committee consisting of
Charles T. Cannada and Curtis G. Gray and a Compensation Committee consisting
of K. William Grothe, Jr. and Robert L. Hoffman.
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to each of the Company's executive officers other than
the Chief Executive Officer (collectively, the "Named Executive Officers")
whose salaries and bonus exceed $100,000 for services rendered in all
capacities to the Company for the year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------- ----------------------
RESTRICTED SECURITIES ALL OTHER
STOCK UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARD(S) OPTIONS (#) SATION
- --------------------------- ---- ---------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Edward J. Driscoll III... 1997 $ 150,000 $ 75,000 $-- -- $--
Chairman of the Board,
Chief Executive Officer,
President and Treasurer
Allen L. Witters......... 1997 150,000 75,000 -- -- --
Chief Technology Officer
James R. Clancy.......... 1997 135,000 67,500 -- 500,000 --
Chief Sales and
Marketing Officer
Mark Marlow.............. 1997 75,000 37,500 -- 150,000 --
Director of Finance
</TABLE>
63
<PAGE>
The following table sets forth certain information for the fiscal year ended
December 31, 1997 with respect to stock options granted to the Named Executive
Officers. For the fiscal year ended December 31, 1997, no stock appreciation
rights were granted to the Named Executive Officers and no stock options were
granted to the Named Executive Officers at an option price below market value
on the date of the grant, as determined by the Board of Directors of the
Company. The Company utilized the appraised value of $0.962 per share in
determining the potential realizable value and the value of unexercisable
options.
STOCK OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZED
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------------- ANNUAL RATES OF
% OF TOTAL EXERCISE STOCK APPRECIATION
NUMBER OF SECURITIES OPTIONS GRANTED OR BASE FOR OPTION TERM
UNDERLYING OPTIONS TO EMPLOYEES PRICE EXPIRATION -------------------
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% 10%
---- -------------------- --------------- -------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Edward J. Driscoll III.. -- -- $ -- -- $ -- $ --
Allen L. Witters........ -- -- -- -- -- --
James R. Clancy......... 500,000 14.4 0.962 July 1, 2002 132,891 302,498
Mark Marlow............. 150,000 4.3 0.962 July 1, 2002 39,867 90,749
</TABLE>
The following table sets forth certain information with respect to the value
of unexercised stock options held by the Named Executive Officers as of
December 31, 1997. As of December 31, 1997, no Named Executive Officer held
any stock appreciation rights. In 1997, no Named Executive Officer exercised
any stock options.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END (#) OPTIONS AT FY-END
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Edward J. Driscoll III..... 195,250 1,804,750 $573,645 $5,302,356
Allen L. Witters........... 195,250 1,804,750 573,645 5,302,356
James R. Clancy............ 259,825 615,175 763,366 1,807,320
Mark Marlow................ 35,000 140,000 115,630 411,320
</TABLE>
DIRECTORS' COMPENSATION
The Company does not grant compensation to its Directors other than as set
forth below. Each Director is reimbursed for reasonable out-of-pocket expenses
incurred in connection with attendance at meetings of the Board of Directors.
Robert L. Hoffman has been granted 75,000 stock options at an exercise price
of $0.962 per share, which options expire November 30, 2005. As of December
31, 1997, 50,000 stock options were vested and exercisable, 25,000 of which
vested and became exercisable during fiscal year 1997. The remaining 25,000
stock options vest and become exercisable during fiscal year 1998. Other than
Mr. Hoffman, no Director received compensation in any form for services
rendered as a Director from the Company during fiscal year 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Company's Compensation Committee is or has been an officer
or employee of the Company or any of its subsidiaries. During 1997, no
executive officer of the Company served on the Compensation Committee or as a
director of another entity in which any of such entity's executive officers
served on the Company's Compensation Committee or Board of Directors. K.
William Grothe, Jr., a member of the Compensation Committee, is an officer of
WorldCom, a significant shareholder of the Company. See "Certain Transactions
and Relationships."
64
<PAGE>
EMPLOYMENT AGREEMENTS
Effective October 1, 1996, the Company entered into an employment agreement
with Edward J. Driscoll III which provides for: (i) an initial term of 27
months and subsequent one-year renewals, (ii) an initial annual salary of
$150,000, subject to periodic review and adjustment, (iii) an additional bonus
or other compensation as may be established from time to time by the Board of
Directors based upon an annual business plan which shall set forth business
goals such as the achievement of revenue and profit measures for the Company,
based upon achievement of performance goals, (iv) use of a company automobile,
(v) non-competition by Mr. Driscoll with the business of the Company during
the term of the agreement and for a period of two years after its termination
and non-solicitation of the employees or customers of the Company during such
period, (vi) confidentiality with respect to all information and trade secrets
of the Company and (vii) automatic assignment to the Company of all ideas,
inventions, discoveries and improvements of Mr. Driscoll relating to the
business of the Company. In the event that the agreement is terminated by the
Company without cause, Mr. Driscoll is entitled to receive severance, payable
in cash, in an amount equal to the sum of (a) the greater of (x) his then base
salary for two years or (y) the amounts reasonably estimated to be due under
the agreement for the two year period following termination, and (b) one half
of the bonus to which he would have been entitled for the year of termination.
In connection with the executive employment agreement, the Company and Mr.
Driscoll also entered into a stock option agreement which provides for the
grant of an option, expiring December 31, 2007, to purchase up to 2,000,000
shares of the Company's Common Stock at a price of $0.962 per share. These
options vested on January 2, 1998.
Effective October 1, 1996, the Company entered into an employment agreement
and a stock option agreement with Allen L. Witters on terms substantially the
same as those of the employment agreements with Mr. Driscoll. The stock
options issued to Mr. Witters vested on January 2, 1998.
Effective April 16, 1996, the Company entered into an employment agreement
with James R. Clancy which provides for: (i) an annual salary of $85,000, (ii)
a bonus of up to $40,000, conditioned on achievement of certain operational
objectives, such operational objectives to include (a) the proposal of a
written plan and timeline for the development and implementation of a
comprehensive marketing plan for the Company's products during 1996 and 1997
and (b) such other additional objectives that Mr. Clancy was to determine and
achieve during the first twelve month period following the effective date of
his employment agreement, (iii) confidentiality with respect to all
information and trade secrets of the Company during the term of employment and
for a period of one year after the termination of employment, and (iv) non-
competition by Mr. Clancy with the business of the Company for a period of 18
months after the termination of employment and non-solicitation of the
customers of the Company during such period. The employment agreement is for
an unspecified term on an "at will" basis. In connection with the employment
agreement, the Company and Mr. Clancy have entered into incentive stock option
agreements with respect to the grant of options to purchase 875,000 shares of
the Common Stock of the Company at a purchase price of $0.962 per share.
750,000 options vest in annual increments ending May 1, 2000 and the remaining
125,000 vested on January 2, 1998.
Effective May 10, 1995, as amended, the Company entered into an employment
agreement with Mark Marlow which provides for (i) a base salary of $7,708.33
per month, (ii) options to acquire 10,000 shares of Common Stock under the
Company's 1994 Stock Option Plan, (iii) confidentiality with respect to
information or trade secrets of the Company during employment and after
termination of employment with the Company, and (iv) non-competition by Mr.
Marlow with the business of the Company for a period of one year after the
termination of employment and non-solicitation of employees or customers of
the Company during such period.
The Company has implemented a quarterly bonus compensation program pursuant
to which directors and key managers can receive up to 30%, and other employees
up to 20%, of their annual salary in cash bonuses based upon individual
achievement and the achievement of corporate goals and objectives.
The Company's other officers and significant technical employees are
employed pursuant to annually renewing employment agreements which continue
until terminated by either the Company or the employee. Each such agreement
contains confidentiality and assignment of invention provisions benefiting the
Company. The Company currently has no retirement, pension, or insurance plans
for its officers. The Company may in the future adopt such plans and may also
adopt a compensation plan substantially increasing officers' salaries and
other compensation based upon the performance of the Company.
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<PAGE>
STOCK OPTION PLANS
The Company's Stock Option Plan (the "1994 Plan") was adopted in September
1994 by the Company's Board of Directors and was approved by the shareholders
of the Company in October 1994. The 1994 Plan has been subsequently amended,
most recently on April 24, 1998 (as so amended and restated in April 1998, the
"Amended 1994 Plan") in conjunction with the adoption of the Company's 1998
Combined Stock Option Plan (the "1998 Plan" and, collectively, the "Plans"),
to reflect the Company's name change to WAM!NET Inc., to incorporate prior
amendments to the 1994 Plan, to provide that no new options be granted under
the 1994 Plan and to limit the number of shares of Common Stock available for
issuance under the Amended 1994 Plan to 7,000,000. Each Plan is currently
administered by the Company's Board of Directors. The 1998 Plan and the
amendments to the 1994 Plan adopted by the Board of Directors on April 24,
1998 received shareholder approval on May 30, 1998.
The Amended 1994 Plan and the 1998 Plan provide for the granting of Common
Stock options which qualify as "incentive stock options" under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), as well as the
granting of "nonqualified options." Under each Plan, the Board or, if the
Board appoints one, a "Stock Option Committee" has complete discretion to
select the optionees and to establish the terms and conditions of each option,
subject in all cases to the provisions of a Plan and applicable provisions of
the Code. Options granted under a Plan are not transferable and are subject to
various other conditions and restrictions. Participation in the Amended 1994
Plan is limited to officers and regular full-time executive, administrative,
professional, production and technical employees of the Company or a
subsidiary of the Company, who are salaried employees of the Company or a
subsidiary of the Company, and consultants or the Company or a subsidiary.
Non-employee directors of the Company may be granted nonqualified options.
Participation in the 1998 Plan is limited to employees of the Corporation or a
subsidiary of the Corporation and to non-employee directors and non-employee
consultants. The 1998 Plan provides that without amending such 1998 Plan, the
Stock Option Committee may grant options to eligible employees who are foreign
nationals on such terms and conditions different from those specified in this
Plan as may in the judgment of the committee be necessary or desirable to
foster and promote achievement of the purposes of the 1998 Plan, and, in
furtherance of such purposes the Committee may make such addenda,
modifications, amendments, procedures, subplans and the like as may be
necessary or advisable to comply with provisions of laws in other countries in
which the Company operates or has employees. An addendum to the 1998 Plan
extends the benefits of stock options granted under the 1998 Plan to employees
of the Company and its subsidiaries who are residents of the United Kingdom.
7,000,000 shares of Common Stock have been reserved for issuance under the
Amended 1994 Plan and a total of 25,000,000 shares of Common Stock have been
reserved for issuance under the 1998 Plan, subject to adjustment for stock
splits or recapitalizations. Shares subject to canceled, unexercised, lapsed
or terminated options are available for subsequently granted options under a
Plan. The exercise price of all incentive stock options granted under a Plan
must be at least equal to the fair market value of the shares on the date of
grant, and the maximum term of each option is ten years. Under the terms of a
Plan, the aggregate fair market value of the Common Stock (determined at the
date of the option grant) for which any employee may first exercise incentive
stock options in any calendar year may not exceed $100,000. Upon exercise of
an option, payment of the exercise price in cash is required, or, at the
discretion of the Company, by the delivery of Common Stock of the Company
already owned by the optionee or a promissory note for all or a portion of the
exercise price of the shares so purchased or a combination of the foregoing.
There is no express limitation on the duration of a Plan; provided, however,
that incentive stock options may not be granted after the date that is ten
years from the date of Shareholder approval of a Plan. The Board may terminate
a Plan and, subject to certain limitations, may amend the Plan at any time. As
of the date hereof, there were 5,764,900 options issued and outstanding under
the Amended 1994 Plan, consisting of incentive stock options to employees to
purchase a total of 5,454,900 shares of Common Stock at exercise prices
ranging from $0.45 to $3.90 per share, and non-qualified stock options to
directors to purchase a total of 310,000 shares of Common Stock at an exercise
price of $0.962 per share. No options have been granted under the 1998 Plan.
In addition to options granted under the Plans, the Company has also granted
certain officers and consultants options to purchase a total of 5,125,000
shares of Common Stock at exercise prices ranging from $0.45 to $3.90 per
share.
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<PAGE>
OWNERSHIP OF THE COMPANY
The following table sets forth the beneficial ownership of the Company's
Common Stock as of April 30, 1998 for (i) each of the Company's executive
officers and directors, (ii) all executive officers and directors as a group,
and (iii) each person known by the Company to own beneficially 5% or more of
the Company's outstanding shares of Common Stock. All persons indicated have
sole voting and dispositive power over such shares unless otherwise indicated.
Except as indicated below, none of the persons in the table have beneficial
ownership in any class of equity securities of any parent or subsidiary of the
Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
BENEFICIALLY OF TOTAL SHARES
NAME OF BENEFICIAL OWNER OWNED(1) OUTSTANDING(1)
------------------------ ---------------- ---------------
<S> <C> <C>
Edward J. Driscoll III(2).. 4,000,000(3) 35.5%
Allen L. Witters(2)........ 4,000,000(3) 35.5
James R. Clancy(2)......... 416,650(4) 4.3
Mark Marlow(2)............. 35,000(5) 0.4
John R. Kauffman(2)........ 225,000(6) 2.4
David T. Ottinger(2)....... -- --
Robert L. Hoffman.......... 62,500(7) 0.7
K. William Grothe, Jr.(8).. -- (9) --
Charles L. Cannada(8)...... -- (10) --
Curtis G. Gray(8).......... -- (11) --
WorldCom, Inc.(8).......... 34,183,670(12) 78.7
David Townend(13).......... 1,317,300 14.2
James L. Ecker............. 922,520(14) 9.0
All executive officers and
directors as a group (13
persons).................. 10,056,450(3)(4)(5)(6)(7)(11) 71.8
</TABLE>
- --------
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes general voting power
and/or investment power with respect to securities. Shares of Common
Stock subject to options or warrants currently exercisable or
exercisable within 60 days of the date of this Prospectus, are deemed
outstanding for purposes of computing the beneficial ownership
percentage of the person holding such options but are not deemed
outstanding for purposes of computing the percentage of any other
person.
(2) Address: 6100 W. 110th Street, Minneapolis, Minnesota 55438.
(3) Includes 2,000,000 shares issuable upon exercise of stock options
currently exercisable.
(4) Includes 354,150 shares issuable upon exercise of stock options
currently exercisable and 62,500 shares issuable upon exercise of stock
options exercisable within 60 days of the date of this Prospectus.
(5) Includes 35,000 shares issuable upon exercise of stock options currently
exercisable.
(6) Includes 225,000 shares issuable upon exercise of stock options
currently exercisable.
(7) Includes 62,500 shares issuable upon exercise of stock options currently
exercisable. Address: Larkin, Hoffman, Daly & Lindgren, Ltd., 1500
Northwest Financial Center, 7900 Xerxes Avenue South, Bloomington, MN
55431.
(8) Address: 515 East Amite, Suite 400, Jackson, MS 39201.
(9) Mr. Grothe is the beneficial owner of 30,666 shares of Common Stock of
WorldCom, representing fewer than 1% of the total shares outstanding,
which total includes 30,666 shares issuable upon exercise of stock
options exercisable within 60 days of the date of this Prospectus.
(10) Mr. Cannada is the beneficial owner of 391,666 shares of Common Stock of
WorldCom, representing fewer than 1% of the total shares outstanding,
which total includes 391,666 shares issuable upon exercise of stock
options exercisable within 60 days of the date of this Prospectus.
(11) Mr. Gray is the beneficial owner of 55,000 shares of Common Stock of
WorldCom, representing fewer than 1% of the total shares outstanding,
which total includes 55,000 shares issuable upon exercise of stock
options exercisable within 60 days of the date of this Prospectus.
(12) Includes 29,183,670 shares issuable upon exercise of warrants currently
exercisable and 5,000,000 shares issuable upon conversion of a
convertible subordinated note in the principal amount of $5 million.
WorldCom also owns 100,000 shares of Class A Preferred Stock. See
"Description of the Company's Securities--Preferred Stock."
(13) Address: 64-68 Norwich Avenue West, Bournemouth, Dorset, BH26AW England.
(14) Includes 131,580 shares issuable upon exercise of a convertible
subordinated debenture, 416,665 shares issuable upon exercise of
currently exercisable warrants and 50,000 shares owned by the Ecker
Family Limited Partnership, of which he is a partner. Address: 5061
Interlachen Bluff, Edina, MN 55436.
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<PAGE>
CERTAIN TRANSACTIONS AND RELATIONSHIPS
WorldCom has the right to elect a majority of the Board of Directors of the
Company and is a principal shareholder of the Company. In September 1996, the
Company issued to WorldCom a $5.0 million Convertible Subordinated Note due
September 30, 1999 (the "WorldCom Convertible Note"). Interest on the WorldCom
Convertible Note accrues at an annual rate of 10%, payable semi-annually,
commencing with the first payment on March 30, 1997. At any time prior to
September 30, 1999, WorldCom may convert the principal amount of the WorldCom
Convertible Note into shares of Common Stock at a conversion price of $1.00
per share, subject to adjustment in the event of stock splits, reorganizations
or recapitalizations. Payment of principal and interest on the WorldCom
Convertible Note is subordinated to existing and future obligations of the
Company for money borrowed from bank, trust, insurance or other financial
institutions. WorldCom has agreed to defer all cash payments in respect of the
WorldCom Convertible Note until a date that is 180 days following the Stated
Maturity of the Notes. The shares of Common Stock underlying the WorldCom
Convertible Note are subject to certain registration rights. See "Description
of the Company's Securities--Certain Options, Warrants, Convertible
Subordinated Debt and Registration Rights."
In November 1996, the Company and WorldCom entered into a Preferred Stock,
Subordinated Note and Warrant Purchase Agreement (the "WorldCom Agreement").
Pursuant to the WorldCom Agreement, the Company issued 100,000 shares of its
Class A Preferred Stock, par value $10.00 per share, to WorldCom for an
aggregate purchase price of $1.0 million. Except for voting with respect to
the election of Directors, holders of shares of Class A Preferred Stock are
entitled to one vote for each share held of record, voting together with the
holders of Common Stock as a single class, on all matters submitted to a vote
of shareholders. With respect to the election of Directors, holders of Class A
Preferred Stock, voting separately as a class, are entitled to elect a
majority of the Board of Directors. Holders of shares of Class A Preferred
Stock, in preference to holders of shares of Common Stock, are entitled to
receive a quarterly dividend in the amount of $0.175 per share, payable in
cash or in kind, commencing on January 1, 1997, if declared by the Board of
Directors. If the net earnings of the Company in a particular year are
insufficient to pay such dividend, the unpaid amount accumulates and must be
paid in subsequent years before any dividends are paid on shares of Common
Stock. At any time that quarterly dividends owing to holders of shares of
Class A Preferred Stock are in arrears, the Company may not, without the
consent of the Directors elected by the holders of shares of Class A Preferred
Stock, (i) declare or pay dividends on any stock ranking junior to the Class A
Preferred Stock, (ii) declare or pay dividends on any stock ranking a parity
with the Class A Preferred Stock, unless such dividends are paid ratably to
the holders of shares of Class A Preferred Stock, (iii) redeem, purchase or
otherwise acquire for consideration any share of stock ranking junior to the
Class A Preferred Stock or (iv) redeem or purchase or otherwise acquire for
consideration any shares of Class A Preferred Stock, or any shares of stock
ranking on a parity with the Class A Preferred Stock, except in accordance
with an offer to all holders upon such terms as the Board of Directors shall
determine in good faith will result in a fair and equitable treatment among
the respective series or classes of stock. Holders of shares of Class A
Preferred Stock are entitled to preferential distributions upon liquidation
equal to $10.00 per share of Class A Preferred Stock plus accumulated and
unpaid dividends thereon. The Company is required to redeem all shares of
Class A Preferred Stock outstanding as of December 31, 1999 at a redemption
price equal to $10 per share plus an amount equal to all accumulated and
unpaid dividends thereon. WorldCom has agreed that no cash dividends or
distributions will be payable by the Company on the Class A Preferred Stock
owned by WorldCom, and the Class A Preferred Stock owned by WorldCom will not
be redeemed by the Company for cash, until a date that is 180 days following
the Stated Maturity of the Notes. WorldCom is the sole holder of shares of
Class A Preferred Stock. See "Description of the Company's Securities--
Preferred Stock."
Pursuant to the WorldCom Agreement, the Company also issued to WorldCom a
$28.5 million Subordinated Note due December 31, 2003 (the "WorldCom
Subordinated Note"), of which $20.4 million aggregate principal amount was
outstanding as of December 31, 1997. The WorldCom Subordinated Note accrues
interest at an annual rate of 7%, payable semi-annually, commencing March 31,
1997. Payment of principal and interest on the WorldCom Subordinated Note is
subordinated to existing and future obligations of the Company for money
borrowed from bank, trust, insurance or other financial institutions. WorldCom
has
68
<PAGE>
agreed to defer all cash payments in respect of the WorldCom Subordinated Note
until a date that is 180 days following the Stated Maturity of the Notes. See
"Descriptions of Certain Indebtedness."
In February 1998, in connection with the Initial Offering, WorldCom agreed
to defer all cash payments of principal (or premium on) or interest on, or
dividend, distribution or other payment in respect of the WorldCom Convertible
Note, the shares of Class A Preferred Stock owned by WorldCom and the WorldCom
Subordinated Note until a date that is 180 days following the Stated Maturity
of the Notes. The agreement also provides that the payment of the principal of
and interest on the WorldCom Convertible Note and the WorldCom Subordinated
Note may be accelerated only in the event of the acceleration of the payment
of the principal amount of the Notes following an Event of Default with
respect to the Notes. The agreement grants WorldCom an option to convert (a)
interest otherwise due on the WorldCom Convertible Note and deferred pursuant
to WorldCom's agreement, and (b) the interest accrued on the outstanding
principal amount of the WorldCom Subordinated Note from December 31, 2003
through the date such amount is paid pursuant to WorldCom's agreement into
shares of Common Stock at the per share price on the date of such conversion.
Pursuant to the WorldCom Agreement, the Company also issued to WorldCom
warrants to purchase, on or before December 31, 2000, up to 20,787,500 shares
of the Company's Common Stock at an initial exercise price of $0.962 per
share, subject to adjustment in the event of stock splits, reorganizations or
recapitalizations (the "WorldCom Warrants"). The exercise price increased to
$0.982 per share on March 31, 1997, and thereafter will automatically increase
by the amount of $0.016 per share on the last day of each calendar quarter,
subject to certain abatement provisions. The exercise price is currently $1.03
per share. The WorldCom Warrants are subject to certain registration rights.
See "Description of the Company's Securities--Certain Options, Warrants,
Convertible Subordinated Debt and Registration Rights."
The WorldCom Agreement provides that if the Company is not publicly held by
the year 2000 its managers and Board of Directors will obtain an independent
valuation by a nationally recognized investment bank of the fair market value
per share of the Company's Common Stock, without any premium allocated for any
controlling interest (the "Tender Valuation"). Upon receipt of the Tender
Valuation, WorldCom may, but is not required to tender (the "First Tender") to
purchase all outstanding shares of Common Stock and all outstanding options,
warrants, convertible securities and other rights to purchase shares of Common
Stock (collectively, "Company Common Securities") for at least the per share
amount of the Tender Valuation. If the owners of a majority of the then
outstanding shares of the Company's Common Stock (excluding shares held by
WorldCom or its affiliates) reject the First Tender, WorldCom will have 60
days following such rejection to again tender (the "Second Tender") to
purchase the same securities. During such 60-day period, the Company will use
its good faith efforts to determine what offer price would be acceptable to
the owners of such shares and will communicate such information to WorldCom.
Subject to certain conditions, WorldCom will sell and the Company will
purchase the WorldCom Warrants, any shares acquired upon exercise of the
WorldCom Warrants and any shares acquired upon the conversion of the WorldCom
Convertible Note (collectively, the "WorldCom Securities") if (i) WorldCom
fails to make the First Tender within 90 days after receipt of the Tender
Valuation; (ii) owners of a majority of the then outstanding shares of Common
Stock (excluding shares held by WorldCom or its affiliates) reject the First
Tender and WorldCom makes no Second Tender; or (iii) owners of a majority of
the then outstanding shares of Common Stock (excluding shares held by WorldCom
or its affiliates) reject the Second Tender. The Company's purchase price for
the WorldCom Securities will be as follows:
(a) If WorldCom fails to make the First Tender, an amount equal to the
Tender Valuation (or the spread between the Tender Valuation and the
exercise price in the case of warrants).
(b) If the First Tender is rejected by the Company's shareholders and
WorldCom does not make the Second Tender, an amount equal to the
purchase price offered by WorldCom in the First Tender (or the spread
between the offer price and the exercise price in the case of
warrants).
(c) If the Second Tender is rejected by the Company's shareholders, an
amount equal to the purchase price offered by WorldCom in the Second
Tender (or the spread between the offer price and the exercise price in
the case of warrants).
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<PAGE>
The Company will have nine months in which to pay the purchase price for the
WorldCom Securities. From the time the obligation of the Company to purchase
the WorldCom Securities arises until the expiration of such nine-month period,
Edward J. Driscoll III and Allen L. Witters will jointly hold a limited proxy
with regard to all of the WorldCom Securities. If the Company fails to timely
pay the purchase price for the WorldCom Securities, WorldCom will be relieved
of all obligations to sell such securities to the Company, the Company will
have no right to cause WorldCom to sell such securities and the Company will
not be obligated to pay the purchase price for such securities. The parties
have agreed to waive their respective obligations thereunder if the Company
determines to become, and thereafter becomes, a publicly-held company.
In December 1996, WorldCom, Edward J. Driscoll III and Allen L. Witters
executed a Right of Refusal Agreement which provides: (i) for a restriction on
transfer by Mr. Driscoll and Mr. Witters of the shares of Common Stock of the
Company held by them as of the date thereof (the "Shares") and (ii) that in
the event Mr. Driscoll or Mr. Witters desires to sell his Shares, then he
shall offer to the other a right of first refusal and, in the event the other
does not elect to purchase such Shares, he shall offer to WorldCom a right of
second refusal.
In September 1997, the Company entered into the Revolving Credit Facility.
The maximum amount that can be borrowed under the Revolving Credit Facility is
$25.0 million. WorldCom has guaranteed the payment of all amounts owed under
the Revolving Credit Facility, and, accordingly, the Company must obtain
WorldCom's consent prior to obtaining any advances under the Revolving Credit
Facility. See "Descriptions of Certain Indebtedness." In consideration of
WorldCom's guaranty, the Company granted to WorldCom 8,396,170 Class A
warrants and 14,204,835 Class B warrants to purchase shares of the Company's
Common Stock at an initial exercise price of $3.90 per share, subject to
adjustment in the event of stock splits, reorganizations or recapitalizations.
The Class A warrants may be exercised at any time on or before December 31,
2000. The Class B warrants begin to vest after the 24th month of the Revolving
Credit Facility depending upon the outstanding balance under the Revolving
Credit Facility at certain times and whether certain qualified repayments are
made thereunder. If the Company repays all obligations under the Revolving
Credit Facility prior to the 24th month with certain qualified repayments, no
Class B warrants will vest. The Class A warrants and Class B warrants are
subject to certain registration rights. See "Description of the Company's
Securities--Certain Options, Warrants, Convertible Subordinated Debt and
Registration Rights." At June 30, 1998, the Company had $0 borrowed under the
Revolving Credit Facility.
WorldCom has also guaranteed the performance of the Company's obligations
under a Service Provision Agreement, dated July 18, 1997, between the Company
and Time.
The Company has entered into service arrangements with WorldCom, including
an Application for Data Services pursuant to which WorldCom provides the
Company with interexchange telecommunications service, frame relay service and
ATM service, and co-location agreements pursuant to which the Company leases
space for its Distribution Hubs. The Company believes that these arrangements
are at terms that are similar to those that could be obtained from an
independent third party on an arm's-length basis. Pursuant to the Company's
agreements with WorldCom, the Company has guaranteed monthly usage levels of
data communications with WorldCom totaling in aggregate approximately $3.0
million, $3.0 million and $1.8 million for the years ended December 31, 1998,
1999 and 2000, respectively. In the event these agreements are terminated
prior to their expiration date, the Company will be liable to WorldCom for
termination contingencies totaling in aggregate approximately $2.9 million,
$0.9 million and $0.4 million for the years ended December 31, 1998, 1999 and
2000, respectively. The Company's data communications expense under
telecommunication contracts with WorldCom was approximately $0, $2,000 and
$1.4 million for the years ended December 31, 1995, 1996 and 1997,
respectively.
Edward J. Driscoll, Jr., purchased 250,000 shares of Common Stock at the
Company's inception in 1994. As consideration for such shares, Mr. Driscoll
paid the Company $500 and agreed to provide certain consulting services to the
Company. In January 1998, Mr. Driscoll was granted an option to purchase up to
200,000 shares of the Company's Common Stock at a price of $3.90 per share as
partial consideration for his agreement to provide certain services to the
Company. Mr. Driscoll is a shareholder of Larkin, Hoffmann, Daly & Lindgren,
Ltd., which provides certain legal services to the Company. Mr. Driscoll is
the father of Edward J. Driscoll III, the Company's Chairman of the Board,
President and Chief Executive Officer.
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The Company's marketing services were performed by Kauffman Marketing Group,
Inc. from November 1995 to December 1997. The former President of Kauffman
Marketing Group, Inc., John Kauffman, joined the Company as Vice President of
Strategic Marketing and Communications in December 1997. During the years
ended December 31, 1995, 1996 and 1997, the Company incurred marketing
expenses of approximately $0.0, $0.3 million and $1.6 million, respectively,
to such firm for marketing services. In addition, Mr. Kauffman was granted, in
July 1997, an option to purchase up to 225,000 shares of Common Stock at a
price of $0.962 per share and Mr. Kauffman was granted, in December 1997, an
option to purchase up to 350,000 shares of Common Stock at a price of $3.90
per share.
In consideration for David Townend's sale of 31,680,000 ordinary shares of
4-Sight to the Company and its subsidiaries in connection with the 4-Sight
Acquisition, Mr. Townend received $7,991,094 and 1,317,300 shares of Common
Stock. Furthermore, Mr. Townend is entitled to receive 48.95% of the 750,000
shares of Common Stock which comprises the deferred consideration for the
purchase of 4-Sight, which shares are conditioned upon the achievement of
certain revenue goals by the Company following the 4-Sight Acquisition.
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DESCRIPTION OF THE COMPANY'S SECURITIES
GENERAL
The Company's authorized capital stock consists of 100,000,000 shares, of
which 90,000,000 shares are designated as Common Stock, 100,000 shares are
designated as Class A Preferred Stock, par value $10.00 per share ("Class A
Preferred Stock"), and 9,900,000 shares are designated as Undesignated Stock.
COMMON STOCK
The Company currently has outstanding 9,271,363 shares of Common Stock. An
additional 68,606,626 shares are reserved for issuance upon exercise of
outstanding options and warrants, conversion of convertible debt securities
and for payment of the portion of the consideration of the 4-Sight Acquisition
that is subject to the satisfaction of certain conditions. The holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of shareholders. There is no cumulative voting for
the election of directors, which means that the holders of more than 50% of
the outstanding Common Stock voting for the election of directors can elect
all of the directors of the Company to be elected by the holders of Common
Stock. As discussed below, the holders of Class A Preferred Stock, voting
separately as a class, are entitled to elect a majority of the Board of
Directors. Subject to the preferences of the Class A Preferred Stock and any
other class or series of outstanding preferred stock, holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor and are entitled to share
ratably in all assets of the Company available for distribution to holders of
the Common Stock upon liquidation, dissolution or winding up of the affairs of
the Company. Holders of Common Stock have no preemptive, subscription or
conversion rights and there are no redemption or sinking fund provisions
applicable thereto. All outstanding shares of Common Stock are fully paid and
nonassessable. All of the Company's outstanding shares of Common Stock have
been acquired from the Company through transactions not involving a public
offering, and, as such, all such shares are deemed "restricted securities"
pursuant to Rule 144(a)(3)(i) of the Securities Act.
PREFERRED STOCK
In November 1996, the Company issued 100,000 shares of Class A Preferred
Stock to WorldCom for an aggregate purchase price of $1.0 million. Except for
voting with respect to the election of Directors, holders of shares of Class A
Preferred Stock are entitled to one vote for each share held of record, voting
together with the holders of Common Stock as a single class, on all matters
submitted to a vote of shareholders. With respect to the election of
Directors, holders of Class A Preferred Stock, voting separately as a class,
are entitled to elect a majority of the Board of Directors. Holders of shares
of Class A Preferred Stock, in preference to holders of shares of Common
Stock, are entitled to receive a quarterly dividend in the amount of $0.175
per share, payable in cash or in kind, commencing January 1, 1997, if declared
by the Board of Directors. If the net earnings of the Company in a particular
year are insufficient to pay such dividend, the unpaid amount accumulates and
must be paid in subsequent years before any dividends are paid on shares of
Common Stock. At any time that the quarterly dividends owing to holders of
shares of Class A Preferred stock are in arrears, the Company may not, without
the consent of the Directors elected by the holders of Class A Preferred
Stock, (i) declare or pay dividends on any stock ranking junior to the Class A
Preferred Stock, (ii) declare or pay dividends on any stock ranking on a
parity with the Class A Preferred Stock, unless such dividends are paid
ratably to the holders of shares of Class A Preferred Stock, (iii) redeem,
purchase or otherwise acquire for consideration any share of stock ranking
junior to the shares of Class A Preferred Stock or (iv) redeem or purchase or
otherwise acquire for consideration any shares of Class A Preferred Stock, or
any shares of stock ranking on a parity with the Class A Preferred Stock,
except in accordance with an offer to all holders upon such terms as the Board
of Directors shall determine in good faith will result in a fair and equitable
treatment among the respective series or classes of stock. Holders of shares
of Class A Preferred Stock are entitled to preferential distributions upon
liquidation equal to $10.00 per share of Class A Preferred Stock plus
accumulated and unpaid dividends thereon. Holders of Class A Preferred Stock
have no preemptive, subscription or conversion rights. The Company is required
to
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redeem all shares of Class A Preferred Stock outstanding as of December 31,
1999 at a redemption price equal to $10 per share plus an amount equal to all
accumulated and unpaid dividends thereon. WorldCom has agreed that no cash
dividends or distributions will be payable by the Company on the Class A
Preferred Stock owned by WorldCom, and the Class A Preferred Stock owned by
WorldCom will not be redeemed by the Company for cash, until a date that is
180 days following the Stated Maturity of the Notes. WorldCom is the sole
holder of shares of Class A Preferred Stock.
UNDESIGNATED STOCK
The Company's Articles of Incorporation authorize the Company's Board of
Directors, without further shareholder action, to issue up to 9,900,000 shares
of Undesignated Stock in one or more series and to fix the voting rights,
liquidation preferences, dividend rights, repurchase rights, conversion
rights, redemption rights and terms, including sinking fund provisions, and
certain other rights and preferences of the Undesignated Stock. This authority
permits the Board of Directors to create out of the Undesignated Stock one or
more classes or series of preferred stock which may have rights, including
voting and conversion rights, that are different from or greater than the
rights of Common shareholders. Such preferred stock could adversely affect the
voting power or dividend rights of the holders of Common Stock and may have
the effect of delaying, deferring or preventing a change in control of the
Company.
CERTAIN OPTIONS, WARRANTS, CONVERTIBLE SUBORDINATED DEBT AND REGISTRATION
RIGHTS
As of April 28, 1998, the Company had granted options to purchase a total of
10,889,900 shares of Common Stock at exercise prices ranging from $0.45 to
$8.00 per share, of which 6,216,504 are currently vested and exercisable and
the remainder vest and become exercisable at various times until 2008.
In the first half of 1995, the Company issued a total of $250,000 aggregate
principal amount of 8% Convertible Subordinated Debentures due December 31,
1999, of which $100,000 aggregate principal amount is currently outstanding.
The Convertible Subordinated Debentures entitle the holder to convert at any
time prior to December 1, 1999, the date represented thereby into shares of
the Company's Common Stock at a conversion price ("Conversion Price") of $0.38
per share, subject to adjustment in the event of stock splits, reorganizations
or recapitalizations, and on a weighted-average basis in the event the Company
issues any Common Stock or security convertible into, or exercisable to
purchase, Common Stock at a price less than the then prevailing Conversion
Price. The Company may redeem the Convertible Subordinated Debentures at any
time commencing January 1, 1997 at 110% of the face amount, plus interest.
Except in certain limited circumstances, the holders of the Convertible
Subordinated Debentures have the right to include the shares of Common Stock
underlying the Convertible Subordinated Debentures in any registration
statement the Company may file in the future with respect to the Company's
Common Stock. The Convertible Subordinated Debentures also provide that the
Company may require the holders to convert the Convertible Subordinated
Debentures into Common Stock at any time the Company files a registration
statement. In June 1995, the holder of $100,000 of Convertible Subordinated
Debentures exercised the right to convert the Debenture into 263,160 shares of
the Company's Common Stock at the Conversion Price of $0.38 per share. In each
of July, 1996 and December 1997, the holder of $25,000 of Convertible
Subordinated Debentures exercised the right to convert the Debenture into
65,790 shares of the Company's Common Stock at the Conversion Price of $0.38
per share.
Holders of 1,650,000 shares of the Company's Common Stock issued in a
private placement in June through August 1995 are entitled to the same
"demand" or "piggy back" registration rights that the Company may grant to any
other shareholder.
From December 1995 through July 1996, the Company issued, in three series,
an aggregate of $5.6 million principal amount of subordinated promissory notes
(the "Bridge Financing"). In connection therewith, the Company issued to the
lenders of the Bridge Financing, for nominal consideration, warrants to
purchase a total of 5,600,000 shares of Common Stock and issued to the
placement agent in connection with such financing warrants to purchase 560,000
shares of Common Stock (collectively, the "Bridge Warrants"). The Bridge
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Warrants expire as follows: 1,760,000 on December 31, 2000, 1,100,000 on March
31, 2003 and 3,300,000 on June 30, 2003. The exercise price of the 1,760,000
warrants expiring on December 31, 2000 is $1.00 per share, and the initial
exercise price of the remaining 4,400,000 warrants is $1.50 per share, subject
to adjustment in the event of stock splits, reorganizations or
recapitalizations. Beginning on the date three years after the date of a
holder's Bridge Warrants, such holder of Bridge Warrants, or of Common Stock
acquired upon exercise of Bridge Warrants, may have the right to include such
Bridge Warrants or Common Stock in a registration statement the Company may
file after such date, subject to the right of the Company to exclude such
Bridge Warrants or Common Stock that are eligible for sale under an applicable
exemption from registration or if the managing underwriter reasonably deems
that the inclusion of such securities in such registration statement would
unreasonably interfere with the contemplated offering.
In September 1996, the Company issued to WorldCom the WorldCom Convertible
Note. Interest on the WorldCom Convertible Note accrues at an annual rate of
10%, payable semi-annually, commencing with the first payment on March 30,
1997. At any time prior to September 30, 1999, WorldCom may convert the
principal amount of the WorldCom Convertible Note, in whole or in part, into
shares of Common Stock at a conversion price of $1.00 per share, subject to
adjustment in the event of stock splits, reorganizations or recapitalizations.
The Company may redeem the WorldCom Convertible Note, in whole or in part, at
any time on or after January 1, 1998 at its face amount plus accrued and
unpaid interest. Except in certain limited circumstances, WorldCom has the
right to include the shares of Common Stock underlying the WorldCom
Convertible Note in any registration statement filed by the Company under the
Securities Act. Notwithstanding the foregoing, if the managing underwriter of
such an offering believes in good faith that inclusion of all such shares
would reduce the number of shares to be offered or interfere with the
successful marketing of the shares to be offered, the number of such shares to
be included in such Registration Statement may be reduced; provided that any
such reduction shall be pro rata among all persons participating in the
offering. In addition, on one occasion only, at any time prior to September
17, 2001, WorldCom may request that the Company use its best efforts to
register or qualify the WorldCom Convertible Note or the shares issued upon
the conversion of the WorldCom Convertible Note under the Securities Act and
such state laws as are reasonably requested. Until the WorldCom Convertible
Note is paid in full or converted, the Company may not declare any dividends
on its Common Stock, except for certain stock splits in the form of a dividend
payable in shares of Common Stock.
In March 1996, the Company entered into an arrangement with Leasing
Technologies International, Inc. ("LTI") pursuant to which LTI agreed to
provide the Company with up to $1,000,000 for the purchase of certain
equipment. See "Description of Certain Indebtedness." In partial consideration
for entering into this arrangement, the Company granted to LTI warrants to
purchase on or before April 30, 2003, up to 45,000 shares of the Company's
Common Stock at an exercise price of $1.50 per share, subject to adjustment in
the event of stock splits, reorganizations or recapitalizations. Beginning
April 26, 1999, LTI may have the right to include such warrants, or Common
Stock acquired upon exercise of such warrants, in a registration statement the
Company may file after such date.
In connection with the execution of the WorldCom Agreement, in December
1996, the Company granted to WorldCom the WorldCom Warrants to purchase on or
before December 31, 2000, up to 20,787,500 shares of the Company's Common
Stock at an initial exercise price of $0.962 per share, subject to adjustment
in the event of stock splits, reorganizations or recapitalizations. See
"Certain Transactions and Relationships." The exercise price increased to
$0.982 per share on March 31, 1997, and thereafter will automatically increase
by the amount of $0.016 per share on the last day of each calendar quarterly,
subject to certain abatement provisions. Beginning December 16, 1999, WorldCom
has the right to include such WorldCom Warrants, or Common Stock acquired upon
exercise of such WorldCom Warrants, in a registration statement the Company
may file after such date, subject to the right of the Company to exclude such
WorldCom Warrants or Common Stock that are eligible for sale under an
applicable exemption from registration or if the managing underwriter
reasonably deems that the inclusion of such securities in such registration
statement would unreasonably interfere with the contemplated offering.
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In September 1997, the Company entered into the Revolving Credit Facility.
In consideration for WorldCom's guaranty of the Company's obligations under
the Revolving Credit Facility, the Company granted to WorldCom 8,396,170 Class
A warrants and 14,204,835 Class B warrants to purchase shares of the Company's
Common Stock at an exercise price of $3.90 per share, subject to adjustment in
the event of stock splits, reorganizations or recapitalizations and subject to
further adjustment after further consideration to determine the "fair market
value" as of September 15, 1997 of such warrants. The Class A warrants may be
exercised at any time on or before December 31, 2000. The Class B warrants
begin to vest after the 24th month of the Revolving Credit Facility depending
upon the outstanding balance under the Revolving Credit Facility at certain
times and whether certain qualified repayments are made. If the Company repays
all obligations under the Revolving Credit Facility prior to the 24th month
with certain qualified repayments no Class B warrants will vest. Beginning
September 26, 2000, WorldCom has the right to include such warrants, or shares
of Common Stock acquired upon exercise of such warrants, in a registration
statement filed by the Company after such date, subject to the right of the
Company to exclude such warrants or Common Stock that are eligible for sale
under an applicable exemption from registration or if the managing underwriter
reasonably deems that the inclusion of such securities in such registration
statement would unreasonably interfere with the contemplated offering.
WorldCom has the option to convert (a) interest otherwise due on the
WorldCom Convertible Note and deferred pursuant to its agreement with the
Company, and (b) the interest accrued on the outstanding principal amount of
the WorldCom Subordinated Note from December 31, 2003 through the date such
amount is paid into shares of Common Stock at the per share price on the date
of such conversion.
On March 5, 1998 the Company offered 208,530 Units (collectively, the
"Units"), each consisting of $1,000 principal amount at maturity of Original
Notes and three warrants (each, a "Warrant"). Each Warrant initially entitles
the holder to purchase 2.01 shares of Common Stock at an exercise price of
$0.01 per share, subject to adjustment. The Notes and Warrants will not be
separately transferable until the "Separability Date," which shall be the
earliest of: (i) September 1, 1998, (ii) the occurrence of certain specified
Warrant exercise events, (iii) the occurrence of an Event of Default (as
defined herein), (iv) the date on which a Shelf Registration Statement or an
Exchange Offer Registration Statement with respect to the Notes is declared
effective, (v) immediately prior to any redemption of Notes by the Company
from the net proceeds of an Initial Public Equity Offering (as defined
herein), (vi) immediately prior to the occurrence of a change of control, or
(vii) such earlier date as determined by Merrill Lynch & Co. (one of the
Initial Purchasers), in its sole discretion.
Pursuant to the terms of the 4-Sight Acquisition Agreement, 4-Sight's former
shareholders may receive an additional 625,000 shares of Common Stock if the
cumulative Non-US/Canada Revenues (defined below) in the period of three years
from the date of the sale and purchase of 4-Sight equal or exceed $50,000,000;
and a further 125,000 shares of Common Stock if the cumulative Non-US/Canada
Revenues in the period of three years from the date of the sale and purchase
of 4-Sight equal or exceed $70,000,000. For the purpose of the foregoing "Non-
US/Canada Revenues" shall mean the revenues attributable to customer sites
located outside the United States and Canada and receivable by the Company or
any of its subsidiaries.
The Company has obtained waivers from all persons that have, or arguably may
have, the right to include such securities in the Exchange Offer Registration
Statement or any Shelf Registration Statement to be filed for the benefit of
Noteholders.
PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND THE MINNESOTA
BUSINESS CORPORATION ACT
The Company is a Minnesota corporation and is governed by the Minnesota
Business Corporation Act. The existence of authorized but unissued
Undesignated Stock, and certain provisions of Minnesota law, could have an
anti-takeover effect. These provisions are intended to provide management
flexibility to discourage an unsolicited takeover of the Company if the Board
determines that such a takeover is not in the best interests of the Company
and its shareholders. However, these provisions could have the effect of
discouraging some attempts to acquire the Company.
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Section 302A.671 of the Minnesota Business Corporation Act applies, with
certain exceptions, to any acquisition of voting stock of the Company (from a
person other than the Company, and other than in connection with certain
mergers and exchanges to which the Company is a party) resulting in the
beneficial ownership of 20 percent or more of the voting stock then
outstanding. Section 302A.671 requires approval of any such acquisitions by a
majority vote of the shareholders of the Company prior to its consummation. In
general, shares acquired in the absence of such approval are denied voting
rights and are redeemable at their then fair market value by the Company
within 30 days after the acquiring person has failed to give a timely
information statement to the Company or the date the shareholders voted not to
grant voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Business Corporation Act generally
prohibits any business combination by the Company, or any subsidiary of the
Company, with any shareholder which purchases 10% or more of the Company's
voting shares (an "interested shareholder") within four years following such
interested shareholder's share acquisition date, unless the business
combination is approved by a committee of all of the disinterested members of
the Board of Directors of the Company before the interested shareholder's
share acquisition date.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
In March 1996, the Company entered into an equipment leasing arrangement
with LTI pursuant to which LTI agreed to lease up to $1.0 million of equipment
to the Company. In April 1996, the Company leased from LTI $245,396.60 of
computer hardware equipment for a term of 30 months, commencing May 1, 1996,
at a monthly rental of $9,480, subject to certain adjustments.
In September 1996, the Company issued to WorldCom the WorldCom Convertible
Note due September 30, 1999 in the principal amount of $5.0 million. Interest
on the WorldCom Convertible Note accrues at an annual rate of 10%, payable
semi-annually, commencing with the first payment on March 30, 1997. The
WorldCom Convertible Note is subordinate to the Notes; WorldCom has agreed to
defer all cash payments in respect of the WorldCom Convertible Note until a
date that is 180 days following the Stated Maturity of the Notes. At any time
prior to September 30, 1999, WorldCom may convert the principal amount of the
WorldCom Convertible Note into shares of Common Stock at a conversion price of
$1.00 per share, subject to adjustment in the event of stock splits,
reorganizations or recapitalizations. Payment of principal and interest on the
WorldCom Convertible Note is subordinated to existing and future obligations
of the Company for money borrowed from bank, trust, insurance or other
financial institutions. The Company may redeem the WorldCom Convertible Note
at any time commencing January 1, 1998 at its face amount plus accrued and
unpaid interest. The shares of Common Stock underlying the Convertible Note
are subject to certain registration rights. See "Description of the Company's
Securities--Certain Options, Warrants, Convertible Subordinated Debt and
Registration Rights."
In December 1996, the Company issued to WorldCom the WorldCom Subordinated
Note due December 31, 2003 in the principal amount of $28.5 million, of which
$20.4 aggregate principal amount was outstanding as of December 31, 1997. The
WorldCom Subordinated Note accrues interest at an annual rate of 7%, payable
semi-annually, commencing March 31, 1997. The WorldCom Subordinated Note is
subordinate to the Notes; WorldCom has agreed to defer all cash payments in
respect of the WorldCom Subordinated Note until a date that is 180 days
following the Stated Maturity of the Notes. WorldCom will, upon the request of
the Company, make additional disbursements under the WorldCom Subordinated
Note in an amount up to $332,500 not more frequently than once each quarter,
commencing March 31, 1997. Payment of principal and interest on the WorldCom
Subordinated Note is subordinated to existing and future obligations of the
Company for money borrowed from bank, trust, insurance or other financial
institutions.
In September 1997, the Company entered into the Revolving Credit Facility
with The First National Bank of Chicago ("FNBC"), an affiliate of First
Chicago Capital Markets, Inc., one of the Initial Purchasers. At the Company's
election, the interest rate per annum applicable to the Revolving Credit
Facility is a fluctuating rate of interest measured by reference to either:
(i) the adjusted London inter-bank offered rate ("LIBOR") plus 55 basis points
(the "Eurodollar Rate") or (ii) the greater of the Federal Funds Effective
Rate or the corporate base rate announced by FNBC plus 50 basis points (the
"Floating Rate") . On March 31, 1998, the Eurodollar Rate was equal to 6.2375%
per annum and the Floating Rate was equal to 8.5% per annum. The aggregate
principal amount outstanding under the Revolving Credit Facility as of March
31, 1998 was $0. The Revolving Credit Facility matures and becomes payable in
full on September 26, 2000. Subject to the written authorization of WorldCom,
as guarantor of the obligations of the Company under the Revolving Credit
Facility, the Company may from time to time make additional draws under the
Revolving Credit Facility up to an aggregate of $25.0 million outstanding at
any one time.
The Company has outstanding the following items of indebtedness relating to
the purchase of certain equipment and the licensing of certain proprietary
software by the Company:
(i) An installment note in favor of FINOVA Technology Finance, Inc.
("FINOVA") bearing monthly payments of $43,324 and an additional final payment
of $241,955, due April 2001.
(ii) An installment note in favor of FINOVA bearing monthly payments of
$90,995 and an additional final payment of $509,052, due May 2001.
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(iii) An installment note in favor of Transamerica Business Credit
Corporation ("Transamerica") bearing monthly payments of $46,043 and an
additional final payment of $206,552, due May 2001.
(iv) An installment note in favor of Transamerica bearing monthly payments
of $41,692 and an additional final payment of $187,349, due May 2001.
(v) An installment note in favor of Transamerica bearing monthly payments of
$40,638 and an additional final payment of $183,668, due June 2001.
(vi) An installment note in favor of Transamerica bearing monthly payments
of $10,509 and an additional final payment of $47,503, due July 2001.
(vii) An installment note in favor of Leasetec Corporation ("Leasetec")
bearing monthly payments of $46,667, due December 1998.
(viii) An installment note in favor of Leasetec bearing monthly payments of
$82,690, due April 1999.
Each of the installment notes held by FINOVA, Transamerica and Leasetec is
secured by certain items of equipment or proprietary software.
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DESCRIPTION OF THE NOTES
The Original Notes are, and the Exchange Notes will be, issued under an
Indenture (the "Indenture") to be dated as of March 5, 1998, between WAM!NET
Inc. (the "Issuer") and U.S. Bank Trust National Association (f/k/a First
Trust National Association), as Trustee, a copy of which has been filed as an
exhibit to the Exchange Offer Registration Statement. Upon the issuance of the
Exchange Notes, if any, or the effectiveness of a Shelf Registration Statement
with respect to the Notes, the Indenture will be subject to and governed by
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
following summary of certain provisions of the Indenture does not purport to
be complete and is subject to, and is qualified in its entirety by reference
to, the Trust Indenture Act and to all of the provisions of the Indenture,
including the definitions of certain terms therein and those terms made a part
of the Indenture by reference to the Trust Indenture Act, as in effect on the
date of the Indenture. The definitions of certain capitalized terms used in
the following summary are set forth below under "--Certain Definitions."
GENERAL
The Original Notes are, and the Exchange Notes will be, issued only in fully
registered form without coupons, in denominations of $1,000 principal amount
and integral multiples thereof. Principal of, premium, if any, and interest on
the Notes are payable, and the Notes are exchangeable and transferable, at the
office or agency of the Issuer in the City of New York maintained for such
purposes (which initially will be the corporate trust office of the Trustee).
See "Book-Entry; Delivery and Form." No service charge will be made for any
registration of transfer, exchange or redemption of the Notes, except in
certain circumstances for any tax or other governmental charge that may be
imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The Original Notes are, and the Exchange Notes will be, general unsecured
obligations of the Issuer, limited to $208,530,000 aggregate principal amount
at maturity, and will mature on March 1, 2005. The Notes will not bear cash
interest prior to March 1, 2002. See "Certain Federal Income Tax
Considerations." Commencing on September 1, 2002, interest on the Notes will
be payable, in cash, at a rate of 13 1/4% per annum, semi-annually in arrears
on each March 1 and September 1 to registered holders of Notes on the February
15 or August 15, as the case may be, immediately preceding such interest
payment date. Interest on the Notes will accrue from the most recent interest
payment date to which interest has been paid or duly provided for or, if no
interest has been paid or duly provided for, from March 1, 2002. Based on the
foregoing, the yield to maturity of each Note will be 14.59% (computed on a
semi-annual bond equivalent basis). Interest will be computed on the basis of
a 360-day year of twelve 30-day months. If the Issuer defaults on any payment
of principal (whether at maturity, upon redemption or otherwise), cash
interest will continue to accrue and, to the extent permitted by law, cash
interest will accrue on overdue installments of interest at the rate of
interest borne by the Notes.
As discussed under "Exchange Offer" and "Note Registration Rights," pursuant
to the Registration Rights Agreement, the Issuer has agreed, for the benefit
of the holders of Notes, to effect at its expense a registered exchange offer
under the Securities Act to exchange the Notes for Exchange Notes. The failure
to comply with such agreement in certain respects may result in the Issuer
paying cash interest on the Notes as liquidated damages.
REDEMPTION
Optional Redemption. The Notes are redeemable, at the option of the Issuer,
in whole or in part, on or after March 1, 2002, upon not less than 30 nor more
than 60 days' written notice at the redemption prices (expressed as
percentages of principal amount at maturity) set forth below, plus accrued and
unpaid interest thereon, if any, to the applicable redemption date, if
redeemed during the twelve-month period beginning on March 1 of each of the
years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002.............................. 106.6250%
2003.............................. 103.3125%
2004.............................. 100.0000%
</TABLE>
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In addition, at any time on or prior to March 1, 2001, the Issuer may, other
than in any circumstances resulting in a Change of Control, redeem, at its
option, up to a maximum of 25% of the originally-issued aggregate principal
amount at maturity of Notes at a redemption price (determined at the
redemption date) equal to 113.25% of the Accreted Value of the Notes so
redeemed, with the net cash proceeds of an Initial Public Equity Offering
resulting in gross cash proceeds to the Issuer of at least $35.0 million in
the aggregate; provided that not less than 75% of the originally-issued
aggregate principal amount at maturity of Notes is outstanding immediately
following such redemption. Any such redemption must be effected upon not less
than 30 nor more than 60 days' notice given within 30 days after the
consummation of the Initial Public Equity Offering.
Mandatory Redemption. The Issuer will not be required to repurchase the
Notes or make any mandatory redemption or sinking fund payments in respect of
the Notes. However, (i) following the occurrence of a Change of Control the
Issuer will be required to make an offer to purchase all outstanding Notes at
a price equal to 101% of the Accreted Value thereof as of the date of purchase
and (ii) following the occurrence of an Asset Sale the Issuer may be obligated
to make an offer to purchase all or a portion of the outstanding Notes at a
price equal to 100% of the Accreted Value thereof as of the date of purchase,
in each case plus accrued and unpaid interest, if any, to the date of
purchase. See "--Certain Covenants--Change of Control" and "--Disposition of
Proceeds of Asset Sales," respectively.
Selection; Effect of Redemption Notice. In the case of a partial redemption,
selection of the Notes for redemption will be made pro rata, by lot or such
other method as the Trustee in its sole discretion deems appropriate and just;
provided that any redemption pursuant to the provisions relating to
redemptions from the proceeds of one or more Public Equity Offerings or sales
to one or more Strategic Equity Investors shall be made on a pro rata basis or
on as nearly a pro rata basis as practicable (subject to DTC procedures). No
Notes of a principal amount at maturity of $1,000 or less shall be redeemed in
part. Notice of redemption shall be mailed by first-class mail at least 30 but
not more than 60 days before the redemption date to each holder of Notes to be
redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in a
principal amount at maturity equal to the unredeemed portion thereof will be
issued in the name of the holder thereof upon surrender for cancellation of
the original Note. Upon giving of a redemption notice, interest on Notes
called for redemption will cease to accrue from and after the date fixed for
redemption (unless the Issuer defaults in providing the funds for such
redemption) and such Notes will cease to be outstanding.
RANKING
The Indebtedness of the Issuer evidenced by the Notes ranks senior in right
of payment to all Subordinated Indebtedness of the Issuer and pari passu in
right of payment with all existing and future unsecured and unsubordinated
Indebtedness of the Issuer. The Notes are effectively subordinated in right of
payment to all secured Indebtedness of the Issuer. Assuming the Notes had been
issued on March 31, 1998, and after giving effect to the application of the
estimated net proceeds thereof, the Issuer would have had outstanding at that
date approximately $10.4 million of secured Indebtedness, which would have
been effectively senior to the Notes, no Indebtedness which would have ranked
pari passu with the Notes and $25.9 million of Indebtedness which would have
been subordinated in right of payment to the Notes.
Although the Indenture contains limitations on the amount of additional
Indebtedness which the Issuer or its Restricted Subsidiaries may incur, under
certain circumstances the amount of such Indebtedness could be substantial,
and the Indenture does not limit the amount of secured Permitted Equipment
Financing that may be incurred by the Issuer. See "--Certain Covenants--
Limitation on Additional Indebtedness" below. If the Issuer becomes insolvent
or is liquidated, or if payment under the any secured Permitted Equipment
Financing or other secured credit facility is accelerated, the lenders under
the Permitted Equipment Financing or such other facility would be entitled to
exercise the remedies available to a secured lender under applicable law
pursuant to the terms of the applicable financing agreements. Accordingly, any
claims of such lenders with respect to assets secured in their favor will be
prior to any claims of the holders of the Notes with respect to such assets.
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The Notes are guaranteed on an unsecured basis by all Material Restricted
Subsidiaries of the Issuer, which guarantees may be released under certain
circumstances; provided, however, that a Material Restricted Subsidiary that
is a Foreign Subsidiary shall not become a Subsidiary Guarantor if by doing so
it would violate applicable law of its jurisdiction of organization or
incorporation. As of the Issue Date and as of the date hereof, the Issuer did
not have any Material Restricted Subsidiaries that are Subsidiary Guarantors.
No other Subsidiary of the Issuer will be required to guarantee the
Indebtedness represented by the Notes, except under the circumstances
described under "--Certain Covenants--Issuance of Guarantees by Certain
Restricted Subsidiaries; Release of Guarantees'' below. As of the date hereof,
the Subsidiaries of the Issuer have no Indebtedness.
CERTAIN COVENANTS
Set forth below are certain covenants that are contained in the Indenture.
Limitation on Additional Indebtedness. The Indenture provides that the
Issuer will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, create, incur, assume, issue, guarantee or in any manner become
directly or indirectly liable for or with respect to, contingently or
otherwise, the payment of (collectively, to "incur") any Indebtedness
(including any Acquired Indebtedness), except for Permitted Indebtedness
(including Acquired Indebtedness to the extent it would constitute Permitted
Indebtedness); provided (i) the Issuer will be permitted to incur Indebtedness
(including Acquired Indebtedness) and (ii) a Restricted Subsidiary will be
permitted to incur Acquired Indebtedness, if, in either case, after giving pro
forma effect to such incurrence (including the application of the net proceeds
therefrom), the Indebtedness to EBITDA Ratio would be less than or equal to 5
to 1.
Indebtedness of any person or any of its Subsidiaries existing at the time
such Person becomes a Restricted Subsidiary (or is merged into or consolidated
with the Issuer or any Restricted Subsidiary), whether or not such
Indebtedness was incurred in connection with, or in contemplation of, such
person becoming a Restricted Subsidiary (or being merged into or consolidated
with the Issuer or any Restricted Subsidiary) shall be deemed incurred at the
time any such person becomes a Restricted Subsidiary or merges into or
consolidates with the Issuer or any Restricted Subsidiary.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness may be incurred by meeting the criteria of one or more
items of Permitted Indebtedness, the Issuer may, in its sole discretion,
classify and divide such item of Indebtedness among more than one of such
items of Permitted Indebtedness.
Limitation on Restricted Payments. The Indenture provides that the Issuer
will not, and will not permit any of the Restricted Subsidiaries to, make,
directly or indirectly, any Restricted Payment unless:
(i) no Default shall have occurred and be continuing at the time of or
upon giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted Payment, the
Issuer would be able to incur $1.00 of Indebtedness under the proviso of
the covenant "--Limitation on Additional Indebtedness"; and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after
the Issue Date does not exceed an amount equal to the sum of, without
duplication, (a) 50% of the Consolidated Net Income accrued on a cumulative
basis during the period beginning on the first day of the first fiscal
quarter immediately following the Issue Date and ending on the last day of
the fiscal quarter of the Issuer immediately preceding the date of such
proposed Restricted Payment (or, if such cumulative Consolidated Net Income
of the Issuer for such period is a deficit, minus 100% of such deficit) for
which financial statements have been provided pursuant to "--Reports''
below, in any event determined by excluding income resulting from transfers
of assets by the Issuer or a Restricted Subsidiary to an Unrestricted
Subsidiary, plus (b) the aggregate net cash proceeds received by the Issuer
either (x) as capital contributions to the Issuer after the Issue Date or
(y) from the issuance and sale of its Capital Stock (other than
Disqualified Stock) or options, warrants or other rights to acquire its
Capital Stock
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(other than Disqualified Stock) (exclusive of any convertible Indebtedness
or any options, warrants or other rights that are redeemable at the option
of the holder, or are required to be redeemed, prior to the Stated Maturity
of the Notes), in each case on or after the Issue Date to a person who is
not a Subsidiary of the Issuer, plus (c) the aggregate net proceeds
received by the Issuer from the issuance (other than to a Subsidiary of the
Issuer) on or after the Issue Date of its Capital Stock (other than
Disqualified Stock) upon the conversion of, or in exchange for,
Indebtedness of the Issuer or upon the exercise of options, warrants or
other rights of Issuer, plus (d) in the case of the disposition or
repayment (in whole or in part) of any Investment constituting a Restricted
Payment made after the Issue Date, an amount equal to the lesser of the
return of capital with respect to the applicable portion of such Investment
and the cost of the applicable portion of such Investment, in either case,
less the cost of the disposition of such Investment, plus (e) in the case
of any Revocation with respect to a Subsidiary of the Issuer that was made
subject to a Designation after the Issue Date, an amount equal to the
lesser of the Designation Amount with respect to such Subsidiary or the
Fair Market Value of the Investment of the Issuer and the Restricted
Subsidiaries in such Subsidiary at the time of Revocation, minus (f) 50% of
the principal amount of any Indebtedness incurred pursuant to clause (g) of
the definition of "Permitted Indebtedness," minus (g) the greater of (x) $0
and (y) the Designation Amount (measured as of the date of Designation)
with respect to any Subsidiary that has been designated as an Unrestricted
Subsidiary in accordance with "--Limitation on Designations of Unrestricted
Subsidiaries'' below. For purposes of the preceding clauses (b) (y) and
(c), as applicable, (A) the value of the aggregate net proceeds received by
the Issuer upon the issuance of Capital Stock either upon the conversion of
convertible Indebtedness or in exchange for outstanding Indebtedness or
upon the exercise of options, warrants or rights will be the net cash
proceeds received upon the issuance of such Indebtedness, options, warrants
or rights plus the incremental amount received, if any, by the Issuer upon
the conversion, exchange or exercise thereof, (B) there shall be excluded
in all cases any issuance and sale of Capital Stock financed, directly or
indirectly, using funds (I) borrowed from the Issuer or any Subsidiary
until and to the extent such borrowing is repaid or (II) contributed,
extended, guaranteed or advanced by the Issuer or any Subsidiary
(including, without limitation, in respect of any employee stock ownership
or benefit plan) and (C) there shall be excluded in all cases any issuance
and sale of Capital Stock in an Initial Public Equity Offering to the
extent the net cash proceeds are used, prior to March 1, 2001, to redeem
Notes as described under "--Redemption--Optional Redemption." The Issuer
may not redeem Notes as described under "--Redemption--Optional
Redemption'' from net cash proceeds received by the Issuer from the
issuance on or after the Issue Date of its Capital Stock if such net cash
proceeds have ever been included in a determination of the amount of
Restricted Payments that may be made by the Issuer pursuant to this
covenant.
For purposes of determining the amount expended for Restricted Payments,
cash distributed shall be valued at the face amount thereof and property other
than cash shall be valued at its Fair Market Value.
The provisions of this covenant shall not prohibit the following (each of
which shall be given independent effect): (i) the payment of any dividend or
other distribution within 60 days after the date of declaration thereof if at
such date of declaration such payment would be permitted by the provisions of
the Indenture; (ii) the purchase, redemption, retirement or other acquisition
of any shares of Capital Stock of the Issuer in exchange for, or out of the
net cash proceeds of the substantially concurrent issue and sale (other than
to a Subsidiary of the Issuer) of, shares of Capital Stock of the Issuer
(other than Disqualified Stock); provided that any such net cash proceeds are
excluded from clause (iii) (b) of the second preceding paragraph; (iii) so
long as no Default shall have occurred and be continuing, the purchase,
redemption, retirement, defeasance or other acquisition of Subordinated
Indebtedness made by exchange for, or out of the net cash proceeds of, a
substantially concurrent issue and sale (other than to a Subsidiary of the
Issuer) of (x) Capital Stock (other than Disqualified Stock) of the Issuer or
(y) other Subordinated Indebtedness to the extent that its stated maturity for
the payment of principal thereof is not prior to the 180th day after the final
stated maturity of the Notes; provided that any such net cash proceeds are
excluded from clause (iii) (b) of the second preceding paragraph; (iv) so long
as no Default shall have occurred and be continuing, purchases or redemptions
of Capital Stock (including cash settlements of stock options) held by
employees, officers or directors upon or following termination of their
employment with the
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Issuer or one of its Subsidiaries; provided that payments shall not exceed
$750,000 in any fiscal year in the aggregate or $3.0 million in the aggregate
during the term of the Notes; (v) so long as no Default shall have occurred
and be continuing, Investments in Unrestricted Subsidiaries to the extent
reasonably promptly made with the proceeds of (x) a capital contribution to
the Issuer or (y) an issue or sale of Capital Stock (other than Disqualified
Capital Stock) of the Issuer (other than to a Subsidiary); provided that any
such net cash proceeds are excluded from clause (iii) (b) of the second
preceding paragraph; and (vi) so long as no Default shall have occurred and be
continuing, Investments in (x) joint ventures formed to engage in the Digital
Network Business and (y) other persons principally engaged in the Digital
Network Business; provided that no more than $12.5 million of Investments made
pursuant to this clause (vi) shall be outstanding at any time.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (i), (iv) and (vi) above shall
be included, without duplication, as Restricted Payments.
Limitation on Liens Securing Certain Indebtedness. The Indenture provides
that the Issuer will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Liens of any kind against or upon
any of the property or assets of the Issuer or any Restricted Subsidiary,
whether now owned or hereafter acquired, or any proceeds therefrom, which
secure either (x) Subordinated Indebtedness unless the Notes are secured by a
Lien on such property, assets or proceeds that is senior in priority to the
Liens securing such Subordinated Indebtedness or (y) Indebtedness of (A) the
Issuer or any Subsidiary Guarantor that is not Subordinated Indebtedness or
(B) any Restricted Subsidiary (other than a Subsidiary Guarantor), unless the
Notes are equally and ratably secured with the Liens securing such other
Indebtedness, except, in the case of this clause (y), Permitted Liens.
Issuance of Guarantees by Certain Restricted Subsidiaries; Release of
Guarantees. The Indenture provides that each Material Restricted Subsidiary
will become a guarantor of the Notes (each a "Subsidiary Guarantor" and
collectively the "Subsidiary Guarantors"); provided, that a Material
Restricted Subsidiary that is a Foreign Subsidiary shall not become a
Subsidiary Guarantor if by doing so it would violate applicable law of its
jurisdiction of organization or incorporation. Each Subsidiary Guarantor will
fully and unconditionally guarantee (collectively, the "Subsidiary
Guarantees"), jointly and severally, on a senior unsecured basis to each
holder of a Note the due and punctual payment of the principal of, premium, if
any, and interest on, and all other amounts owing in respect of such Note and
under the Indenture. A Subsidiary may become a Material Restricted Subsidiary
and, in accordance with the terms of the Indenture, a Subsidiary Guarantor, at
any time while the Notes are outstanding. Each Subsidiary Guarantor will
execute a supplemental indenture evidencing its Subsidiary Guarantee in the
form attached to the Indenture. The Company will amend the Registration
Statement and attach a Supplemental Indenture should a subsidiary become a
Subsidiary Guarantor during the Exchange Offer.
The Issuer will not permit any Restricted Subsidiary that is not a
Subsidiary Guarantor, directly or indirectly, to Guarantee any Indebtedness of
any person unless, in each case, such Restricted Subsidiary simultaneously
executes and delivers to the Trustee a supplemental indenture pursuant to
which such Restricted Subsidiary shall guarantee the full and punctual payment
of all obligations of the Issuer under the Indenture and the Notes on the same
terms and conditions as the Subsidiary Guarantees by the Subsidiary
Guarantors.
Pursuant to each Subsidiary Guarantee, if the Issuer defaults in payment of
any amount owing in respect of the Notes or the Indenture, the Subsidiary
Guarantor will be obligated to duly and punctually pay the same. Pursuant to
the terms of the Indenture, each of the Subsidiary Guarantors will agree that
its obligations under its Subsidiary Guarantee will be unconditional,
irrespective of the validity, regularity or enforceability of the Notes or the
Indenture, the absence of any action to enforce the same or any other
circumstance which might otherwise constitute a legal or equitable discharge
of defense of a guarantor.
Upon (i) any sale or disposition (by merger or otherwise) of any Subsidiary
Guarantor by the Issuer, or a Restricted Subsidiary of the Issuer, to any
person that is not an Affiliate of the Issuer or any of its Subsidiaries (and
which is otherwise in compliance with the terms of the Indenture) as a result
of which such Subsidiary
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Guarantor ceases to be a Restricted Subsidiary of the Issuer or (ii) the
Designation of any Restricted Subsidiary that is a Subsidiary Guarantor as an
Unrestricted Subsidiary in compliance with the covenant "--Limitation on
Designations of Unrestricted Subsidiaries," such Subsidiary Guarantor will be
deemed to be automatically and unconditionally released from all obligations
under its Subsidiary Guarantee.
Change of Control. Upon the occurrence of a Change of Control (the date of
such occurrence being the "Change of Control Date"), the Issuer shall make an
offer to purchase (the "Change of Control Offer"), on a business day (the
"Change of Control Payment Date") not later than 60 days following the Change
of Control Date, all Notes then outstanding at a purchase price equal to 101%
of the Accreted Value thereof as of any Change of Control Payment Date, plus
accrued and unpaid interest thereon, if any, to such Change of Control Payment
Date. Notice of a Change of Control Offer shall be given to holders of Notes,
not less than 25 days nor more than 45 days before the Change of Control
Payment Date. The Change of Control Offer is required to remain open for at
least 20 business days and until the close of business on the Change of
Control Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the holders of the Notes to require
that the Issuer repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction which may be highly leveraged.
If a Change of Control Offer is made, there can be no assurance that the
Issuer will have available funds sufficient to pay for all of the Notes that
might be delivered by holders of Notes seeking to accept the Change of Control
Offer. The Issuer's obligation to make a Change of Control Offer following a
Change of Control shall be satisfied if a third party makes the Change of
Control Offer in the manner, at the times and otherwise in compliance with the
requirements applicable to a Change of Control Offer made by the Issuer and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer. In addition, a Change in Control could result in the
acceleration of existing or future indebtedness of the Company that is senior
to the Notes, and, as such, may adversely affect the ability of the Company to
repay the Notes. See "Risk Factors--Risks Associated with a Change of
Control."
If the Issuer is required to make a Change of Control Offer, the Issuer will
comply with all applicable tender offer laws and regulations, including, to
the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act,
and any other applicable securities laws and regulations.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Issuer will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or
otherwise enter into or cause to become effective any consensual encumbrance
or consensual restriction of any kind on the ability of any Restricted
Subsidiary to pay dividends, in cash or otherwise, or make any other
distributions on its Capital Stock or any other interest or participation in,
or measured by, its profits to the extent owned by the Issuer or any
Restricted Subsidiary, except for (i) any encumbrance or restriction in
existence on the Issue Date, (ii) customary non-assignment provisions, (iii)
any encumbrances or restriction pertaining to an asset subject to a Lien to
the extent set forth in the security documentation governing such Lien, (iv)
any encumbrance or restriction applicable to a Restricted Subsidiary at the
time that it becomes a Restricted Subsidiary that is not created in
contemplation thereof, (v) any encumbrance or restriction existing under any
agreement that refinances or replaces an agreement containing a restriction
permitted by clause (iv) above; provided that the terms and conditions of any
such encumbrance or restriction are not materially less favorable to the
holders of Notes than those under or pursuant to the agreement being replaced
or the agreement evidencing the Indebtedness refinanced, (vi) any encumbrance
or restriction imposed upon a Restricted Subsidiary pursuant to an agreement
which has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Restricted Subsidiary
or any Asset Sale to the extent limited to the Capital Stock or assets in
question, (vii) any customary encumbrance or restriction applicable to a
Restricted Subsidiary that is contained in an agreement or instrument
governing or relating to Indebtedness contained in any Debt Securities;
provided that the terms and conditions of any such encumbrance or restriction
are no more restrictive than those contained in the Indenture; and provided
further, that the provisions of such agreement or instrument permit the
payment
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of interest and principal and mandatory repurchases pursuant to the terms of
the Indenture and the Notes and other Indebtedness (other than Subordinated
Indebtedness) that is solely an obligation of the Issuer; and (viii) any
customary encumbrance or restriction contained in (x) a Permitted Credit
Facility or (y) a pledge agreement applicable to Capital Stock of a Restricted
Subsidiary that is Foreign Subsidiary pledged to secure Indebtedness incurred
pursuant to Permitted Equipment Financing; provided that the provisions of any
such agreement do not restrict the payment of cash dividends or distributions
to the Issuer or any Restricted Subsidiary prior to the occurrence of a
default or an event of default under such Permitted Credit Facility or
Permitted Equipment Financing.
Disposition of Proceeds of Asset Sales. The Indenture provides that the
Issuer will not, and will not permit any Restricted Subsidiary to, make any
Asset Sale unless (a) the Issuer or such Restricted Subsidiary, as the case
may be, receives consideration at the time of such Asset Sale at least equal
to the Fair Market Value of the shares or assets sold or otherwise disposed of
and (b) at least 80% of such consideration consists of cash or Cash
Equivalents; provided that the following shall be treated as cash for purposes
of this covenant: (x) the amount of any Indebtedness (other than Subordinated
Indebtedness) of the Issuer or any Restricted Subsidiary that is actually
assumed by the transferee in such Asset Sale and from which Issuer and the
Restricted Subsidiaries are fully released and (y) the amount of any notes or
other obligations that within 30 days of receipt are converted into cash (to
the extent of the cash (after payment of any costs of disposition) so
received). The Issuer or the applicable Restricted Subsidiary, as the case may
be, may (i) apply the Net Cash Proceeds from such Asset Sale within 365 days
of the receipt thereof to repay secured Indebtedness incurred pursuant to a
Permitted Credit Facility, (ii) apply such Net Cash Proceeds within 365 days
of the receipt thereof to repay Indebtedness of any Restricted Subsidiary that
is not a Subsidiary Guarantor and permanently reduce the amount of the
commitments thereunder by the amount of the Indebtedness so repaid, and/or
(iii) apply such Net Cash Proceeds within 365 days of the receipt thereof to
the an investment in properties and assets that will be used in a Digital
Network Business of the Company or any Restricted Subsidiary (or in Capital
Stock of any person that will become a Restricted Subsidiary as a result of
such investment if all or substantially all of the properties and assets of
such person are used in a Digital Network Business).
To the extent all or part of the Net Cash Proceeds of any Asset Sale are not
applied within 365 days of such Asset Sale as described in clause (i), (ii) or
(iii) of the preceding paragraph (such Net Cash Proceeds, the "Unutilized Net
Cash Proceeds"), the Issuer shall, within 20 days after such 365th day, make
an offer to purchase (an "Asset Sale Offer") all outstanding Notes up to a
maximum Accreted Value (expressed as a multiple of $1,000) equal to the Note
Pro Rata Share of Unutilized Net Cash Proceeds, at a purchase price in cash
equal to 100% of the Accreted Value thereof as of any purchase date, plus
accrued and unpaid interest, if any, to such purchase date; provided, however,
that an Asset Sale Offer may be deferred by the Issuer until there are
Unutilized Net Cash Proceeds equal to at least $5.0 million, at which time the
entire amount of such Unutilized Net Cash Proceeds (and not just the amount in
excess of $5.0 million) shall be applied as required pursuant to this
paragraph.
In the event that any other Indebtedness of the Issuer which ranks pari
passu with the Notes (the "Other Indebtedness") requires that an offer to
repurchase such Indebtedness be made upon the consummation of an Asset Sale,
the Issuer may apply the Unutilized Net Cash Proceeds otherwise required to be
applied to an Asset Sale Offer to offer to purchase such Other Indebtedness
and to an Asset Sale Offer so long as the amount of such Unutilized Net Cash
Proceeds applied to repurchase the Notes is not less than the Note Pro Rata
Share of Unutilized Net Cash Proceeds. Any offer to purchase such Other
Indebtedness shall be made at the same time as the Asset Sale Offer, and the
purchase date in respect of any such offer to purchase and the Asset Sale
Offer shall occur on the same day.
For purposes of this covenant, "Note Pro Rata Share of Unutilized Net Cash
Proceeds" means the amount of the Unutilized Net Cash Proceeds equal to the
product of (x) the Unutilized Net Cash Proceeds and (y) a fraction, the
numerator of which is the Accreted Value of all Notes validly tendered and not
withdrawn pursuant to an Asset Sale Offer related to such Unutilized Net Cash
Proceeds (the "Note Amount") and the denominator of which is the sum of the
Note Amount and the lesser of the aggregate principal face amount or accreted
value
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as of the relevant purchase date of all Other Indebtedness validly tendered
and not withdrawn pursuant to a concurrent offer to purchase such Other
Indebtedness made at the time of such Asset Sale Offer.
Each Asset Sale Offer shall remain open for a period of 20 business days or
such longer period as may be required by law. To the extent that the Accreted
Value of Notes validly tendered and not withdrawn pursuant to an Asset Sale
Offer is less than the Note Pro Rata Share of Unutilized Net Cash Proceeds,
the Issuer or any Restricted Subsidiary may use such deficiency for general
corporate purposes. If the Accreted Value of Notes validly tendered and not
withdrawn by holders thereof exceeds the amount of Notes which can be
purchased with the Unutilized Net Cash Proceeds, Notes to be purchased will be
selected on a pro rata basis. Upon completion of an Asset Sale Offer, the
amount of Unutilized Net Cash Proceeds shall be reset to zero.
If the Issuer is required to make an Asset Sale Offer, the Issuer will
comply with all applicable tender offer rules, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable securities laws and regulations.
Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The Indenture provides that the Issuer will not sell, and will
not permit any Restricted Subsidiary, directly or indirectly, to issue or
sell, any shares of Capital Stock (or any options, warrants or other rights to
purchase such Capital Stock) of a Restricted Subsidiary, except (i) to the
Issuer or a Wholly Owned Restricted Subsidiary, (ii) to directors as director
qualifying shares, but only to the extent required under applicable law, (iii)
the Issuer or a Restricted Subsidiary may pledge Capital Stock of a Restricted
Subsidiary that is a Foreign Subsidiary to the extent and in the manner
permitted under clause (g) of the definition of "Permitted Liens;" (iv) if,
immediately after giving effect to such issuance or sale, such Restricted
Subsidiary would no longer constitute a Restricted Subsidiary or (v) if the
covenant "--Disposition of Proceeds of Asset Sales" is complied with.
Limitation on Transactions with Affiliates. The Indenture provides that the
Issuer will not, and will not permit, cause or suffer any Restricted
Subsidiary to, directly or indirectly, conduct any business, sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into any contract, agreement,
loan, advance or Guarantee or engage in any other transaction (or series of
related transactions which are similar or part of a common plan) with or for
the benefit of any of their respective Affiliates or any beneficial owner of
10% or more of the Common Stock of the Issuer or any officer or director of
the Issuer or any Subsidiary (each, an "Affiliate Transaction"), unless the
terms of the Affiliate Transaction are set forth in writing and are no less
favorable to the Issuer or such Restricted Subsidiary, as the case may be,
than would be available in a comparable transaction with an unaffiliated third
party. Each Affiliate Transaction (or series of related Affiliate
Transactions) involving aggregate payments and/or other consideration having
Fair Market Value (i) in excess of $1 million shall be approved by a majority
of the Board, such approval to be evidenced by a Board Resolution stating that
the Board has determined that such transaction or transactions comply with the
foregoing provisions, (ii) in excess of $5.0 million shall further require the
approval of a majority of the Disinterested Directors and (iii) in excess of
$10.0 million shall require that the Issuer obtain a written opinion from an
Independent Financial Advisor stating that the terms of such Affiliate
Transaction (or series of related Affiliate Transactions) to the Issuer or the
Restricted Subsidiary, as the case may be, are fair from a financial point of
view; provided, however, that the dollar thresholds set forth in clauses (i),
(ii) and (iii) above shall be increased to $2.5 million, $10.0 million and
$25.0 million, respectively, in the case of any Affiliate Transaction with
WorldCom or any of its Affiliates. For purposes of this covenant, any
Affiliate Transaction approved by a majority of the Disinterested Directors or
as to which a written opinion has been obtained from an Independent Financial
Advisor, on the basis set forth in the preceding sentence, shall be deemed to
be on terms that are no less favorable to the Issuer or such Restricted
Subsidiary, as the case may be, than would be available in a comparable
transaction with an unaffiliated third party and, therefore, shall be
permitted under this covenant.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among, or solely for the benefit
of, the Issuer and/or any of the Restricted Subsidiaries, provided that in any
such case, no officer, director or beneficial owner of 10% or more of any
class of Capital Stock of the Issuer
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shall beneficially own any Capital Stock of any such Restricted Subsidiary,
(ii) transactions pursuant to agreements and arrangements existing on the
Issue Date and specified on a schedule to the Indenture, (iii) any Restricted
Payment made in compliance with the covenant "--Limitation on Restricted
Payments," (iv) customary directors' fees, indemnification and similar
arrangements, consulting fees, legal fees, employee salaries, bonuses and
employment agreements, compensation or employee benefit arrangements and
incentive arrangements with any officer, director or employee of the Issuer or
any Restricted Subsidiary entered into in the ordinary course of business and
payments under indemnification arrangements permitted by applicable law, (v)
loans and advances to officers, directors and employees of the Issuer or any
Restricted Subsidiary for travel, entertainment, moving and other relocation
expenses, in each case made in the ordinary course of business and consistent
with past business practices; (vi) any agreement or arrangement entered into
in the ordinary course of business by the Issuer or any Restricted Subsidiary
with WorldCom or any of its Affiliates with respect to communications or
communications related products and services; and (vii) any Permitted
Investment.
Reports. The Indenture provides that, whether or not the Issuer is subject
to Section 13(a) or 15(d) of the Exchange Act or any successor provision of
law, the Issuer shall furnish without cost to each holder of Notes and file
with the Trustee (i) within 135 days after the end of each fiscal year of the
Issuer (commencing with its 1998 fiscal-year end), all annual financial
information that would be required to be contained in a filing with the SEC on
Form 10-K (whether or not the Issuer is then required to file such Form with
the SEC), including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and a report thereon by the Issuer's
certified public accountants, (ii) within 60 days after the end of each of the
first three fiscal quarters of each fiscal year of the Issuer, all quarterly
financial information that would be required to be contained in a filing with
the SEC on Form 10-Q (whether or not the Issuer is then required to file such
Form with the SEC), including a "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and (iii) on a timely basis,
any information concerning the Issuer or any Restricted Subsidiary required to
be contained in a current report on Form 8-K (whether or not the Issuer is
then required to file such Form with the SEC). Until such time as the Issuer
is otherwise required to file periodic reports with the SEC under the Exchange
Act (or any successor provision of law), the Issuer will file with the SEC (if
permitted by SEC practice and applicable law and regulations), for public
availability, a copy of the annual and quarterly financial information and
other information prepared by it for distribution to holders of Notes. In
addition, for so long as any Notes remain outstanding the Issuer will furnish
to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act, and, to any beneficial holder of Notes, if not obtainable from
the SEC, information of the type that wold be filed with the SEC pursuant to
the foregoing provisions, upon the request of any such holder.
Limitation on Designations of Unrestricted Subsidiaries. The Indenture
provides that the Issuer will not designate any Subsidiary of the Issuer
(other than a newly created Subsidiary in which the Issuer has made an
Investment of $1,000 or less) as an "Unrestricted Subsidiary" under the
Indenture (a "Designation") unless:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(b) except in the case of Permitted Investments and any Investment made
pursuant to clause (v) of the third paragraph of the covenant "--Limitation
on Restricted Payments," at the time of and after giving effect to such
Designation, the Issuer would be able to incur $1.00 of Indebtedness (other
than Permitted Indebtedness) under the covenant described under "--
Limitation on Additional Indebtedness" above; and
(c) the Issuer would be permitted under the Indenture to make an
Investment at the time of such Designation (assuming the effectiveness of
such Designation) in an amount (the "Designation Amount") equal to the Fair
Market Value of the interest of the Issuer and its Restricted Subsidiaries
in such Restricted Subsidiary on such date.
In the event of any such Designation, the Issuer shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
"--Limitation on Restricted Payments" for all purposes of the Indenture in an
amount equal to the Designation Amount. The Indenture will further provide
that neither the
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Issuer nor any Restricted Subsidiary shall at any time (x) provide credit
support for, subject any of its properties or assets (other than the Capital
Stock of any Unrestricted Subsidiary) to the satisfaction of, or Guarantee,
any Indebtedness of any Unrestricted Subsidiary (including any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z)
be directly or indirectly liable for any other Indebtedness which provides
that the holder thereof may (upon notice, lapse of time or both) declare a
default thereon (or cause the payment thereof to be accelerated or payable
prior to its final scheduled maturity) upon the occurrence of a default with
respect to any other Indebtedness that is Indebtedness of an Unrestricted
Subsidiary (including any corresponding right to take enforcement action
against such Unrestricted Subsidiary), except in the case of clause (x) or (y)
to the extent otherwise permitted under the Indenture, including, without
limitation, under the covenant "--Limitation on Restricted Payments" above.
The Indenture further provides that the Issuer will not revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation")
unless:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by Board Resolutions
delivered to the Trustee certifying compliance with the foregoing provisions.
The Issuer designated 4-Sight and each of its Subsidiaries as a Restricted
Subsidiary at such time as 4-Sight and its Subsidiaries became Subsidiaries of
the Issuer.
Limitation on Status as Investment Company. The Indenture provides that the
Issuer will not, and will not permit any of its Subsidiaries or Affiliates to,
conduct its business in a fashion that would cause the Issuer to be required
to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act")), or
otherwise become subject to regulation under the Investment Company Act. For
purposes of establishing the Issuer's compliance with this provision, any
exemption which is or would become available under Section 3(c)(1) or Section
3(c)(7) of the Investment Company Act will be disregarded.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Indenture provides that the Issuer will not (i) consolidate or combine
with or merge with or into or, directly or indirectly, sell, assign, convey,
lease, transfer or otherwise dispose of all or substantially all of its
properties and assets to any person or persons in a single transaction or
through a series of transactions, or (ii) permit any of the Restricted
Subsidiaries to enter into any such transaction or series of transactions if
it would result in the disposition of all or substantially all of the
properties or assets of the Issuer and the Restricted Subsidiaries on a
consolidated basis, unless, in the case of either (i) or (ii), (a) the Issuer
shall be the continuing person or, if the Issuer is not the continuing person,
the resulting, surviving or transferee person (the "surviving entity") shall
be a company organized and existing under the laws of the United States or any
State or territory thereof; (b) the surviving entity (if other than the
Issuer) shall expressly assume all of the obligations of the Issuer under the
Notes and the Indenture, and shall execute a supplemental indenture to effect
such assumption which supplemental indenture shall be delivered to the Trustee
and shall be in form and substance reasonably satisfactory to the Trustee; (c)
immediately after giving effect to such transaction or series of transactions
on a pro forma basis (including, without limitation, any Indebtedness incurred
or anticipated to be incurred in connection with or in respect of such
transaction or series of transactions), the Issuer or the surviving entity
(assuming such surviving entity's assumption of the Issuer's obligations under
the Notes and the Indenture), as the case may be, would be able to incur $1.00
of Indebtedness (other than Permitted Indebtedness) under the
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covenant described under "--Certain Covenants--Limitation on Additional
Indebtedness" above; (d) immediately after giving effect to such transaction
or series of transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), no Default shall
have occurred and be continuing; and (e) the Issuer or the surviving entity,
as the case may be, shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel stating that such transaction or series
of transactions, and, if a supplemental indenture is required in connection
with such transaction or series of transactions, such supplemental indenture
complies with this covenant and that all conditions precedent in the Indenture
relating to the transaction or series of transactions have been satisfied.
Upon any consolidation or merger or any sale, assignment, conveyance, lease,
transfer or other disposition of all or substantially all of the assets of the
Issuer in accordance with the foregoing in which the Issuer or the Restricted
Subsidiary, as the case may be, is not the surviving corporation, the
successor corporation formed by such a consolidation or into which the Issuer
or such Restricted Subsidiary is merged or to which such transfer is made,
will succeed to, and be substituted for, and may exercise every right and
power of, the Issuer or such Restricted Subsidiary, as the case may be, under
the Indenture with the same effect as if such successor corporation had been
named as the Issuer or such Restricted Subsidiary therein; and thereafter,
except in the case of (i) any lease or (ii) any sale, assignment, conveyance,
transfer, lease or other disposition to a Restricted Subsidiary of the Issuer,
the Issuer shall be discharged from all obligations and covenants under the
Indenture and the Notes.
The Indenture provides that for all purposes of the Indenture and the Notes
(including the provisions of this covenant and the covenants described under
"--Certain Covenants--Limitation on Additional Indebtedness," "--Limitation on
Restricted Payments" and "--Limitation on Liens Securing Certain
Indebtedness"), Subsidiaries of any surviving entity will, upon such
transaction or series of related transactions, become Restricted Subsidiaries
or Unrestricted Subsidiaries as provided pursuant to the covenant "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries" and all
Indebtedness, and all Liens on property or assets, of the Issuer and the
Restricted Subsidiaries in existence immediately prior to such transaction or
series of related transactions will be deemed to have been incurred upon such
transaction or series of related transactions.
The meaning of the phrase "all or substantially all" as used above varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances, there may be a degree
of uncertainty in ascertaining whether a particular transaction would involve
a disposition of "all or substantially all" of the assets of the Issuer, and
therefore it may be unclear whether the foregoing provisions are applicable.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of interest on the Notes when it becomes due
and payable and continuance of such default for a period of 30 days or
more; or
(ii) default in the payment of the principal of, or premium, if any, on
the Notes when due at maturity, upon redemption or otherwise; or
(iii) default in the payment of the Accreted Value of, and any accrued
and unpaid interest on, any Notes required to be purchased pursuant to a
Change of Control Offer or Asset Sale Offer when due and payable; or
(iv) default in the performance, or breach, of any covenant described
under "--Certain Covenants--Change of Control," "--Disposition of Proceeds
of Asset Sales" or "--Consolidation, Merger, Sale of Assets, Etc."; or
(v) default in the performance, or breach, of any covenant in the
Indenture (other than defaults specified in clause (i), (ii), (iii) or (iv)
above), and continuance of such default or breach for a period of 30
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days or more after written notice to the Issuer by the Trustee or to the
Issuer and the Trustee by the holders of at least 25% in aggregate
principal amount at maturity of the outstanding Notes; or
(vi) (a) failure to pay, following any applicable grace period, any
installment of principal due (whether at maturity or otherwise) under one
or more classes or issues of Indebtedness in an aggregate principal amount
of $5 million or more under which the Issuer or any Material Restricted
Subsidiary is obligated or (b) failure by the Issuer or any Material
Restricted Subsidiary to perform any other term, covenant, condition or
provision of one or more classes or issues of Indebtedness in an aggregate
principal amount of $5 million or more under which the Issuer or such
Material Restricted Subsidiary is obligated and, in the case of this clause
(b), such failure results in an acceleration of the maturity thereof; or
(vii) any holder of Indebtedness in an aggregate principal amount of $5.0
million or more of the Issuer or any Material Restricted Subsidiary shall
commence judicial proceedings or take any other action to foreclose upon,
or dispose of assets of the Issuer or any Material Restricted Subsidiary
having an aggregate Fair Market Value, individually or in the aggregate, of
$5.0 million or more or shall have exercised any right under applicable law
or applicable security documents to take ownership of any such assets in
lieu of foreclosure; provided that, in any such case, the Issuer or any
Material Restricted Subsidiary shall not have obtained, prior to any such
foreclosure or disposition of assets, a stay of all such actions that
remains in effect; or
(viii) one or more judgments, orders or decrees for the payment of money
of $5.0 million or more, either individually or in the aggregate, shall be
entered against the Issuer or any Material Restricted Subsidiary or any of
their respective properties and shall not be paid or discharged and there
shall have been a period of 60 consecutive days or more during which a stay
of enforcement of such judgment or order, by reason of pending appeal or
otherwise, shall not be in effect; or
(ix) certain events of bankruptcy, insolvency, reorganization,
administration or similar proceedings with respect to the Issuer or any
Subsidiary Guarantor shall have occurred; or
(x) the Indenture or the Registration Rights Agreement ceases to be in
full force and effect or is declared null and void or the Issuer denies
that it has any further obligation or liability thereunder or gives notice
to that effect (other than by reason of termination or release in
accordance with the terms thereof); or
(xi) any Subsidiary Guarantee or any provision thereof shall at any time
cease to be the legal, valid and binding obligation of the Subsidiary
Guarantor party thereto, such that the Holders of Notes could not
reasonably be expected to realize the material benefits intended to be
provided by such Subsidiary Guarantor under its Subsidiary Guarantee or any
Subsidiary Guarantor shall assert that its Subsidiary Guarantee is not a
legal, valid and binding obligation or shall purport to revoke its
obligations thereunder.
If an Event of Default (other than an Event of Default specified in clause
(ix) above with respect to the Issuer or any Subsidiary Guarantor) occurs and
is continuing, then the Trustee or the holders of at least 25% in principal
amount at maturity of the outstanding Notes may, by written notice, and the
Trustee upon the request of the holders of not less than 25% in principal
amount at maturity of the outstanding Notes shall, declare the Default Amount
of all outstanding Notes to be immediately due and payable and upon any such
declaration such amount shall become immediately due and payable. If an Event
of Default specified in clause (ix) above with respect to the Issuer or any
Subsidiary Guarantor occurs and is continuing, then the Default Amount of all
outstanding Notes shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any holder.
After a declaration of acceleration, the holders of a majority in aggregate
principal amount at maturity of outstanding Notes may, by notice to the
Trustee, rescind such declaration of acceleration if all existing Events of
Default, other than nonpayment of the Default Amount of the Notes that has
become due solely as a result of such acceleration, have been cured or waived
and if the rescission of acceleration would not conflict with any judgment or
decree. The holders of a majority in principal amount at maturity of the
outstanding Notes also have the right to waive past defaults under the
Indenture, except a default in the payment of principal of, or any
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interest on, any outstanding Note, or in respect of certain covenants or
provisions that cannot be modified or amended without the consent of all
holders of Notes.
No holder of any of the Notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in principal amount at maturity of the outstanding Notes have made
written request, and offered reasonable security or indemnity, to the Trustee
to institute such proceeding as Trustee, the Trustee has failed to institute
such proceeding within 60 days after receipt of such notice and the Trustee
has not within such 60-day period received directions inconsistent with such
written request by holders of a majority in principal amount at maturity of
the outstanding Notes. Such limitations do not apply, however, to a suit
instituted by a holder of a Note for the enforcement of the payment of the
principal of, or any accrued and unpaid interest on, such Note on or after the
respective due dates expressed in such Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person
would exercise under the circumstances in the conduct of such person's own
affairs. Subject to the provisions of the Indenture relating to the duties of
the Trustee, if an Event of Default shall occur and be continuing, the Trustee
is not under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders unless such
holders shall have offered to such Trustee reasonable security or indemnity.
Subject to certain provisions concerning the rights of the Trustee, the
holders of a majority in principal amount at maturity of the outstanding Notes
have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee.
The Indenture provides that the Trustee will, within 45 days after the
occurrence of any Default, give to the holders of the Notes notice of such
Default known to it, unless such Default shall have been cured or waived;
provided that the Trustee shall be protected in withholding such notice if it
determines in good faith that the withholding of such notice is in the
interest of such holders.
The Issuer is required to furnish to the Trustee annually a statement as to
its compliance with all conditions and covenants under the Indenture.
DEFEASANCE
The Issuer may at any time terminate all of the obligations of the Issuer
and any Subsidiary Guarantor with respect to the Notes ("defeasance"), except
for certain obligations, including those regarding any trust established for a
defeasance and obligations to register the transfer or exchange of the Notes,
to replace mutilated, destroyed, lost or stolen Notes as required by the
Indenture and to maintain agencies in respect of Notes. The Issuer may at any
time terminate the obligations of the Issuer and any Subsidiary Guarantor
under certain covenants set forth in the Indenture, some of which are
described under "--Certain Covenants" above, and any omission to comply with
such obligations shall not constitute a Default or an Event of Default with
respect to the Notes ("covenant defeasance"). To exercise either defeasance or
covenant defeasance, the Issuer must irrevocably deposit in trust, for the
benefit of the holders of the Notes, with the Trustee money (in United States
dollars) or U.S. government obligations (denominated in United States
dollars), or a combination thereof, in such amounts as will be sufficient to
pay the Accreted Value of and premium, if any, and accrued but unpaid interest
on the Notes to redemption or maturity and comply with certain other
conditions, including the delivery of a legal opinion as to certain tax
matters. The requirements for defeasance shall not be deemed satisfied if a
Default specified in clause (ix) of "--Events of Default" above occurs on or
prior to the 91st calendar day after the date of the deposit of money or
securities in the defeasance trust.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of
Notes) as to all outstanding Notes when either (a) all such Notes
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theretofore authenticated and delivered (except lost, stolen or destroyed
Notes that have been replaced or paid and Notes for whose payment money has
theretofore been deposited in trust or segregated and held in trust by the
Issuer and thereafter repaid to the Issuer or discharged from such trust) have
been delivered to the Trustee for cancellation; or (b) (i) all such Notes not
theretofore delivered to the Trustee for cancellation have become due and
payable and the Issuer has irrevocably deposited or caused to be deposited
with the Trustee as trust funds in trust for the purpose an amount of money
sufficient to pay and discharge the entire indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal amount,
premium, if any, and accrued and unpaid interest to the date of such deposit;
(ii) the Issuer has paid all sums payable by it under the Indenture; and (iii)
the Issuer has delivered irrevocable instructions to the Trustee to apply the
deposited money toward the payment of the Notes at maturity or on the
redemption date, as the case may be. In addition, the Issuer must deliver an
Officers' Certificate and an Opinion of Counsel stating that all conditions
precedent to satisfaction and discharge have been complied with.
AMENDMENT AND WAIVERS
From time to time, the Issuer and any Subsidiary Guarantors, when authorized
by resolutions of their respective Boards of Directors, and the Trustee,
without the consent of the holders of the Notes, may amend, waive or
supplement the Indenture or the Notes for certain specified purposes,
including, among other things, curing ambiguities, defects or inconsistencies,
maintaining the qualification of the Indenture under the Trust Indenture Act
or making any change that does not adversely affect the rights of any holder.
Other amendments and modifications of the Indenture and the Notes may be made
by the Issuer, the Subsidiary Guarantors and the Trustee by supplemental
indenture with the consent of the holders of not less than a majority of the
aggregate principal amount at maturity of the outstanding Notes; provided that
no such modification or amendment may, without the consent of the holder of
each outstanding Note affected thereby, (i) reduce the principal amount at
maturity of, change the fixed maturity of, or alter the redemption provisions
of, the Notes or amend or modify the calculation of the Accreted Value or the
Default Amount so as to reduce the amount of the Accreted Value or the Default
Amount, (ii) change the currency in which any Notes or amounts owing thereon
is payable, (iii) reduce the percentage of the aggregate principal amount at
maturity of the outstanding Notes which must consent to an amendment,
supplement or waiver or consent to take any action under the Indenture or the
Notes, (iv) impair the right to institute suit for the enforcement of any
payment on or with respect to the Notes or any Subsidiary Guarantee, (v) waive
a default in payment with respect to the Notes or any Subsidiary Guarantee,
except a rescission of acceleration of the relevant Notes by the holders
thereof as provided in the Indenture and a waiver of the payment default that
resulted from such acceleration, (vi) reduce the rate or change the time for
payment of interest on the Notes, (vii) alter the Issuer's obligation to
purchase the Notes following the occurrence of a Change of Control or an Asset
Sale in accordance with the Indenture or waive any default in the performance
thereof, (viii) affect the ranking of the Notes in a manner adverse to the
holder of the Notes or (ix) release any Subsidiary Guarantor from any of its
obligations under its Subsidiary Guarantee or the Indenture except in
compliance with the terms of the Indenture.
Holders of a majority in aggregate principal amount at maturity of the
outstanding Notes, on behalf of all holders of Notes, may waive compliance by
the Issuer with certain restrictive provisions of the Indenture. Subject to
certain rights of the Trustee as provided in the Indenture, the holders of a
majority in aggregate principal amount at maturity of the Notes, on behalf of
all holders, may waive any past Default under the Indenture (including any
such waiver obtained in connection with a tender offer or exchange offer for
such Notes), except a default in the payment of principal or interest or a
Default arising from failure to purchase any Notes tendered pursuant to an
offer to purchase required to be made by any provision of the Indenture, or a
Default in respect of a provision that under the Indenture cannot be modified
or amended without the consent of the holder of each Note that is affected.
REGARDING THE TRUSTEE
U.S. Bank Trust National Association (f/k/a First Trust National
Association) serves as Trustee under the Indenture.
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GOVERNING LAW
The Indenture provides that the Indenture and the Notes, respectively, will
be governed by and construed in accordance with the laws of the State of New
York, without giving effect to principles of conflicts of law.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the Indenture.
Reference is made to the Indenture for the full definition of all such terms,
as well as any other capitalized terms used herein for which no definition is
provided.
"Accreted Value" means, as of any date (the "Specified Date"), with respect
to each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date is one of the following dates (each a "Semi-
Annual Accrual Date"), the amount set forth opposite such date below:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRETED
ACCRUAL DATE VALUE
------------ ---------
<S> <C>
Issue Date...................................................... $ 599.44
September 1, 1998............................................... 638.24
March 1, 1999................................................... 680.53
September 1, 1999............................................... 725.61
March 1, 2000................................................... 773.68
September 1, 2000............................................... 824.94
March 1, 2001................................................... 879.59
September 1, 2001............................................... 937.87
March 1, 2002................................................... 1,000.00
</TABLE>
(ii) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the sum of (A) the Accreted Value for the Semi-Annual Accrual Date
immediately preceding the Specified Date and (B) an amount equal to the
product of (x) the Accreted Value for the immediately following Semi-Annual
Accrual Date less the Accreted Value for the immediately preceding Semi-
Annual Accrual Date and (y) a fraction, the numerator of which is the
number of days actually elapsed from the immediately preceding Semi-Annual
Accrual Date to the Specified Date, using a 360-day year of twelve 30-day
months, and the denominator of which is 180; and
(iii) if the Specified Date is on or after March 1, 2002, $1,000.
"Acquired Indebtedness" means Indebtedness of a person (i) assumed in
connection with an Asset Acquisition from such person or (ii) existing at the
time such person is merged or consolidated with or into the Issuer or any
Restricted Subsidiary or becomes a Restricted Subsidiary, in each case not
incurred in connection with, or in anticipation of, such Asset Acquisition or
merger or consolidation or such person becoming a Restricted Subsidiary;
provided that Indebtedness of such person which is redeemed, defeased, retired
or otherwise repaid at the time of or immediately upon consummation of such
Asset Acquisition or the transactions by which such person is merged or
consolidated with or into the Issuer or any Restricted Subsidiary or becomes a
Restricted Subsidiary shall not constitute Acquired Indebtedness.
"Affiliate" of any specified person means any other person which, directly
or indirectly, controls, is controlled by or is under direct or indirect
common control with, such specified person. For the purposes of this
definition, "control" when used with respect to any person means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others) by the Issuer or any Restricted
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Subsidiary in any other person, or any acquisition or purchase of Capital
Stock of any other person by the Issuer or any Restricted Subsidiary, in
either case pursuant to which such person shall (a) become a Restricted
Subsidiary or (b) shall be merged or consolidated with or into the Issuer or
any Restricted Subsidiary or (ii) any acquisition by the Issuer or any
Restricted Subsidiary of the assets of any person which constitute
substantially all of an operating unit or line of business of such person or
which is otherwise outside of the ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer or
lease (that has the effect of a disposition and is not for security purposes)
or other disposition (that is not for security purposes) to any person other
than the Issuer or a Wholly Owned Restricted Subsidiary, in one transaction or
a series of related transactions, of (i) any Capital Stock of any Restricted
Subsidiary, (ii) any assets of the Issuer or any Restricted Subsidiary which
constitute substantially all of an operating unit or line of business of the
Issuer and the Restricted Subsidiaries or (iii) any other property or asset of
the Issuer or any Restricted Subsidiary outside of the ordinary course of
business. For the purposes of this definition, the term "Asset Sale" shall not
include (i) any disposition of properties and assets of the Issuer that is
governed under "--Consolidation, Merger, Sale of Assets, Etc." above, (ii)
sales of property or equipment that have become worn out, obsolete or damaged
or otherwise unsuitable for use in connection with the business of the Issuer
or any Restricted Subsidiary, as the case may be, and (iii) for purposes of
the covenant "--Certain Covenants--Disposition of Proceeds of Asset Sales,"
sales, conveyances, transfers, leases or other dispositions of property or
assets, whether in one transaction or a series of related transactions
occurring within one year, either (x) involving assets with a Fair Market
Value not in excess of $1.0 million in any 12 month period, or (y) which
constitutes the incurrence of a Capitalized Lease Obligation.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
implicit in the terms of the lease included in such Sale/Leaseback
Transaction) of the total obligations of the lessee for rental payments during
the remaining term of the lease included in such Sale/Leaseback Transaction
(including any period for which such lease has been extended).
"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from such date to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness multiplied by (b) the
amount of each such principal payment by (ii) the sum of all such principal
payments; provided that, in the case of any Capitalized Lease Obligation, all
calculations hereunder shall give effect to any applicable options to renew in
favor of the Issuer or any Restricted Subsidiary.
"Board" means the Board of Directors of the Issuer.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Issuer to have been duly adopted by the Board
and to be in full force and effect on the date of such certification, and
delivered to the Trustee.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of, such person's capital stock, whether
outstanding on the Issue Date or issued after the Issue Date, and any and all
rights (other than any evidence of Indebtedness), warrants or options
exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed, immovable or movable) that is
required to be classified and accounted for as a capitalized lease obligation
under GAAP, and, for the purpose of the Indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness with a maturity of
365 days or less issued or directly and fully guaranteed or insured by the
United States or any agency or instrumentality thereof (provided
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that the full faith and credit of the United States is pledged in support
thereof or such Indebtedness constitutes a general obligation of such
country); (ii) deposits, certificates of deposit or acceptances with a
maturity of 365 days or less of any financial institution that is a member of
the Federal Reserve System, in each case having combined capital and surplus
and undivided profits (or any similar capital concept) of not less than $500.0
million and whose senior unsecured debt is rated at least "A-l" by S&P or "P-
l" by Moody's; (iii) commercial paper with a maturity of 365 days or less
issued by a corporation (other than an Affiliate of the Issuer) organized
under the laws of the United States or any State thereof and rated at least
"A-l" by S&P or "P-1" by Moody's; (iv) repurchase agreements and reverse
repurchase agreements relating to marketable direct obligations issued or
unconditionally guaranteed by the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States
Government maturing within 365 days from the date of acquisition; (v) money
market funds in the United States which invest substantially all of their
assets in securities of the type described in any of the preceding clauses (i)
through (iv); and (vi) any evidence of Indebtedness with a maturity of 365
days or less issued by WorldCom and rated at least "BBB-" or "A2" by S&P and
at least "Baa3" or "P2" by Moody's.
"Change of Control" means the occurrence of any of the following events: (a)
any "person" or "group" (as such terms are used in Sections 13(d) or 14(d) of
the Exchange Act), excluding Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 or 13d-5 under the Exchange Act, except that
a person shall be deemed to have "beneficial ownership" of all securities that
such person has or acquires the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 35% of the total voting power of all Voting Stock of
the Issuer (unless the Permitted Holders "beneficially own" (as so defined),
directly or indirectly, in the aggregate a greater percentage of the voting
power of the Voting Stock of the Issuer) or has, directly or indirectly, the
right to elect or designate a majority of the Board or (b) the Issuer
consolidates with, or merges with or into, another person or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all
of its assets to any person, or any person consolidates with, or mergers with
or into, the Issuer, in any such event pursuant to a transaction in which the
outstanding Voting Stock of the Issuer is converted into or exchanged for
cash, securities or other property, other than any such transaction where (i)
the outstanding Voting Stock of the Issuer is converted into or exchanged for
(1) Voting Stock (other than Disqualified Stock) of the surviving or
transferee corporation or its parent corporation and/or (2) cash, securities
and other property in any amount which could be paid by the Issuer as a
Restricted Payment under the Indenture, (ii) the "beneficial owners" (as so
defined) of the Voting Stock of the Issuer immediately before such transaction
own, directly or indirectly, immediately after such transaction, at least a
majority of the voting power of all Voting Stock of the surviving or
transferee corporation or its parent corporation immediately after such
transaction, as applicable, or (iii) no "person" or "group" (as such terms are
used in Sections 13(d) or 14(d) of the Exchange Act), excluding the Permitted
Holders, is the "beneficial owner" (as so defined), directly or indirectly, of
more than 35% of the Voting Stock or such surviving or transferee corporation
or is parent corporation, as applicable (unless the Permitted Holders
"beneficially own" (as so defined), directly or indirectly, in the aggregate a
greater percentage of the voting power of the Voting Stock of such surviving
or transferee corporation or its parent corporation (as the case may be)), or
has, directly or indirectly, the right to elect or designate a majority of the
board of directors of the surviving or transferee corporation or its parent
corporation, as applicable, or (c) during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board
(together with any new directors whose election by the Board or whose
nomination for election by the stockholders of the Issuer was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board then in office. The good faith determination by the
Board, based upon advice of outside counsel, of the beneficial ownership of
securities of the Issuer with the meaning of Rules 13d-3 and 13d-5 under the
Exchange Act shall be conclusive, absent contrary controlling precedent or
contrary written interpretation published by the SEC. No inference shall be
created that officers or employees of the Issuer are acting as a "person" or
"group" (as such terms are used in Sections 13(d) or 14(d) of the Exchange
Act) with the power to designate a majority of the members of the Board solely
because such officers or employees constitute a majority of the members of the
Board.
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"Common Stock" means, with respect to any person, any and all shares,
interest or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of such person's common stock and includes,
without limitation, all series and classes of such common stock.
"Consolidated Income Tax Expense" means, with respect to any period, the
provision for federal, state, local, foreign and other income taxes of the
Issuer and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period, without
duplication, the sum of (i) the interest expense of the Issuer and the
Restricted Subsidiaries for such period as determined on a consolidated basis
in accordance with GAAP, including, without limitation, (a) any amortization
of debt discount, (b) the net cost under Interest Rate Obligations and
Currency Hedge Obligations (including any amortization of discounts), (c) the
interest portion of any deferred payment obligation, (d) all commissions,
discounts and other fees and charges owed with respect to letters of credit
and bankers' acceptance financing and similar transactions and (e) all
capitalized interest and accrued interest, (ii) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by the Issuer and the Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP, (iii) the portion
of any rental obligation in respect of any Sale/Leaseback Transaction
allocable to interest expense (determined as if such were treated as a Capital
Lease Obligation) and (iv) the amount of dividends and distributions in
respect of Disqualified Stock paid by the Issuer and the Restricted
Subsidiaries during such period.
"Consolidated Net Income" means, with respect to any period, the net income
(or loss) of the Issuer and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, adjusted, to the
extent included in calculating such consolidated net income (or loss), by
excluding, without duplication, (i) all extraordinary, unusual or nonrecurring
gains or losses and all gains or losses from sales or other dispositions of
assets (including Asset Sales) out of the ordinary course of business (net of
taxes, fees and expenses relating to the transaction giving rise thereto) for
such period, (ii) that portion of such net income (or loss) derived from or in
respect of Investments in persons other than Restricted Subsidiaries, except
to the extent of any cash dividends actually received by the Issuer or any
Restricted Subsidiary (subject, in the case of any Restricted Subsidiary, to
the provisions of clause (vi) of this definition); (iii) any gain or loss, net
of taxes, realized upon the termination of any employee pension benefit plan
during such period, (iv) that portion of such net income (or loss) allocable
to minority interests in any Restricted Subsidiary for such period, (v) net
income (or loss) of any other person combined with the Issuer or any
Restricted Subsidiary on a "pooling of interests" basis attributable to any
period prior to the date of combination and (vi) the net income of any
Restricted Subsidiary for such period to the extent that the declaration of
dividends or similar distributions by that Restricted Subsidiary of that
income is not at the time permitted, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulations applicable to that Restricted
Subsidiary or its stockholders.
"Consolidated Net Worth" means, with respect to any person, the consolidated
stockholders' or partners' equity of such person reflected on the most recent
balance sheet of such person, determined in accordance with GAAP, less any
amounts attributable to redeemable capital stock (as determined under
applicable accounting standards promulgated by the SEC) of such person.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period (a) increased (without duplication),
to the extent deducted in arriving at such Consolidated Net Income, by the sum
of (i) Consolidated Income Tax Expense for such period; (ii) Consolidated
Interest Expense for such period; and (iii) depreciation, amortization and any
other non-cash items for such period of the Issuer and the Restricted
Subsidiaries (other than any non-cash item which requires the accrual of, or a
reserve for, cash charges for any future period), including, without
limitation, amortization of capitalized debt issuance costs for such period,
all determined on a consolidated basis in accordance with GAAP, and (b)
decreased by any non- cash items (including non-recurring gains and non-
recurring items of income) to the extent they increased
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Consolidated Net Income for such period (including any partial or complete
reversal of reserves taken in a prior period).
"consolidation" means, with respect to the Issuer, the consolidation of the
accounts of the Restricted Subsidiaries with those of the Issuer, all in
accordance with GAAP; provided that "consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary with the accounts
of the Issuer or any Restricted Subsidiary. The term "consolidated" has a
correlative meaning to the foregoing.
"Currency Hedge Obligation" means the obligations of a person, incurred in
the ordinary course of business, pursuant to a foreign currency exchange
agreement, option or futures contract or other similar agreement or
arrangement designed to protect against or manage such person's or its
subsidiaries' exposure to fluctuations in foreign currency exchange rates.
"Debt Securities" means any debt securities issued by the Issuer in a public
offering or in a private placement to institutional "accredited investors" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act).
"Deeply Subordinated Indebtedness" means Indebtedness of the Issuer as to
which the payment of principal of (and premium, if any) and interest and other
payment obligations in respect of such Indebtedness shall be subordinate to
the prior payment in full of the Notes to at least the following extent: (i)
no payments of principal of (or premium on) or interest on or otherwise in
respect of such Indebtedness may be made prior to the date that is 180 days
following the Stated Maturity of the principal of the Notes; except that such
indebtedness may be redeemed or retired by the Issuer with, or converted at
the option of the holder into, Capital Stock (other than Disqualified Stock)
of the Issuer or options, warrants or other rights to purchase any such
Capital Stock (other than Disqualified Stock); and (ii) the payment of the
principal of and interest on such Indebtedness may be accelerated only in the
event of the acceleration of the payment of the principal amount of the Notes
following an Event of Default; provided, that any payment in respect of such
Indebtedness following the acceleration thereof shall be subordinated to the
prior payment in full of all amounts due in respect of the Notes and under the
Indenture; and provided, further, in the event of the recission of any such
acceleration of the Notes, the acceleration of such Indebtedness shall be
deemed rescinded upon notice to such effect to the holder(s) of such
Indebtedness from the Trustee.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Default Amount" means (i) as of any date prior to March 1, 2002, the
Accreted Value of the Notes (and any applicable premium thereon) as of such
date and (ii) as of any date on and after March 1, 2002, the principal amount
at maturity of the Notes (and any applicable premium thereon) and any accrued
and unpaid interest thereon.
"Designation" has the meaning set forth under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries."
"Digital Network Business" means the business of developing, implementing,
operating, managing or maintaining networks or systems for the transportation
or management of data and any related, ancillary or complementary business;
provided, that the determination of what constitutes a Digital Network
Business shall be made in good faith by the Board, which determination shall
be conclusive.
"Disinterested Director" means, with respect to any transaction or series of
related transactions, a member of the Board of Directors of the Issuer other
than a director who (i) has any material direct or indirect financial interest
in or with respect to such transaction or series of related transactions or
(ii) is an employee or officer of the Issuer or an Affiliate that is itself a
party to such transaction or series of transactions or an Affiliate of a party
to such transaction or series of related transactions.
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"Disqualified Stock" means, with respect to any person, any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for Indebtedness at the
option of the holder thereof, or becomes redeemable at the option of the
holder thereof, in whole or in part, on or prior to the final maturity date of
the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"Fair Market Value" means, with respect to any asset or property, the price
(after taking into account any liabilities relating to such asset or property)
that could be negotiated in an arms-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under
pressure or compulsion to complete the transaction. Unless otherwise specified
in the Indenture, Fair Market Value shall be determined by the Board acting in
good faith and shall be evidenced by a Board Resolution.
"Foreign Subsidiary" means any Subsidiary of the Issuer that is organized or
incorporated under the laws of any jurisdiction other than the laws of the
United States or any State or territory thereof.
"4-Sight" means 4-Sight Limited, a private limited company incorporated
under the laws of England and Wales.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States and which are applicable as of the
date of determination and which are consistently applied for all applicable
periods.
"Guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, any
obligation (A) to pay amounts drawn down by letters of credit, (B) to purchase
or pay (or advance or supply funds for the purchase or payment of) such
obligation (whether arising by virtue of partnership arrangement, agreements
to keep-well, to purchase assets, goods, securities or services, to take-or-
pay, or to maintain financial statement conditions or otherwise) or (C)
entered into for purposes of assuring in any other manner the obligee of such
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided that the term "Guarantee"
shall not include endorsements for collection or deposit in the ordinary
course of business. The term "Guarantee" used as a verb has a corresponding
meaning.
"Indebtedness" means, with respect to any person, without duplication
(whether or not the recourse of the lender is to the whole of the assets of
such person or only to a portion thereof), and whether or not contingent, (i)
every liability of such person (A) for borrowed money, (B) evidenced by notes,
bonds, debenture or other similar instruments (whether or not negotiable), (c)
for reimbursement of amounts expended under letters of credit, bankers'
acceptances or similar facilities issued for the account of such person, (D)
issued or assumed as the deferred purchase price of property or services, (E)
relating to a Capitalized Lease Obligation and all Attributable Debt in
respect of Sale/Leaseback Transactions of such person and (F) in respect of an
Interest Rate Obligation or Currency Hedge Obligation of such person; (ii)
every liability of others of the kind described in the preceding clause (i)
which such person has guaranteed or which is otherwise its legal liability; or
(iii) every obligation secured by a Lien (other than (x) Permitted Liens of
the types described in clauses (b), (d) or (e) of the definition of Permitted
Liens; provided that the obligations secured would not constitute Indebtedness
under clauses (i) or (ii) or (iii) of this definition, and (y) Liens on
Capital Stock or Indebtedness of any Unrestricted Subsidiary) to which the
property or assets of such person are subject, whether or not the obligations
secured thereby shall have been assumed by or shall otherwise be such person's
legal liability (the amount of such obligation being deemed to be the lesser
of the Fair Market Value of such property or asset or the amount of the
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obligation so secured); (iv) all Disqualified Stock of such person, valued at
the greater of its voluntary or involuntary maximum fixed repurchase or
redemption price (plus accrued and unpaid dividends to the date of
determination); and (v) any and all deferrals, renewals, extensions and
refundings of, or amendments, modifications or supplements to, any liability
of the kind described in any of the preceding clauses (i), (ii), (iii) or
(iv). In no event shall "Indebtedness" include trade payables and accrued
liabilities that are current liabilities incurred in the ordinary course of
business, excluding the current maturity of any obligation which would
otherwise constitute Indebtedness. For purposes of the covenants described
under "--Certain Covenants-- Limitation on Additional Indebtedness" and "--
Limitation on Restricted Payments" and the definition of "Events of Default,"
in determining the principal amount of any Indebtedness to be incurred by the
Issuer or a Restricted Subsidiary or which is outstanding at any date, (i) the
principal amount of any Indebtedness which provides that an amount less than
the principal amount at maturity thereof shall be due upon any declaration of
acceleration thereof shall be the accreted value thereof at the date of
determination; (ii) the principal amount of any Indebtedness shall be reduced
by any amount of cash or Cash Equivalent collateral securing on a perfected
basis, and dedicated for disbursement exclusively to the payment of principal
of and interest on, such Indebtedness and (iii) the amount of Indebtedness of
any person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and, with respect to contingent
obligations that are included in any clause above, the maximum liability upon
the occurrence of the contingency giving rise to the obligation.
"Indebtedness to EBITDA Ratio" means, as at any date of determination (the
"Transaction Date"), the ratio of (i) Total Consolidated Indebtedness
(including all Permitted Indebtedness) as at the Transaction Date to (ii)
Consolidated Operating Cash Flow for the four full fiscal quarters immediately
preceding the Transaction Date for which financial information has been
distributed to the holders of the Notes in accordance with "Certain
Covenants--Reports" above (such four full fiscal quarter period being referred
to herein as the "Measurement Period"). For purposes of calculating
Consolidated Operating Cash Flow for the relevant Measurement Period prior to
a Transaction Date, (A) any person that is a Restricted Subsidiary on the
Transaction Date (or would become a Restricted Subsidiary on such Transaction
Date in connection with the transaction that requires the calculation of such
Consolidated Operating Cash Flow) shall be deemed to have been a Restricted
Subsidiary at all times during the Measurement Period, (B) any person that is
not a Restricted Subsidiary on such Transaction Date (or would cease to be a
Restricted Subsidiary on such Transaction Date in connection with the
transaction that requires the calculation of Consolidated Operating Cash Flow)
will be deemed not to have been a Restricted Subsidiary at any time during the
Measurement Period, (c) if the Issuer or any Restricted Subsidiary shall have
in any manner (x) acquired through an Asset Acquisition or (y) disposed of
(including by way of an Asset Sale or the termination or discontinuance of
activities constituting such operating business) any operating business during
such Measurement Period or after the end of such period and on or prior to the
Transaction Date, such calculation will be made on a pro forma basis in
accordance with GAAP as if, in the case of an Asset Acquisition, such
transaction had been consummated on the first day of the Measurement Period
and, in the case of a Asset Sale or other disposition, termination or
discontinuance of activities constituting such an operating business, such
transaction had been consummated prior to the first day of the Measurement
Period; provided, however that such pro forma adjustment shall not give effect
to the operating cash flow of any person that would become a Restricted
Subsidiary on the Transaction Date in connection with the transaction that
requires the calculation of Consolidated Operating Cash Flow to the extent
that such person's net income would be excluded from the calculation of
Consolidated Net Income pursuant to clause (vi) of the definition of
Consolidated Net Income.
"Independent Financial Advisor" means a United States investment banking
firm of national or regional standing in the United States (i) which does not,
and whose directors, officers and employees or Affiliates do not have, a
direct or indirect financial interest in the Issuer and (ii) which, in the
judgment of the Board, is otherwise independent and qualified to perform the
task for which it is to be engaged.
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"Initial Public Equity Offering" means an underwritten primary public
offering of Capital Stock (other than Disqualified Stock) of the Issuer for
cash pursuant to an effective registration statement filed under the
Securities Act.
"Interest Rate Obligations" means the obligations of any person pursuant to
any arrangement with any other person whereby, directly or indirectly, such
person is entitled to receive from time to time periodic payments calculated
by applying either a floating or a fixed rate of interest on a stated notional
amount and shall include, without limitation, interest rate swaps, caps,
floors, collars, forward interest rate agreements and similar agreements.
"Investment" means, with respect to any person, any direct or indirect
advance, loan, account receivable (other than an account receivable arising in
the ordinary course of business), or other extension of credit (including,
without limitation, by means of any guarantee) or any capital contribution to
(by means of transfers of cash or other property or assets to others, payments
for property or services for the account or use of others, or otherwise), or
any purchase or acquisition of capital stock, bonds, notes, debentures or
other securities or evidences of Indebtedness of any other person. The amount
of any Investment shall be the original cost of such Investment, plus the cost
of all additions thereto, and minus the amount of any portion of such
Investment repaid to such person in cash as a repayment of principal or a
return of capital, as the case may be, but without any other adjustments for
increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment. In determining the amount of any Investment
involving a transfer of any property or assets other than cash, such property
shall be valued at its Fair Market Value at the time of transfer.
"Issue Date" means the original date of issuance of the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any
property of any kind whether or not filed, recorded or otherwise perfected
under applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give a security interest and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction). A person shall be deemed to own subject to a Lien any
property which such person has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
"Market Capitalization" of any person means, as of any day of determination,
the product of (i) the average Closing Price of a share of such person's
Common Stock over the 20 consecutive trading days immediately preceding such
date and (ii) the number of shares of such Common Stock issued and outstanding
on such date. "Closing Price" on any trading day with respect to the per share
price of any shares of Common Stock means the last reported sale price regular
way or, in case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices regular way, in either case on the
New York Stock Exchange or, if such shares of Common Stock are not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the
Nasdaq National Market or, if such shares are not listed or admitted to
trading on any national securities exchange or quoted on the Nasdaq National
Market but such person is a "foreign issuer" (as defined Rule 3b-4(b) under
the Exchange Act) and the principal securities exchange on which such shares
are listed or admitted to trading is a "designated offshore securities market"
(as defined in Rule 902(a) under the Securities Act), the average of the
reported closing bid and asked prices regular way on such principal exchange
or, if such shares are not listed or admitted to trading on any national
securities exchange or quoted on the Nasdaq National Market and such person
and any securities markets in which such person's Common Stock trades does not
meet any of the foregoing such requirements, the average of the closing bid
and asked prices in the over-the-counter marked as furnished by any New York
Stock Exchange member firm that is selected from time to time by the Issuer
for the purpose and is reasonably acceptable to the Trustee.
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"Material Restricted Subsidiary" means any Restricted Subsidiary, together
with its Subsidiaries that are themselves Restricted Subsidiaries, of the
Issuer which, at any date of determination, (i) is a "Significant Subsidiary"
under the definition of that term set forth in Regulation S-X promulgated
under the Securities Act, as in effect on the Issue Date (but substituting "5
percent" for each occurrence of "10 percent" in such definition), (ii)
contributed 5% or more of the Consolidated Operating Cash Flow of the Issuer
on a pro forma basis in the immediately preceding fiscal quarter for which
financial information is available, (iii) when aggregated with all other
Restricted Subsidiaries that are not otherwise Material Restricted
Subsidiaries and as to which any event described in clauses (vi), (vii) or
(viii) of the definition of "Events of Default" above has occurred, would
constitute a Material Restricted Subsidiary under clause (i) or (ii) of this
definition.
"Maturity Date" means, with respect to any Note, the date specified in such
Note as the fixed date on which the principal of such Note is due and payable.
"Moody's" means Moody's Investors Service, Inc. (and any successor).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof received by the Issuer or any Restricted Subsidiary in the form of
cash (including assumed Indebtedness (other than Subordinated Indebtedness)
and other items deemed to be cash under the proviso to the first sentence of
the covenant described under "--Certain Covenants--Disposition of Proceeds of
Asset Sales") or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents
(except to the extent that such obligations are financed or sold with recourse
to the Issuer or any Restricted Subsidiary) net of (i) brokerage commissions
and other fees, costs and expenses (including fees and expenses of legal
counsel and investment bankers) related to such Asset Sale, (ii) provisions
for all taxes paid or payable as a result of such Asset Sale, (iii) amounts
required to be paid to any person (other than the Issuer or any Restricted
Subsidiary) owning a beneficial interest in or having a Lien on the assets
subject to the Asset Sale, (iv) with respect to Asset Sales by Restricted
Subsidiaries, the portion of such cash and Cash Equivalents attributable to
any persons holding a minority interest in such Restricted Subsidiary and (v)
appropriate amounts to be provided by the Issuer or any Restricted Subsidiary,
as the case may be, as a reserve required in accordance with GAAP against any
liabilities associated with such Asset Sale and retained by the Issuer or any
Restricted Subsidiary, as the case may be, after such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as reflected
in an Officers' Certificate delivered to the Trustee.
"Permitted Credit Facility" means any senior secured or unsecured commercial
term loan and/or revolving credit facility (including any letter of credit
subfacility) entered into principally with commercial banks and/or other
financial institutions.
"Permitted Equipment Financing" means any credit facility (including a
Permitted Credit Facility) or other financing arrangement entered into with
any vendor, supplier or other third party (or any financial institution for
the purpose of financing purchases from any vendor, supplier or third party)
to the extent the Indebtedness thereunder is incurred for the purpose of
financing the cost (including the cost of design, development, construction,
improvement, enhancement, upgrade, replacement, integration, manufacture or
acquisition) of real or personal property (tangible or intangible) used, or to
be used, in the Digital Network Business of the Issuer or any of its
Restricted Subsidiaries.
"Permitted Holders" means (i) WorldCom and each of its Affiliates and (ii)
Edward J. Driscoll III (the Chairman of the Board and Chief Executive Officer
of the Issuer as of the date of the Indenture) and his family members, any
trust for the benefit of any of the foregoing persons and their respective
estates and heirs. As used herein, "family member" means the spouse, siblings
and lineal descendants of Mr. Driscoll.
"Permitted Indebtedness" means the following Indebtedness (each of which
shall be given independent effect):
(a) Indebtedness under the Notes, the Subsidiary Guarantees and the
Indenture;
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(b) Indebtedness (including Disqualified Stock) of the Issuer and/or any
Restricted Subsidiary outstanding on the Issue Date and identified on a
schedule to the Indenture; provided, that Indebtedness that may be borrowed
under credit facilities in place on the Issue Date shall be deemed
outstanding for purposes of this clause (b);
(c)(i) Indebtedness of any Restricted Subsidiary owed to and held by the
Issuer or a Restricted Subsidiary and (ii) Indebtedness of the Issuer,
which is not secured by any Lien and is subordinated to the Issuer's
obligations with respect to the Notes, owed to and held by any Restricted
Subsidiary; provided that an incurrence of Indebtedness shall be deemed to
have occurred upon (x) any sale or other disposition of any Indebtedness of
the Issuer or a Restricted Subsidiary referred to in this clause (c) to a
person other than the Issuer or a Restricted Subsidiary, (y) any sale or
other disposition of Capital Stock of a Restricted Subsidiary which holds
Indebtedness of the Issuer or another Restricted Subsidiary such that such
Restricted Subsidiary ceases to be a Restricted Subsidiary or (z) the
Designation of a Restricted Subsidiary which holds Indebtedness of the
Issuer or another Restricted Subsidiary as an Unrestricted Subsidiary;
(d) Interest Rate Obligations of the Issuer and/or any Restricted
Subsidiary relating to Indebtedness of the Issuer and/or such Restricted
Subsidiary, as the case may be (which Indebtedness (x) bears interest at
fluctuating interest rates and (y) is otherwise permitted to be incurred
under the "Limitation on Additional Indebtedness" covenant), but only to
the extent that the notional amount of such Interest Rate Obligations does
not exceed the principal amount of the Indebtedness (and/or Indebtedness
subject to commitments) to which such Interest Rate Obligations relate;
(e) Indebtedness of the Issuer and/or any Restricted Subsidiary in
respect of performance bonds of the Issuer or any Restricted Subsidiary or
surety bonds provided by the Issuer or any Restricted Subsidiary, in each
case incurred in the ordinary course of business;
(f) Indebtedness of the Issuer and/or any Restricted Subsidiary to the
extent it represents a replacement, renewal, refinancing or extension (a
"refinancing") of outstanding Indebtedness of the Issuer and/or of any
Restricted Subsidiary incurred or outstanding pursuant to clause (a), (b),
(g), (h) or (i) of this definition or the proviso of the covenant described
under "--Certain Covenants--Limitation on Additional Indebtedness";
provided that (1) no Restricted Subsidiary may incur Indebtedness to
refinance Indebtedness of the Issuer, (2) any such refinancing shall not
(x) result in a lower Average Life to Stated Maturity of such Indebtedness
as compared with the Indebtedness being refinanced or (y) exceed the sum of
the principal amount (or, if such Indebtedness provides for a lesser amount
to be due and payable upon a declaration of acceleration thereof, an amount
no greater than such lesser amount) of the Indebtedness being refinanced,
plus the amount of accrued and unpaid interest thereon, plus the amount of
any reasonably determined prepayment premium necessary to accomplish such
refinancing and such reasonable fees and expenses incurred in connection
therewith; (3) Indebtedness that ranks pari passu with the Notes may be
refinanced only with Indebtedness that is made pari passu with or
subordinate in right of payment to the Notes, and Subordinated Indebtedness
may only be refinanced with Subordinated Indebtedness; and (5) the
refinancing Indebtedness shall be incurred by the obligor on the
Indebtedness being refinanced or by the Issuer;
(g) Indebtedness of the Issuer such that, after giving effect to the
incurrence thereof, the total aggregate principal amount of Indebtedness
incurred under this clause (g) and any refinancings thereof otherwise
incurred in compliance with the Indenture would not exceed 175% of Total
Incremental Equity;
(h) Indebtedness of the Issuer incurred under one or more Permitted
Credit Facilities and/or Indebtedness of the Issuer represented by Debt
Securities of the Issuer, and any refinancings of the foregoing otherwise
incurred in compliance with the Indenture, in an aggregate principal amount
not to exceed $50 million at any time outstanding; and Guarantees by any
Restricted Subsidiary that is a Subsidiary Guarantor of Indebtedness of the
Issuer incurred under any Permitted Credit Facility; provided, however, the
incurrence of such Indebtedness by the Issuer under such Permitted Credit
Facility is permitted by the covenant described under "--Certain
Covenants--Limitation on Additional Indebtedness";
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(i) Indebtedness of the Issuer incurred under any Permitted Equipment
Financing and Guarantees of any Restricted Subsidiary that is a Foreign
Subsidiary of Indebtedness incurred under any Permitted Equipment Financing
in an amount not in excess of the amount of Indebtedness incurred in
respect of the property acquired by such Restricted Subsidiary under such
Permitted Equipment Financing; provided, such Restricted Subsidiary is a
Subsidiary Guarantor or complies with the covenant "--Certain Covenants--
Issuance of Guarantees by Certain Restricted Subsidiaries; Release of
Guarantees"; and provided, further that the issuance of any Guarantees
pursuant to this clause (i) shall be in addition to any Guarantees issued
pursuant to clause (h) above;
(j) Indebtedness in respect of any Currency Hedge Obligations of the
Issuer and/or any Restricted Subsidiary (which Indebtedness is otherwise
permitted to be incurred under the covenant described under "--Certain
Covenants--Limitation on Additional Indebtedness"), but only to the extent
that the notional amount of such Currency Hedge Obligations do not exceed
the principal amount of the Indebtedness (and/or Indebtedness subject to
commitments) to which such Currency Hedge Obligations relate;
(k) in addition to any Indebtedness of the Issuer referred to in clause
(b) above, Deeply Subordinated Indebtedness of the Issuer owed to and held
by WorldCom or any other Strategic Equity Investor in an aggregate
principal amount not to exceed $50.0 million at any time outstanding;
provided, at the time of incurrence of such Indebtedness by the Issuer, the
payee is the "beneficial owner" (as defined in Rules 13d-3 or 13d-5 under
the Exchange Act, (except that WorldCom shall be deemed to have "beneficial
ownership" of all Voting Stock of the Issuer that it, directly or
indirectly, has or acquires the right to acquire, whether such right is
exercisable immediately or only after the passage of time) of at least 10%
of the total voting power of all Voting Stock of the Issuer;
(l) Indebtedness of 4-Sight and each of its Subsidiaries existing at the
time 4-Sight and such Subsidiaries become Restricted Subsidiaries; and
(m) in addition to the items referred to in clauses (a) through (k)
above, Indebtedness of the Issuer having an aggregate principal amount not
to exceed $15.0 million at any time outstanding.
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease,
utility and workers' compensation, performance and other similar deposits; (c)
Interest Rate Obligations and Currency Hedge Obligations incurred in
compliance with the covenant described under "--Certain Covenants--Limitation
on Additional Indebtedness"; (d) loans and advances to employees made in the
ordinary course of business not to exceed $750,000 in the aggregate at any one
time outstanding; (e) bonds, notes, debentures or other securities received as
a result of Asset Sales permitted under "--Certain Covenants--Disposition of
Proceeds of Asset Sales" above not to exceed 15% of the total consideration
for such Asset Sales; (f) any Investment to the extent that the consideration
therefor consists of Capital Stock (other than Disqualified Stock) of the
Issuer; and (d) the extension by the Issuer of (i) trade credit to
Subsidiaries of the Issuer represented by accounts receivable, extended on
usual and customary terms in the ordinary course of business or (ii)
guarantees of commitments for the purchase of goods or services incurred in
the ordinary course of business so long as such guarantees, to the extent
constituting Indebtedness, are permitted to be incurred under the covenant
described under "--Certain Covenants--Limitation on Additional Indebtedness."
"Permitted Liens" means (a) Liens on property of a person existing at the
time such person is merged into or consolidated with the Issuer or any
Restricted Subsidiary or becomes a Restricted Subsidiary; provided that such
Liens were in existence prior to the contemplation of such merger,
consolidation or acquisition and do not secure any property or assets of the
Issuer or any Restricted Subsidiary other than the property or assets subject
to the Liens prior to such merger or consolidation or acquisition; (b) Liens
imposed by law, such as carriers', warehousemen's and mechanics' Liens and
other similar Liens arising in the ordinary course of business that secure
payment of obligations not more than 60 days past due or that are being
contested in good faith and by appropriate proceedings; (c) Liens existing on
the Issue Date; (d) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith
by appropriate proceedings promptly instituted and diligently conducted;
provided that any reserve or other appropriate provision as shall be
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required in conformity with GAAP shall have been made therefor; (e) easements,
rights of way, restrictions and other similar easements, licenses,
restrictions on the use of properties, or minor imperfections of title that,
in the aggregate, are not material in amount and do not in any case materially
detract from the properties subject thereto or interfere with the ordinary
conduct of the business of the Issuer or the Restricted Subsidiaries; (f)
Liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in the
ordinary course of business (exclusive of obligations for the payment of
borrowed money); (g) Liens securing Indebtedness consisting of Permitted
Equipment Financing, provided, however, that (I) such Liens attach within 180
days of the incurrence of such Indebtedness and (II) if such Liens include a
pledge of Capital Stock of any Restricted Subsidiary that is a Foreign
Subsidiary, (x) such Liens were created in connection with financing the cost
of property acquired or used by such Restricted Subsidiary, directly or
indirectly, with Indebtedness incurred pursuant to a Permitted Equipment
Financing and (y) such Liens do not secure Indebtedness in excess of the
amount of Indebtedness incurred with respect to the purchase of such property
by such Restricted Subsidiary; (h) Liens securing Indebtedness incurred under
a Permitted Credit Facility; provided, however, that (I) the incurrence of
such Indebtedness is permitted by the covenant described under "--Certain
Covenants--Limitation on Additional Indebtedness" above and (II) such Liens
attach within 180 days of the incurrence of such Indebtedness; (i) Liens to
secure any refinancing of any Indebtedness secured by Liens referred to in the
clauses above, but only to the extent that such Liens do not extend to any
other property or assets (other than improvements thereto); (j) Liens to
secure the Notes; (k) Liens on real property incurred in connection with the
financing of the purchase of such real property (or incurred within 60 days of
purchase) by the Issuer or any Restricted Subsidiary; and (l) Liens on and
pledges of Capital Stock of any Unrestricted Subsidiary securing any
Indebtedness of such Unrestricted Subsidiary.
"Preferred Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
person's preferred or preference stock whether now outstanding, or issued
after the Issue Date, and including, without limitation, all classes and
series of preferred or preference stock of such person.
"refinancing" has the meaning set forth in clause (f) of the definition of
"Permitted Indebtedness."
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on any Capital Stock of the
Issuer or any Restricted Subsidiary or any other payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Issuer
or any Restricted Subsidiary (other than any dividends, distributions or
payments made to the Issuer or any Restricted Subsidiary and dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock)
of the Issuer or in options, warrants or other rights to purchase Capital
Stock (other than Disqualified Stock) of the Issuer); (ii) the purchase,
redemption or other acquisition or retirement for value of any Capital Stock
of the Issuer or any Restricted Subsidiary (other than any such Capital Stock
owned by the Issuer or a Restricted Subsidiary); (iii) the purchase,
redemption, defeasance or other acquisition or retirement for value, or the
making of any principal payment on, prior to any scheduled repayment,
scheduled sinking fund payment or scheduled maturity, of any Subordinated
Indebtedness (other than any Subordinated Indebtedness held by a Wholly Owned
Restricted Subsidiary); or (iv) the making by the Issuer or any Restricted
Subsidiary of any Investment (other than a Permitted Investment) in any person
(other than in the Issuer, any Restricted Subsidiary or a person that becomes
a Restricted Subsidiary, or is merged with or into or consolidated with the
Issuer or a Restricted Subsidiary (provided the issuer or a Restricted
Subsidiary is the survivor)) as a result of or in connection with such
Investment.
"Restricted Subsidiary" means any Subsidiary of the Issuer that has not been
designated by the Board, by a Board Resolution delivered to the Trustee, as an
Unrestricted Subsidiary pursuant to and in compliance with the covenant
described under "--Certain Covenants--Limitation on Designations of
Unrestricted Subsidiaries." Any such designation may be revoked by a Board
Resolution delivered to the Trustee, subject to the provisions of such
covenant.
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"Revocation" has the meaning set forth under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries."
"S&P" means Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies (and any successor).
"Sale/Leaseback Transaction" of any person means an arrangement with any
lender or investor or to which such lender or investor is a party providing
for the leasing by such person of any property or assets of such person which
has been or is being sold or transferred by such person after its acquisition
thereof or the completion of construction or commencement of operations
thereof to such lender or investor or to any other person to whom funds have
been or are to be advanced by such lender or investor on the security of such
property or asset.
"Strategic Equity Investor" means any person that, as of the date of
determination, has a Market Capitalization or Consolidated Net Worth of at
least $2.0 billion and that is principally engaged in the communications,
entertainment or electronics business or any other business related to the
Digital Network Business.
"Subordinated Indebtedness" means any Indebtedness of the Issuer or any
Guarantor which is expressly subordinated in right of payment to any other
Indebtedness of the Issuer or such Guarantor.
"Subsidiary" means, with respect to any person, (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors shall at the time be owned, directly
or indirectly, by such person, or (ii) any other person of which at least a
majority of voting interest is at the time, directly or indirectly, owned by
such person.
"Total Consolidated Indebtedness" means, at any date of determination, an
amount equal to the aggregate amount of all Indebtedness of the Issuer and the
Restricted Subsidiaries outstanding as of the date of determination.
"Total Incremental Equity" means, at any time of determination, the sum of,
without duplication, (i) the aggregate cash proceeds received by the Issuer
from capital contributions in respect of existing Capital Stock (other than
Disqualified Stock) or the issuance and sale of Capital Stock (other than
Disqualified Stock but including Capital Stock issued upon the conversion of
convertible Indebtedness or from the exercise of options, warrants or rights
to purchase Capital Stock (other than Disqualified Stock)) subsequent to the
Issue Date, other than to a Subsidiary of the Issuer, plus (ii) the aggregate
cash proceeds received by the Issuer or any Restricted Subsidiary from the
sale, disposition or repayment (in whole or in part) of any Investment that is
made after the Issue Date and that constitutes a Restricted Payment that has
been deducted from Total Incremental Equity pursuant to clause (iv) below in
an amount equal to the lesser of (a) the return of capital with respect to the
applicable portion of such Investment and (b) the cost of the applicable
portion of such Investment, in either case, less the cost of the disposition
of such Investment, plus (iii) the value (determined at the time of issuance)
of any Capital Stock (other than Disqualifed Stock) of the Issuer issued as
consideration for the acquisition of Capital Stock or assets of any other
person (other than a Subsidiary or any Affiliate of the Issuer or any
Subsidiary) engaged in the Digital Network Business; provided, the issuance of
the first 2,500,000 shares of Common Stock (as adjusted for subdivisions,
combinations or reclassifications subsequent to the Issue Date) by the Issuer
to the stockholders of 4-Sight in connection with the Issuer's acquisition of
4-Sight shall be excluded from this clause (iii), minus (iv) the aggregate
amount of all Restricted Payments declared or made (including by way of a
Designation) on and after the Issue Date.
"Unrestricted Subsidiary" means any Subsidiary of the Issuer designated as
such pursuant to and in compliance with the covenant described under "--
Certain Covenants--Limitation on Designations of Unrestricted Subsidiaries."
Any such designation may be revoked by a Board Resolution delivered to the
Trustee, subject to the provisions of such covenant.
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"U.S. Government Securities" means securities that are direct obligations of
the United States of America for the payment of which its full faith and
credit is pledged.
"Voting Stock" means, with respect to any person, the Capital Stock of any
class or kind ordinarily having the power to vote for the election of
directors or other members of the governing body of such person.
"voting power" means with respect to the Capital Stock of any person, the
relative voting power in any general election of directors or other members of
the governing body of such person.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which 100% of the outstanding Capital Stock is owned by the Issuer or another
Wholly Owned Restricted Subsidiary. For the purposes of this definition, any
directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a
Restricted Subsidiary.
"WorldCom" means WorldCom Inc., a Georgia corporation.
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NOTE REGISTRATION RIGHTS
The Company entered into the Registration Rights Agreement with the Initial
Purchasers pursuant to which the Company agreed to file with the Commission
the Exchange Offer Registration Statement on an appropriate form under the
Securities Act with respect to an offer to exchange the Original Notes for the
Exchange Notes. Upon the effectiveness of the Exchange Offer Registration
Statement, the Company will offer to the holders of Original Notes who are
able to make certain representations the opportunity to exchange their
Original Notes for Exchange Notes. If (i) the Company is not permitted to file
the Exchange Offer Registration Statement or to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy, (ii) the Exchange Offer is not for any other reason consummated within
180 days after the Issue Date, (iii) any holder of Original Notes notifies the
Company within a specified time period that (a) due to a change in law or
policy it is not entitled to participate in the Exchange Offer, (b) due to a
change in law or policy it may not resell the Exchange Notes acquired by it in
the Exchange Offer to the public without delivering a prospectus and (x) the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales by such holder and (y) such
prospectus is not promptly amended or modified in order to be suitable for use
in connection with such resales for such holder and all similarly situated
holders or (c) it is a broker-dealer and owns Original Notes acquired directly
from the Company or an affiliate of the Company or (iv) the holders of a
majority of the Original Notes may not resell the Exchange Notes acquired by
them in the Exchange Offer to the public without restriction under the
Securities Act and without restriction under applicable blue sky or state
securities laws, the Company will file with the Commission the Shelf
Registration Statement to cover resales of the Transfer Restricted Notes (as
defined below) by the holders thereof. The Company agreed it will use its best
efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. For purposes of the
foregoing, "Transfer Restricted Notes" means each Original Note until (i) the
date on which such Original Note has been exchanged by a person other than a
broker-dealer for an Exchange Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of an Original Note for an
Exchange Note, the date on which such Exchange Note is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a copy
of the prospectus contained in the Exchange Offer Registration Statement,
(iii) the date on which such Original Note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement, (iv) the date on which such Original Note is
distributed to the public pursuant to Rule 144(k) under the Securities Act (or
any similar provision then in force, but not Rule 144A under the Securities
Act), (v) such Original Note shall have been otherwise transferred by the
holder thereof and a new Note not bearing a legend restricting further
transfer shall have been delivered by the Company and subsequent disposition
of such Note shall not require registration or qualification under the
Securities Act or any similar state law then in force or (vi) such Note ceases
to be outstanding.
Under existing Commission interpretations, the Exchange Notes would, in
general, be freely transferable after the Exchange Offer without further
registration under the Securities Act; provided that in the case of broker-
dealers participating in the Exchange Offer, a prospectus meeting the
requirements of the Securities Act must be delivered upon resale by such
broker-dealers in connection with resales of the Exchange Notes. The Company
has agreed, for period of 180 days after consummation of the Exchange Offer,
to make available a prospectus meeting the requirements of the Securities Act
to any such broker-dealer for use in connection with any resale of any
Exchange Notes acquired in the Exchange Offer. A broker-dealer which delivers
such a prospectus to purchasers in connection with such resales will be
subject to certain of the civil liability provisions under the Securities Act
and will be bound by the provisions of the Registration Rights Agreement
(including certain indemnification rights and obligations).
Each holder of Original Notes that wishes to exchange such Original Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations, including representations that (i) any Exchange Notes to be
received by it will be acquired in the ordinary course of its business, (ii)
it has no arrangement with any person to participate in the distribution of
the Exchange Notes and (iii) it is not an "affiliate," as defined in Rule 405
of the Securities Act, of the Company, or if it is an affiliate, it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
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The Registration Rights Agreement provides that: (i) unless the Exchange
Offer would not be permitted by applicable law or Commission policy, the
Company will file the Exchange Offer Registration Statement with the
Commission on or prior to the 90th day after the Issue Date, (ii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will use its best efforts to have the Exchange Offer Registration
Statement declared effective by the Commission on or prior to the 150th day
after the Issue Date (the "Target Effectiveness Date"), (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to
issue, on or prior to the date which is 30 days after the date on which the
Exchange Offer Registration Statement was declared effective by the
Commission, Exchange Notes in Exchange for all Original Notes tendered prior
thereto in the Exchange Offer and (iv) if obligated to file the Shelf
Registration Statement, the Issuer will use its best efforts to file prior to
the later of (a) the 90th day after the Issue Date or (b) the 30th day after
such filing obligation arises and will use its best efforts to cause the Shelf
Registration Statement to be declared effective by the Commission on or prior
to the 60th day after such obligation arises; provided that if the Issuer has
not consummated the Exchange Offer within the date which is 180 days after the
Issue Date, then the Company will file the Shelf Registration Statement with
the Commission on or prior to the 30th day after such date. The Company shall
use its best efforts to keep such Shelf Registration Statement continuously
effective, supplemented and amended until the earlier of (i) the second
anniversary of the effective date of the Shelf Registration Statement and (ii)
such time as all of the Transfer Restricted Notes covered by the Shelf
Registration Statement have been sold thereunder or otherwise cease to be
Transfer Restricted Notes.
If (i) the Company fails to file any of the registration statements required
by the Registration Rights Agreement on or before the date specified for such
filing, (ii) any of such registration statements is not declared effective by
the Commission on or prior to the Target Effectiveness Date (subject to
certain limited exceptions), (iii) the Company fails to consummate the
Exchange Offer within 30 days of the Target Effectiveness Date with respect to
the Exchange Offer Registration Statement, or (iv) the Shelf Registration
Statement or the Exchange Offer Registration Statement is declared effective
but thereafter, subject to certain limited exceptions, ceases to be effective
or usable in connection with the Exchange Offer or resales of Transfer
Restricted Notes, as the case may be, during the periods specified in the
Registration Rights Agreement (each such event referred to in clauses (i)
through (iv) above, a "Registration Default"), then the Company shall pay as
liquidated damages interest on the Transfer Restricted Notes as to which any
Registration Default exists. If a Registration Default exists with respect to
Transfer Restricted Notes, the Company will, with respect to the first 90-day
period (or portion thereof) while such Registration Default is continuing
immediately following the occurrence of such Registration Default, make cash
payments at a rate of .50% per annum multiplied by the Accreted Value of the
Transfer Restricted Notes as of the date such payment is required to be made.
The rate of such cash payment shall increase by an additional .50% per annum
at the beginning of each subsequent 90-day period (or portion thereof) while
such Registration Default is continuing until such Registration Default is
cured, up to a maximum rate of 1.5% per annum. Following the cure of all
Registration Defaults, the making of cash payments with respect to the Notes
will cease and the interest rate on the Notes will revert to zero.
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BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the Exchange Notes will be registered in book-
entry form and will be represented by a single Global Exchange Note in
definitive, fully registered form without interest coupons and will be
deposited with the Trustee as custodian for DTC and registered in the name of
Cede & Co. or such other nominee as DTC may designate. Beneficial interests in
the Global Exchange Security will be shown on, and transfers thereon will be
effected only through, records maintained by DTC and its direct and indirect
participants, and any such interest may not be exchanged for Notes in
certificated form except in the circumstances described below.
DTC has advised the Issuer as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a participant, either directly or indirectly
("indirect participants").
Upon the issuance of the Global Exchange Note, DTC or its custodian will
credit, on its internal system, the respective principal amount of the
applicable Exchange Note represented by such Global Exchange Note to the
accounts of persons who have accounts with DTC. Ownership of beneficial
interests in the Global Securities will be limited to persons who have
accounts with DTC ("participants") or persons who hold interests through
participants. Ownership of beneficial interests in the Global Exchange Note
will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests
of participants) and the records of participants (with respect to interests of
persons other than participants). The laws of some jurisdictions may require
that certain purchasers of securities take physical delivery of such
securities in definative form. Such limits and laws may impair the ability to
transfer or pledge beneficial interest in each such Global Exchange Note.
So long as DTC or its nominee is the registered owner or holder of a Global
Exchange Note, DTC or such nominee, as the case may be, will be considered the
sole record owner or holder of the Exchange Note represented by such Global
Exchange Note for all purposes under the Indenture and the Notes. No
beneficial owner of an interest in the Global Exchange Note will be able to
transfer that interest except in accordance with DTC's applicable procedures
in addition to those provided for under the Indenture.
Payments in respect of the Global Exchange Note will be made to DTC or its
nominee, as the case may be, as the registered owner thereof. None of the
Issuer, the Trustee or any paying agent will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the Global Exchange Note or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment in
respect of the Global Exchange Note, will credit participants' accounts with
payments in amounts proportionate to their respective beneficial ownership
interests in such Global Exchange Note, as shown on the records of DTC or its
nominee. The Company also expects that payments by participants to owners of
beneficial interests in such Global Exchange Note held through such
participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such
payments will be the responsibility of such participants.
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Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. If a holder requires physical delivery of
Certificated Notes for any reason, including selling Units, Notes or Warrants
to persons in states which require delivery of such Notes or pledging such
Notes, such holder must transfer its interest in the Global Exchange Note, in
accordance with the normal procedures of DTC and the procedures set forth in
the Indenture.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of Notes only at the direction of one or more participants
to whose account the DTC interests in the Global Exchange Notes are credited
and only in respect of such portion of the aggregate amount of Exchange Notes
as to which such participant or participants has or have given such direction.
However, if there is an Event of Default under the Indenture, DTC will
exchange the applicable Global Exchange Notes for Certificated Securities,
which it will distribute to its participants.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in Global Exchange Notes among participants of DTC, it
is under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither of the Issuer or the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Subject to certain conditions, any person having a beneficial interest in a
Global Exchange Note may, upon request to the Trustee, exchange such
beneficial interest for Notes in the form of Certificated Exchange Notes. Upon
any such issuance, the Trustee is required to register such Certificated
Exchange Notes in the name of, and cause the same to be delivered to, such
person or persons (or the nominee of any thereof). In addition, if DTC is at
any time unwilling or unable to continue as a depositary for the Global Notes
and a successor depositary is not appointed by the Issuer within 90 days, the
Issuer will issue Certificated Exchange Notes in exchange for the Global
Exchange Notes.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material United States federal
income tax considerations relevant to the exchange of Original Notes for
Exchange Notes pursuant to the Exchange Offer and the ownership and
disposition of Exchange Notes by holders who acquire the Exchange Notes
pursuant to the Exchange Offer, but does not purport to be a complete analysis
of all potential tax effects. This discussion was prepared by Willkie Farr &
Gallagher and, as herein limited, constitutes such counsel's opinion of the
expected material U.S. federal income tax consequences of the Exchange Offer.
The discussion is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), U.S. Treasury Regulations, Internal Revenue Service ("IRS")
rulings and pronouncements and judicial decisions all in effect as of the date
hereof, all of which are subject to change at any time, and any such change
may be applied retroactively in a manner that could adversely affect a holder
of the Notes. The discussion does not address all of the U.S. federal income
tax consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, such as
certain financial institutions, insurance companies, dealers in securities,
tax-exempt organizations and persons holding the Notes as part of a
"straddle," "hedge" or "conversion transaction." In addition, this discussion
is limited to persons purchasing the Original Notes at the issue price.
Moreover, the effect of any applicable state, local or foreign tax laws is not
discussed. The discussion deals only with Notes held as "capital assets"
within the meaning of Section 1221 of the Code.
As used herein, "U.S. holder" means a beneficial owner of the Exchange Notes
who or that (i) is a citizen or resident of the United States, (ii) is a
corporation, partnership or other entity created or organized in or under the
laws of the United States or political subdivision thereof, (iii) is an estate
the income of which is subject to U.S. federal income taxation regardless of
its source, (iv) is a trust if (A) a U.S. court is able to exercise primary
supervision over the administration of the trust and (B) one or more U.S.
persons have authority to control all substantial decisions of the trust, or
(v) is otherwise subject to U.S. federal income tax on a net income basis in
respect of the Notes. As used herein, a "non-U.S. holder" means a holder who
or that is not a U.S. holder.
The Company has not sought and will not seek any rulings from the IRS with
respect to the position of the Company discussed below. There can be no
assurance that the IRS will not take a different position concerning the tax
consequences of the exchange of Original Notes for Exchange Notes and the
ownership or disposition of the Exchange Notes by holders who acquire the
Exchange Notes pursuant to the Exchange Offer or that any such position would
not be sustained.
PROSPECTIVE HOLDERS OF EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS
WITH REGARD TO THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO
THEIR PARTICULAR SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL,
FOREIGN OR OTHER TAX LAWS, INCLUDING GIFT AND ESTATE TAX LAWS.
THE EXCHANGE OFFER
The Exchange of Original Notes for Exchange Notes pursuant to the Exchange
Offer will not be treated as an exchange or other taxable event for United
States federal income tax purposes because, under the Regulations, the
Exchange Notes do not differ materially in kind or extent from the Original
Notes. Rather, the Exchange Notes received by a holder will be treated as a
continuation of the Original Notes in the hands of such holder. As a result,
there will be no United States federal income tax consequences to holders who
exchange Original Notes for Exchange Notes pursuant to the Exchange Offer and
any such holder will have the same tax basis and holding period in the
Exchange Notes as it had in the Original Notes immediately before the
exchange.
U.S. HOLDERS
The Units
The purchase of a Unit consisting of a Note and Warrants will be treated as
the purchase of an "investment unit" for federal income tax purposes. The
"issue price" of the Units will be the first price at which a substantial
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<PAGE>
amount of the Units is sold to the public (excluding sales to bond houses,
brokers, or similar persons or organizations acting in the capacity of
underwriters or wholesalers). The aggregate issue price of the Unit must be
allocated among the Note and the Warrants based on their relative fair market
values on the date of issuance of the Unit to determine the issue price of
each of the securities. The Company believes that the aggregate issue price of
each Unit should be allocated $114,944,000 to the Notes and $10,057,000 to the
Warrants, which amounts are based on the instruments' anticipated relative
fair market value at the time of issuance. Although the Company's allocation
is not binding on the IRS, a U.S. holder of a Unit must use the Company's
allocation unless the U.S. holder discloses on its federal income tax return
for the year in which the Unit was acquired that it plans to use an allocation
that is inconsistent with the Company's allocation. A U.S. holder's initial
tax basis in each security will be the issue price allocated thereto.
The Notes
Original Issue Discount. Because the Notes were issued at a discount from
their "stated redemption price at maturity," the Notes have original issue
discount ("OID") for federal income tax purposes. A U.S. holder will be
required to include OID in income periodically over the term of a Note before
receipt of the cash or other payment attributable to such income, regardless
of the U.S. holder's method of tax accounting. For federal income tax
purposes, OID on a Note will be the excess of the "stated redemption price at
maturity" of the Note over its "issue price."
The "stated redemption price at maturity" of a Note is the sum of all
payments required to be made on such Note, whether denominated as principal or
interest, other than payments of "qualified stated interest." "Qualified
stated interest" is stated interest that is unconditionally payable at least
annually at a single fixed rate that appropriately takes into account the
length of the interval between payments. Prior to March 1, 2002 there will be
no payment of interest on the Notes. Therefore, none of the interest payments
on the Notes will constitute qualified stated interest and all such payments
will be included in the Notes, stated redemption price at maturity. Therefore,
each Note will bear OID in an amount equal to the excess of (i) the sum of its
principal amount and all stated interest payments over (ii) the issue price.
The amount of OID required to be included in a U.S. holder's gross income
for any taxable year is the sum of the "daily portions" of OID with respect to
the Note for each day during the taxable year or portion of a taxable year
during which such U.S. holder holds the Note. The daily portion is determined
by allocating to each day of any "accrual period" within a taxable year a pro
rata portion of an amount equal to the "adjusted issue price" of the Note at
the beginning of the accrual period multiplied by the "yield to maturity" of
the Note. Accrual periods with respect to a Note may be of any length selected
by the holder and may vary in length over the term of the Note as long as (i)
no accrual period is longer than one year and (ii) each scheduled payment of
interest or principal on the Note occurs on either the first or final day of
an accrual period. The "adjusted issue price" of a Note at the beginning of
any accrual period is the original issue price of the Note increased by the
amount of OID previously includible in the gross income of the U.S. holder,
and decreased by any payments (including interest that is not qualified stated
interest) previously made on the Note. The "yield to maturity" is the interest
rate, expressed as a constant annual interest rate, that when used in
computing the present value of all payments of principal and interest to be
paid in connection with a Note produces an amount equal to the issue price of
the Note.
Because the yield to maturity with respect to the Notes will exceed the sum
of the "applicable federal rate" plus five percentage points, the Notes will
be treated as applicable high yield discount obligations ("AHYDOs") under the
Code. Accordingly, no deduction will be allowed to the Company for the
"disqualified portion" of the OID, and the remainder of the OID will be
deductible only when paid. The "disqualified portion" of the OID will
generally be the OID relating to that portion of the Notes' yield to maturity
that exceeds the "applicable federal rate" plus six percentage points.
Additionally, the "disqualified portion" of the OID may be treated as a
dividend for purposes of the "dividend received deduction" to the extent that
the OID would have been a dividend if distributed with respect to the
Company's stock. Holders are advised to consult their tax advisors regarding
the applicability and operation of the AHYDO rules to their investment in the
Notes.
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Sale or Retirement of a Note. A U.S. holder of a Note will recognize gain or
loss upon the sale, retirement, redemption or other taxable disposition of
such Note in an amount equal to the difference between (a) the amount of cash
and the fair market value of other property received in exchange therefor
(other than amounts attributable to accrued but unpaid stated interest) and
(b) the U.S. holder's adjusted tax basis in such Note. Any gain or loss
recognized will generally be capital gain or loss. A non-corporate U.S. holder
is generally subject to a maximum capital gains rate of 28% for Notes held for
more than one year and a maximum capital gains rate of 20% for Notes held for
more than eighteen months.
A U.S. holder's tax basis in a Note will generally be equal to the issue
price of such Note, increased by the amount of OID, if any, included in gross
income prior to the date of disposition, and decreased by the amount of any
payment on such Note other than stated interest prior to disposition.
U.S. holders should be aware that the resale of the Notes may be affected by
the "market discount" rules of the Code, under which a purchaser of a Note
acquiring the Note at a market discount generally would be required to include
as ordinary income a portion of the gain realized upon the disposition or
retirement of such Note, to the extent of the market discount that has accrued
but has not been included in income while such Note was held by such
purchaser.
NON-U.S. HOLDERS
U.S. Withholding Tax
Interest or redemption proceeds paid to non-U.S. holders of the Notes will
not be subject to U.S. withholding tax, provided that (i) the non-U.S. Holder
does not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the Company, (ii) the non-U.S. Holder
is not (a) a controlled foreign corporation as to the United States that is
related to the Company through stock ownership or (b) a bank that received the
Note on an extension of credit made pursuant to a loan agreement entered into
in the ordinary course of its trade or business, and (iii) the beneficial
owner of the Note provides a statement signed under penalties of perjury that
includes its name and address and certifies that it is not a U.S. person in
compliance with applicable requirements or an exemption is otherwise
established. If these requirements cannot be met, a non-U.S. holder will be
subject to U.S. withholding tax at a rate of 30% (or lower treaty rate, if
applicable) on interest payments. Although U.S. tax will also be imposed
against OID on the Notes prior to payment, such tax will only be withheld from
stated interest payments on the Notes. However, such additional withholding
may result in U.S. withholding tax on stated interest payments exceeding 30%.
Recently promulgated Treasury Regulations (the "New Regulations") regarding
U.S. withholding tax and information reporting and backup withholding
(discussed below) will apply to payments made after December 31, 1999. The New
Regulations provide alternative methods for satisfying the certification
requirements discussed in clause (iii) above and clarify and modify reliance
standards. The New Regulations also address certain issues relating to
intermediary certification procedures designed to simplify compliance by
withholding agents. Non-U.S. holders should consult their own tax advisors
regarding the effect of the New Regulations.
In general, any gain realized by any non-U.S. Holder upon the sale, exchange
or redemption of a Note will not be subject to United States withholding tax.
However, such gain will be subject to U.S. withholding tax if (i) a non-U.S.
holder is an individual and is present in the United States for a total of 183
days or more during the taxable year in which the gain is realized, or (ii)
such gain is effectively connected with a U.S. trade or business.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Certain non-corporate U.S. persons may be subject to backup withholding at a
rate of 31% on payments of principal and interest (including payments of OID)
on the Notes and the proceeds from a disposition of the Notes. Backup
withholding will only be imposed where the holder (i) fails to furnish its
taxpayer identification number ("TIN"), which, for an individual, would
ordinarily be his or her social security number, (ii) furnishes an
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incorrect TIN, (iii) is notified by the IRS that it has failed to properly
report payments of interest or dividends, or (iv) under certain circumstances,
fails to certify, under penalties of perjury, that it has furnished a correct
TIN and has not been notified by the IRS that it is subject to backup
withholding. Holders of the Notes should consult their own tax advisors
regarding their qualification for exemption from backup withholding and the
procedure for obtaining such an exemption, if applicable. However, principal
and interest (including OID) paid with respect to a Note and received by a
non-U.S. holder will not be subject to information reporting or backup
withholding if the payor has received appropriate certification statements and
provided that the payor does not have actual knowledge that the holder is a
U.S. person.
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PLAN OF DISTRIBUTION
Based on interpretations by the Staff set forth in no-action letters issued
to third parties, the Company believes that Exchange Notes issued pursuant to
the Exchange Offer in exchange for the Original Notes may be offered for
resale, resold and otherwise transferred by Holders thereof (other than any
Holder which is (i) an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act, (ii) a broker-dealer who acquired Original Notes
directly from the Company or (iii) broker-dealers who acquired Original Notes
as a result of market-making or other trading activities) without compliance
with the registration and prospectus delivery provisions of the Securities Act
provided that such Exchange Notes are acquired in the ordinary course of such
Holders' business, and such Holders are not engaged in, and do not intend to
engage in, and have no arrangement or understanding with any person to
participate in, a distribution of such Exchange Notes; provided that broker-
dealers ("Participating Broker-Dealers") receiving Exchange Notes in the
Exchange Offer will be subject to a prospectus delivery requirement with
respect to resales of such Exchange Notes. To date, the Staff has taken the
position that Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to transactions involving an exchange of
securities such as the exchange pursuant to the Exchange Offer (other than a
resale of an unsold allotment from the sale of the Original Notes to an
Initial Purchaser) with a current Prospectus meeting the requirements of the
Securities Act. Pursuant to the Registration Rights Agreement, the Company has
agreed to permit Participating Broker-Dealers and other persons, if any,
subject to similar prospectus delivery requirements to use this Prospectus in
connection with the resale of such Exchange Notes. The Company has agreed that
they will make this Prospectus, and any amendment or supplement to this
Prospectus, available to any broker-dealer that reasonably requests such
documents in the Letter of Transmittal.
Each Holder of the Original Notes who wishes to exchange its Original Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company as set forth in "The Exchange Offer--Terms and
Conditions of the Letter of Transmittal." In addition, each Holder who is a
broker-dealer and who receives Exchange Notes for its own account in exchange
for Original Notes that were acquired by it as a result of market-making
activities or other trading activities, will be required to acknowledge that
it will deliver a prospectus in connection with any resale by it of such
Exchange Notes.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer and/or the purchasers of any such Exchange Notes.
Any broker-dealer that resells Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be a
statutory "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation
under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify Holders of the Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in
the Registration Rights Agreement.
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LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company by
Willkie Farr & Gallagher, New York, New York.
EXPERTS
The consolidated financial statements of WAM!NET Inc. as of December 31,
1996 and 1997 and for each of the three years in the period ended December 31,
1997, included in this Prospectus and Registration Statement of the Company,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of 4-Sight Limited as of August 31,
1996, September 30, 1996 and September 30, 1997 and for the year ended August
31, 1996, the month ended September 30, 1996 and the year ended September 30,
1997, included in the Prospectus and Registration Statement of WAM!NET Inc.,
have been audited by Ernst & Young, chartered accountants, independent
auditors, as set forth in their report appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WAM!NET INC.
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited).................................................... F-3
Consolidated Statements of Operations for the three years in the period
ended December 31, 1997 and for the three months in the periods ended
March 31, 1997 and 1998 (unaudited)..................................... F-5
Consolidated Statements of Shareholders' Deficit as of December 31, 1997
and as of March 31, 1998 (unaudited).................................... F-6
Consolidated Statements of Cash Flows for the three years in the period
ended December 31, 1997 and for the three months in the periods ended
March 31, 1997 and 1998 (unaudited)..................................... F-7
Notes to Consolidated Financial Statements............................... F-9
4-SIGHT LIMITED
Report of Independent Auditors........................................... F-23
Consolidated Balance Sheets as of August 31, 1996, September 30, 1996 and
September 30, 1997 and December 31, 1997 (unaudited).................... F-24
Consolidated Statements of Operations for the year ended August 31, 1996,
the month ended September 30, 1996 and the year ended September 30, 1997
and for the three months in the periods ended December 31, 1996 and 1997
(unaudited)............................................................. F-25
Consolidated Statement of Shareholders' Equity for the year ended August
31, 1996, the month ended September 30, 1996 and the year ended
September 30, 1997 and the three months ended December 31, 1997
(unaudited)............................................................. F-26
Consolidated Statements of Cash Flows for the year ended August 31, 1996,
the month ended September 30, 1996 and the year ended September 30, 1997
and for the three months in the periods ended December 31, 1996 and 1997
(unaudited)............................................................. F-27
Notes to Consolidated Financial Statements............................... F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
WAM!NET Inc.
We have audited the accompanying consolidated balance sheets of WAM!NET Inc.
(formerly known as NetCo Communications Corporation) as of December 31, 1996
and 1997, and the related consolidated statements of operations, shareholders'
deficit and cash flows for each of the years in the three year period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
Since the date of completion of our audits of the accompanying consolidated
financial statements and the initial issuance of our report thereon dated
February 9, 1998, which report contained an explanatory paragraph regarding
the Company's ability to continue as a going concern, the Company, as
discussed in Note 2, has completed an issuance of Senior Discount Notes
resulting in net proceeds of $120,622,093. Therefore, the conditions that
raised substantial doubt about whether the Company will continue as a going
concern no longer exist.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of WAM!NET Inc. at December 31, 1996 and 1997, and the consolidated results of
its operations and its cash flows for each of the years in the three year
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
February 9, 1998, except for Note 2,
as to which date is March 12, 1998
F-2
<PAGE>
WAM!NET INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $14,444 $ 274 $ 66,760
Investments...................................... 1,000 -- --
Accounts receivable, net of allowance of $0, $10,
and $10, respectively........................... 71 459 3,493
Inventory........................................ -- -- 940
Prepaid expenses and other current assets........ 139 554 765
------- ------- --------
Total current assets........................... 15,654 1,287 71,958
Property and equipment:
Network equipment................................ 3,072 15,618 22,296
Other support equipment.......................... 1,210 5,242 8,183
Furniture and fixtures........................... 384 1,078 3,052
Leasehold improvements........................... 228 259 266
------- ------- --------
4,894 22,197 33,797
Accumulated depreciation......................... 478 2,877 4,403
------- ------- --------
4,416 19,320 29,394
Goodwill, net of accumulated amortization of $0,
$6, and $762 respectively....................... -- 479 32,446
Deferred Charges................................. -- -- 3,972
------- ------- --------
Total assets................................... $20,070 $21,086 $137,770
======= ======= ========
</TABLE>
F-3
<PAGE>
WAM!NET INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1996 1997 1998
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................... $ 628 $ 2,460 $ 3,805
Accrued salaries and wages................ 100 360 369
Accrued expenses.......................... 552 2,159 3,287
Bridge financing.......................... 1,075 -- --
Current portion of equipment financing and
obligations under capitalized leases..... 179 3,129 3,541
Accrued taxes payable..................... -- -- 1,147
------- -------- --------
Total current liabilities............... 2,534 8,108 12,149
Long-term debt:
Subordinated notes payable................ 19,219 21,784 22,368
Line of credit............................ -- 14,431 --
Equipment financing....................... -- 6,434 6,883
13.25% Senior Discounted Notes............ -- -- 110,686
Redeemable Preferred Stock, Class A, $10.00
par value:
Authorized, issued and outstanding
shares--100,000.......................... 1,000 1,000 1,000
Shareholders' deficit:
Undesignated shares, $.01 par value--
9,900,000
Common Stock, $.01 par value:
Authorized shares--90,000,000
Issued and outstanding shares--
6,478,950, 6,699,740, and 9,265,530 at
December 31, 1996 and 1997 and March
31, 1998............................... 65 67 93
Additional paid-in capital.............. 6,125 11,771 53,712
Accumulated deficit..................... (8,873) (42,509) (69,192)
Cumulative foreign currency translation
adjustjment............................ -- -- 71
------- -------- --------
Total shareholders' deficit............. (2,683) (30,671) (15,316)
------- -------- --------
Total liabilities and shareholders'
deficit................................ $20,070 $ 21,086 $137,770
======= ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
WAM!NET INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
WAM!NET revenues...... $ 20 $ 110 $ 1,628 $ 117 $ 1,320
Less rebates.......... -- -- (150) -- (271)
--------- --------- --------- --------- ---------
Net WAM!NET user fees... 20 110 1,478 117 1,049
Software and hardware
sales.................. -- -- -- -- 822
Other service fees...... 160 169 77 5 9
--------- --------- --------- --------- ---------
Total revenues...... 180 279 1,555 122 1,880
Operating expenses:
Network communication
fees................. 46 816 7,364 863 3,152
Cost of software and
hardware............. -- -- -- -- 261
Network operations.... 539 1,109 7,478 849 3,259
Sales and marketing... 94 2,054 9,207 1,229 2,352
General and
administrative....... 727 2,610 4,320 977 14,467
Depreciation and
amortization......... 31 447 2,668 287 1,921
--------- --------- --------- --------- ---------
1,437 7,036 31,037 4,205 25,412
--------- --------- --------- --------- ---------
Loss from operations.... (1,257) (6,757) (29,482) (4,083) (23,532)
Other income (expense):
Interest income....... -- 64 202 150 293
Interest (expense).... (20) (903) (4,356) 778 3,444
--------- --------- --------- --------- ---------
Net loss................ $ (1,277) $ (7,596) $( 33,636) $ (4,711) $ (26,683)
Less preferred divi-
dends................ (-- ) (-- ) (70) (18) (18)
--------- --------- --------- --------- ---------
Net loss applicable to
common stock........... $ (1,277) $ (7,596) $ (33,706) $ (4,729) $ (26,701)
========= ========= ========= ========= =========
Net loss applicable per
common share........... $ (.24) $ (1.18) $ (5.19) $ (0.83) $ (3.65)
========= ========= ========= ========= =========
Weighted average number
of common shares
outstanding............ 5,263,535 6,445,785 6,496,345 5,700,005 7,305,734
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
WAM!NET INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL COMMON CURRENCY
------------- PAID-IN ACCUMULATED STOCK TRANSLATION
DESCRIPTION ISSUED AMOUNT CAPITAL DEFICIT SUBSCRIPTION ADJUSTMENT TOTAL
----------- ------ ------ ---------- ----------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 4,500 $ 44 $ (35) $ -- $ (9) $ --
Payments received on
stock subscriptions
in May 1995.......... -- -- -- -- 9 9
Issuance of Common
Stock upon debt
conversion in May,
conversion price of
$.38 per share....... 265 3 97 -- -- 100
Subscription for sale
of Common Stock in
June at $.45 per
share................ 1,650 17 726 -- (743) --
Payments received on
stock subscriptions.. -- -- -- -- 723 723
Value of warrants
issued in connection
with Notes Payable in
November............. -- -- 7 -- -- 7
Value of warrants
issued in connection
with Bridge Financing
in December.......... -- -- 45 -- -- 45
Value of warrants
issued to a
consultant for
services performed in
December............. -- -- 23 -- -- 23
Net loss.............. -- -- -- (1,277) -- (1,277)
------ ----- ------- -------- ----- --------
Balance at December 31,
1995................... 6,415 64 863 (1,277) (20) (370)
Payments received on
stock subscription... -- -- -- -- 20 20
Value of warrants
issued in connection
with Bridge Financing
in July.............. -- -- 121 -- -- 121
Value of warrants
issued in connection
with Subordinated
Notes in March, June
and December......... -- -- 5,040 -- -- 5,040
Value of warrants
issued for services
rendered............. -- -- 15 -- -- 15
Value of warrants
issued in connection
with Equipment
Lease................ -- -- 14 -- -- 14
Issuance of Common
Stock upon debt
conversion in July,
conversion price of
$1.90 per share...... 65 1 24 -- -- 25
Payments received on
sale of stock
warrants............. -- -- 48 -- -- 48
Net loss.............. -- -- -- (7,596) -- (7,596)
------ ----- ------- -------- ----- --------
Balance at December 31,
1996................... 6,480 65 6,125 (8,873) -- (2,683)
Accumulated and unpaid
dividends in
connection with
Preferred Stock...... -- -- (70) -- -- (70)
Amortization of stock
options.............. -- -- 426 -- -- 426
Value of warrants
issued in connection
with Line of Credit
in September......... -- -- 4,766 -- -- 4,766
Issuance of Common
Stock upon merger
with FreeMail........ 125 1 487 -- -- 488
Issuance of Common
Stock upon debt
conversion in
December, conversion
of $1.90 per share... 65 1 24 -- -- 25
Exercise of stock
options.............. 30 -- 13 -- -- 13
Net loss.............. -- -- -- (33,636) -- (33,636)
------ ----- ------- -------- ----- --------
Balance at December 31,
1997................... 6,700 67 11,771 (42,509) -- (30,671)
Accumulated and unpaid
dividends in
connection with
Preferred Stock...... -- -- (18) -- -- (18)
Amortization of stock
options.............. -- -- 11,913 -- -- 11,913
Value of warrants
issued in connection
with Senior
Discounted Notes..... -- -- 10,047 -- -- 10,047
Issuance of Common
Stock upon merger
with 4-Sight......... 2,500 25 19,975 -- -- 20,000
Issuance of Common
Stock upon debt
conversion .......... 65 1 24 -- -- 25
Net loss.............. -- -- -- (26,683) -- (26,683)
Foreign currency
translation
adjustment........... -- -- -- -- 71 71
------ ----- ------- -------- ----- --- --------
Balance at March 31,
1998 (unaudited)....... $9,265 $ 93 $53,712 $(69,192) $ -- $71 $(15,316)
====== ===== ======= ======== ===== === ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
WAM!NET INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- -------------------
1995 1996 1997 1997 1998
------- ------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss..................... $(1,277) $(7,596) $(33,636) $ (4,711) $ (26,683)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Noncash interest expense
related to warrants....... 7 306 1,624 307 2,274
Capitalized financing
costs..................... -- -- -- -- (1,824)
Value of stock options
issued to employees and
consultants............... 23 15 426 -- 11,914
Foreign currency
translation adjustment.... -- -- -- -- 33
Depreciation and
amortization.............. 31 447 2,668 287 2,024
Loss on disposal of
property and equipment.... -- -- 797 -- --
Changes in operating assets
and liabilities:
Accounts receivable...... (57) (14) (386) (32) 633
Inventory................ -- -- -- -- 399
Prepaid expenses and
other current assets.... (20) (111) (415) (17) (211)
Accounts payable......... 290 338 1,832 905 439
Income taxes............. -- -- -- -- 251
Accrued expenses......... 256 397 3,173 (84) 1,008
------- ------- -------- -------- ---------
Net cash used in operating
activities.................. (747) (6,218) (23,917) (3,345) (9,743)
INVESTING ACTIVITIES
Purchases of property and
equipment................... (657) (4,244) (16,599) (3,904) (10,143)
Purchase of investments...... -- (1,000) -- -- --
Purchase of 4-Sight.......... -- -- -- -- (20,253)
Proceeds from sale of
investments................. -- -- 1,000 1,000 --
------- ------- -------- -------- ---------
Net cash used in investing
activities.................. (657) (5,244) (15,599) (2,904) (30,396)
FINANCING ACTIVITIES
Proceeds from sale of common
stock....................... 732 20 -- -- --
Proceeds from sale of common
stock warrants.............. -- 48 -- -- --
Proceeds from sale of
preferred stock............. -- 1,000 -- -- --
Proceeds from subordinated
notes payable............... 500 24,000 -- -- --
Proceeds from 13.25% Senior
Discounted Notes............ -- -- -- -- 120,626
Proceeds from line of
credit...................... -- -- 18,800 -- 5,203
Payment of subordinated notes
payable..................... -- (250) -- -- --
Payments on line of credit... -- -- -- -- (24,003)
Proceeds from bridge
financing................... 1,500 4,100 10,000 -- --
Proceeds from equipment
financing................... -- 245 8,158 -- 1,809
Payments on bridge
financing................... -- (4,525) (11,075) (1,075) (948)
Payments on equipment
financing................... -- (60) (537) (21) --
------- ------- -------- -------- ---------
Net cash provided by (used
in) financing activities.... 2,732 24,578 25,346 (1,096) 102,687
------- ------- -------- -------- ---------
(Decrease) increase in cash
and cash equivalents........ 1,328 13,116 (14,170) (7,345) 62,548
Cash and cash equivalents at
beginning of period......... -- 1,328 14,444 14,444 4,212
------- ------- -------- -------- ---------
Cash and cash equivalents at
end of period............... $ 1,328 $14,444 $ 274 $ 7,099 $ 66,760
======= ======= ======== ======== =========
</TABLE>
See accompanying notes.
F-7
<PAGE>
WAM!NET INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- -------------------
1995 1996 1997 1997 1998
------- -------- -------- -------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES
Value of interest cost assigned
to warrants................... $ -- $ 5,176 $ 4,766 $ -- $ --
Equipment financed through
equipment financing........... -- -- 1,764 -- --
Conversion of accrued interest
to subordinated debt.......... -- -- 1,363 366 585
Issuance of common stock
relating to acquisition....... -- -- 488 -- 20,000
Warrant valuation reclassed to
deferred charges from line of
credit........................ -- -- -- -- 4,104
Accumulated and unpaid
dividends..................... -- -- 70 18 18
Cashless exercise of stock
options....................... -- -- 13 -- --
Conversion of convertible
subordinated debenture for
common stock.................. 100 25 25 -- 25
Equipment financed through
capital leases................ -- 239 -- -- --
SUPPLEMENTAL SCHEDULE OF CASH
FLOW INFORMATION
Cash paid for interest......... -- 358 1,208 283 677
</TABLE>
See accompanying notes.
F-8
<PAGE>
WAM!NET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED
MARCH 31, 1998)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
WAM!NET Inc. (formerly known as NetCo Communications Corporation), (the
"Company") provides a managed, high speed digital data delivery network
service that integrates the Company's industry-specific work flow applications
with high speed computer and telephony technologies. The Company offers
digital data delivery service designed to provide its subscribers with the
rapid, secure, accurate and reliable transportation and management of
information. In late 1997, the Company no longer considered itself in the
development stage.
The Company was incorporated in Minnesota on September 19, 1994. The Company
was inactive from September 19, 1994 (inception) through December 31, 1994.
Substantial Ownership
Through its ownership of debt and equity securities of the Company, as well
as its designation of a majority of the directors of the Board of Directors of
the Company, WorldCom Inc. ("WorldCom") has the potential to exercise
considerable influence and control over the affairs of the Company. In
addition, WorldCom and its affiliates are non-exclusive suppliers of
telecommunication and other services to the Company.
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries from their respective dates of acquisition:
FreeMail, Inc., NetCo Communications of Canada, Inc. and WAM!NET U.K. Limited
(formerly 4-Sight Limited). All intercompany transactions have been
eliminated.
Revenue Recognition
Revenues from user fees are recorded as revenue in the period the service is
provided to the customer. Revenue is derived primarily from contracts which
are usually annual, automatically renewable service contracts with a minimum
monthly fee and additional charges for usage exceeding the monthly minimum.
The Company begins to earn gross revenue following installation of service at
a customer's premise. The Company also incurs service rebates that offset the
gross revenue generated by the Company. Revenue from hardware and software
sales is recognized upon delivery of the hardware and software. Upon delivery
of the hardware and software, the Company has no remaining obligations to the
customer. Other service fees are recognized as revenue in the period the
service is provided to the customer.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. Investments
classified as cash equivalents consist of high grade commercial paper (A1/P1),
certificates of deposits and United States Treasury Bills.
Investments
Investments at December 31, 1996 consist of certificates of deposits which
are classified as available for sale. The cost of investments approximates
fair value.
F-9
<PAGE>
WAM!NET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED
MARCH 31, 1998)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful life of four to seven years.
Goodwill
The excess of the cost over the fair value of the net assets acquired is
amortized on a straight-line basis over three to five years. The Company
periodically reviews the recoverability of goodwill based on estimated future
cash flows from the related operations.
Impairment of Long-Lived Assets
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
Income Taxes
Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between the financial reporting
and tax bases of assets and liabilities.
Research and Development
Research and development costs are charged to operations in the year
incurred. These costs for 1995, 1996 and 1997 were $539, $1,109 and $3,364,
respectively.
Foreign Currency Translation and Transactions
The Company's Canadian subsidiary's functional currency is considered to be
its local currency. The effect of the cumulative translation adjustment for
the fiscal year ended December 31, 1997 is not material and has not been
separately disclosed in the Company's financial statements.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist primarily of accounts receivable. The Company grants credit to
customers in the ordinary course of business. No single customer or region
represents a significant concentration of credit risk.
Stock Split
In February, 1998, the Board of Directors declared a five-for-one Common
Stock split effected in the form of a stock dividend. The number of shares,
options and warrants and the conversion price and exercise price per share
have been adjusted to reflect this stock split on a retroactive basis.
Net Loss Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share (Statement 128). Statement 128 replaced the calculation of
primary and fully diluted earnings per share with
F-10
<PAGE>
WAM!NET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED
MARCH 31, 1998)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to fully
diluted earnings per share under the previous rules. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements. Diluted earnings per share is not
presented as the effect of outstanding options and warrants are antidilutive.
Interim Financial Information
The accompanying consolidated financial statements as of March 31, 1998 and
for the three month periods ended March 31, 1997 and 1998 are unaudited. In
the opinion of the management of the Company, these consolidated financial
statements reflect all adjustments, consisting only of normal and recurring
adjustments necessary for a fair presentation of the consolidated financial
statements. The results of operations for the three month period ended March
31, 1998 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998.
Reclassification
Certain amounts presented in the December 31, 1996 financial statements have
been reclassified to conform with the December 31, 1997 presentation.
2. CONTINUED EXISTENCE
On March 5, 1998, the Company sold 208,530 Units consisting of 13 1/4%
Senior Discount Notes due 2005 and warrants to purchase a total of 1,257,436
shares of common stock. Each Unit consists of $1 principal amount at maturity
of 13 1/4% Senior Discount Notes and three warrants. Each warrant entitles the
holder to purchase 2.01 shares of common stock at an exercise price of $.01
per share. The sale of the Units resulted in net proceeds to the Company of
$120,622. See Note 3. Prior to the sale of the Units, there was substantial
doubt about the Company's ability to continue as a going concern. With the
completion of the Unit offering, the Company believes that it has a sufficient
cash on hand to satisfy its cash requirements for at least the next twelve
months.
F-11
<PAGE>
WAM!NET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED
MARCH 31, 1998)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. LONG-TERM DEBT
Equipment financing notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
FINOVA Technology Finance; installment note; monthly
payments of $43 and an additional final installment of
$242 including interest imputed at 13.44%; secured by
equipment; due April 2001............................. $ -- $1,518 $1,411
FINOVA Technology Finance; installment note; monthly
payments of $91 and an additional final installment of
$509 including interest imputed at 13.35%; secured by
equipment; due May 2001............................... -- 3,248 3,025
Transamerica Business Credit; installment note; monthly
payments of $46 and an additional final installment of
$207 including interest imputed at 13.53%; secured by
equipment; due May 2001............................... -- 1,606 1,522
Transamerica Business Credit; installment note; monthly
payments of $42 and an additional final installment of
$187 including interest imputed at 13.43%; secured by
equipment; due May 2001............................... -- 1,457 1,380
Transamerica Business Credit; installment note; monthly
payments of $41 and an additional final installment of
$184 including interest imputed at 13.11%; secured by
equipment; due June 2001.............................. -- -- 1,378
Transamerica Business Credit; installment note; monthly
payments of $11 and an additional final installment of
$48 including interest imputed at 12.88%; secured by
equipment; due July 2001.............................. -- -- 365
Leasetec
Corporation; installment note; monthly payments of $47
including interest imputed at 13.50%; unsecured; due
December 1998......................................... -- 521 355
Leasetec Corporation; installment note; monthly
payments of $83 including interest imputed at 13.50%;
unsecured; due April 1999............................. -- 1,123 923
------ ------ ------
-- 9,473 10,359
Less current portion................................... -- 3,039 3,476
------ ------ ------
$ -- $6,434 $6,883
====== ====== ======
</TABLE>
Maturities of notes payable as of March 31, 1998 are as follows:
<TABLE>
<S> <C>
1998........................................... $ 2,655
1999........................................... 2,577
2000........................................... 2,757
2001........................................... 2,382
-------
$10,371
=======
</TABLE>
F-12
<PAGE>
WAM!NET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED
MARCH 31, 1998)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SENIOR DISCOUNT NOTES
On March 5, 1998, the Company sold 208,530 Units. Each Unit consists of $1
principal amount at maturity of 13 1/4% Senior Discount Notes and three
warrants. The aggregate principal amount of the Notes payable at maturity is
$208,530. The sale of the Units resulted in net proceeds to the Company of
$120,622. Cash interest does not accrue nor is it payable on the Notes prior
to March 1, 2002. Thereafter, cash interest on the Notes will accrue on the
Notes at a rate of 13 1/4% per annum (calculated on a semiannual bond
equivalent basis) and will be payable semiannually in arrears on March 1 and
September 1 of each year, commencing September 1, 2002.
In connection with the 13 1/4% Senior Discount Notes, the Company issued
625,590 warrants to purchase a total of 1,257,436 shares of common stock. Each
warrant entitles the holder to purchase 2.01 shares of common stock at an
exercise price of $.01 per share. The warrants were deemed to have a value of
$10,047, which will be amortized as interest expense over the life of the
Notes. The unamortized value of the warrants has been reflected in the
financial statements as a reduction of the Notes.
LINE OF CREDIT AGREEMENT
In September 1997, the Company entered into a three year $25,000 line of
credit agreement with a bank. The line of credit is guaranteed by WorldCom and
the Company must obtain WorldCom's consent prior to each borrowing under the
line. At December 31, 1997, the amount outstanding on the line of credit was
$18,800. The line of credit has both Eurodollar and Floating Rate advances.
The Eurodollar and Floating Rate accrue interest at 55 basis points above
LIBOR (6.27% at December 31, 1997) and prime (8.50% at December 31, 1997),
respectively. Interest on the LIBOR borrowings is payable upon maturity and
the prime borrowings is payable quarterly. The aggregate principal amount
outstanding under the Revolving Credit Facility as of March 31, 1998 was $0.
In connection with WorldCom's guarantee of the line of credit agreement, the
Company issued Class A warrants to purchase 8,396,170 common shares and Class
B Warrants to purchase 14,204,835 common shares at an initial exercise price
of $3.90 per share. The Class A warrants are immediately exercisable and
expire on December 31, 2000. The Class A warrants were deemed to have a value
of $4,766 which will be amortized as interest expense over the life of the
agreement. Amortization of the warrants for the year ended December 31, 1997
was $397. The unamortized value of the warrants has been reflected in the
financial statements as a reduction of the outstanding amount owed under the
line of credit. The Class B warrants are exercisable based on a calculation
that factors the outstanding balance and repayments made on the line of credit
during the final twelve months of the agreement. The Class B warrants expire
on December 31, 2000. It is Management's intention to fully repay the credit
facility before the final twelve months of the agreement with funds received
in a proposed Rule 144A private placement by the end of the first quarter
1998. The Class B warrants were deemed to have no value based on Management's
intentions and the unpredictability of the factors used to calculate the
number of warrants exercisable.
4. BRIDGE FINANCING
On December 29, 1995, the Company entered into a bridge financing agreement
(Bridge Loan) which provides funding up to $1,600. The Bridge Loan accrued
interest at 10% per annum and was payable on the earlier of December 31, 1996
or the date of closing of a qualifying preferred stock financing. In
connection with the financing, the Company granted warrants to purchase
1,600,000 shares of common stock at $1.00 per share.
F-13
<PAGE>
WAM!NET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED
MARCH 31, 1998)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BRIDGE FINANCING (CONTINUED)
The warrants were deemed to have a value of $109 which was recorded as
interest expense over the life of the Bridge Loan. Additionally, the Company
granted the placement agent warrants to purchase 160,000 shares of Common
Stock at $1.00 per share exercisable over five years.
On March 19, 1996, the Company issued a total of $1,000 of subordinated
notes. The subordinated notes accrued interest at 10% per annum and were
payable on the earlier of December 31, 1996 or the date of closing of a
qualifying financing transaction. In connection with the issuance of the
notes, the Company granted warrants to purchase 1,000,000 shares of common
stock at $1.50 per share. The warrants were deemed to have a value of $57
which was recorded as interest expense over the life of the subordinated
notes. Additionally, the Company granted the placement agent warrants to
purchase 100,000 shares of common stock at $1.50 per share.
On June 24, 1996, the Company issued $3,000 of subordinated notes. The
subordinated notes accrued interest at 10% per annum and were payable on the
earlier of December 31, 1996 or the date of closing of a qualifying financing
transaction. In connection with the subordinated notes, the Company sold for a
price of $.01 each Common Stock warrants to purchase 3,000,000 shares of
common stock at $1.50 per share. The warrants to purchase 3,000,000 shares of
common stock were deemed to have a value of $120 which was recorded as
interest expense over the life of the subordinated notes. Additionally, the
Company granted the placement agent warrants to purchase 300,000 shares of
common stock at $1.50 per share.
On June 30, 1997, the Company entered into a promissory note agreement with
WorldCom which provided funding up to $10,000. The Company was advanced
$10,000 on the promissory note. The promissory note accrued interest at 12%
per annum and was paid in full as of December 31, 1997.
The valuation of the Common Stock in each transaction was negotiated between
the parties at arm's-length.
5. SUBORDINATED NOTES PAYABLE
In March through May of 1995, the Company issued a total of $250 of
convertible subordinated notes which are due December 31, 1999. Interest on
the notes accrues at an annual rate of 8%, payable semi-annually. The Company
may redeem the notes at any time commencing January 1, 1997, upon notice to
the holders at 110% of the face amount of the notes plus interest. The holder
has the right to convert the unpaid principal amount of the notes into shares
of common stock at a conversion price of $.38 per share.
On May 24, 1995, $100 of the notes were converted into 263,160 shares of
common stock at the conversion price of $.38 per share. On July 3, 1996, $25
of the notes were converted into 65,790 shares of common stock at the
conversion price of $.38 per share. On December 31, 1997, $25 of the notes
were converted into 65,790 shares of common stock at the conversion price of
$.38 per share.
In September 1996, the Company issued to WorldCom a $5,000 convertible
subordinated note which is due September 30, 1999. Interest on the note
accrues at an annual rate of 10%, payable semi-annually, commencing with the
first payment on March 30, 1997. The Company may redeem the note at any time
commencing January 1, 1998, upon notice to the holder's at the outstanding
principal amount of the note plus interest. The holder has the right to
convert the principal amount of the note into shares of common stock at a
conversion price of $1.00 per share.
F-14
<PAGE>
WAM!NET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED
MARCH 31, 1998)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SUBORDINATED NOTES PAYABLE (CONTINUED)
In November 1996, the Company entered into a Redeemable Preferred Stock,
Subordinated Note and Common Stock Warrant Purchase Agreement ("Investment
Agreement") with WorldCom. Pursuant to the agreement, the Company sold 100,000
shares of Class A Preferred Shares, $10.00 par value. The preferred shares are
required to be redeemed on December 31, 1999 at a price of $10.00 per share
plus an amount equal to all accumulated and unpaid dividends. Dividends are
payable at the rate of 7% ($.175 per quarter per share) and shall start to
cumulate on January 1, 1997, whether or not earned. Cumulated dividends on the
preferred stock were $70 at December 31, 1997. The Class A Preferred Shares
also carry voting rights equal to Common Shares and possess special voting
rights that entitle the holder to elect a majority of the Directors.
Under the Subordinated Note Agreement, the Company has available an
aggregate amount of $28,500. The Company has the option to issue additional
notes not more frequently than once each quarter, commencing with the calendar
quarter ending March 31, 1997. The note accrues interest at 7% per annum, is
payable semi-annually and is due December 31, 2003. During 1997, $1,363 of
accrued interest was converted into additional subordinated notes. The amount
outstanding on the subordinated note agreement was $19,000 and $20,363 at
December 31, 1996 and December 31, 1997, respectively.
In connection with the Investment Agreement, the Company sold for a price of
$0.01 each, Common Stock Warrants entitling WorldCom to purchase 20,787,500
shares of common stock at an initial exercise price of $.96 per share. The
warrants are immediately exercisable and expire on December 31, 2000. The
warrants were deemed to have a value of $4,906 which will be amortized as
interest expense over the life of the warrant agreement. Amortization of the
warrants for the year ended December 31, 1997 was $1,227. The unamortized
value of the warrants has been reflected as a reduction of the subordinated
note. The initial exercise price of $.96 per share increased to $.98 per share
on March 31, 1997, and shall thereafter increase by an amount of $.016 per
share on the last day of each calendar quarter during the term of the warrant,
commencing with the calendar quarter ending June 30, 1997. The exercise price
was $1.03 per share on December 31, 1997.
The carrying amounts of the Company's debt instruments in the balance sheets
at December 31, 1996 and 1997 and March 31, 1998 approximate fair value.
The valuation of the Common Stock in each transaction was negotiated between
the parties at arm's-length.
F-15
<PAGE>
WAM!NET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED
MARCH 31, 1998)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. COMMITMENTS AND CONTINGENCIES
The Company enters into various term contracts with suppliers of
telecommunications services for the purpose of receiving discounts off the
standard service offerings. Some of these contracts will result in termination
liabilities if the contract is terminated prior to the expiration date of the
contract. The termination liabilities are generally based upon the minimum
monthly dollar amount committed to the vendor multiplied by a termination
liability percentage, multiplied by the number of months remaining in the
contract. Total data communications expense under telecommunication contracts
was $46, $816 and $7,364 for the years ended December 31, 1995, 1996 and 1997,
respectively. The Company's data communications expense under
telecommunication contracts with WorldCom was $0, $2 and $1,375 for the years
ended December 31, 1995, 1996 and 1997, respectively. Guaranteed monthly usage
levels of data communications with certain of the Company's telecommunication
vendors and WorldCom at December 31, 1997 aggregate to the following annual
amounts:
<TABLE>
<CAPTION>
GUARANTEED USAGE GUARANTEED USAGE
(ALL VENDORS) (WORLDCOM)
---------------- ----------------
<S> <C> <C>
1998.................................... $ 4,255 $3,080
1999.................................... 3,741 3,000
2000.................................... 2,204 1,750
2001.................................... 194 --
2002.................................... 138 --
------- ------
$10,532 $7,831
======= ======
</TABLE>
The termination contingency of data communications with certain of the
Company's telecommunication vendors and WorldCom at December 31, 1997
aggregate to the following annual amounts:
<TABLE>
<CAPTION>
TERMINATION
CONTINGENCY TERMINATION
(ALL CONTINGENCY
VENDORS) (WORLDCOM)
----------- -----------
<S> <C> <C>
1997.............................................. $4,645 $2,916
1998.............................................. 1,783 929
1999.............................................. 682 350
2000.............................................. 54 --
2001.............................................. 65 --
------ ------
$7,229 $4,195
====== ======
</TABLE>
The Company also has operating leases for its office space. Operating
expenses including maintenance, utilities, real estate taxes and insurance are
paid by the Company. Total rent expense under operating leases was $47, $208
and $592 for the years ended December 31, 1995, 1996 and 1997, respectively.
Future minimum lease obligations in excess of one year as of December 31, 1997
are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998............................................................... $ 798
1999............................................................... 743
2000............................................................... 529
2001............................................................... 461
2002............................................................... 461
Thereafter......................................................... 1,345
------
$4,337
======
</TABLE>
F-16
<PAGE>
WAM!NET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED
MARCH 31, 1998)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
During 1996, the Company entered into a sale-leaseback agreement for
equipment. The total lease obligation is $239 which is to be paid over a
thirty month period. In connection with this lease financing, the leasing
company was granted warrants to purchase 45,000 shares of common stock at
$1.50 per share. The warrants were deemed to have a value of $14 which will be
recorded as interest expense over the life of the agreement. The minimum
future obligation on the capital lease is $90. The entire balance is
classified as current.
7. INCOME TAXES
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $41,292. These carryforwards are available to offset future
taxable income through 2012 and are subject to the limitations of Internal
Revenue Code Section 382 resulting from changes in ownership.
INCOME TAXES (CONTINUED)
Components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- --------
<S> <C> <C>
Deferred assets:
Net operating loss.......................................... $ 3,525 $ 15,691
Warrant amortization........................................ -- 619
Other....................................................... -- 238
------- --------
Subtotal..................................................... 3,525 16,548
Deferred liability:
Depreciation and amortization............................... (39) (562)
------- --------
Net deferred income tax assets.............................. 3,486 15,986
Valuation allowance......................................... (3,486) (15,986)
------- --------
Net deferred income taxes.................................... $ -- $ --
======= ========
</TABLE>
8. CAPITAL STOCK
In February 1998, the Company amended the Articles of Incorporation to
increase its authorized capital from 20,000,000 shares to 100,000,000 shares,
90,000,000 of which shall be classified as common shares, 100,000 of which
shall be Class A preferred shares and 9,900,000 of which shall be undesignated
shares.
9. STOCK OPTIONS AND WARRANTS
In September 1994, the Company adopted an Incentive Stock Option Plan that
includes incentive stock options to be granted to certain eligible employees
and non-employee directors of the Company. The Company has authorized the
grant of options to management personnel for up to 22,071,400 shares and up to
4,725,000 of the Company's common stock under the plan and outside the plan,
respectively. A majority of the options granted have 10 year terms and vest
and become fully exercisable at the end of 3 years of continued employment.
F-17
<PAGE>
WAM!NET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED
MARCH 31, 1998)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STOCK OPTIONS AND WARRANTS (CONTINUED)
In November 1996, the Chief Executive Officer and Chief Technology Officer
were each granted options to purchase 2,000,000 shares of common stock at an
exercise price of $.96. These options vest in incremental amounts based on the
number of installed customer sites and remain exercisable until December 31,
2007. In 1997, the Company recorded $297 in compensation relating to these
option grants. Subsequent to year end, the Board of Directors agreed to amend
the stock option agreements whereas the shares are fully vested effective
January 3, 1998. The amendment constitutes a repricing and accordingly the
Company recorded $11,405 as compensation expense in January 1998.
During 1997, the Company granted non-plan options to various consultants to
purchase 347,500 shares of the Company's common stock at an exercise price of
$.96 per share. The options were deemed to have a value of $92 and was
recognized as compensation expense.
Subsequent to December 31, 1997, the Company granted to employees options to
purchase a total of 656,250 shares of common stock at an exercise price of
$3.90 per share. Additionally, the Company granted options to purchase a total
of 400,000 shares at an exercise price of $3.90 per share to two consultants.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
AVAILABLE OPTIONS OUTSTANDING EXERCISE
FOR GRANT --------------------- PRICE
UNDER PLAN PLAN NON-PLAN PER SHARE
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Establishment of 1994 Stock Option
Plan............................. 500,000 -- -- $ --
Additional shares reserved for is-
suance........................... 2,500,000 -- -- --
Granted........................... (532,500) 32,500 377,500 .45
---------- ---------- ---------
Balance at December 31, 1995...... 2,467,500 532,500 377,500 .45
Additional shares reserved for
issuance......................... 4,071,400 -- --
Granted........................... (2,992,800) 2,992,800 4,000,000 1.09
Canceled.......................... 1,646,400 (1,646,400) -- 1.48
---------- ---------- ---------
Balance at December 31, 1996...... 5,192,500 1,878,900 4,377,500 .90
Additional shares reserved for
issuance......................... 15,000,000 -- --
Granted........................... (3,131,250) 3,131,250 347,500 1.38
Canceled.......................... 257,750 (257,750) -- .86
Exercised......................... -- (30,000) -- .45
---------- ---------- ---------
Balance at December 31, 1997...... 17,319,000 4,722,400 4,725,000 1.09
========== ========== =========
</TABLE>
F-18
<PAGE>
WAM!NET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED
MARCH 31, 1998)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about the stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$.45 730,000 7.2 years $ .45 715,000 $.45
.96 8,454,900 9.1 years .96 1,366,795 .96
3.90 262,500 9.8 years 3.90 0 --
--------- ---------
.45-
3.90 9,447,400 9.0 years 1.11 2,081,795 .79
</TABLE>
The Company has shares exercisable within the plan of 440,000 and 1,167,795
at December 31, 1996 and 1997, respectively, at a weighted average exercise
price of $.53 and $.81 per share, respectively. The Company also has shares
exercisable outside the plan of 576,500 and 914,000 at December 31, 1996 and
1997, respectively, at a weighted average exercise price of $.64 and $.76 per
share, respectively. The fair value of options granted within the plan in
1995, 1996 and 1997 was $.12, $.27 and $.34 per share, respectively. The fair
value of options granted outside the plan in 1995, 1996 and 1997 was $.12,
$.27 and $.27 per share.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (Statement 123),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a minimum
value option pricing model with the following weighted-average assumptions for
1995, 1996 and 1997: risk-free interest rate of 6.5%; dividend yield of 0% and
a weighed-average expected life of the option of 5 years.
The minimum value option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Net loss as reported............................ $(1,277) $(7,596) $(33,636)
Pro forma net loss.............................. (1,408) (7,763) (34,168)
Net loss per common share as reported........... (.24) (1.18) (5.18)
Pro forma net loss per common share............. (.27) (1.20) (5.26)
</TABLE>
F-19
<PAGE>
WAM!NET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED
MARCH 31, 1998)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STOCK OPTIONS AND WARRANTS (CONTINUED)
During the initial phase-in period, the effects of applying statement 123
for recognizing compensation cost may not be representative of the effects on
reported net loss or income for future years because the options in the
Incentive Stock Option Plans vest over several years and additional awards
will be made in the future.
During 1995, the Company granted a consultant warrants to purchase 150,000
shares of common stock at an exercise price of $.60 per share for services
provided. The warrants are immediately exercisable and expire November 17,
2002. The warrants were valued at $15 and were charged to expense.
The following is a table of the warrants to purchase shares of the Company's
Common Stock:
<TABLE>
<CAPTION>
WARRANTS EXERCISE PRICE EXPIRATION
OUTSTANDING EXERCISABLE PER SHARE DATE
----------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994
Granted:
Note payable............. 416,665 416,665 $ .60 2000
Consulting Service....... 150,000 150,000 .60 2002
Bridge Loan #1........... 1,760,000 1,760,000 1.00 2000
---------- ---------- ----------
Balance at December 31,
1995........................ 2,326,665 2,326,665 .60-1.00
Granted:
Bridge Loan #2........... 1,100,000 1,100,000 1.50 2003
Bridge Loan #3........... 3,300,000 3,300,000 1.50 2003
Lease Financing.......... 45,000 45,000 1.50 2003
7% Subordinated Notes.... 20,787,500 20,787,500 1.03 2000
---------- ---------- ----------
Balance at December 31,
1996........................ 27,559,165 27,559,165 .60-1.50
Granted:
Line of Credit........... 22,601,005 8,396,170 3.90 2000
---------- ---------- ----------
Balance at December 31,
1997........................ 50,160,170 35,955,335 $.60-$3.90
---------- ---------- ----------
Granted:
13 1/4% Senior Discount
Note.................... 1,257,436 1,257,436 .01 2005
Balance at June 30, 1998..... 51,417,606 37,212,771 $.01-$3.90
========== ========== ==========
</TABLE>
10. EMPLOYMENT AGREEMENTS
In November 1996, the Company entered into Employment Agreements with its
President and Chief Executive Officer and its Chief Technology Officer. The
agreements provide for an annual base salary and a bonus and other
compensation as may be established from time to time by the Board of
Directors. As part of the agreements, the employees were each granted options
to purchase 2,000,000 shares of common stock at an exercise price of $.96. The
agreements contain provisions providing for the maintenance of confidentiality
of proprietary information of the Company and a two-year non-competition
clause in the event of termination of employment. The agreements may be
terminated by either parties for any reason at any time. If, however, the
employees are terminated by the Company without cause, the Company must pay
salary to the employees equal to the employees' then base salary for two
years.
F-20
<PAGE>
11. SAVINGS AND RETIREMENT PLAN
The Company has a savings and retirement plan covering all eligible
employees. The plan was adopted pursuant to 401(k) of the Internal Revenue
Code. Contributions to the plan are discretionary for the employees. The
Company does not make contributions to the plan.
12. ACQUISITION
In December 1997, the Company acquired the outstanding common stock of
FreeMail, Inc. (FreeMail). The results of operations of the acquired business
are included in the accompanying financial statements since the date of
acquisition.
The Company issued 125,000 shares of common stock, with a fair value of
$488, as consideration in connection with the acquisition. The Company will
pay a quarterly payment to the former shareholders of FreeMail as additional
contingent consideration equal to five percent of the gross collected revenue
derived by the Company from certain identified FreeMail products. The total
amounts of the quarterly payments shall not exceed $3,013. As of December 31,
1997, the Company did not record a liability relating to the FreeMail revenue
since no revenue was collected. The acquisition was accounted for as a
purchase. The inclusion of the FreeMail operating results for periods prior to
the date of acquisition would not have materially affected results of
operations.
13. RELATED PARTY TRANSACTIONS
The Company's corporate in-house counsel owns 250,000 shares, and has been
granted warrants and options to purchase 450,000 shares of Company common
stock. During the years ended December 31, 1995, 1996 and 1997, the Company
incurred legal fees and expenses of approximately $0, $102 and $128,
respectively, to such counsel for services rendered in connection with
litigation and for general legal services.
The Company's corporate counsel is Larkin, Hoffman, Daly & Lindgren, Ltd.
One of the partners of this firm is the father of the Company's President and
Chief Executive Officer and owns 250,000 shares of common stock of the Company
and has been granted an option to purchase 200,000 shares of the Company's
common stock. Additionally, Mr. Hoffman, a partner of this firm, is a director
of the Company and has been granted an option to purchase 75,000 shares of the
Company's common stock. During the years ended December 31, 1995, 1996 and
1997, the Company incurred legal fees and expenses of approximately $0, $75
and $157, respectively, to such counsel for services rendered in connection
with litigation and for general legal services.
The Company's marketing services were performed by Kauffman Marketing Group,
Inc. from November 1995 to December 1997. The former President of Kauffman
Marketing Group, Inc. joined the Company as the Vice President of Strategic
Marketing & Communications in December 1997. During the years ended
December 31, 1995, 1996 and 1997, the Company incurred marketing expenses of
approximately $0, $318 and $1,634, respectively, to such firm for strategic
positioning and outside marketing services.
Management believes the fees paid for all the above services rendered to the
Company were on terms at least as favorable to the Company as could have been
obtained from an unrelated party.
14. MAJOR CUSTOMERS
In 1996 two customers accounted for 80%, in aggregate, of net sales. In 1997
three customers accounted for 24%, in aggregate, of net sales.
15. CONTINGENCY
The Company is engaged in certain legal proceedings and claims arising in
the ordinary course of its business. The ultimate liabilities, if any, which
may result from these or other pending or threatened legal actions
F-21
<PAGE>
against the Company cannot be determined at this time. However, it is the
opinion of management that facts known at the present time do not indicate
that there is a probability that such litigation with have a material effect
on the financial position, results of operations or liquidity of the Company.
16. SUBSEQUENT EVENT (UNAUDITED)
On March 13, 1998, the Company purchased all of the outstanding capital
stock of 4-Sight Limited, a private limited company organized under the laws
of the United Kingdom ("4-Sight"), for $20 million in cash plus related
acquisition expenses of $500 and 2,500,000 shares of the Company's common
stock valued at $20,000. In addition, the former shareholders of 4-Sight will
be entitled to receive up to an additional 750,000 shares of the Company's
common stock in the event certain sales objectives are met over the next three
years. Specifically, 4-Sight's former shareholders shall be entitled to
receive an additional 625,000 shares of Common Stock if the cumulative Non-
US/Canada Revenues (defined below) for the period from March 13, 1998 to
March 13, 2001 equal or exceed $50,000,000; and they shall be entitled to
receive a further 125,000 shares of Common Stock if the cumulative Non-
US/Canada Revenues during the same three year period equal or exceed
$70,000,000. For the purpose of the foregoing, "Non-US/Canada Revenues" shall
mean the revenues attributable to customer sites located outside the United
States and Canada and receivable by the Company or any of its subsidiaries.
The shares to be issued as contingent consideration will result in the Company
recording additional goodwill, which will be amortized over its estimated
useful life.
The acquisition was accounted for under the purchase method of accounting
and, accordingly, the operating results of 4-Sight have been included in the
consolidated operating results since the date of acquisition.
On acquisition, approximately $31,928 of goodwill was recorded, which is
being amortized on a straight-line basis over 5 years. The following table
shows the pro forma consolidated results of operations as if 4-Sight had been
acquired as of the beginning of the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
UNAUDITED
<S> <C> <C>
Revenues.............................................. $ 20,833 $ 5,363
Net loss.............................................. $(37,942) $(26,725)
Net loss per share.................................... $ (4.22) $ (3.66)
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
4-Sight Limited
We have audited the accompanying consolidated balance sheets of 4-Sight
Limited as at August 31, 1996, September 30, 1996 and September 30, 1997, and
the related consolidated statements of operations, shareholders' equity and
cash flows for the year ended August 31, 1996, the month ended September 30,
1996 and the year ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with United Kingdom auditing standards
which do not differ in any significant respect from those generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of 4-Sight Limited at August 31, 1996, September 30, 1996 and September 30,
1997, and the consolidated results of its operations and its cash flows for
the year ended August 31, 1996, the month ended September 30, 1996 and the
year ended September 30, 1997 in conformity with accounting principles
generally accepted in the United States.
Ernst & Young
Chartered Accountants
Southampton, England
May 28, 1998
F-23
<PAGE>
4-SIGHT LIMITED
CONSOLIDATED BALANCE SHEETS
(US DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1997 1997
---------- ------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $1,290 $ 439 $ 3,986 $ 4,253
Accounts receivable, less
allowance of $100 as of
August 31, 1996; $116 as
of September 30, 1996;
$101 as of September 30,
1997; $118 as of
December 31, 1997 for
doubtful accounts....... 2,237 2,133 2,717 3,179
Recoverable taxes........ 48 98 -- --
Other current assets..... 226 219 100 327
Inventories--finished
goods................... 935 983 1,152 1,313
Prepaid expenses......... 247 175 377 87
------ ------- ------- -------
Total current assets... 4,983 4,047 8,332 9,159
------ ------- ------- -------
Property and equipment:
Land and buildings....... 585 587 604 616
Fixtures and equipment... 1,341 1,433 1,990 2,269
Motor vehicles........... 19 19 63 64
------ ------- ------- -------
1,945 2,039 2,657 2,949
Accumulated
depreciation............ 584 614 1,073 1,265
------ ------- ------- -------
1,361 1,425 1,584 1,684
------ ------- ------- -------
Goodwill, net of
accumulated amortization--
August 31, 1996--$19;
September 30 1996--$28;
September 30, 1997--$167;
December 31, 1997--$198 .. 552 545 503 485
------ ------- ------- -------
Other assets:
Deferred tax............. 31 32 54 54
------ ------- ------- -------
Total assets........... $6,927 $ 6,049 $10,473 $11,382
====== ======= ======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......... $1,119 $ 848 $ 859 $ 800
Other taxes and social
security costs.......... 244 109 582 202
Other accounts payable... 2,079 1,655 609 728
Income taxes payable..... 695 686 506 899
Current portion of long-
term debt and capital
lease obligations....... 55 54 71 238
------ ------- ------- -------
Total current
liabilities........... 4,192 3,352 2,627 2,867
Long-term, debt less
current portion........... 170 166 108 70
Capital lease obligations
less current portion.... -- -- 27 24
Redeemable preferred
ordinary shares of 1p
each...................... -- -- 5,157 5,256
------ ------- ------- -------
Total liabilities...... 4,362 3,518 7,919 8,217
------ ------- ------- -------
Shareholders' equity:
Ordinary shares of 1p
each
Authorized shares--
1,000,000,000 as of
August 31, 1996 and
September 30, 1996;
985,374,550 as of
September 30, 1997 and
December 31, 1997.....
Issued and outstanding
shares--50,000,000 as
of August 31, 1996 and
September 30, 1996;
55,000,000 as of
September 30, 1997 and
December 31, 1997..... 781 783 886 903
Retained earnings........ 1,769 1,713 1,589 2,276
Translation adjustment... 15 35 79 (14)
------ ------- ------- -------
Total shareholders'
equity................ 2,565 2,531 2,554 3,165
------ ------- ------- -------
Total liabilities and
shareholder's equity.. $6,927 $ 6,049 $10,473 $11,382
====== ======= ======= =======
</TABLE>
See accompanying notes.
F-24
<PAGE>
4-SIGHT LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(US DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
YEAR ENDED MONTH ENDED YEAR ENDED ----------------------
AUGUST 31, 1996 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 1996 1997
--------------- ------------------ ------------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............ $ 11,446 $ 1,065 $ 18,264 $ 3,860 $ 4,769
Cost of revenues........ 3,466 324 5,010 1,390 1,367
---------- ---------- ---------- ---------- ----------
Gross profit............ 7,980 741 13,254 2,470 3,402
---------- ---------- ---------- ---------- ----------
Operating expenses:.....
Sales and distribu-
tion................. 2,173 381 5,750 1,150 1,357
General and
administrative....... 3,741 419 5,057 1,202 1,160
---------- ---------- ---------- ---------- ----------
Total operating
expenses........... 5,914 800 10,807 2,352 2,517
---------- ---------- ---------- ---------- ----------
Operating income
(loss)................. 2,066 (59) 2,447 118 884
Other income (expense):
Interest income....... 66 0 112 8 63
Interest (expense).... (48) (9) (55) (33) (5)
---------- ---------- ---------- ---------- ----------
Profit (loss) before
income taxes........... 2,084 (68) 2,504 93 942
Income tax charge....... (606) 7 (916) (22) (374)
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 1,478 $ (61) $ 1,588 $ 71 $ 568
========== ========== ========== ========== ==========
Net income per ordinary
share Basic and diluted
....................... $ 0.0296 $ (0.0012) $ 0.0301 $ 0.0014 $ 0.0103
========== ========== ========== ========== ==========
Weighted average number
of ordinary shares
outstanding Basic and
diluted ............... 50,000,000 50,000,000 52,767,123 50,000,000 55,000,000
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-25
<PAGE>
4-SIGHT LIMITED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(US DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
SHARE CAPITAL
<TABLE>
<CAPTION>
ORDINARY
ORDINARY SHARES
SHARES OF OF 1P
1P EACH EACH
------------- --------
NUMBER AMOUNT
<S> <C> <C>
AUTHORIZED
At September 1, 1995................................ 1,000,000,000 $15,515
Translation adjustment.............................. -- 97
------------- -------
At August 31, 1996.................................. 1,000,000,000 15,612
Translation adjustment.............................. -- 41
------------- -------
At September 30, 1996............................... 1,000,000,000 15,653
Division of share capital........................... (14,625,450) (236)
Translation adjustment.............................. -- 464
------------- -------
At September 30, 1997............................... 985,374,550 $15,881
============= =======
ISSUED
At September 1, 1995................................ 124,990 $ 2
Bonus issue of shares............................... 49,875,010 779
------------- -------
At August 31, 1996.................................. 50,000,000 781
Translation adjustment.............................. -- 2
------------- -------
At September 30, 1996............................... 50,000,000 783
Issued during the period............................ 5,000,000 80
Translation adjustment.............................. -- 23
------------- -------
At September 30, 1997............................... 55,000,000 $ 886
============= =======
</TABLE>
On March 12, 1997 the share capital of the Company was divided into ordinary
shares and preferred ordinary shares.
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SHARE RETAINED TRANSLATION
CAPITAL EARNINGS ADJUSTMENT TOTAL
------- -------- ----------- -------
<S> <C> <C> <C> <C>
At September 1, 1995................. $ 2 $ 1,289 $-- $ 1,291
Bonus issue of shares................ 779 (779) -- --
Net income........................... -- 1,478 -- 1,478
Dividend............................. -- (193) -- (193)
Translation adjustment............... -- (26) 15 (11)
---- ------- ---- -------
At August 31, 1996................... 781 1,769 15 2,565
Net income (loss).................... -- (61) -- (61)
Translation adjustment............... 2 5 20 27
---- ------- ---- -------
At September 30, 1996................ 783 1,713 35 2,531
Issue of shares...................... 80 -- -- 80
Cost of share issue.................. -- (89) -- (89)
Net income........................... -- 1,588 -- 1,588
Dividend............................. -- (1,630) -- (1,630)
Translation adjustment............... 23 7 44 74
---- ------- ---- -------
At September 30, 1997................ $886 $ 1,589 $ 79 $ 2,554
==== ======= ==== =======
</TABLE>
See accompanying notes.
F-26
<PAGE>
4-SIGHT LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31,
YEAR ENDED MONTH ENDED YEAR ENDED -------------
AUGUST 31, 1996 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 1996 1997
--------------- ------------------ ------------------ ----- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....... $1,478 $ (61) $1,588 $ 71 $ 568
Adjustments to reconcile
net income (loss) to
net cash used in
operating activities:
Depreciation.......... 287 30 467 129 141
Profit on disposal of
fixed assets......... -- -- (3) -- --
Amortization of
goodwill............. 19 9 136 32 31
Profit from interest
in associated
undertaking.......... (100) -- -- -- --
Changes in operating
assets and liabilities:
Accounts receivable... (720) 111 (519) (990) (373)
Other current assets.. (232) (45) 207 (22) (222)
Inventories........... (195) (45) (142) (360) (123)
Prepaid expenses...... (159) 73 (195) (9) 302
Accounts payable...... 584 (274) (23) 253 (87)
Other taxes and social
security costs....... (126) (135) 465 100 (399)
Other accounts
payable.............. (476) (431) (1,108) 220 99
Income taxes payable.. 30 (11) (200) 42 376
Effects of exchange
rate changes......... (10) 20 34 42 39
------ ----- ------ ----- ------
Net cash provided by
(used in) operating
activities............. 380 (759) 707 (492) 382
------ ----- ------ ----- ------
INVESTING ACTIVITIES
Capital expenditures.... (465) (87) (545) (165) (240)
Investment in
subsidiary............. 138 -- -- -- --
Receipts from sales of
tangible fixed assets.. -- -- 3 -- --
------ ----- ------ ----- ------
Net cash used in
investing activities... (327) (87) (540) (165) (240)
------ ----- ------ ----- ------
FINANCING ACTIVITIES
Proceeds from sale of
preferred stock........ -- -- 5,157 -- --
Share issue costs....... -- -- (89) -- --
Long-term debt
(including current
portion)............... (54) (5) (55) 665 168
Payment of capital
leases................. -- -- (3) -- (43)
Equity dividend paid.... (195) -- (1,630) -- --
------ ----- ------ ----- ------
Net cash provided by
(used in) financing
activities............. (249) (5) 3,380 665 125
------ ----- ------ ----- ------
Net increase in cash and
cash equivalents....... (196) (851) 3,547 8 267
Cash and cash
equivalents at
beginning of period.... 1,486 1,290 439 439 3,986
------ ----- ------ ----- ------
Cash and cash
equivalents at end of
period................. $1,290 $ 439 $3,986 $ 447 $4,253
====== ===== ====== ===== ======
Interest paid during the
period................. $ 48 $ 9 $ 55 $ 33 $ 5
====== ===== ====== ===== ======
Tax paid during the
period................. $ 620 $ -- $1,093 $ -- $ --
====== ===== ====== ===== ======
SIGNIFICANT NON-CASH
TRANSACTIONS
Acquisition of equipment
under capital lease.... $ -- $ -- $ 45 $ -- $ --
====== ===== ====== ===== ======
Issue of ordinary shares
to acquire non-voting
stock in subsidiary
undertaking............ $ -- $ -- $ 80 $ -- $ --
====== ===== ====== ===== ======
</TABLE>
See accompanying notes.
F-27
<PAGE>
4-SIGHT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US DOLLARS IN THOUSANDS)
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
4-Sight Limited ( the "Company") was incorporated in England and Wales in
April 1993. The Company's principal activity is the development, marketing and
worldwide distribution of computer software applications.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements, which are prepared under United
States generally accepted accounting principles, include the financial
statements of the Company and all its subsidiaries (together, the "Group").
All inter-company accounts and transactions have been eliminated.
ESTIMATES
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Management believes that the estimates are reasonable.
GOODWILL
Purchased goodwill is capitalized and amortized over its estimated useful
life.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash and short-term deposits with
maturities of less than three months at inception.
INVENTORIES
Inventories are stated at the lower of cost, determined on the basis of the
first in, first out method, and market value.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Depreciation is charged on a
straight-line basis over the expected useful lives of the assets. Depreciation
is provided at the following annual rates:
<TABLE>
<S> <C>
Long leasehold buildings........................... 2%
Fixtures and equipment............................. 25%
Motor vehicles..................................... 25%
</TABLE>
REVENUE RECOGNITION
Software sales
Revenue is recognised upon shipment of goods to the customer and
satisfaction of significant related obligations, if any.
F-28
<PAGE>
4-SIGHT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLARS IN THOUSANDS)
Hardware sales
Revenue is recognised upon shipment of goods to the customer.
Services and royalty fees
Revenue is recognised in the period in which it is earned.
RESEARCH AND DEVELOPMENT
Expenditure on research and development is written off as incurred.
LEASES
The cost of assets held under capital leases is capitalised within the
appropriate fixed asset category and depreciation is provided in accordance
with the accounting policy for the category of asset concerned. The interest
cost is charged over the term of the lease and the capital element of future
lease payments is shown on the balance sheet in liabilities as capital lease
obligations. The cost of operating leases is charged to income as incurred.
FOREIGN CURRENCY TRANSLATION
The functional currency is UK sterling.
Transactions in non-functional currencies are recorded at the rates ruling
at the date of the transactions. Gains and losses resulting from non-
functional currency translations, and the re-measurement of non-functional
currency balances are included in the determination of net income in the
period in which they occur, in accordance with the requirements of Statement
of Financial Accounting Standards No. 52, "Foreign Currency Translation".
The financial statements of overseas subsidiaries are translated at the rate
of exchange ruling at the balance sheet date, and the resulting translation
adjustment is shown as a separate component of shareholders' equity.
NET INCOME (LOSS) PER ORDINARY SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share (Statement 128). Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to fully diluted earnings per share
under the previous rules. All earnings per share amounts for all periods have
been presented, and where necessary, restated to conform to the Statement 128
requirements.
INCOME TAXES
The Group accounts for income taxes by the liability method. Deferred income
taxes are provided for on all temporary differences between financial
reporting and tax bases of assets and liabilities.
INTERIM FINANCIAL INFORMATION
The accompanying consolidated financial statements as of December 31, 1997
and for the three month periods ended December 31, 1996 and 1997 are
unaudited. In the opinion of the management of the Company,
F-29
<PAGE>
4-SIGHT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLARS IN THOUSANDS)
these consolidated financial statements reflect all adjustments, consisting
only of normal and recurring adjustments necessary for a fair presentation of
the consolidated financial statements. The results of operations for the three
month period ended December 31, 1997 are not necessarily indicative of the
results that may be expected for the year ended September 30, 1998.
2. LONG-TERM DEBT
The aggregate amount of bank loans (secured) was as follows:
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997
---------- ------------- -------------
<S> <C> <C> <C>
Bank loan accounts: Current por-
tion of long-term loan........... $ 55 $ 54 $ 56
Long-term loan........... 170 166 108
---- ---- ----
$225 $220 $164
==== ==== ====
</TABLE>
The bank loan is collateralized by a fixed charge over the long leasehold
property. The loan is repayable over 5 years from November 21, 1994 by monthly
instalments. Interest is charged at 10% per annum.
3. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Group's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
AUGUST 31, 1996 SEPT. 30, 1996 SEPT. 30, 1997
--------------- -------------- --------------
<S> <C> <C> <C>
Deferred tax assets:
Book over tax
depreciation............ $31 $32 $ 54
Overseas operating losses
carried forward......... 23 43 89
--- --- ----
54 75 143
Less: valuation allowance.. 23 43 89
--- --- ----
Net deferred tax assets.... $31 $32 $ 54
=== === ====
</TABLE>
There is no time limit for the utilization of the operating losses carried
forward totalling $75 as of August 31, 1996, $140 as of September 30, 1996 and
$288 as of September 30, 1997 which are specific to certain companies and
cannot be relieved against profits in other Group companies.
For financial reporting purposes, earnings (loss) before income taxes
includes the following components:
<TABLE>
<CAPTION>
AUGUST 31, 1996 SEPT. 30, 1996 SEPT. 30, 1997
--------------- -------------- --------------
<S> <C> <C> <C>
United Kingdom............... $1,945 $ (3) $2,973
United States................ 139 (65) (469)
------ ---- ------
$2,084 $(68) $2,504
====== ==== ======
</TABLE>
F-30
<PAGE>
4-SIGHT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
AUGUST 31, 1996 SEPT. 30, 1996 SEPT. 30, 1997
--------------- -------------- --------------
<S> <C> <C> <C>
Current: United Kingdom.... $637 $(7) $910
Overseas............ 6 -- 15
Adjustment in respect of
prior years............... (6) -- 13
Increase in net deferred
tax assets................ (31) -- (22)
---- --- ----
$606 $(7) $916
==== === ====
</TABLE>
The reconciliation of income tax computed at the UK statutory tax rate to
the effective rate is:
<TABLE>
<CAPTION>
AUGUST 31, 1996 SEPT. 30, 1996 SEPT. 30, 1997
----------------- ----------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
----------------- --------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Statutory rate.......... $ 688 33.0 $ (22) 33.0 $ 801 32.0
Unrelieveable overseas
tax losses............. -- -- 9 (13.7) 89 3.6
Adjustment to previous
year................... (6) (0.3) -- -- 13 0.5
Utilization of overseas
tax losses............. (46) (2.2) -- -- -- --
Other sundry items...... (30) (1.4) 6 (9.0) 13 0.5
------- ------- ------- ------- ------- -------
$ 606 29.1 $ (7) 10.3 $ 916 36.6
======= ======= ======= ======= ======= =======
</TABLE>
4. LEASE COMMITMENTS
OPERATING AND CAPITAL AGREEMENTS
The future minimum rental payments under capital leases and non-cancellable
operating leases at August 31, 1996, September 30, 1996 and September 30, 1997
are:
<TABLE>
<CAPTION>
AUGUST 31, 1996 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
----------------- --------------------- ----------------------
OPERATING CAPITAL OPERATING CAPITAL OPERATING CAPITAL
LEASES LEASES LEASES LEASES LEASES LEASES
--------- ------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
1998.................... $ 69 $ -- $ 69 $ -- $ 18 $ 18
1999.................... 21 -- 21 -- 12 18
2000.................... -- -- -- -- 11 13
2001.................... -- -- -- -- 3 --
2002.................... -- -- -- -- -- --
---- ----- -------- --------- --------- ---------
$ 90 -- $ 90 -- $ 44 49
==== ======== =========
Less: amount
representing interest.. -- -- (7)
----- --------- ---------
Present value of minimum
lease payments......... -- -- 42
Less: current portion... -- -- (15)
----- --------- ---------
$ -- $ -- $ 27
===== ========= =========
</TABLE>
Total rent expense under all operating leases was $122, $11 and $101 for the
year ended August 31, 1996, the month ended September 30, 1996 and the year
ended September 30, 1997, respectively.
F-31
<PAGE>
4-SIGHT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
5. REDEEMABLE PREFERRED ORDINARY SHARES
The preferred ordinary shares entitle the holders to the following rights:
(i) the preferred ordinary shares rank pari passu in all respects as to
dividend with the ordinary shares;
(ii) the preferred ordinary shares rank in priority to all other
shareholders in the event of the winding up of the company;
(iii) the holders of the preferred ordinary shares are entitled to attend
and vote at general meetings of the company.
(iv) the preferred ordinary shares can, at the option of the
shareholders, be redeemed for an amount of $5,157 at any time after October
1, 2004 over three years in equal installments.
6. SEGMENT INFORMATION, EXPORT SALES AND MAJOR CUSTOMERS
The Group currently operates in one principal industry segment. The Group's
sales were divided by geographical location as follows:
<TABLE>
<CAPTION>
BY DESTINATION BY ORIGIN BY DESTINATION BY ORIGIN BY DESTINATION BY ORIGIN
AUGUST 30, AUGUST 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1996 1996 1997 1997
-------------- ------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
United Kingdom.......... $ 8,411 $10,649 $ 565 $ 660 $10,177 $13,687
United States........... 797 797 405 405 4,577 4,577
Rest of Europe.......... 1,218 -- 69 -- 1,903 --
Rest of World........... 1,020 -- 26 -- 1,607 --
------- ------- ------- ------ ------- -------
$11,446 $11,446 $ 1,065 $1,065 $18,264 $18,264
======= ======= ======= ====== ======= =======
Total assets by
reporting entity:
<CAPTION>
AUGUST 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997
-------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
United Kingdom.......... $ 5,396 $ 4,395 $ 7,919
United States........... 1,483 1,593 2,496
Germany................. 48 61 58
------- ------- -------
$ 6,927 $ 6,049 $10,473
======= ======= =======
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
AUGUST 31, 1996 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
-------------------------- -------------------------- --------------------------
COST DEPRECIATION NET COST DEPRECIATION NET COST DEPRECIATION NET
------ ------------ ------ ------ ------------ ------ ------ ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long leasehold
property............... $ 585 $ 24 $ 561 $ 587 $ 25 $ 562 $ 604 $ 39 $ 565
Fixtures and equipment.. 1,341 541 800 1,433 570 863 1,990 1,029 961
Motor vehicles.......... 19 19 -- 19 19 -- 63 5 58
------ ---- ------ ------ ---- ------ ------ ------ ------
$1,945 $584 $1,361 $2,039 $614 $1,425 $2,657 $1,073 $1,584
====== ==== ====== ====== ==== ====== ====== ====== ======
</TABLE>
The net book value of motor vehicles at September 30, 1997 includes $46 in
respect of assets held under capital leases.
F-32
<PAGE>
8. OPERATING INCOME
Operating income is stated after charging:
<TABLE>
<CAPTION>
YEAR ENDED MONTH ENDED YEAR ENDED
AUGUST 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997
---------- ------------- -------------
<S> <C> <C> <C>
Depreciation of owned fixed assets..... $ 284 $30 $ 462
Depreciation of assets held under
finance leases........................ -- -- 5
Amortization and write-off of
goodwill.............................. 48 9 136
Research and development............... 1,015 89 1,035
</TABLE>
9. COMPANIES ACT 1985
These financial statements are not the Company's statutory accounts within
the meaning of section 240 of the Companies Act 1985 of Great Britain. The
Company's statutory accounts are prepared in accordance with accounting
principles generally accepted in the UK in compliance with the Companies Act
1985 and are prepared in sterling. Statutory accounts for the year ended
August 31, 1996 and the thirteen month period ended September 30, 1997, on
which the auditors have given unqualified audit reports, have been delivered
to the Registrar of Companies for England and Wales.
10. EMPLOYEE PROFIT-SHARING AND OPTION PLANS
The Company has adopted two share option schemes as follows.
The employee share option scheme was established on March 19, 1996. The
grant of options under the scheme is discretionary and dependant on the Board
being satisfied that the grant is merited by the individual in the light of
personal performance and contribution to the business.
The executive share option scheme covers senior executives within the group.
The grant of options under the scheme is discretionary and dependant on the
Board being satisfied that the grant is merited by the individual in the light
of personal performance and future contributions to the business.
F-33
<PAGE>
4-SIGHT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
A summary of the options outstanding under the schemes is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE
EMPLOYEE SCHEME -------- ----------- ---------------- --------
<S> <C> <C> <C> <C>
Granted on March 19, 1996... $.15 2,627,332 5 years $.15
Lapsed...................... .15 (46,612)
---------
Outstanding at August 31,
1996....................... .15 2,580,720 5 years .15
Lapsed...................... --
---------
Outstanding at Sept 30,
1996....................... 2,580,720 5 years .15
Lapsed...................... (150,621)
---------
Outstanding at Sept. 30,
1997....................... .15 2,430,099 5 years .15
=========
EXECUTIVE SCHEME
Granted on March 19, 1996... .15 995,000 5 years .15
Lapsed...................... --
---------
Outstanding at August 31,
1996....................... .15 995,000 5 years .15
Lapsed...................... --
---------
Outstanding at Sept 30,
1996....................... 995,000 5 years .15
Lapsed...................... --
---------
Outstanding at Sept. 30,
1997....................... .15 995,000 5 years .15
=========
</TABLE>
None of the options were exercisable as at August 31, 1996, September 30,
1996 and September 30, 1997.
The Company accounts for options granted under these plans in accordance
with APB No. 25. Each stock option has an exercise price equal to or above the
market value on the date of grant and accordingly no compensation expense is
recorded for any stock option grants. No options were granted during the
period to September 30, 1997.
The weighted average fair value of options granted at market price in the
year ended August 31, 1996 was 4.5p ($0.07). The determination of the fair
value of the stock options granted in 1996 was calculated using the Black
Scholes method based on (i) risk-free interest rates of 5.4%, (ii) expected
option lives of 6 years and (iii) dividend yield of 0%.
Pro forma information regarding net income and income per share is required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. For
the purposes of pro forma disclosure, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MONTH ENDED YEAR ENDED
AUGUST 31, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
--------------- ------------------ ------------------
<S> <C> <C> <C>
Net income (loss) as
reported............... $ 1,478 $ (61) $ 1,588
Pro forma net
income(loss)........... 1,465 (63) 1,561
Net income per ordinary
share as reported
Basic and diluted..... 0.0296 (0.0012) 0.0301
Pro forma net income per
ordinary share
Basic and diluted..... 0.0293 (0.0013) 0.0296
</TABLE>
F-34
<PAGE>
GLOSSARY
The following terms are used in this Offering Memorandum.
Address A point of origin or selected destination on an electric
circuit, such as a telephone number or an e-mail address.
ADSL Asymmetrical Digital Subscribers Line. A technology designed
for conventional copper wire connections which provides a 1.5-
8 Mbps downstream data transfer rates, and 16-640 Kbps
upstream data transfer rates. The speed of the connection is
limited by the distance the signal must travel.
Architecture The overall design of a computer system, including how the
components are connected both physically and functionally.
ATM Asynchronous transfer mode. A communications protocol that
divides digital data into small packets of fixed length (53
byte cells) that facilitates high speed switching.
Bandwidth The number of bits of information which can move through a
communications medium in a given amount of time; the capacity
of a telecommunications circuit/network to carry voice, data
and video information. Typically measured in Kbps and Mbps.
Bandwidth from public networks is typically available to
business and residential end-users in increments from 56 Kbps
to T-3.
Binary A numbering system in base two, which uses only the digits 0
and 1. The first three binary numbers are 01, 10, and 11.
Bit A contraction of "binary digit." It is the smallest piece of
information in a digital system, a 0 or 1.
bps Bits per second. The speed at which a modem can transmit bits
over a telephone line. Standard telephone modems currently
operate at levels of 9,600 bps, 14,400 bps, 28,800 bps, 33,300
bps and 56,000 bps.
Bug An error in hardware or software that prevents it from
operating properly.
Browser Software used to view information on the Internet.
Byte A basic unit of computer information, usually composed of 8
bits. A kilobyte (KB) equals 1,024 bytes. A megabyte (MB)
equals 1,024KB. A gigabyte (GB) equals 1,024MB, or more than
one billion bytes.
CD-ROM Compact Disk-Read Only Memory. A laser disk that stores
digital information that cannot be changed.
CIS Customer Information System. Software a customer uses to track
transactions or billing information.
DS1
The bandwidth of a telephone line capable of transmitting
approximately 1.54 megabits per second. Also referred to as
"T1."
DS3
The bandwidth of a telephone line capable of transmitting
approximately 45 megabits per second. Also referred to as
"T3."
Database An organized collection of information or data in digital form
that is readable by a computer, and may include text, numbers,
images, sounds and video or film clips.
Digital Composed of, or employing, discrete binary representations of
information.
A-1
<PAGE>
Distribution-
Hub A local distribution hub developed by the Company as part of
the WAMINET Service.
Firewall A system placed between networks that filters data passing
through it and prevents unauthorized traffic, thereby
enhancing the security of the network.
Frame Relay A system like ATM that divides digital data into small packets
and routes the packets over a circuit.
GUI Graphical User Interface. A program that allows a user to
operate a computer by selecting and activating graphic symbols
(icons) on the computer display screen, generally by using a
mouse, without having to type instructions on the computer
keyboard.
Hub A sophisticated computer that is capable of converting
protocols, changing transmissions speeds, and routing data to
a variety of nodes.
Icon A graphic symbol appearing on a computer screen that
represents a foundation, object or program and may be chosen
and activated by a graphic user interface.
Interface The boundary where different computer media or devices are
connected.
Internet A global collection of interconnected computer networks which
uses the Internet protocol suite.
ISDN Integrated Services Digital Network. A larger bandwidth
digital telephone services as distinguished from standard,
smaller bandwidth, analog telephone service. DS1 and DS3 are
both ISDN services.
Kbps Kilobits per second. A transmission rate. One kilobit equals
1,024 bits of information.
LAN Local Area Network. A computer network that is principally
contained inside one building or complex and is primarily
connected by direct wires.
Laser Disk A small disk on which digital data are stored as minute pits
or bumps, and which is read by a laser beam. Common examples
are the audio compact disc and the CD-ROM. A 5.25 inch laser
disk is typically capable of storing 680 megabytes.
Mbps Megabits per second. A transmission rate. One megabit equals
1,024 kilobits.
Menu A list of routine command options that appears on a screen in
an interactive program with a graphic user interface.
Modem A device that converts digital data into electrical impulses
for transmission over telephone lines.
Network The interconnection of many individual computers allowing
access to central databases and communication between
computers. Networks serve as thoroughfares over which data are
transported.
NAD Network Access Device. A programmed equipment module developed
by the Company that is leased to its customers and serves as
the interface between the customer's own computers and the
WAM!NET Service.
NOC Network Operations Center. A regional distribution hub developed
by the Company as part of the WAM!NET Service.
A-2
<PAGE>
Nodes Systems or devices, such as computers, terminals, or
communication units, that are connected to a LAN or other
circuit and that have discrete electronic addresses.
On-line Commercial information services that offer a computer user
Service access to a specified slate of information, entertainment, and
communications menus on what appears to be a single system.
Pre-press The various steps involved in the preparation and combination
of text, graphic design, graphics, color separations, photo
retouching, page assembly, printing plate layout, and image
setting that are performed before printing.
Protocol The rules or procedures that control how data are organized
and transmitted from one computer to another.
ROC Regional operations center.
Router A device that uses multiple protocols to link networks and to
locate a node on a network.
T1 See DS1.
T3 See DS3.
A-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[Logo]
WAM!NET Inc.
All tendered Original Notes, executed Letters of Transmittal, and other
related documents should be directed to the Exchange Agent. Requests for
assistance and for additional copies of the Prospectus, the Letter of
Transmittal and other related documents should be directed to the Exchange
Agent.
The Exchange Agent
for the Exchange Offer is
U.S. BANK TRUST NATIONAL ASSOCIATION
(f/k/a First Trust National Association)
By Facsimile:
(612) 244-1145
Attention: Specialized Finance
Confirm by telephone:
(612) 244-0444
By Registered or Certified Mail:
U.S. Bank Trust National Association
180 East 5th Street
St. Paul, Minnesota 55101
Attention: Specialized Finance, 4th Floor
By Hand/Overnight Courier:
U.S. Bank Trust National Association
180 East 5th Street
St. Paul, Minnesota 55101
Attention: Specialized Finance, 4th Floor
or
U.S. Bank Trust New York
100 Wall Street
Bond Window, 20th Floor
New York, New York 10005
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 302A.521 of the Minnesota Business Corporation Act generally
provides for the indemnification of directors, officers and employees of a
corporation made or threatened to be made a party to a proceeding by reason of
the former or present official capacity of the person against judgments,
penalties and fines (including attorneys' fees and disbursements) where such
person, among other things, has not been indemnified by another organization,
acted in good faith, received no improper personal benefit, and with respect
to any criminal proceeding, had no reasonable cause to believe his conduct was
unlawful.
Section 9.3 of the Company's Amended and Restated Articles of Incorporation
provide:
9.3 Indemnification. A director of the Corporation shall not be
personally liable to the Corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director, except for (i)
liability based on a breach of the duty of loyalty to the Corporation or
the shareholders (ii) liability for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law; (iii)
liability under Minnesota Statutes Section 302A.559 or 80A.23; or (iv)
liability for any transaction from which the director derived an improper
personal benefit. If Chapter 302A, the Minnesota Business Corporation Act,
is hereafter amended to authorize the further elimination or limitation of
the liability of directors, then the liability of a director of the
Corporation, in addition to the limitation on personal liability provided
herein, shall be limited to the fullest extent permitted by the amended
Chapter 302A, the Minnesota Business Corporation Act. Any repeal or
modification of this Section 9.3 by the shareholders of the Corporation
shall be prospective only, and shall not adversely affect any limitation on
the personal liability of a director of the Corporation at the time of such
repeal or modification.
Section 9.01 of the Company's By-Laws provides:
Section 9.01. The corporation shall indemnify all officers and directors
of the corporation, for such expenses and liabilities, in such manner,
under such circumstances and to such extent as permitted by Minnesota
Business Corporation Act section 302A.521, as now enacted or hereafter
amended. Unless otherwise approved by the board of directors, the
corporation shall not indemnify any employee of the corporation who is not
otherwise entitled to indemnification pursuant to the prior sentence of
this section 9.01.
The Company maintains an insurance policy providing for indemnification of
its officers, directors and certain other persons against liabilities and
expenses incurred by any of them in certain stated proceedings and under
certain stated conditions.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
2.1 Agreement for the Sale and Purchase of the entire issued share
capital of 4-Sight Limited dated February 11, 1998, among the
Company, WAM!NET (UK) Limited and the Selling Shareholders listed
therein.*
2.2 Agreement and Plan of Reorganization dated December 17, 1997 by
and among NetCo Communications Corporation, NetCo Acquiring
Corporation, FreeMail, Inc. and the shareholders listed therein.**
3.1 Amended and Restated Articles of Incorporation of the Company.**
3.2 By-Laws of the Company.*
4.1 Indenture dated as of March 5, 1998, between the Company, as
Issuer, and First Trust National Association, as Trustee.*
4.2(a) Certificate for the Rule 144A Original Notes ($200,000,000).*
4.2(b) Certificate for the Rule 144A Original Notes ($8,030,000).*
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
4.3 Certificate for the Regulation S Original Notes.*
4.4 Certificate for the Rule 144A Warrants.*
4.5 Certificate for the Regulation S Warrants.*
4.6(a) Rule 144A Unit Certificate. (200,000 Units)*
4.6(b) Rule 144A Unit Certificate. (8,030 Units)*
4.7 Certificate for the Regulation S Units.*
4.8 Form of Certificate for the Exchange Notes (included in Exhibit 4.1
hereto).
4.9 Common Stock Certificate.*
4.10 Registration Rights Agreement, dated March 5, 1998, among the
Company and Merrill Lynch Pierce, Fenner & Smith Incorporated,
Credit Suisse First Boston Corporation and First Chicago Capital
Markets, Inc.*
4.11 Common Stock Registration Rights Agreement, dated as of March 5,
1998, among the Company, WorldCom Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Credit Suisse First Boston Corporation
and First Chicago Capital Markets, Inc.*
4.12 Warrant Agreement, dated as of March 5, 1998, by and between the
Company and First Trust National Association, as Warrant Agent, to
purchase common stock of the Company.*
5 Opinion of Willkie Farr & Gallagher.**
8 Opinion of Willkie Farr & Gallagher with respect to certain tax
matters.**
10.1 Credit Agreement among the Company, the Lending Institutions party
thereto, as Lenders, The First National Bank of Chicago, as Agent,
dated as of September 26, 1997.*
10.2 Ten Percent Convertible Note Purchase Agreement between the Company
and WorldCom Inc. dated September 12, 1996 ($5,000,000 Note).*
10.3 Preferred Stock, Subordinated Note and Warrant Purchase Agreement
between the Company and WorldCom Inc. dated November 14, 1996.*
10.4 $28,500,000 Seven Percent Subordinated Note due December 31, 2003,
payable to WorldCom Inc.*
10.5 Certificate Representing 100,000 Shares of Class A Preferred Stock
of the Company issued to WorldCom Inc.*
10.6 Warrants to purchase 4,157,500 Shares of Common Stock of the
Company exercisable on or before December 31, 2000, issued to
WorldCom Inc.*
10.7 Right of Refusal Agreement Among WorldCom Inc., Edward Driscoll III
and Alan L. Witters dated December 16, 1996.*
10.8 Guaranty Agreement dated September 26, 1997, by and between the
Company and WorldCom Inc.*
10.9 Certificate for 1,679,234 Class A Warrants and 2,840,967 Class B
Warrants to purchase Common Stock of the Company, issued to
WorldCom Inc.*
10.10 Sublease dated September 24, 1997 between the Company and 1250895
Ontario Limited, relating to the property located at 6100 110th
Street West, Bloomington, Minnesota.*
10.11 Service Provision Agreement dated as of July 18, 1997, by and
between the Company and Time Inc.**
10.12 Standby Agreement dated as of July 19, 1997 by and between WorldCom
Inc. and Time Inc.**
10.13 Employment Agreement dated as of November 14, 1996, by and between
the Company and Edward J. Driscoll III.*
10.14 Employment Agreement dated as of November 14, 1996, by and between
the Company and Allen Witters.*
10.15 Employment Agreement dated as of April 16, 1996, by and between the
Company and James R. Clancy.*
10.16 Employment Agreement dated as of May 10, 1995, as amended, by and
between the Company and Mark Marlow.*
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.17 Agreement dated February 11, 1998 between the Company and WorldCom,
Inc. modifying certain terms of the (i) 10% Convertible Subordinated
Note, due September 30, 1999, (ii) 7% Subordinated Note, due
December 31, 2003, and (iii) 100,000 shares of Series A Preferred
Stock, all of which are held by WorldCom, Inc.**
10.18 Intentionally omitted.
10.19 Amended and Restated 1994 Stock Option Plan.*
10.20 1998 Combined Stock Option Plan.**
10.21 Agreement dated June 5, 1997 between the Company and WorldCom, Inc.
regarding data services provided by WorldCom, Inc. to the Company.**
12 Statement re Computation of Ratios.**
21 List of Subsidiaries of the Company.**
23.1 Consent of Ernst & Young LLP.**
23.2 Consent of Ernst & Young, chartered accountants.**
23.3 Consent of Willkie Farr & Gallagher (included in their opinions
filed as Exhibit 5 and
Exhibit 8 hereto).
24 Power of Attorney (included on the signature page hereto).*
25 Statement on Form T-1 of Eligibility of Trustee.*
27 Financial Data Schedule.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Letter to Clients.*
99.4 Form of Letter to Nominees.*
</TABLE>
* Previously filed.
** Filed herewith.
(b) Financial Statement Schedules:
All schedules have been omitted because they are not applicable or not
required or the required information is included in the financial statements
or notes thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions, described under Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of their counsel the matter has been settled by controlling
precedent, submit to court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned Registrants hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
this Registration Statement when it became effective.
II-3
<PAGE>
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) ((S) 230.424(b) of this
chapter) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) If the registrant is a foreign private issuer, to file a post-
effective amendment to the registration statement to include any financial
statements required by (S) 210.3-19 of this chapter at the start of any
delayed offering or throughout a continuous offering. Financial statements
and information otherwise required by Section 10(a)(3) of the Act need not
be furnished, provided that the registrant includes in the prospectus, by
means of a post-effective amendment, financial statements required pursuant
to this paragraph (a)(4) and other information necessary to ensure that all
other information in the prospectus is at least as current as the date of
those financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3 ((S) 239.33 of this chapter), a post-
effective amendment need not be filed to include financial statements and
information required by Section 10(a)(3) of the Act or (S) 210.3-19 of this
chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Form F-3.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT ON FORM S-4 (FILE
NO. 333-53841) TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF MINNEAPOLIS, STATE OF MINNESOTA, ON THE 10TH DAY OF
JULY, 1998.
WAM!NET Inc.
/s/ EDWARD J. DRISCOLL III
By: _________________________________
NAME: EDWARD J. DRISCOLL III
TITLE: CHAIRMAN OF THE BOARD, CHIEF
EXECUTIVE OFFICER, PRESIDENT
AND TREASURER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT ON FORM S-4 (FILE NO. 333-53841) HAS BEEN SIGNED
BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
Chairman of the
/s/ EDWARD J. DRISCOLL III Board, Chief July 10, 1998
- ------------------------------------- Executive Officer,
EDWARD J. DRISCOLL III President and
Treasurer
(principal
executive and
financial officer)
Director
* July 10, 1998
- -------------------------------------
CHARLES T. CANNADA
Director
* July 10, 1998
- -------------------------------------
ROBERT L. HOFFMAN
Director
* July 10, 1998
- -------------------------------------
CURTIS G. GRAY
Director
/s/ K. WILLIAM GROTHE, JR. July 10, 1998
- -------------------------------------
K. WILLIAM GROTHE, JR.
/s/ MARK MARLOW Director of Finance
- ------------------------------------- (principal July 10, 1998
MARK MARLOW accounting officer)
/s/ MARK MARLOW
By: ____________________________
MARK MARLOW,
ATTORNEY-IN-FACT
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
2.1 Agreement for the Sale and Purchase of the entire issued share
capital of 4-Sight Limited dated February 11, 1998, among the
Company, WAM!NET (UK) Limited and the Selling Shareholders
listed therein.*
2.2 Agreement and Plan of Reorganization dated December 17, 1997 by
and among NetCo Communications Corporation, NetCo Acquiring
Corporation, FreeMail, Inc. and the shareholders listed
therein.**
3.1 Amended and Restated Articles of Incorporation of the
Company.**
3.2 By-Laws of the Company.*
4.1 Indenture dated as of March 5, 1998, between the Company, as
Issuer, and First Trust National Association, as Trustee.*
4.2(a) Certificate for the Rule 144A Original Notes ($200,000,000).*
4.2(b) Certificate for the Rule 144A Original Notes ($8,030,000).*
4.3 Certificate for the Regulation S Original Notes.*
4.4 Certificate for the Rule 144A Warrants.*
4.5 Certificate for the Regulation S Warrants.*
4.6(a) Rule 144A Unit Certificate. (200,000 Units)*
4.6(b) Rule 144A Unit Certificate. (8,030 Units)*
4.7 Certificate for the Regulation S Units.*
4.8 Form of Certificate for the Exchange Notes (included in Exhibit
4.1 hereto).
4.9 Common Stock Certificate.*
4.10 Registration Rights Agreement, dated March 5, 1998, among the
Company and Merrill Lynch Pierce, Fenner & Smith Incorporated,
Credit Suisse First Boston Corporation and First Chicago
Capital Markets, Inc.*
4.11 Common Stock Registration Rights Agreement, dated as of March
5, 1998, among the Company, WorldCom Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston
Corporation and First Chicago Capital Markets, Inc.*
4.12 Warrant Agreement, dated as of March 5, 1998, by and between
the Company and First Trust National Association, as Warrant
Agent, to purchase common stock of the Company.*
5 Opinion of Willkie Farr & Gallagher.**
8 Opinion of Willkie Farr & Gallagher with respect to certain tax
matters.**
10.1 Credit Agreement among the Company, the Lending Institutions
party thereto, as Lenders, The First National Bank of Chicago,
as Agent, dated as of September 26, 1997.*
10.2 Ten Percent Convertible Note Purchase Agreement between the
Company and WorldCom Inc. dated September 12, 1996 ($5,000,000
Note).*
10.3 Preferred Stock, Subordinated Note and Warrant Purchase
Agreement between the Company and WorldCom Inc. dated November
14, 1996.*
10.4 $28,500,000 Seven Percent Subordinated Note due December 31,
2003, payable to WorldCom Inc.*
10.5 Certificate Representing 100,000 Shares of Class A Preferred
Stock of the Company issued to WorldCom Inc.*
10.6 Warrants to purchase 4,157,500 Shares of Common Stock of the
Company exercisable on or before December 31, 2000, issued to
WorldCom Inc.*
10.7 Right of Refusal Agreement Among WorldCom Inc., Edward Driscoll
III and Alan L. Witters dated December 16, 1996.*
10.8 Guaranty Agreement dated September 26, 1997, by and between the
Company and WorldCom Inc.*
10.9 Certificate for 1,679,234 Class A Warrants and 2,840,967 Class
B Warrants to purchase Common Stock of the Company, issued to
WorldCom Inc.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.10 Sublease dated September 24, 1997 between the Company and
1250895 Ontario Limited, relating to the property located at
6100 110th Street West, Bloomington, Minnesota.*
10.11 Service Provision Agreement dated as of July 18, 1997, by and
between the Company and Time Inc.**
10.12 Standby Agreement dated as of July 19, 1997 by and between
WorldCom Inc. and Time Inc.**
10.13 Employment Agreement dated as of November 14, 1996, by and
between the Company and Edward J. Driscoll III.*
10.14 Employment Agreement dated as of November 14, 1996, by and
between the Company and Allen Witters.*
10.15 Employment Agreement dated as of April 16, 1996, by and between
the Company and James R. Clancy.*
10.16 Employment Agreement dated as of May 10, 1995, as amended, by
and between the Company and Mark Marlow.*
10.17 Agreement dated February 11, 1998 between the Company and
WorldCom, Inc. modifying certain terms of the (i) 10%
Convertible Subordinated Note, due September 30, 1999, (ii) 7%
Subordinated Note, due December 31, 2003, and (iii) 100,000
shares of Series A Preferred Stock, all of which are held by
WorldCom, Inc.**
10.18 Intentionally omitted.
10.19 Amended and Restated 1994 Stock Option Plan.*
10.20 1998 Combined Stock Option Plan.**
10.21 Agreement dated June 5, 1997 between the Company and WorldCom,
Inc. regarding data services provided by WorldCom, Inc. to the
Company.**
12 Statement re Computation of Ratios.**
21 List of Subsidiaries of the Company.**
23.1 Consent of Ernst & Young LLP.**
23.2 Consent of Ernst & Young, chartered accountants.**
23.3 Consent of Willkie Farr & Gallagher (included in their opinions
filed as Exhibit 5 and Exhibit 8 hereto).
24 Power of Attorney (included on the signature page hereto).*
25 Statement on Form T-1 of Eligibility of Trustee.*
27 Financial Data Schedule.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Letter to Clients.*
99.4 Form of Letter to Nominees.*
</TABLE>
- --------
*Previously filed.
**Filed herewith.
<PAGE>
EXHIBIT 2.2
AGREEMENT AND PLAN OF REORGANIZATION
Agreement and Plan of Reorganization ("Agreement") made and entered by and
among Netco Communications Corporation ("Netco"), Netco Acquiring Corporation
("NAC"), FreeMail, Inc. ("FreeMail"), Glenn Kreisel ("Kreisel"), Steve Saroff
("Saroff"), Chris Coyle ("Coyle"), Steve Barrett ("Barrett"), Greg Gianforte
("Gianforte"), Ray Kreisel ("Ray Kreisel") and William Knight ("Knight,"
Kreisel, Saroff, Coyle, Barrett, Gianforte, Ray Kreisel and Knight individually
and collectively referred to as "Shareholders").
RECITALS:
a. Netco is a corporation duly organized and existing under the laws of
the state of Minnesota. NAC is a corporation duly organized and existing under
the laws of the state of Minnesota, and is a wholly owned subsidiary of Netco.
FreeMail is a corporation duly organized and existing under the laws of the
state of Montana.
b. If the conditions for merger contemplated herein are satisfied,
FreeMail shall be merged with and into NAC (the "Merger") pursuant to this
Agreement and the Plan and Articles of Merger ( the "Merger Plan") attached
hereto as Exhibit A.
c. The respective boards of directors of Netco and FreeMail deem it
advisable for the general welfare and advantage of the respective corporations
and their respective shareholders that, subject to the terms and conditions
contained herein and in accordance with the applicable laws of the states of
Minnesota and Montana, the Merger can be accomplished.
d. Whereas, the Shareholders own all of the issued and outstanding shares
of FreeMail.
AGREEMENTS:
NOW, THEREFORE, in consideration of the agreements, provisions and
covenants herein contained, the parties hereby agree as follows:
ARTICLE I
MERGER
1.1 Filing of Merger Plan. Subject to the conditions contained in Article
---------------------
V of this Agreement, the Merger Plan shall be filed with the Minnesota Secretary
of State and the Montana Secretary of State as soon as practicable following the
time when the last of the conditions as set forth in Article V hereof shall have
been fulfilled or such earlier or later time as may be mutually agreed to by the
parties.
1.2 Definitions. The time of delivery of the Merger Plan to the Minnesota
-----------
Secretary of State pursuant to the preceding section is herein referred to as
the "Time of Filing." The "Effective Date of the Merger" shall be the date and
time the Certificate of Merger is filed with the Minnesota Secretary of State.
<PAGE>
1.3 The Merger.
----------
(a) Conversion of Securities. At the Effective Date of the Merger:
------------------------
(i) The separate existence of FreeMail shall cease, and FreeMail shall
be merged with and into NAC, which shall be the surviving
corporation of the Merger.
(ii) The outstanding shares of FreeMail common stock shall be converted
into an aggregate of 25,000 Netco common shares in accordance with
the following conversion formula: Twenty Five Thousand (25,000)
divided by the sum of the number of outstanding shares of FreeMail.
Such Netco common shares will be distributed to the persons
(shareholders) named and in the amounts set forth on Schedule
1.3(a) to this Agreement. No fractional shares of Netco shall be
issued.
(iii) All issued and outstanding shares of NAC shall remain issued and
outstanding.
(iv) The name of NAC shall be changed to "FreeMail, Inc.", or such
substantially similar name as the parties shall agree upon.
(b) Additional Contingent Consideration.
-----------------------------------
(i) Subject to the terms of this Section 1.3(b), and subject to Netco
and NAC's right of offset as described in Section 8.3 below, Netco
shall pay to the Shareholders the additional contingent
consideration ("Additional Contingent Consideration") as, and not
exceeding the total amount, provided in this Section 1.3(b).
(ii) Netco shall pay allocably to the Shareholders as Additional
Contingent Consideration an aggregate quarterly sum (the "Quarterly
Payment") equal to five percent (5%) of the gross collected revenue
derived by Netco and/or NAC from the items listed on Schedule
1.3(b) to this Agreement ("FreeMail Product") provided, Netco shall
have no obligation to sell or otherwise commercialize such items
except as it may determine to do so in its sole judgment.
(iii) The Quarterly Payment shall be allocated among the Shareholders
ratably to their receipt of Netco common shares according to
Schedule 1.3(a) to this Agreement.
(iv) The total amount of Quarterly Payments payable by Netco in
accordance with this Section 1.3(b) shall not exceed Three Million
Twelve Thousand Five Hundred Dollars ($3,012,500.00), less any
amounts offset under Section 8.3 below.
(v) The Quarterly Payments will be made within thirty (30) days
following the end of each calendar quarter. At the time of each
Quarterly Payment, Netco shall furnish to a duly appointed
representative selected by a majority of the Shareholders a
reasonably detailed statement showing (a) the name of Netco's
customer respecting whom any calculation and payment of Quarterly
Payment is due under this Agreement, (b) the amount of gross
revenue billed for FreeMail Product each such customer during the
calendar quarter for which such calculation is made, (c)
2.
<PAGE>
the amount of gross revenue collected from each such customer for
FreeMail Product during the calendar quarter for which such
calculation is made, (d) the amount, if any, of uncollectible
receivables written off for each such customer for FreeMail
Product, and (e) a reconciliation showing the amount remaining
receivable from each such customer for FreeMail Product. The duly
appointed representative of a majority of the FreeMail Holders, or
its agent and/or accountant shall have the right, exercisable no
more often than once each year, to examine Netco's records during
normal business hours, upon ten day's prior written notice, to
confirm the adequacy and accuracy of the Quarterly Payments and of
the related quarterly statements since the then most recent of (x)
the Effective Date of the Merger, (y) the last such examination, or
(y) twenty four (24) months. Netco shall promptly pay any
deficiency revealed by such examination together with simple
interest at the rate of eight percent (8%) per annum from date on
which any such deficient amounts first became payable through the
date of payment. In addition, if such deficiencies exceed five
percent (5%) of the total amount owned for the period to which the
examination relates, Netco shall also pay all reasonable costs and
expenses incurred by the FreeMail Holders, and by their duly
appointed representative, in the conduct of such examination.
(c) Status of FreeMail Securities After the Merger. After the Effective
----------------------------------------------
Date of the Merger:
(i) Until surrendered, each outstanding certificate which prior to the
Effective Date of the Merger represented common stock of FreeMail
shall be deemed for all corporate purposes (subject to the further
provisions of this Section 1.3(c)(i) and Section 1.3(d)) to
evidence the number of Common Shares of Netco into which they are
converted in accordance with the terms of this Agreement. After the
Effective Date of the Merger, there shall be no further registry or
transfer on FreeMail's records of its common stock which had been
outstanding immediately prior to the Effective Date of the Merger,
and, if certificates representing such shares are presented to
Netco and are reflected on FreeMail's Stock register as validly
issued and outstanding, the shares represented by such certificates
shall be treated in accordance with the above conversion terms of
this Agreement. No dividends or distributions shall be paid to
persons entitled to receive certificates for shares of Netco Common
Shares until such persons shall have surrendered their certificates
representing FreeMail common stock; provided, however, that when
such certificates have been so surrendered in exchange for
certificates of Netco Common Shares, there shall be paid to the
holders thereof, but without interest thereof, all dividends and
other distributions payable subsequent to and in respect of record
dates after the Effective Date of the Merger on the Netco Common
Shares for which such certificates shall have been so exchanged.
(ii) If any certificate representing shares of FreeMail common stock (or
the right to purchase FreeMail common stock) is surrendered in
exchange for Netco Common Shares and the certificate for such Netco
Common Shares is to be issued in a name
3.
<PAGE>
other than that in which the certificate surrendered for exchange
is registered, it shall be a condition of such exchange that the
certificate so surrendered shall be properly endorsed or otherwise
in proper form for transfer and that the person requesting such
exchange shall pay to Netco or its transfer agent any transfer or
other taxes required by reason of the issuance of Common Shares in
any name other than that of the registered holder of the
certificate for shares, options or warrants so surrendered.
1.4 Tax Considerations. Neither Party makes any representation
------------------
regarding the taxability of the transaction contemplated by this Agreement or
the Merger Plan.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF NETCO
Netco represents and warrants to FreeMail and the Shareholders that the
following are true and correct as of the date hereof:
2.1 Organization and Related Matters. Netco is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the State of
Minnesota. Netco has the corporate power to carry on its business as now being
conducted, to execute and deliver this Agreement and the Merger Plan, and to
consummate the transactions contemplated hereby. NAC has been duly organized
under the laws of the State of Minnesota for the purpose of carrying out the
transaction contemplated hereby, and is validly existing and has the corporate
power to execute and deliver this Agreement and the Merger Plan, and to
consummate the transactions contemplated hereby.
2.2 Capital Stock of Netco.
----------------------
(a) Shares, Preferred Shares, Convertible Debt, Warrants and Options
----------------------------------------------------------------
Outstanding.
-----------
(i) As of the date hereof, the authorized capital stock of Netco
consists of 20,000,000 shares of which 15,000,000 are Common Shares
and 5,000,000 are undesignated shares.
(ii) 1,300,791 Common Shares are issued and outstanding and have been
validly issued and are fully paid and nonassessable and are not
subject to preemptive rights.
(iii) 100,000 of the undesignated shares have been designated and issued
as the Class A Preferred Stock ("Preferred Stock") having the
rights and preferences set forth on Schedule 2.2(a) hereof.
(iv) Except as contemplated by this Agreement and as disclosed on
Schedule 2.2(a) to this Agreement, there are no outstanding
subscriptions, options, warrants or other rights of any kind to
acquire any additional shares of capital stock of Netco, or other
instruments or securities convertible into or exchangeable for, or
which otherwise confer on the holder thereof any right to acquire,
any such additional
4.
<PAGE>
shares, nor is Netco committed to issue any such option, warrant,
right, or security, or any other instrument convertible into a
security.
(b) Validity. The designation of the terms, classes, series and
relative rights and preferences of the shares of authorized capital stock of
Netco has been established in the articles or incorporation of Netco and in
accordance with the laws of Minnesota respecting the designations of common and
preferred shares, and such terms, rights and preferences are valid and binding
on Netco and its shareholders. All outstanding Netco Common Shares and Preferred
Stock have been duly authorized and validly issued, and are fully paid and
nonassessable. All outstanding convertible debt, warrants and options of Netco
have been duly authorized and validly issued, and are valid and binding
obligations of Netco, enforceable in accordance with their terms. Except for the
special right of the holders of the Preferred Stock to elect a majority of
Netco's board of directors until December 31, 1999, there are no special voting
rights, cumulative voting rights or preemptive rights in respect of outstanding
Netco securities.
2.3 Status of Capital Stock to be Issued. The Netco Common Shares to be
------------------------------------
issued the shareholders of FreeMail pursuant to this Agreement and the Merger
Plan, when so issued, will be duly authorized, validly issued, fully paid and
non-assessable.
2.4 Subsidiaries. Netco has three wholly owned subsidiary corporations:
------------
(a) WAM!NET Inc., a Minnesota corporation;
(b) NAC, a Minnesota corporation;
(c) Netco Communications of Canada, Inc., a Canadian corporation.
2.5 Financial Statements.
--------------------
(a) Financial Statements. Netco has previously furnished to FreeMail
--------------------
true and correct copies of its financial statements for the year ended December
31, 1996 (the "Netco Annual Financial Statements") audited by Ernst & Young,
independent public accountants, together with true and correct copies of Netco's
unaudited interim financial statements ("Netco Interim Financial Statements")
for the six months ended June 30, 1997. All such financial statements have been
prepared in accordance with generally accepted accounting principals ("GAAP")
and fairly present the financial position of Netco as of the dates thereof and
for the periods indicated, except that the Netco Interim Financial Statements do
not include all notes or adjustments that may be required by GAAP.
(b) No Adverse Changes. Since the date of the Netco Interim Financial
------------------
Statements, there has not occurred or arisen in the ordinary course of business
or otherwise: (i) any material adverse change in the financial condition,
results of operations or prospects of Netco or (ii) any other event or condition
known to Netco which materially and adversely affects or may be reasonably
expected to affect the assets, business or prospects of Netco.
2.6 Tax and Other Returns and Reports. All federal and state tax
---------------------------------
returns and tax reports required to be filed by Netco have been filed with the
appropriate governmental agencies
5.
<PAGE>
in all jurisdictions in which such returns and reports are required to be filed,
and all federal and state income and other taxes (including interest and
penalties) shown on such returns and reports to be due from Netco have been paid
or adequately provided for on the books and financial statements of Netco, or
are being contested in good faith by appropriate proceedings and are not
material to Netco. Such federal income tax returns have not been subjected to
examination or audit by the Internal Revenue Service or any governmental
authority.
2.7 No Breaches of Statute or Contract; Required Consents.
-----------------------------------------------------
(a) Netco is not in violation of any applicable law, statute, order,
rule or regulation promulgated or judgment entered (or known by Netco to be
pending or imminent) by any federal or state court, or federal, state or local
governmental authority relating to the operation, conduct or ownership of the
property or business of Netco, which violation might have a material adverse
effect, individually or in the aggregate, on the financial condition, the
business operations, or the business prospects of Netco, or which may be
reasonably expected to impair the consummation of the transactions contemplated
hereby.
(b) The execution and delivery by Netco of this Agreement and of the
Merger Plan by Netco, and the compliance by Netco with the terms and provisions
of this Agreement or the Merger Plan, will not:
(i) conflict with, or result in a breach of, any of the terms,
conditions or provisions of Netco's articles of incorporation,
bylaws or other governing instruments, or any judgment, order,
decree or ruling to which Netco is subject, of any court or
governmental authority, or of any agreement, contract or commitment
listed on any Schedule hereto and which is material to the
financial condition or results of operations of Netco; or
(ii) require the affirmative consent of any nongovernmental third party,
except the affirmative consent of WorldCom, Inc., in accordance
with agreements between Netco and WorldCom, Inc.
2.8 Litigation and Related Matters. Netco is not a party or subject to
------------------------------
any legal, administrative, arbitration, investigatory, or other proceedings, or
other controversy, nor does Netco have knowledge of any proceedings that are
threatened, which may be reasonably expected, individually or in the aggregate,
to materially and adversely affect the financial condition or results of
operations of Netco, except:
(a) Arbitration proceeding entitled, Piper Jaffray, Inc., Claimant vs.
Netco Communications Corporation, Respondent, before the National Association of
Securities Dealers, Inc., case no. 9703288, claiming a commission of $1,450,000;
and
(b) Related litigation by Netco against Piper Jaffray, Inc., and Joseph
Caruso in the District Court of Hennepin, County, State of Minnesota The suit
against Piper Jaffray seeks a declaratory judgment invalidating the engagement
letter upon which the claim for commission
6.
<PAGE>
identified above is based. The suit against Caruso seeks damages arising from
his representations and conduct in connection with his obtaining and performing
the engagement.
2.9 Authorization of Agreement. The execution and delivery, and subject
--------------------------
to the receipt of the affirmative consent of WorldCom, Inc., the performance of
this Agreement and the Merger Plan by Netco and by NAC have been duly and
validly authorized and approved by the Board of Directors of Netco, and Netco
has taken, or will use its best efforts to take prior to the Time of Filing, all
action required by law, its articles of incorporation and bylaws, and all other
action required to authorize the execution, delivery and performance of this
Agreement and the Merger Plan.
2.10 Status of Netco Common Shares to be Issued.
------------------------------------------
(a) The Common Shares of Netco to be issued to the Shareholders
identified in Schedule 1.3(a) pursuant to this Agreement and the Merger
Plan have not been registered for sale under the Securities Act of 1933, as
amended ("the Act"), or applicable state security laws and will be issued
to the Shareholders in reliance upon Section 4(2) of the Act and Regulation
D of the General Rules and Regulations ("Rules") of the Securities and
Exchange Commission promulgated under the Act, and under applicable
exemptions from registration under applicable state laws. All such Common
Shares so issued will be "restricted securities" within the meaning of Rule
144(a)(3) of the Rules. All certificates representing Netco Common Shares
will be endorsed by Netco with the following legend:
"The shares represented by the within certificate have not
been registered under the Act, as amended, or under the
securities laws of any state of the United States. These
shares may not be sold, transferred, assigned, hypothecated,
or otherwise disposed of, without the prior opinion of the
holder's counsel in form and substance satisfactory to Netco
Communications Corporation to the effect that the proposed
disposition is exempt from the registration requirements of
the Act and any applicable state securities law. This legend
restricts the transferability of this certificate."
(b) In connection with, and in consideration of, the sale of 25,000 Netco
Common Shares to the Shareholders, the Shareholders, and each of them, by
the execution of this Agreement represent and warrant to Netco that
(i) the Shareholders, and each of them, have been given
access to full and complete information regarding Netco; and
(ii) that the Shareholders, and each of them, can bear the
economic risk of an investment in 25,000 Netco Common Shares
for an indefinite of time, can afford to sustain a complete
loss of such investment and acknowledge that the receipt of
the Netco
7.
<PAGE>
Shares is an illiquid investment and that they individually have no
need for liquidity in connection with this investment; and
(iii) that the Shareholders, and each of them, realize that there
will be no market for the 25,000 Netco Common Shares, that there are
significant restrictions on transferability of the 25,000 Netco
Common Shares as provided above and that for this reason, among
others, that the Shareholders may not be able to liquidate an
investment in the 25,000 Shares for an indefinite period; and
(iv) that the Shareholders, and each of them, represents and warrants
they are bona fide residents of the State of Montana and the 25,000
Netco Common Shares are being acquired by the Shareholders, and each
of them, solely for the individual shareholder's own benefit, and not
as a nominee for, on behalf of, or for the beneficial interest of
another, or to transfer to any other person, trust, or organization.
2.11 No Broker's or Finder's Fees. No agent, broker, investment banker,
----------------------------
person or firm acting on behalf of Netco or under the authority of Netco is, or
will be entitled to, any broker's or finder's fee, or any other commission or
similar fee directly or indirectly in connection with any of the transactions
contemplated hereby.
2.12 Documents. Netco will make available upon request for inspection,
---------
review and copying by FreeMail and/or the Shareholders, at or prior to the
Closing, true and correct copies of:
(a) any document or agreement referred to in this Agreement to which
Netco is a party;
(b) each and every material contract or agreement between Netco and any
third party;
(c) each and every material contract or agreement between Netco and any
subsidiary of Netco;
(d) each and every material contract or agreement between any subsidiary
of Netco and any third party; and
(e) any other document requested by FreeMail and/or any Shareholder.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FREEMAIL AND SHAREHOLDERS
FreeMail and the Shareholders jointly and severally represent and warrant
to Netco and NAC as of the date hereof and as of the Closing Date as follows:
8.
<PAGE>
3.1 Organization and Related Matters. FreeMail is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the State of
Montana. FreeMail has the corporate power to carry on its business as now being
conducted, to execute and deliver this Agreement and the Merger Plan, and to
consummate the transactions contemplated hereby.
3.2 Capital Stock of FreeMail.
-------------------------
(a) Shares and Other Securities Outstanding
(i) As of the date hereof, the authorized capital stock of FreeMail
consists of 50,000 shares and no par common stock.
(ii) As of the date hereof, and as of the Closing Date, there are 37,500
of common stock of FreeMail issued and outstanding, and they all
have been validly issued and are fully paid and nonassessable and
are not subject to preemptive rights.
(iii) There are no outstanding subscriptions, options, warrants or other
rights of any kind to acquire any additional shares of capital
stock of FreeMail, or other instruments or securities convertible
into or exchangeable for, or which otherwise confer on the holder
thereof any right to acquire, any such additional shares, nor is
FreeMail committed to issue any such option, warrant, right, or
security, or any other instrument convertible into a security.
(b) Validity. The designation of the terms, classes, series and
--------
relative rights and preferences of the shares of authorized capital stock of
FreeMail has been established in the articles or incorporation of FreeMail and
in accordance with the laws of Montana respecting the designation of terms,
classes, series, and relative rights and preferences of shares, and such terms,
rights and preferences are valid and binding on FreeMail and its shareholders
and are fully set forth in the Articles of Incorporation of FreeMail. All
outstanding FreeMail Common Shares have been duly authorized and validly issued,
and are fully paid and nonassessable. FreeMail has no outstanding convertible
debt, warrants, options or other rights to acquire, or rights convertible into,
any common or other equity security of FreeMail There are no special voting
rights, cumulative voting rights or preemptive rights in respect of outstanding
FreeMail securities.
3.3 Subsidiaries. FreeMail has no subsidiary corporations.
------------
3.4 Financial Statements.
--------------------
(a) Financial Statements. FreeMail has previously furnished to Netco
--------------------
true and correct copies of its unaudited financial statements for the nine-month
period ended September 30, 1997 (the "FreeMail Financial Statements") certified
as true and correct by the officers of FreeMail. All such financial statements
have been prepared in accordance with generally accepted accounting principals
and fairly present the financial position of FreeMail as of the dates thereof
and for the periods indicated. All such financial statements are deemed to
include the notes thereto, respectively.
9.
<PAGE>
(b) No Adverse Changes. Since the date of the FreeMail Financial
------------------
Statements, there has not occurred or arisen in the ordinary course of business
or otherwise: (i) any material adverse change in the financial condition or
prospects of FreeMail or (ii) any other event or condition known to FreeMail
which materially and adversely affects or may affect the assets, business or
prospects of FreeMail.
3.5 Tax and Other Returns and Reports. All federal, state and local tax
---------------------------------
returns and tax reports required to be filed by FreeMail have been properly
completed and filed with the appropriate governmental agencies in all
jurisdictions in which such returns and reports are required to be filed, and
all federal and state income and other taxes (including interest and penalties)
shown on such returns and reports to be due from FreeMail have been paid or
adequately provided for an the books and financial statements of FreeMail, or
are being contested in food faith by appropriate proceedings and are not
material to FreeMail. Such returns and reports have not been subjected to
examination or audit by the Internal Revenue Service or any other governmental
authority, and such returns and reports correctly reflect the facts existing at
the time they were filed regarding the income, business, assets, operations and
activities and other matters of FreeMail and other information required to be
reported therein. There is no material omission, deficiency, error, misstatement
or misrepresentation, whether innocent, unintentional or fraudulent, in any such
report filed by FreeMail.
3.6 No Breaches of Statute or Contract; Required Consents.
-----------------------------------------------------
(a) FreeMail is not in violation of any applicable law, statute, order,
rule or regulation promulgated or judgment entered (or known by FreeMail to be
pending or imminent) by any federal or state court, or federal, state or local
governmental authority relating to the operation, conduct or ownership of the
property or business of FreeMail, which violation might have a material adverse
effect, individually or in the aggregate, on the financial condition, results of
operations, or the business prospects of FreeMail, or which might impair the
consummation of the transactions contemplated hereby.
(b) The execution and delivery of this Agreement and of the Merger Plan
by FreeMail, and the compliance by FreeMail with the terms and provisions of
this Agreement or the Merger Plan will not:
(i) conflict with, or result in a breach of, any of the terms,
conditions or provisions of FreeMail's articles of incorporation,
bylaws or other governing instruments, or any judgment, order,
decree or ruling to which FreeMail is subject, of any court or
governmental authority, or of any agreement, contract or commitment
listed on any Schedule hereto and which is material to the
financial condition or results of operations of FreeMail; or
(ii) require the affirmative consent of any nongovernmental third party.
3.7 Litigation and Related Matters. FreeMail is not a party or subject
------------------------------
to any legal, administrative, arbitration, investigatory, or other proceedings,
or other controversy, nor does FreeMail have knowledge of any proceedings that
are threatened, which might, individually or in
10.
<PAGE>
the aggregate, materially and adversely affect the financial condition or
results of operations of FreeMail.
3.8 Authorization of Agreement. The execution and delivery, and subject
--------------------------
to the receipt of the affirmative vote of the FreeMail Holders, the performance
of this Agreement and the Merger Plan by FreeMail have been duly and validly
authorized and approved by the Board of Directors of FreeMail, and FreeMail has
taken, or will use its best efforts to take prior to the Time of Filing, all
action required by law, its articles of incorporation and bylaws, and all other
action required to authorize the execution, delivery and performance of this
Agreement and the Merger Plan.
3.9 No Broker's or Finder's Fees. No agent, broker, investment banker,
----------------------------
person or firm acting on behalf of FreeMail or under the authority of FreeMail
is, or will be entitled to, any broker's or finder's fee, or any other
commission or similar fee directly or indirectly in connection with any of the
transactions contemplated hereby.
3.10 Documents. FreeMail has made or will make available for inspection,
---------
review and copying by Netco at least ten (10) days prior to closing, true and
correct copies of:
(a) any document or agreement referred to in this Agreement to which
FreeMail is a party;
(b) each and every material contract or agreement between FreeMail and
any third party;
(c) any other document requested by Netco.
3.11 Absence of Certain Payments. Neither FreeMail, nor any director,
---------------------------
officer, agent, employee or other person associated with, or acting on behalf,
of FreeMail has used any corporate funds for unlawful contributions, gifts,
entertainment, or other direct or indirect unlawful expenditures relating
political activity, or made any direct or indirect unlawful payments to
governmental officials or employees from corporate funds or established or
maintained any unlawful or unrecorded funds.
3.12 Assets; Absence of Conflicting Claims, or Encumbrances.
------------------------------------------------------
(a) FreeMail is the sole and lawful owner of all assets or properties
owned or used by FreeMail, including but not limited to, the assets listed on
Schedule 3.12(a), (the "FreeMail Assets") free from any claims, liens or
encumbrances by, for or on behalf of any third party:
Each of the FreeMail Assets is in good operating condition, ordinary wear and
tear excepted. The FreeMail Assets constitute the assets that are necessary or
relate to FreeMail's business and operations as they are presently conducted.
(b) At the Effective Date of the Merger, NAC will become the sole and
lawful owner of the assets listed in Section 3.12(a) , free from any claims,
liens or encumbrances by, for or on behalf of any party.
11.
<PAGE>
3.13 Contracts. Attached as Schedule 3.13 is a complete and accurate
---------
list as of the date hereof of all of the following types of contracts,
commitments and other agreements, oral or written, to which FreeMail is a party
or by which FreeMail or its properties are bound, which list shall include the
full names of each party to each agreement and the date of execution thereof:
joint venture or partnership agreements, contracts or collective bargaining
arrangements with any labor organizations, loan agreements, promissory notes,
debentures, leases, powers of attorney, indemnity or guaranty agreements, bonds,
mortgages, options to purchase land, liens, pledges or other security
agreements, agreements for the employment of any individual, agreements under
which FreeMail has advanced or loaned any amount to stockholders or any
employee, officer or director of FreeMail, any guaranties by FreeMail, any
agreement concerning confidentiality or noncompetition, and any other agreement
or instrument under which the consequences of a default or termination could
have an adverse effect on the business, financial condition, results of
operations or prospects of FreeMail. None of the agreements listed on Schedule
3.13 have been modified, altered, terminated or otherwise amended and there have
been no waivers, oral agreements, representations or other statements with
relation to any such agreements except as described in Schedule 3.13. FreeMail
has complied with the obligations pertaining to it contained in such contracts,
commitments and other agreements, is not in default thereunder and no notice of
default has been received nor will the consummation of the transactions
contemplated by this Agreement result in such a default. To the best of
FreeMail's knowledge, there is no default by any other party to any contract,
commitment or other agreement attached as Schedule 3.13. Since the date of the
most recent balance sheet included in the FreeMail Financial Statements, no
customers of FreeMail have canceled or substantially reduced the purchase of
goods or services, have notified FreeMail of their intent to cancel or reduce
their purchases of goods or services service or are attempting or threatening to
cancel or substantially reduce their purchases of goods or service. There is no
pending or threatened labor dispute involving FreeMail and any group of its
respective employees and FreeMail has not experienced any labor interruptions
over the past three years. There are no outstanding powers of attorney executed
on behalf of FreeMail.
3.14. Insurance Policies. Attached as Schedule 3.14 are complete and
------------------
accurate copies as of the date hereof of all insurance policies carried by
FreeMail and an accurate list of all insurance loss runs and workers'
compensation claims received for the past three policy years. All current
insurance policies are in full force and effect and shall remain in full force
and effect through the Closing Date. FreeMail's insurance has never been
canceled, and FreeMail has never been denied coverage.
3.15 Directors, Officers, Employees and Independent Contractors;
-----------------------------------------------------------
Compensation. Attached as Schedule 3.15 is a complete and accurate list of all
- ------------
employees, officers, directors and independent contractors of FreeMail, and the
rate of compensation of each (including a breakdown of the portion thereof
attributable to salary, bonus and other compensation, respectively) as of the
date hereof. Except as set forth on Schedule 3.15, each employee of FreeMail is
an employee at will.
3.16 Employee Plans. Attached as Schedule 3.16 are complete and accurate
--------------
copies, as of the date hereof, of all employee benefit plans, all employee
welfare benefit plans, all employee pension benefit plans, all multi-employer
plans and all multiple-employer welfare arrangements (as defined in Sections
3(3), (1), (2), (37) and (40), respectively, of the Employee Retirement Income
12.
<PAGE>
Security Act of 1974, as amended ("ERISA")) which are currently maintained
and/or sponsored by FreeMail, or to which FreeMail currently contributes, or has
an obligation to contribute in the future (including, without limitation,
employment agreements and any other agreements containing "golden parachute"
provisions and deferred compensation agreements), together with copies of any
trusts related thereto and a classification of employees covered thereby
(collectively, the "Plans"); together with a list of all such Plans that have
been terminated within the past three years.
3.17 Compliance with ERISA. Neither FreeMail, any Controlled Group Member
---------------------
(as defined in Code Section 414(n)(6)(B)), nor any business, subsidiary,
division or operation acquired by FreeMail or a Controlled Group Member in the
last five years, ever have maintained or sponsored, or contributed to, an
employee pension benefit plan (as defined in ERISA Section 3(2)) which is
subject to the provisions of Title IV of ERISA. Except for the Plans, FreeMail
neither maintains or sponsors, or is a contributing employer to, a pension,
profit-sharing, deferred compensation, stock option, employee stock purchase or
other employee benefit plan, employee welfare benefit plan, or any other
arrangement with its employees. All Plans are in substantial compliance with
all applicable provisions of ERISA and the regulations issued thereunder, as
well as with all other laws applicable to such Plans, and, in all material
respects, have been administered, operated and managed in substantial accordance
with the governing documents. All Plans that are intended to qualify (the
"Qualified Plans") under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code") have been determined by the Internal Revenue Service to be
so qualified, and copies of the current plan determination letters, most recent
Form 5500, or, as applicable, Form 5500-C/R filed with respect to each such
Qualified Plan or employee welfare benefit plan and most recent trustee or
custodian report, are included as part of Schedule 3.16 hereof. To the extent
that any Qualified Plans have not been amended to comply with the laws and
regulations applicable to such Plan, the remedial amendment period permitting
retroactive amendment of such Qualified Plans has not expired and will not
expire within 120 days after the Closing Date. All reports and other documents
required to be filed with any governmental agency or distributed to plan
participants or beneficiaries (including, but not limited to, annual reports,
summary annual reports, actuarial reports, PBGC-1 Forms, audits or tax returns)
have been timely filed or distributed. Neither any Plan nor FreeMail, has
engaged in any transaction prohibited under the provisions of Section 4975 of
the Code or Section 406 of ERISA. No Plan has incurred an accumulated funding
deficiency, as defined in Section 412(a) of the Code and Section 302(l) of
ERISA. Further:
(a) there have been no terminations, partial terminations or
discontinuance of contributions to any Qualified Plan without notice to and
approval by the Internal Revenue Service;
(b) with respect to Plans which qualify as "group health plans" under
Section 4980B of the Internal Revenue Code and Section 607(1) of ERISA and
related regulations (relating to the benefit continuation rights imposed by
"COBRA"), FreeMail and Stockholders have complied (and on the Closing Date will
have complied), in all respects with all reporting, disclosure, notice, election
and other benefit continuation requirements imposed thereunder as and when
applicable to such plans, and FreeMail has no (and will incur no) direct or
indirect liability and is not (and will not be) subject to any loss, assessment,
excise tax penalty, loss of federal income tax
13
<PAGE>
deduction or other sanction, arising on account of or in respect of any direct
or indirect failure by FreeMail and Stockholders or any of them, any time prior
to the Closing Date to comply with any such federal or state benefit
continuation requirement, which is capable of being assessed or asserted before
or after the Closing Date directly or indirectly against FreeMail or
Stockholders, or any of them with respect to such group health plans;
(c) there is no pending or threatened litigation, arbitration, or disputed
claim, settlement or adjudication proceeding, or investigation with respect to
any Plan, or with respect to any fiduciary, administrator, or sponsor thereof
(in their capacities as such), or any party in interest thereof;
(d) the FreeMail Financial Statements reflect the approximate total
pension, medical and other benefit expense for all Plans for the periods covered
by the applicable Financial Statement, and no material funding changes or
irregularities are reflected thereon which would cause such Financial Statements
to be not representative of most prior periods;
(e) FreeMail has no (and will not incur any) retiree health care
obligations to its employees;
(f) FreeMail has no (and will not incur any) severance pay obligation to
its employees and no severance pay will be due to any employee of FreeMail as a
result of the transaction contemplated herein; and
(g) With respect to any Plan which qualifies as a group health plan, such
plan is fully insured and all premiums have been paid on a timely basis and are
paid in full as of the Closing Date or, to the extent such plan is not fully
insured, all self insured obligations have been met as of the Closing Date and
are fully reflected in the plan's financial statements. To the extent that any
of FreeMail's group health plans are retrospectively rated, there are no
liabilities capable of assertion against FreeMail in respect of claims already
incurred and present.
3.18 Bank Accounts; Depositories. Attached as Schedule 3.18 is a
---------------------------
complete and accurate list as of the date of this Agreement, of the name of each
financial institution in which FreeMail has any account or safe deposit box; the
names in which each account or box is held; the type of each account; and the
name of each person authorized to draw on or have access to each account or box.
3.19 Accounts Receivable. Attached as Schedule 3.19 is a complete and
-------------------
accurate list of all accounts and notes receivable of FreeMail as of November
30, 1997, including receivables from and advances to officers, directors,
employees and stockholders and also including all such accounts and notes
receivable which are not reflected in FreeMail's Financial Statements. Also
attached as Schedule 3.19 is an aging of all accounts and notes receivable
showing amounts due in 30 day aging categories. Except to the extent reflected
on Schedule 3.19, each account and note receivable is collectible in the full
amount shown on Schedule 3.19.
3.20 No Undisclosed Liabilities. FreeMail does not have any liabilities
--------------------------
or claims of any kind whatsoever, whether secured or unsecured, accrued or
unaccrued, fixed or contingent,
14
<PAGE>
matured or unmatured, known or unknown, direct or indirect, contingent or
otherwise and whether due or to become due (referred to herein individually as a
"Liability" and collectively as "Liabilities"), other than:
(a) Liabilities that are fully reflected or reserved for in the FreeMail
Financial Statements; or
(b) Liabilities incurred by FreeMail in the ordinary course of business
after the date of the most recent balance sheet included in the FreeMail
Financial Statements (none of which results from, arises out of, relates to, is
in nature of, or was caused by any breach of contract, breach of warranty, tort,
infringement, or violation of law).
Prior to the Closing Date, FreeMail shall deliver a true, correct and
complete schedule of all liabilities (including accounts payable) of FreeMail as
of the Closing Date.
3.21 Inventories. All of the inventories of FreeMail, whether reflected
-----------
in FreeMail's Financial Statements or otherwise, consist of a quality and
quantity usable and saleable in the ordinary course of the business, and the
present quantities of all inventory of FreeMail are reasonable in the present
circumstances of FreeMail's business as currently conducted or as proposed to be
conducted.
3.22 Intellectual Property Rights. FreeMail owns or has the unrestricted
----------------------------
right to use, and Schedule 3.22 attached hereto contains a detailed listing of,
all patents, patent applications, patent rights, registered and unregistered
trademarks, trademark applications, trade names, service marks, service mark
applications, copyrights, computer programs and other computer software,
inventions, know-how, trade secrets, technology, proprietary processes, trade
dress and formula (collectively, "Intellectual Property Rights") used in, or
necessary for, the operation of FreeMail's business as currently conducted or
proposed to be conducted. Except as set forth on Schedule 3.22, the use of all
Intellectual Property Rights necessary or required for the conduct of the
business of FreeMail as presently conducted and as proposed to be conducted does
not infringe on or violate the Intellectual Property Rights of any person or
entity. Except as described in Schedule 3.22:
(a) FreeMail does not own or use any Intellectual Rights pursuant to any
written license agreement;
(b) FreeMail has not granted any person or entity any rights, pursuant to
a written license agreement or otherwise, to use any Intellectual Property
Rights; and
(c) all of said Intellectual Property Rights of FreeMail are free and
clear or all liens, security interests, and other encumbrances.
3.23 Books and Records. The books of account, minute books, stock record
-----------------
books and other records of FreeMail, all of which have been made available to
Netco, are complete and correct in all material respects and have been
maintained in accordance with reasonable business practices. FreeMail's minute
books contain accurate and complete records of all formal meetings held of, and
in corporate action taken by, the shareholders, the Board of Directors, and
15
<PAGE>
committees of the Board of Directors of FreeMail. At the Closing, all such books
and records will be in the possession of FreeMail.
3.24 Accuracy of Information. No representation or warranty made by
-----------------------
FreeMail in this Agreement, the schedules or exhibits attached hereto, or in any
agreement, instrument, document, certificate, statement or letter furnished or
to be furnished to Netco or NAC at the Closing by or on behalf of FreeMail or
the FreeMail shareholders in connection with any of the transactions
contemplated by this Agreement contains or will contain any untrue statement of
material fact, or admit or will admit to state any material fact necessary in
order to make the statements herein or therein not misleading in light of the
circumstances in which they are made, and all of the foregoing completely and
correctly present the information required or purported to be set forth herein
or therein. There is no material fact as of the date hereof which has not been
disclosed in writing to Netco to which FreeMail has knowledge related to
FreeMail, its operations, properties, financial operation or prospects which has
a material adverse effect or, to the knowledge of FreeMail, in the future may
have a material adverse effect, on FreeMail. FreeMail's representations and
warranties contained in this Agreement or any other document delivered pursuant
hereto shall not be affected or deemed late by reason of the fact that Netco or
NAC, or the representative of either of them, knew or should have known that any
such representation and warranty is or might be inaccurate in any respect.
ARTICLE IV
CONDUCT AND TRANSACTIONS PRIOR TO THE
EFFECTIVE DATE OF THE MERGER
4.1 Investigation.
-------------
(a) Netco and FreeMail agrees to use their best efforts respectively, to
give to each other, to each other's representatives and agents and, subject to
the provisions of Section 4.1(c), to the FreeMail Holders full and complete
access to their respective premises and books and records and to cause their
respective officers to furnish each other and, subject to the provisions of
Section 4.1(c), to the FreeMail Holders with such financial and operating data
and other information with respect to their respective business and properties;
provided, however, that any such investigation:
(i) Shall be conducted in such manner as not to interfere unreasonably wit
the operation of the business of either Netco or FreeMail; and
(ii) Shall not affect any of the representations, warranties or agreements
given by either Netco or FreeMail hereunder.
(b) In the event of the termination of this Agreement or of the Merger
Plan for any reason, Netco and FreeMail will each return immediately all
documents obtained in connection with the transaction contemplated hereby and
not disclose or utilize any non-public information obtained from the other.
16
<PAGE>
(c) As a condition to furnishing any confidential or proprietary
information to FreeMail Holders, Netco may require each such FreeMail Holder to
furnish a written agreement, in form and substance satisfactory to Netco, to the
effect that each such FreeMail holder will maintain the confidentiality of any
confidential or proprietary information furnished by Netco, and will not
disclose to any one or use such confidential or proprietary information for any
purpose whatsoever, except for the purpose of determining whether to approve the
Merger Plan.
4.2 Business Organization. FreeMail will use its best efforts to
---------------------
preserve substantially intact its business organizations, to keep available the
services of its present officers, and to preserve its present relationships with
all entities or persons having significant business dealings with it.
4.3 Conduct of Business. Except as otherwise contemplated in this
-------------------
Agreement, FreeMail will not, without the prior written consent of Netco:
(a) issue or commit to issue, and capital stock or other ownership
interest;
(b) grant, or commit to grant, any options, warrants, or other rights to
subscribe for, purchase or otherwise acquire any securities or other ownership
interest, or issue, any securities convertible into or exchangeable for, shares
of its capital stock or other ownership interests, with the sole exception of
shares issuable by FreeMail upon exercise or conversion of any option, warrant
or other convertible security or interest set forth on Schedule 3.2(a) of this
Agreement;
(c) declare, set aside or pay any dividend or distribution;
(d) directly or indirectly redeem, purchase or otherwise acquire, or
commit to acquire, any of its capital stock or other ownership interest, or
directly or indirectly terminate or reduce or commit to terminate or reduce, any
bank line of credit or availability of any funds under any other loan or
financing agreement;
(e) effect a stock split, reclassification or recapitalization;
(f) change its articles of incorporation, its bylaws or any other of its
governing instruments;
(g) borrow, or agree to borrow, any funds, or guarantee or agree to
guarantee, the obligations of others, or indemnify, or agree to indemnify, the
obligations of others;
(h) waive, or commit to waive, any right of substantial value;
(i) increase the amount or rate of compensation for any employee or
independent contractor;
(j) enter into any agreement to dispose of any FreeMail Assets, except in
the ordinary course of business; or
17
<PAGE>
(k) enter into any other agreements of merger or share exchange, or
any other agreement with respect to the shares of capital stock of FreeMail; or
(viii) enter into an agreement, contract, or commitment which, if
entered into prior to the date of this Agreement, would be required to
be listed in Schedule 3.13 of this Agreement.
4.4 Shareholder Approval. FreeMail will submit this Agreement and the
--------------------
Merger Plan to its shareholders for approval, all as provided by law, either by
a unanimous written action of shareholders or at a meeting, which shall be
effected as soon as practicable, and will use its best efforts to obtain the
approval of such shareholders.
4.5 Consents. Netco and FreeMail shall use their respective best
--------
efforts to obtain the consent or approval of each person identified in this
Agreement, including any Schedule hereto, whose consent or approval is required
in connection with the execution, delivery or performance of this Agreement and
the Merger Plan.
4.6 Payment of Expenses. Netco and FreeMail will each pay all
-------------------
expenses each incurs in connection with the transaction contemplated hereby (in
the case of FreeMail, prior to the Closing Date), including fees of their
respective legal counsel, plus other out-of-pocket expenses.
4.7 No Public Announcement. Between the date of this Agreement and
----------------------
the Closing Date, neither Netco nor FreeMail will, without the prior written
consent of the other, make any oral or written announcement concerning this
transaction except as may be required by law, all of which announcements, if
any, shall be forwarded to the other for review and comment at least seven days
prior to dissemination.
ARTICLE V
CONDITIONS OF MERGER; ABANDONMENT OF MERGER
5.1 General Conditions. The obligations of the parties hereto to
------------------
effect the Merger shall be subject to the following conditions.
(a) Approvals. The shareholders of FreeMail and the Board of
---------
Directors of Netco shall have approved this Agreement and the Merger Plan.
(b) Consents. All third parties , including WorldCom, Inc., whose
--------
consents are necessary to the consummation of the Merger shall have consented to
this Agreement, the Merger Plan and the consummation of the Merger.
(c) No Governmental Proceedings. No governmental action or proceeding
---------------------------
shall have been instituted and, at what would otherwise have been the Time of
Filing, remain pending by or before a court or other governmental body, agency
or authority to restrain or prohibit the transactions contemplated by this
Agreement.
18
<PAGE>
(d) Statutory Requirements. All statutory requirements for valid
----------------------
consummation of the transactions contemplated by this Agreement and the Merger
Plan by Netco, NAC and FreeMail, respectively, shall have been fulfilled; and
all authorizations, consents and approvals of all federal and state governmental
agencies and authorities required to be obtained to permit such consummation, if
any, shall have been obtained.
(e) Complete Disclosure. This Agreement and the Schedules hereto and all
-------------------
other documents and information furnished by either party to the other, and its
representatives pursuant hereto or pursuant to the negotiation of this
transaction or the investigations of Netco or FreeMail, or the employees or
representatives of either of them, do not, and will not, as of the Effective
Date of the Merger, include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements herein or therein not
misleading.
5.2 Conditions to Obligations of Netco. The obligations of Netco to
----------------------------------
effect the Merger shall be subject to the following conditions:
(a) Representations and Warranties of FreeMail and Shareholders to be
-----------------------------------------------------------------
true. The representations and warranties of FreeMail and Shareholders herein
shall be true in all material respects at the Closing Date with the same effect
as though made at and as of such time, except to the extent waived hereunder of
affected by the transaction contemplated herein and by the Schedules delivered
hereunder. FreeMail shall have performed all obligations and complied with all
covenants and conditions required by this Agreement to be performed or complied
with by it at or prior to the Time of Filing; and FreeMail shall have delivered
to Netco certificates of FreeMail, signed by appropriate officers of FreeMail
and dated as of the Closing Date, in form and substance satisfactory to Netco to
all such effects.
(b) Litigation. FreeMail shall not have become a party to any litigation
----------
or the subject of any legal, administrative, arbitration, investigatory or other
proceeding.
(c) Opinion of Counsel. Netco shall have received from Steve Barrett,
------------------
counsel for FreeMail and Shareholders, an opinion dated as of the Closing Date
and in form and substance satisfactory to Netco and its counsel, substantially
in the form of Exhibit 5.2(c).
--------------
(d) Shareholder Approval. FreeMail shall have obtained the approval, as
--------------------
required by law, of all of its shareholders for the consummation of the Merger.
(e) Dissenters' Rights. No Shareholder of FreeMail shall have exercised or
------------------
asserted their dissenters' rights.
(f) Delivery of Employment Agreements. FreeMail shall have obtained from
----------------------------------
Steve Saroff and Glenn Kreisel, and delivered to Netco employment agreements
between Steve Saroff and Glenn Kreisel, respectively, and Netco to become
effective upon the Effective Date of the Merger, which employment agreements are
appended hereto as Schedule 5.2(f)(1) and Schedule 5.2(f)(2), respectively.
5.3 Conditions to Obligations of FreeMail. The obligations of FreeMail to
-------------------------------------
effect the Merger shall be subject to the following conditions:
19
<PAGE>
(a) Representations and Warranties of Netco to be True. The
--------------------------------------------------
representations and warranties of Netco herein shall be true in all material
respects at the Closing Date with the same effect as though made at and as of
such time, except to the extent waived hereunder of affected by the transaction
contemplated herein and by the Schedules delivered hereunder. Netco shall have
performed all obligations and complied with all covenants and conditions
required by this Agreement to be performed or complied with by it at or prior to
the Time of Filing; and Netco shall have delivered to FreeMail certificates of
Netco, signed by appropriate officers of Netco and dated as of the Closing Date,
in form and substance satisfactory to Netco to all such effects.
(b) Litigation. Neither Netco nor NAC shall have become a party to any
----------
additional litigation or the subject of any legal, administrative, arbitration,
investigatory or other proceeding, which, if decided adversely to Netco or NAC
would have a material adverse effect on either of them.
(c) Opinion of Counsel. FreeMail shall have received from Larkin,
------------------
Hoffman, Daly & Lindgren, Ltd., counsel for Netco, an opinion dated as of the
Closing Date and in form and substance satisfactory to FreeMail and its counsel,
substantially in the form of Exhibit 5.3(c).
--------------
5.4 Termination of Agreement and Abandonment of Merger. Anything herein
--------------------------------------------------
to the contrary notwithstanding, this Agreement, the Merger Plan and the Merger
contemplated hereby may be terminated at any time before the Time of Filing,
whether before or after approval of the shareholders of FreeMail and the board
of directors of Netco as follows, and in no other manner:
(a) Mutual Consent. By written mutual consent of Netco and FreeMail.
--------------
(b) General Conditions not Met. By the board of directors of Netco or of
--------------------------
FreeMail if any of the conditions set forth in Section 5.1 shall not have been
met.
(c) Conditions to Netco's Performance not Met. By the board of directors
-----------------------------------------
of Netco if any of the conditions set forth in Section 5.2 shall not have been
met.
(d) Conditions to FreeMail's Performance not Met. By the board of
--------------------------------------------
directors of FreeMail if any of the conditions set forth in Section 5.3 shall
not have been met.
(e) Expiration Date. By the board of directors of Netco or of FreeMail if
---------------
the Merger shall not have become effective by December 31, 1997, which date may
be extended by mutual agreement of the boards of directors of Netco and
FreeMail.
ARTICLE VI
TERMINATION OF OBLIGATIONS AND WAIVER OF CONDITIONS
6.1 Termination. In the event that this Agreement shall be terminated
-----------
pursuant to Section 5.4 hereof or if the Merger shall not be consummated for any
reason, all further obligations of the parties hereto under this Agreement shall
terminate without further liability of any party to another; provided, however,
that in the event of such termination or failure to
20
<PAGE>
consummate the Merger, the obligations set forth under Section 4(1)(b) and
4(1)(c) shall survive any such termination.
6.2 Waiver of Conditions.
--------------------
(a) In any of the conditions specified in Section 5.1 hereof has not been
met, Netco and FreeMail may mutually agree to proceed with the transactions
contemplated hereby, to the extent not otherwise prohibited by law.
(b) If any of the conditions specified in Section 5.2 hereof has not been
satisfied, Netco may nevertheless at its sole election proceed with the
transactions contemplated hereby.
(c) If any of the conditions specified in Section 5.3 hereof has not been
satisfied, FreeMail may nevertheless at its sole election proceed with the
transactions contemplated hereby.
ARTICLE VII
CLOSING
7.1 Closing Date. The closing of the transactions contemplated herein
------------
shall occur at the offices of Netco on December 18, 1997, or at such other time
and place as may be agreed by the parties.
7.2 Documents to be Delivered by Netco. At the closing, Netco shall
----------------------------------
deliver to FreeMail (or shall have previously delivered to FreeMail) duly
executed or endorsed as required herein, all documents required to be delivered
pursuant to this Agreement and such other documents as FreeMail shall reasonably
request.
7.3 Documents to be Delivered by FreeMail. At the closing, FreeMail shall
-------------------------------------
deliver to Netco (or shall have previously delivered to Netco) duly executed or
endorsed as required herein, all documents required to be delivered pursuant to
this Agreement, and such other documents as Netco shall reasonably request,
including, without limitation, a certificate of the appropriate officers of
FreeMail to the effect that the representations and warranties given by FreeMail
in this Agreement are true and correct at the time of Closing.
ARTICLE VIII
GENERAL
8.1 Amendments. Subject to applicable law, this Agreement and the Merger
----------
Plan and any Schedule or Exhibit attached hereto or amendment thereof, may be
amended upon authorization by the boards of directors of the parties hereto
before or after any meeting of shareholders or obtaining of consents from third
parties, at any time before the Time of Filing; provided that no such amendment
effected after any shareholder meeting of obtaining of consent from a third
party shall, without the requisite consent of shareholders or third parties,
alter the conversion formula set forth in Section 1.3(a) hereof.
21
<PAGE>
8.2 Schedules and Exhibits. Each Schedule and Exhibit delivered pursuant
----------------------
to this Agreement shall be in writing and shall constitute a part of this
Agreement.
8.3 Survival of Representations and Warranties. The representations and
------------------------------------------
warranties given by each party to the other shall survive the execution and
closing. The Shareholders shall jointly and severally indemnify and hold
harmless Netco and NAC from and against any and all liabilities, claims,
damages, actions, suits, proceedings, demands, losses, costs and expenses
(including without limitation reasonable attorneys' fees and expenses or
reasonable expenses and investigation which result either before or after the
date of this Agreement from: (a) any breach of, misrepresentation in, untruth
in or inaccuracy in the representations and warranties by Shareholders and/or
FreeMail, and (b) nonfulfillment or nonperformance of any agreement, covenant or
condition on the part of Shareholders or FreeMail contained in this Agreement.
Netco may, in addition to any other right or remedy available to it by law or
under this Agreement, deduct from the Additional Contingent Consideration
otherwise due to the FreeMail Holders the amount or amounts of damages or loss
incurred by Netco as a result of such untrue representation or warranty.
8.4 Taxes. The Shareholders irrevocably agree to indemnify and hold
-----
harmless the Purchaser against and from:
(a) any and all federal, state, local, and other taxes of FreeMail arising
from the audit, examination, review or other adjustment of tax liabilities
for periods ending on or prior to the Closing Date; and
(b) any and all taxes, interest, penalties, additions to tax (or
additional amounts imposed with respect to any such interest, penalties, or
additions to tax) imposed with respect to any federal, state, local, or
other taxes of FreeMail for periods ending on or before the Closing Date.
In addition, the Shareholders agree that they shall be responsible, at
their sole and absolute expense, for the (i) preparation of FreeMail's federal,
state, local and other income and franchise tax returns for the tax period
ending on the Closing Date; (ii) delivery of the Schedule K-1s to all of the
Shareholders; and (iii) payment of all taxes due for such period, if any. The
Shareholders further agree that such returns shall be prepared, and the income
or loss of FreeMail determined, by closing the books of FreeMail on the Closing
Date pursuant to Section 1362(e)(3) of the Internal Revenue Code of 1986, as
amended. Prior to filing the returns provided for in this paragraph, the
Shareholders agree to allow NAC thirty (30) business days to review and approve
such returns, approval of which will not unreasonably be withheld.
8.5 Governing Law. This Agreement and the legal relations between the
-------------
parties shall be governed by and construed in accordance with the laws of the
State of Minnesota without giving regard to the conflicts of law provisions
thereof; with the sole exception that the Merger contemplated hereby shall be
effected in accordance with the laws of both Minnesota and Montana.
22
<PAGE>
8.6 Notices. Any notice or other communication required or permitted
-------
hereunder shall be sufficiently given if sent by a nationally recognized
overnight courier or if sent by facsimile transmission with written copy by U.S.
Mail, postage prepaid and addressed:
(a) If to FreeMail:
Steve Saroff
601 Lolo Street
Missoula, Montana 59802
Telephone: (406) 542-0901
Facsimile: (406) 542-0894
Glenn Kreisel
311 East Spruce
Missoula, Montana 59802
Telephone: (406) 542-0901
Facsimile: (406) 542-0894
Steve Barrett
Box 1348
Bozeman, Montana 59771-1348
Telephone: (406) 586-1553
Facsimile: (406) 586-8971
(b) If to the Netco:
Netco Communications Corporation
6100 West 110th Street
Bloomington, Minnesota 55438
Attention: Edward J. Driscoll, III
President
Telephone: (612) 204-3100
Facsimile: (612) 204-3101
with a copy to:
Edward J. Driscoll, Jr., Esq.
Larkin, Hoffman, Daly & Lindgren, Ltd.
1500 Norwest Financial Center
7900 Xerxes Avenue South
Bloomington, Minnesota 55431
23
<PAGE>
Telephone: (612) 896-3394
Facsimile: (612) 896-1511
or to such other address as a party may notify the other.
Any such notice or communication shall be deemed to have been given as of the
date so delivered to a courier or sent by facsimile transmission and deposited
in the US mails, except a notice of change of address shall not be deemed to
have been given until received by the addressee.
8.7 No Assignment. This Agreement may not be assigned by operation
-------------
of law or otherwise.
8.8 Headings. The descriptive headings of the several Articles and
--------
Sections of this Agreement, of the Plan of Merger, and of the several Schedules
and Exhibits to this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
8.9 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more of the counterparts have been signed by
each of the parties hereto and delivered to the other party.
8.10 Time of the Essence. Time is of the essence of this Agreement.
-------------------
8.11 Severability. In case any provision of this Agreement shall be
------------
invalid, illegal or unenforceable, it shall, to the extent possible, be modified
in such manner as to be valid, legal and enforceable but so as most nearly to
retain the intent of the parties. If such modification is not possible, such
provision shall be severed from this Agreement. In either case the validity,
legality and enforceability of the remaining provisions of this Agreement shall
not in any way be affected or impaired thereby.
8.12 Construction. The parties have participated jointly in the
------------
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local or
foreign statute shall be deemed to refer to all rules and regulations
promulgated thereunder, unless the context requires otherwise. The word
"including" means including, without limitation. The parties intend that each
representation, warranty and covenant contained herein shall have independent
significance. If any party has breached any representation, warranty or
covenant contained herein in any respect, the fact that there exists another
representation, warranty or covenant relating to the same subject matter
(regardless of the relative levels of specificity) that the party has not
breached shall not detract from or mitigate the fact the party is in breach of
the first representation, warranty or covenant.
8.13 Merger and Integration. This Agreement and the Merger Plan
----------------------
represent the final written expression of the agreements among the parties, and
all prior negotiations and agreements are merged herein and superseded by this
Agreement and the Merger Plan.
24
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, as of the
day and year so indicated.
Netco Communications Corporation
Date: 12/17/97 By: /s/ Edward J. Driscoll, III
-------------------------------------
Edward J. Driscoll, III
Its: President
Netco Acquiring Corporation
Date: 12/17/97 By: /s/ Edward J. Driscoll, III
-------------------------------------
Edward J. Driscoll, III
Its: President
FreeMail, Inc.
Date: 12/11/97 By: /s/ /Stephen Barrett
-------------------------------------
Stephen Barrett
Its: President
Date: 12/11/97 /s/ Glenn Kreisel
-------------------------------------
Glenn Kreisel
Date: 12/11/97 /s/ Steve Saroff
-------------------------------------
Steve Saroff
Date: 12/11/97 /s/ Chris Coyle
-------------------------------------
Chris Coyle
25
<PAGE>
Date:12/11/97 /s/ Steve /Barrett
--------------------------------------
Steve Barrett
Date: 12/12/97 /s/ Greg Gianforte
--------------------------------------
Greg Gianforte
Date: 12/11/97 /s/ Ray Kreisel by Glenn Kreisel
--------------------------------------
Ray Kreisel Attorney in fact
Date: 12/11/97 /s/ William Knight
--------------------------------------
William Knight
26
<PAGE>
EXHIBIT 3.1
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
WAM!NET INC.
The undersigned, the President of WAM!NET Inc., a Minnesota corporation
(the "Corporation"), does hereby certify that pursuant to the annual meeting of
shareholders of the Corporation held May 30, 1998, the following resolution was
adopted by the shareholders of the Corporation in accordance with the
application with the applicable provisions of Minnesota Statutes:
Resolution Authorizing Amendment of
------------------------------------
Articles of Incorporation
-------------------------
RESOLVED, that Article 6 of the Corporation's Articles of Incorporation be
amended to read as follows:
ARTICLE 6.
STOCK
6.1) Capitalization. The aggregate number of shares of capital
--------------
stock that the Corporation has authority to issue shall be five
hundred million (500,000,000) shares, which are hereby designated as
and shall consist of (a) four hundred ninety million (490,000,000)
shares of common stock, with a par value of One Cent ($.01) per share
("Common Stock"); (b) one hundred thousand (100,000) shares of Class A
preferred stock ("Class A Preferred Stock"); and (c) nine million nine
hundred thousand (9,900,000) shares of undesignated stock. The Board
of Directors of the Corporation is authorized to establish from the
undesignated stock, by resolution adopted and filed in the manner
provided by law, one or more classes or series of shares, to designate
each such class or series (which may include but is not limited to
designation as additional Common Stock), and to fix the relative
rights and preferences of each such class or series.
6.2) Class A Preferred Stock. The express terms and provisions
-----------------------
of the shares classified and designated as Class A Preferred Shares
are as follows:
(a) Designation and Amount. Each share of Class A Preferred
----------------------
Stock shall have a par value of Ten Dollars ($10.00) per share.
The number of shares of Class A Preferred Stock may be increased
or decreased by resolution of the Board of Directors; provided,
that, no decrease shall
<PAGE>
reduce the number of shares of Class A Preferred Stock to a
number less than the number of shares then outstanding, plus the
number of shares of Class A Preferred Stock, if any, reserved for
issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities
issued by the Company convertible into Class A Preferred Stock.
(b) Dividends and Distributions.
---------------------------
(1) The holders of shares of Class A Preferred Stock, in
preference to the holders of Common Stock of the
Company, shall be entitled to receive, when, as and if
declared by the Board of Directors of the Company (the
"Directors"), a dividend (the "Quarterly Dividend") in
the amount of Seventeen and One-half Cents ($.175) per
share payable out of the net earnings of the Company
constituting funds legally available for the purpose.
The Quarterly Dividend shall begin to accrue on January
1, 1997, and shall be payable in cash on the first day
of March, June, September and December in each year
(each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of Class A
Preferred Stock. If the net earnings in any year are
not sufficient to pay the Quarterly Dividend, either in
whole or in part, then any unpaid portion of such
dividend will become a charge against the net earnings
of the Company, and will be paid in full out of the net
earnings of the Company in subsequent years before any
dividends are paid on the Common Stock of the Company
in those years. No dividends will be paid or set apart
for payment on the Common Stock, no distribution will
be made on the Common Stock, and no shares of Common
Stock will be redeemed, retired or otherwise acquired
for valuable consideration unless all theretofore
unpaid Quarterly Dividends have been declared, and the
Company has paid those dividends or has set aside a sum
sufficient to pay them.
(2) Dividends shall begin to accrue and accumulate on
outstanding shares of Class A Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date
of issue of such shares, in which case dividends on
such shares shall begin to accrue from the date of
issue of such shares, or unless the date of issue is a
Quarterly Dividend
<PAGE>
Payment Date or is a date after the record date for the
determination of holders of shares of Class A Preferred
Stock entitled to receive Quarterly Dividends and
before such Quarterly Dividend Payment Date, in either
of which events such Quarterly Dividends shall begin to
accrue and accumulate from such Quarterly Dividend
Payment Date. Accrued but unpaid Quarterly Dividends
shall not bear interest. Dividends paid on the shares
of Class A Preferred Stock in an amount less than the
total amount of Quarterly Dividends then accrued and
payable shall be allocated pro rata on a share-by-share
basis among all such shares of Class A Preferred Stock
then outstanding. The Directors may fix a record date
for the determination of holders of shares of Class A
Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record
date shall be no more than sixty (60) days prior to the
date fixed for the payment thereof.
(c) Voting Rights. The holders of shares of Class A Preferred
-------------
Stock shall have the following voting rights:
(1) Each share of Class A Preferred Stock shall entitle the
holder thereof to one (1) vote for each share of Class
A Preferred Stock standing in the name of the holder on
the books of the Company. The holders of Class A
Preferred Stock, voting separately as a class, shall be
entitled to elect a majority of the Directors. The
right to elect Directors may be exercised at any annual
meeting of the stockholders of the Company, at any
special meeting held in place of an annual meeting, or
at a special meeting called to elect directors. The
right to elect directors shall continue until December
31, 1999, and then expire. The directors elected by
the Class A Preferred Stock shall serve until the next
annual or special meeting of the stockholders of the
Company and until their respective successors have been
elected by the holders of Class A Preferred Stock and
have been qualified. The term of office of any person
elected as a director by the holders of Class A
Preferred Stock shall terminate on December 31, 1999.
The vacancies created thereby may be filled by
resolution of the remaining Directors who shall have
been elected by a vote of the holders of the Common
Stock of the Company. If the office of a director
elected by the holders of Class A Preferred Stock is
vacant prior to December 31, 1999, due to resignation,
removal or death, the vacancy shall be filled
<PAGE>
by the majority vote of the directors then in office,
even if less than a quorum, upon the recommendation of
the remaining director or directors who were elected by
the holders of the Class A Preferred Stock. If the
office of a director who was elected by the holders of
Common Stock is vacant prior to December 31, 1999, due
to resignation, removal or death, the vacancy shall be
filled by the majority vote of the directors then in
office, even if less than a quorum, upon the
recommendation of the remaining director or directors
who were elected by the holders of the Common Stock. If
the vacancy is not so filled within forty (40) days
after the creation of the vacancy, a special meeting of
the holders of Preferred Stock and/or Common Stock
shall be called and the vacancy or vacancies shall be
filled at that meeting.
(2) In addition to the right to elect a majority of the
Directors as provided in Section 6.2(c)(1), the holder
of each share of Class A Preferred Stock shall be
entitled to one (1) vote, voting together with the
holders of Common Stock as a single class, on all
matters, excluding the election of Directors, submitted
to the vote of shareholders of the Company.
(3) Except as otherwise provided in this Section 6.2(c) or
in Section 6.2(j), or in any Certificate of Designation
creating another class or series of preferred stock, or
in any similar stock of the Company hereafter created,
or by law, the holders of shares of Class A Preferred
Stock and the holders of shares of Common Stock and any
other capital stock of the Company having general
voting rights shall vote together as one class on all
matters submitted to a vote of stockholders of the
Company.
(4) Except as expressly set forth herein, or as otherwise
provided by law, holders of Class A Preferred Stock
shall have no special voting rights and their consent,
as a separate class, shall not be required (except to
the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any
corporate action.
(d) Certain Restrictions.
--------------------
(1) Whenever Quarterly Dividends or distributions payable
on Class A Preferred Stock as provided in Section
6.2(b) are in
<PAGE>
arrears, thereafter and until all accrued and unpaid
Quarterly Dividends and distributions, whether or not
declared, on shares of Class A Preferred Stock
outstanding shall have been paid in full, the Company
shall not, without the express affirmative unanimous
approval of the Directors elected by holders of the
Class A Preferred Stock:
a. declare or pay dividends, or make any other
distributions, on any shares of stock
ranking junior (either as to dividends or
upon liquidation, dissolution or winding up)
to the Class A Preferred Stock;
b. declare or pay dividends, or make any other
distributions, on any shares of stock
ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding
up) with the Class A Preferred Stock, except
dividends paid ratably on the Class A
Preferred Stock and all such parity stock on
which dividends are payable or in arrears in
proportion to the total amounts to which the
holders of all such shares are then
entitled;
c. redeem or purchase or otherwise acquire for
consideration shares of any stock of the
Company ranking junior (either as to
dividends or upon liquidation, dissolution
or winding up) to the Class A Preferred
Stock, provided that the Company may at any
time redeem, purchase or otherwise acquire
shares of any such junior stock in exchange
for shares of any stock of the Company
ranking junior (as to dividends and upon
dissolution, liquidation and winding up) to
the Class A Preferred Stock; or
d. redeem or purchase or otherwise acquire for
consideration any shares of Class A
Preferred Stock, or any shares of stock
ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding
up) with the Class A Preferred Stock, except
in accordance with a purchase offer made in
writing or by publication (as determined by
<PAGE>
the Board of Directors) to all holders of
such shares upon such terms as the Board of
Directors, after consideration of the
respective annual dividend rates and other
relative rights and preferences of the
respective series and classes, shall
determine in good faith will result in fair
and equitable treatment among the respective
series or classes.
(2) The Company shall not permit any subsidiary of the
Company to purchase or otherwise acquire for
consideration any shares of stock of the Company unless
the Company could, under Section 6.2(d)(1), purchase or
otherwise acquire such shares at such time and in such
manner.
(e) Liquidation, Dissolution or Winding Up. Upon any voluntary
--------------------------------------
or involuntary liquidation, dissolution or winding up of the
affairs of the Company, no distribution shall be made (a) to the
holders of shares of stock ranking junior (either as to dividends
or upon liquidation, dissolution or winding up) to the Class A
Preferred Stock, or (b) to the holders of shares of stock ranking
on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Class A Preferred Stock
unless each holder of Class A Preferred Stock has received in
cash out of the assets of the Company, whether from capital or
earnings, available for distribution to the shareholders of the
Company, before any amount is paid to the holders of Common
Stock, the sum of Ten Dollars ($10.00) per share for each share
of Class A Preferred Stock held by the holder, plus an amount
equal to the sum of all accumulated and unpaid dividends to the
date affixed for the payment of the distribution on the shares of
Class A Preferred Stock held by the holder. The sale or transfer
by the Company of all or substantially all of its assets shall
not, for the purposes of determining preferences and liquidation,
be deemed to be a liquidation, dissolution or winding up of the
Company.
(f) Preemptive Rights. No holder of any shares of Class A
-----------------
Preferred Stock shall be entitled as such, as a matter of right,
to subscribe for, purchase or receive any part of any class
whatsoever, or of securities convertible into or exchangeable for
any stock or any class whatsoever, whether now or hereafter
authorized or whether issued for cash or other consideration or
by way of a dividend.
(g) Mandatory Redemption. Unless earlier redeemed or acquired in
--------------------
whole or in part by the Company with the consent of the holder,
the shares
<PAGE>
of Class A Preferred Stock that remain issued and outstanding
shall expire and shall be automatically redeemed on December 31,
1999, at par value, plus an amount equal to all accumulated and
unpaid dividends, if any, due with respect to the Class A
Preferred Stock (collectively, the "Redemption Price").
Redemption shall be in cash out of any funds legally available
for the redemption of the Class A Preferred Stock.
(h) Rank. The Class A Preferred Stock shall rank, with respect
----
to the payment of dividends and the distribution of assets,
senior to all other classes and series of preferred stock.
(i) Reacquired Shares. Any shares of Class A Preferred Stock
-----------------
purchased or otherwise acquired by the Company in any manner
whatsoever shall be retired and canceled promptly after the
acquisition thereof. All such shares shall upon their
cancellation become authorized but unissued shares of
undesignated stock and may be reissued subject to the conditions
and restrictions on issuance in the Articles of Incorporation, or
in any other Certificate of Designations creating another class
or series of stock or as otherwise required by law.
(j) Amendment. If any proposed amendment to these Articles of
---------
Incorporation would alter or change the preferences, special
rights or powers given to the Class A Preferred Stock so as to
affect the Class A Preferred Stock adversely, or would authorize
the issuance of a class or classes of stock having preferences or
rights with respect to dividends or dissolution or the
distribution of assets that would be superior to the preferences
or rights of the Class A Preferred Stock, then the holders of the
Class A Preferred Stock shall be entitled to vote as a series
upon such amendment, and the affirmative vote of two-thirds of
the outstanding shares of Class A Preferred Stock shall be
necessary to the adoption thereof, in addition to such other vote
as may be required by law.
6.3) Preemptive Rights. Shareholders shall not have any
-----------------
preemptive or preferential rights for or to shares of this
Corporation, whether now or hereafter authorized, or to any
obligations convertible into shares of this Corporation, or to any
options, warrants or other right to acquire shares of this
Corporation, or to any subscription or right of subscription therefor,
except such, if any, as the Board of Directors in its sole discretion
may determine from time to time, and at such price or terms as the
Board of Directors may fix. The Board of Directors may, at any time
and from time to time, issue and sell for such consideration as may be
permitted by law and these Articles of Incorporation, any or all of
the authorized shares of the Corporation not then issued and any and
all of any stock of any class or series that may hereafter be
authorized.
<PAGE>
6.4) Issuance of Shares. Subject to this Article 6, the Board
------------------
of Directors may issue any or all shares of the Corporation authorized
by these Articles and not already issued, including any shares
previously issued and reacquired by the Corporation. Upon approval by
the Board of Directors, shares may be issued (i) for any consideration
determined appropriate by the Board of Directors, or (ii) for no
consideration in order to effectuate share conversions, dividends or
splits, including reverse splits.
6.5) Issuance of Rights to Acquire Shares. Subject to Section
------------------------------------
6.4, the Board of Directors may issue rights to purchase shares of the
Corporation, and shall fix the terms, provisions and conditions of
such rights to purchase, including the conversion basis and the price
at which shares may be purchased or subscribed for. Shares to be
issuable upon the exercise of all outstanding rights to purchase,
including such rights to be issued, must be authorized by these
Articles and not already issued.
IN WITNESS WHEREOF, I have subscribed my name this 16th day of June, 1998.
/s/ Edward J. Driscoll, III
---------------------------------
Edward J. Driscoll, III
President
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
WAM!NET INC.
ARTICLE 1.
NAME
The name of the corporation is WAM!NET Inc., which shall be referred to in
these Articles of Incorporation as the "Corporation."
ARTICLE 2.
REGISTERED OFFICE
The address of the registered office of the Corporation in Minnesota is
6100 West 110th Street, Minneapolis, Minnesota 55438
ARTICLE 3.
DURATION
The duration of the Corporation shall be perpetual.
ARTICLE 4.
PURPOSE
The Corporation is organized for general business purposes.
ARTICLE 5.
POWERS
The Corporation shall have the unlimited power to engage in and to do any
act necessary or incidental to the carrying out of its purposes, together with
the power to do or perform any acts consistent with or which may be implied from
the powers expressly conferred upon corporations by Minnesota Statutes, Chapter
302A.
<PAGE>
ARTICLE 6.
STOCK
6.1) Capitalization. The aggregate number of shares of stock that the
--------------
Corporation has authority to issue shall be one hundred million (100,000,000)
shares, which shall consist of (a) ninety million (90,000,000) shares of common
stock, with a par value of One Cent ($.01) per share ("Common Stock"); (b) one
hundred thousand (100,000) shares of Class A preferred stock ("Class A Preferred
Stock"); and (c) nine million nine hundred thousand (9,900,000) shares of
undesignated stock. The Board of Directors of the Corporation is authorized to
establish from the undesignated stock, by resolution adopted and filed in the
manner provided by law, one or more classes or series of shares, to designate
each such class or series (which may include but is not limited to designation
as additional Common Stock), and to fix the relative rights and preferences of
each such class or series.
6.2) Class A Preferred Stock. The express terms and provisions of the
-----------------------
shares classified and designated as Class A Preferred Shares are as follows:
(a) Designation and Amount. Each share of Class A Preferred Stock shall
----------------------
have a par value of Ten Dollars ($10.00) per share. The number of shares of
Class A Preferred Stock may be increased or decreased by resolution of the
Board of Directors; provided, that, no decrease shall reduce the number of
shares of Class A Preferred Stock to a number less than the number of
shares then outstanding, plus the number of shares of Class A Preferred
Stock, if any, reserved for issuance upon the exercise of outstanding
options, rights or warrants or upon the conversion of any outstanding
securities issued by the Company convertible into Class A Preferred Stock.
(b) Dividends and Distributions.
---------------------------
(1) The holders of shares of Class A Preferred Stock, in preference
to the holders of Common Stock of the Company, shall be entitled
to receive, when, as and if declared by the Board of Directors
of the Company (the "Directors"), a dividend (the "Quarterly
Dividend") in the amount of Seventeen and One-half Cents ($.175)
per share payable out of the net earnings of the Company
constituting funds legally available for the purpose. The
Quarterly Dividend shall begin to accrue on January 1, 1997, and
shall be payable in cash on the first day of March, June,
September and December in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Class A
Preferred Stock. If the net earnings in any year are not
sufficient to pay the Quarterly Dividend, either in whole or in
part, then any unpaid portion of such dividend will become a
charge against the net earnings of the Company, and will be paid
in full out of the net earnings of the Company in subsequent
years before any dividends are
<PAGE>
paid on the Common Stock of the Company in those years. No dividends
will be paid or set apart for payment on the Common Stock, no
distribution will be made on the Common Stock, and no shares of Common
Stock will be redeemed, retired or otherwise acquired for valuable
consideration unless all theretofore unpaid Quarterly Dividends have
been declared, and the Company has paid those dividends or has set
aside a sum sufficient to pay them.
(2) Dividends shall begin to accrue and accumulate on outstanding shares
of Class A Preferred Stock from the Quarterly Dividend Payment Date
next preceding the date of issue of such shares, in which case
dividends on such shares shall begin to accrue from the date of issue
of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination
of holders of shares of Class A Preferred Stock entitled to receive
Quarterly Dividends and before such Quarterly Dividend Payment Date,
in either of which events such Quarterly Dividends shall begin to
accrue and accumulate from such Quarterly Dividend Payment Date.
Accrued but unpaid Quarterly Dividends shall not bear interest.
Dividends paid on the shares of Class A Preferred Stock in an amount
less than the total amount of Quarterly Dividends then accrued and
payable shall be allocated pro rata on a share-by-share basis among
all such shares of Class A Preferred Stock then outstanding. The
Directors may fix a record date for the determination of holders of
shares of Class A Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be
no more than sixty (60) days prior to the date fixed for the payment
thereof.
(c) Voting Rights. The holders of shares of Class A Preferred Stock shall have
-------------
the following voting rights:
(1) Each share of Class A Preferred Stock shall entitle the holder thereof
to one (1) vote for each share of Class A Preferred Stock standing in
the name of the holder on the books of the Company. The holders of
Class A Preferred Stock, voting separately as a class, shall be
entitled to elect a majority of the Directors. The right to elect
Directors may be exercised at any annual meeting of the stockholders
of the Company, at any special meeting held in place of an annual
meeting, or at a special meeting called to elect directors. The right
to elect directors shall continue until December 31, 1999, and then
expire. The directors elected by the Class A Preferred Stock shall
serve until the next annual or special meeting of the stockholders of
the Company and until their respective successors have been elected by
the holders of Class A Preferred Stock and have been qualified. The
term of office of any person elected as a director by the holders of
Class A Preferred Stock shall terminate on December 31, 1999.
<PAGE>
The vacancies created thereby may be filled by resolution of the
remaining Directors who shall have been elected by a vote of the
holders of the Common Stock of the Company. If the office of a
director elected by the holders of Class A Preferred Stock is vacant
prior to December 31, 1999, due to resignation, removal or death, the
vacancy shall be filled by the majority vote of the directors then in
office, even if less than a quorum, upon the recommendation of the
remaining director or directors who were elected by the holders of the
Class A Preferred Stock. If the office of a director who was elected
by the holders of Common Stock is vacant prior to December 31, 1999,
due to resignation, removal or death, the vacancy shall be filled by
the majority vote of the directors then in office, even if less than a
quorum, upon the recommendation of the remaining director or directors
who were elected by the holders of the Common Stock. If the vacancy is
not so filled within forty (40) days after the creation of the
vacancy, a special meeting of the holders of Preferred Stock and/or
Common Stock shall be called and the vacancy or vacancies shall be
filled at that meeting.
(2) In addition to the right to elect a majority of the Directors as
provided in Section 6.2(c)(1), the holder of each share of Class A
Preferred Stock shall be entitled to one (1) vote, voting together
with the holders of Common Stock as a single class, on all matters,
excluding the election of Directors, submitted to the vote of
shareholders of the Company.
(3) Except as otherwise provided in Section 6.2(c) or in Section 6.2(j)
hereof, or in any Certificate of Designations creating another class
or series of preferred stock, or in any similar stock of the Company
hereafter created, or by law, the holders of shares of Class A
Preferred Stock and the holders of shares of Common Stock and any
other capital stock of the Company having general voting rights shall
vote together as one class on all matters submitted to a vote of
stockholders of the Company.
(4) Except as expressly set forth herein, or as otherwise provided by law,
holders of Class A Preferred Stock shall have no special voting rights
and their consent, as a separate class, shall not be required (except
to the extent they are entitled to vote with holders of Common Stock
as set forth herein) for taking any corporate action.
(d) Certain Restrictions
--------------------
(1) Whenever Quarterly Dividends or distributions payable on Class A
Preferred Stock as provided in Section 6.2(b) are in arrears,
thereafter and until all accrued and unpaid Quarterly Dividends and
distributions, whether or not declared, on shares of Class A Preferred
Stock outstanding shall have been paid in full, the Company shall not,
without the express
<PAGE>
affirmative unanimous approval of the Directors elected by holders of
the Class A Preferred Stock:
a. declare or pay dividends, or make any other distributions, on any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Class A Preferred
Stock;
b. declare or pay dividends, or make any other distributions, on any
shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Class A
Preferred Stock, except dividends paid ratably on the Class A
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which
the holders of all such shares are then entitled;
c. redeem or purchase or otherwise acquire for consideration shares
of any stock of the Company ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Class A Preferred Stock, provided that the Company may at any
time redeem, purchase or otherwise acquire shares of any such
junior stock in exchange for shares of any stock of the Company
ranking junior (as to dividends and upon dissolution, liquidation
and winding up) to the Class A Preferred Stock; or
d. redeem or purchase or otherwise acquire for consideration any
shares of Class A Preferred Stock, or any shares of stock ranking
on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Class A Preferred Stock,
except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors,
after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series
and classes, shall determine in good faith will result in fair
and equitable treatment among the respective series or classes.
(2) The Company shall not permit any subsidiary of the Company to purchase
or otherwise acquire for consideration any shares of stock of the
Company unless the Company could, under Section 6.2(d)(1), purchase or
otherwise acquire such shares at such time and in such manner.
(e) Liquidation, Dissolution or Winding Up. Upon any voluntary or involuntary
--------------------------------------
liquidation, dissolution or winding up of the affairs of the Company, no
distribution shall be made (a) to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Class A Preferred Stock, or (b) to the
<PAGE>
holders of shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Class A Preferred Stock unless
each holder of Class A Preferred Stock has received in cash out of the assets of
the Company, whether from capital or earnings, available for distribution to the
shareholders of the Company, before any amount is paid to the holders of Common
Stock, the sum of Ten Dollars ($10.00) per share for each share of Class A
Preferred Stock held by the holder, plus an amount equal to the sum of all
accumulated and unpaid dividends to the date affixed for the payment of the
distribution on the shares of Class A Preferred Stock held by the holder. The
sale or transfer by the Company of all or substantially all of its assets shall
not, for the purposes of determining preferences and liquidation, be deemed to
be a liquidation, dissolution or winding up of the Company.
(f) Preemptive Rights. No holder of any shares of Class A Preferred Stock shall
------------------
be entitled as such, as a matter of right, to subscribe for, purchase or receive
any part of any class whatsoever, or of securities convertible into or
exchangeable for any stock or any class whatsoever, whether now or hereafter
authorized or whether issued for cash or other consideration or by way of a
dividend.
(g) Mandatory Redemption. Unless earlier redeemed or acquired in whole or in
--------------------
part by the Company with the consent of the holder, the shares of Class A
Preferred Stock that remain issued and outstanding shall expire and and shall be
automatically redeemed on December 31, 1999, at par value, plus an amount equal
to all accumulated and unpaid dividends, if any, due with respect to the Class A
Preferred Stock (collectively, the "Redemption Price"). Redemption shall be in
cash out of any funds legally available for the redemption of the Class A
Preferred Stock.
(h) Rank. The Class A Preferred Stock shall rank, with respect to the payment
----
of dividends and the distribution of assets, senior to all other classes and
series of preferred stock.
(i) Reacquired Shares. Any shares of Class A Preferred Stock purchased or
-----------------
otherwise acquired by the Company in any manner whatsoever shall be retired and
canceled promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued shares of undesignated stock
and may be reissued subject to the conditions and restrictions on issuance in
the Articles of Incorporation, or in any other Certificate or Designations
creating another class or series of stock or as otherwise required by law.
(j) Amendment. If any proposed amendment to these Articles of Incorporation
---------
would alter or change the preferences, special rights or powers given to the
Class A Preferred Stock so as to affect the Class A Preferred Stock adversely,
or would authorize the issuance of a class or classes of stock having
preferences or rights with respect to dividends or dissolution or the
distribution of assets that would be superior to the preferences or rights of
the Class A Preferred Stock, then the holders of the Class A Preferred Stock
shall be entitled to vote as a series upon such amendment, and the
<PAGE>
affirmative vote of two-thirds of the outstanding shares of Class A
Preferred Stock shall be necessary to the adoption thereof, in addition to
such other vote as may be required by law.
6.3) Preemptive Rights. Shareholders shall not have any preemptive or
-----------------
preferential rights for or to shares of this Corporation, whether now or
hereafter authorized, or to any obligations convertible into shares of this
Corporation, or to any options, warrants or other right to acquire shares of
this Corporation, or to any subscription or right of subscription therefor,
except such, if any, as the Board of Directors in its sole discretion may
determine from time to time, and at such price or terms as the Board of
Directors may fix. The Board of Directors may, at any time and from time to
time, issue and sell for such consideration as may be permitted by law and these
Articles of Incorporation, any or all of the authorized shares of the
Corporation not then issued and any and all of any stock of any class or series
that may hereafter be authorized.
6.4) Issuance of Shares. Subject to this Article 6, the Board of Directors
------------------
may issue any or all shares of the Corporation authorized by these Articles and
not already issued, including any shares previously issued and reacquired by the
Corporation. Upon approval by the Board of Directors, shares may be issued (i)
for any consideration determined appropriate by the Board of Directors, or (ii)
for no consideration in order to effectuate share conversions, dividends or
splits, including reverse splits. The Board of Directors shall determine the
value of non-monetary consideration received for shares.
6.5) Issuance of Rights to Acquire Shares. Subject to Section 6.4, the
------------------------------------
Board of Directors may issue rights to purchase shares of the Corporation, and
shall fix the terms, provisions and conditions of such rights to purchase,
including the conversion basis and the price at which shares may be purchased or
subscribed for. Shares to be issuable upon the exercise of all outstanding
rights to purchase, including such rights to be issued, must be authorized by
these Articles and not already issued.
ARTICLE 7.
SHAREHOLDERS
All shareholder actions shall require an affirmative vote of the holders of
a majority of the voting power of the shares represented and entitled to vote at
a duly held meeting, except where the law requires a vote with respect to all
outstanding shares of the Corporation, in which case the affirmative vote of a
majority of the shares entitled to vote (by class or series if more than one
class or series of shares is outstanding and entitled to vote separately as a
class or series on such matter) shall be sufficient to authorize the action.
ARTICLE 8.
NON-CUMULATIVE VOTING
Unless otherwise provided in these Articles or in a Certificate of
Designation, cumulative voting for directors shall not be permitted.
<PAGE>
ARTICLE 9.
DIRECTORS
9.1) Power; Voting. The Board of Directors shall have the power and
-------------
authority to take any action required or permitted by law or by these Articles.
The Board of Directors shall take action by the affirmative vote of a majority
of directors present at a duly held meeting, except where law requires the
affirmative vote of a larger proportion or number.
9.2) Written Action. Any action required or permitted to be taken at a
--------------
board meeting may be taken by written action signed by a majority of directors.
If the action must also be approved by the shareholders, then the action must be
taken by written action of all the directors.
9.3) Indemnification. A director of the Corporation shall not be
---------------
personally liable to the Corporation or its shareholders for monetary damages
for breach of fiduciary duty as a director, except for (i) liability based on a
breach of the duty of loyalty to the Corporation or the shareholders (ii)
liability for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (iii) liability under Minnesota
Statutes Section 302A.559 or 80A.23; or (iv) liability for any transaction from
which the director derived an improper personal benefit. If Chapter 302A, the
Minnesota Business Corporation Act, is hereafter amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Corporation, in addition to the limitation on
personal liability provided herein, shall be limited to the fullest extent
permitted by the amended Chapter 302A, the Minnesota Business Corporation Act.
Any repeal or modification of this Section 9.3 by the shareholders of the
Corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation at the
time of such repeal or modification.
ARTICLE 10.
BYLAWS
The Board of Directors may adopt bylaws which may contain any provision
relating to the management of the business or the regulation of the affairs of
the Corporation not inconsistent with law or these Articles of Incorporation.
The power to adopt, amend or repeal the bylaws shall be vested in the Board of
Directors.
<PAGE>
EXHIBIT 5
---------
[Willkie Farr & Gallagher Letterhead]
July 10, 1998
WAM!NET Inc.
6100 West 110th Street
Minneapolis, Minnesota 55438
Re: Registration Statement on Form S-4
(File No. 333-53841)
---------------------------------
Ladies and Gentlemen:
We are special counsel to WAM!NET Inc., a Minnesota corporation (the "Company"),
and have acted as such in connection with various legal matters relating to the
filing of a Registration Statement on Form S-4 (File No. 333-53841) (the
"Registration Statement") under the Securities Act of 1933, as amended, relating
to the offer to exchange up to $208,530,000 in aggregate principal amount at
maturity of 13-1/4% Senior Discount Notes due 2005, Series B (the "Exchange
Notes"), for outstanding 13-1/4% Senior Discount Notes due 2005, Series A, that
were issued and sold in a transaction exempt from registration under the
Securities Act of 1933, as amended (the "Original Notes"). The Original Notes
were issued under, and the Exchange Notes are to be issued under, the Indenture,
dated as of March 5, 1998, between the Company and First Trust National
Association, as trustee (the "Trustee"). The exchange will be made pursuant to
an exchange offer (the "Exchange Offer") contemplated by the Registration
Statement.
In so acting, we have examined copies of such records of the Company and such
other certificates and documents as we have deemed relevant and necessary for
the opinions hereinafter set forth. In such examination, we have assumed the
genuineness of all signatures, and the authenticity of all documents submitted
to us as originals and the conformity to authentic originals of all documents
submitted to us as certified or reproduced copies. We have also assumed the
legal capacity of all persons executing such documents and the truth and
correctness of any representations or warranties therein contained. As to
various questions of fact material to such opinions, we have relied upon
certificates of officers of the Company and of public officials.
Based upon the foregoing, we are of the opinion that:
1. The Company is duly formed and validly existing under the laws of the State
of Minnesota.
<PAGE>
Wam!Net Inc.
July 10, 1998
Page 2
2. The execution and delivery of the Indenture have been duly authorized by
the Company and the Indenture constitutes a valid and binding obligation of
the Company enforceable against the Company in accordance with its terms,
except as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization and other similar laws affecting the enforcement of
creditors' rights generally and except as enforcement thereof is subject to
general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law).
3. The Exchange Notes have been duly authorized and, when duly executed by the
proper officers of the Company, duly authenticated by the Trustee and
issued by the Company in accordance with the terms of the Indenture and the
Exchange Offer, will constitute valid and binding obligations of the
Company and will be entitled to the benefits of the Indenture, except as
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization and other similar laws affecting the enforcement of
creditors' rights generally and except as enforcement thereof is subject to
general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law).
This opinion is limited to the laws of the State of New York and the federal
laws of the United States of the type typically applicable to transactions
contemplated by the Exchange Offer, and we do not express any opinion with
respect to the laws of any other country, state or jurisdiction. In rendering
certain of the opinions expressed herein, we have relied upon, as to matters of
Minnesota law, the opinion of George H. Frisch, Esq., counsel to the Company.
This opinion letter is limited to the matters stated herein and no opinion is
implied or may be inferred beyond the matters expressly stated.
This letter speaks only as of the date hereof and is limited to present
statutes, regulations and administrative and judicial interpretations. We
undertake no responsibility to update or supplement this letter after the date
hereof.
<PAGE>
Wam!Net Inc.
July 10, 1998
Page 3
We consent to being named in the Registration Statement and related Prospectus
as counsel who are passing upon the legality of the Exchange Notes for the
Company and to the reference to our name under the caption "Legal Matters" in
such Prospectus. We also consent to your filing copies of this opinion as an
exhibit to the Registration Statement or any amendment thereto.
Very truly yours,
/s/ Willkie Farr & Gallagher
<PAGE>
Exhibit 8
[WILLKIE FARR & GALLAGHER LETTERHEAD]
July 10, 1998
WAM!NET Inc.
6100 West 110th Street
Minneapolis, Minnesota 55438
Re: Registration Statement on Form S-4
(File No. 333-53811)
Ladies and Gentlemen:
We have acted as special counsel to WAM!NET Inc., a Minnesota corporation (the
"Company"), in connection with the filing of a Registration Statement on Form
S-4 (File No. 333-53811) (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), relating to the Company's offer to
exchange up to $208,530,000 in aggregate principal amount at maturity of 13 1/4%
Senior Discount Notes due 2005, Series B (the "Exchange Notes"), for outstanding
13 1/4% Senior Discount Notes due 2005, Series A (the "Original Notes"),
originally issued by the Company in reliance upon exemptions from registration
under the Securities Act. In that connection, we have prepared the section
entitled "Certain Federal Income Tax Consequences--The Exchange Offer" contained
in the Registration Statement, which section constitutes our opinion as counsel
regarding the expected U.S. federal income tax consequences of the Exchange
Offer.
Our opinion is based on the provisions of the Internal Revenue Code of 1986, as
amended, regulations under such Code, judicial authority and current
administrative rulings and practice, all as of the date of this letter, all of
which may change at any time, possibly with retroactive effect. As stated in the
above-referenced section of the Registration Statement, it is our opinion that
the exchange of Original Notes for Exchange Notes by holders will not be a
taxable exchange for federal income tax purposes, and holders should not
recognize any taxable gain or loss or any interest income as a result of such
exchange.
We hereby consent to the use of this opinion as Exhibit 8 to the Registration
Statement and related Prospectus filed with the
<PAGE>
WAM!NET Inc.
July 10, 1998
Page 2
Securities and Exchange Commission and to the reference to us under the caption
"Legal Matters" therein.
Very truly yours,
/s/ Willkie Farr & Gallagher
<PAGE>
Exhibit 10.11
SERVICE PROVISION AGREEMENT
Service Provision Agreement made effective as of this 18th day of July,
1997, by and between:
NetCo Communications Corporation
("NetCo"), a Minnesota corporation, having
its principal place of business at 333 North
Washington Avenue, Suite 102,
Minneapolis, MN 55401
and
Time Inc. ("Time Inc."), a Delaware
corporation, having its principal place of
business at Time Life Building, Rockefeller
Center, New York, NY 10020.
PREMISES:
NetCo, through its wholly owned subsidiary, WAM!NET, Inc., has developed,
installed and is expanding its WAM!NET(R) data transportation and delivery
network which has application to the publishing, printing and prepress business.
Time Inc. is engaged in the magazine publishing business and currently uses
the services of eleven (11) geographically diverse printing companies for
simultaneous printing of Time Inc. magazine publications in the United States
and Canada.
Time Inc. desires to install and use WAM!NET data transportation and
delivery services for the simultaneous delivery of electronic data to printing
companies, including printing companies Time Inc. currently uses as well as
additional or different printing companies, for use in printing Time Inc.
magazine publications, and for other purposes contemplated by this Agreement.
Some of the printing companies Time Inc. currently uses already utilize
WAM!NET services for purposes unrelated to this Agreement.
As a condition to its use of WAM!NET data transportation and delivery
services for such purposes, Time Inc. desires NetCo to provide multiple WAM!NET
links, redundant equipment and satellite backup of land-line telephone circuits
in order to minimize the risk of delayed data delivery from Time Inc. to
printing companies.
As a further condition to its use of WAM!NET data transportation and
delivery services for such purposes, Time Inc. desires a third party to assure
continuation of all contracted WAM!NET services for a specified period of time
in the event that NetCo becomes unable to continue to provide such services
during the term of this Agreement.
In consideration of the premises and of the promises and other
consideration provided in, or contemplated by, this Agreement, NetCo and Time
Inc. agree as follows:
<PAGE>
AGREEMENT:
Section 1. - Definitions
As used in this Agreement, unless the context requires otherwise, the
following words shall have the meanings ascribed to them in this Section 1.
Section references appearing in this Agreement refer to the corresponding
sections of this Agreement.
1.1. "Agreement" means this Service Provision Agreement.
---------
1.2. "Central Office" means the operations point of a local exchange
--------------
telephone carrier.
1.3. "Data Transportation and Delivery Services" or "Services" means, for
----------------------------------------- --------
the purposes of this Agreement, the transportation and delivery of
electronic data across the WAM!NET Network between remote NADs,
whether by land-line or satellite telephone connection, and includes
Interactive Services, Simultaneous Broadcast and such other or
enhanced services as may be agreed by the parties from time to time.
1.4. "Destination NAD" means a NAD that is located on the premises of a
---------------
Printer in accordance with Section 2.3, that is accessible to the
Printer's own internal computer network, and that is a destination
selected by Time Inc. for the receipt of a discrete transmission of
data originating from Time Inc.
1.5. "Dual T1" means a level of land line telephone service capable of
-------
carrying digitally formatted electronic data at the minimum rate of
one thousand (1,000) megabytes per hour, and includes any other or
future communications technology capable of reliably carrying
digitally formatted electronic data at no lesser rate.
1.6. "Equipment" means NADs that are installed on Time Inc.'s premises or
---------
on the premises of any Printer pursuant to the terms of this
Agreement, and includes SBS satellite transmitting or receiving
equipment that are installed on the premises of any Printer or
maintained by NetCo pursuant to the terms of this Agreement.
1.7. "Gigabyte" means one billion (1,000,000,000) bytes.
--------
1.8. "Hub" means a WAM!NET regional data receipt and distribution facility
---
interconnected with other Hubs by redundant land-fine telephone
services and interconnecting multiple NADs to a NOC.
1.9. "Initial Term" means the Initial Term of this Agreement as defined in
------------
Section 10.
1.10. "Interactive Service" means an ancillary capability permitting
-------------------
interactive, real-time communication between NADs.
1.11. "Local Carrier" means a provider of publicly subscribed telephone
-------------
service capable of connecting a NAD to a HUB in the geographic region
in which the NAD and HUB are located.
1.12. "Megabyte" means one million (1,000,000) bytes.
--------
-2-
<PAGE>
1.13. "Network Access Device" or "NAD" means WAM!NET equipment and Software
--------------------- ---
that is installed on a customer's premises, that is connected to a
HUB and that allows (a) a customer to deliver data from its own
computer or computer network into the NAD for transmission through
the WAM!NET Network to another NAD, or (ii) a customer to receive
data onto its own computer or computer network through the WAM!NET
Network from a remote NAD.
1.14. "Network Operations Center" or "NOC" means a WAM!NET national data
------------------------- ---
receipt and distribution facility interconnecting NOCs and multiple
Hubs by redundant land-line telephone services.
1.15. "Printer" means a printing company engaged by Time Inc. to publish
-------
magazines or other printed material.
1.16. "Renewal Term" means the Renewal Term provided in Section 11.
------------
1.17. "Redundant Line" means T1 service provided to a Printer by a provider
--------------
of publicly subscribed telephone service who does not otherwise
provide telephone service to that same Printer.
1.18. "Satellite Backup Service" or "SBS" means satellite communication
------------------------ ---
capable of relaying digitally formatted electronic data at the
minimum rate of four hundred (400) megabytes per hour, and includes
DSS, VSAT, Millimeter Microwave, Spread Spectrum or any other or
future wireless technology capable of reliably carrying digitally
formatted electronic data at no lesser rate.
1.19. "Services Charges" means the Service Charges payable by Time Inc. in
----------------
accordance with Section 3, and includes the "Base Charges," the "SBS
Availability Charges," the "SBS Priority Charges," the "Redundant
Line Charges," the "Interactive Service Charges," and the "Excess
Services Charges" as defined respectively in Section 3.
1.20. "Simultaneous Broadcast" means a transmission of electronic data from
----------------------
a NAD installed on Time Inc.'s premises for concurrent distribution
and delivery across the WAM!NET Network to geographically diverse
Destination NADs, and includes the ability to make group selections
for each Simultaneous Broadcast.
1.21. "Software" means all software used (i) to operate the Equipment, (ii)
--------
to transport data across the WAM!NET Network or (iii) produce
periodic or other reports, and also includes graphic user interfaces.
1.22. "T1" means a level of land line telephone service capable of carrying
--
digitally formatted electronic data at the minimum rate of four
hundred (400) megabytes per hour, and includes any other or future
communications technology capable of reliably carrying digitally
formatted electronic data at no lesser rate.
1.23. "WAM!NET Network" means, for the purposes of this Agreement, the
---------------
configuration and interconnection of NADs, Hubs and NOCs for the
purpose of transmitting electronic data between remote NADs, and will
include, when available, appropriate SBS satellite communications
equipment and connections necessary for such transmissions in the
event that land-line telephone connections are interrupted.
-3-
<PAGE>
1.24. "WAM!NET Operations Center" means NetCo's customer service and
-------------------------
network operations monitoring and control facility for the WAM!NET
Network.
Section 2. - Provision of Services
2.1. General. NetCo will furnish the Services to Time Inc. and to each
-------
Printer in accordance with this Agreement. In furtherance thereof, NetCo will:
(a) Install, support and repair the Services and all Equipment or
Software furnished by NetCo; such repair and support to be in
accordance with the "WAM!NET Service Level Agreement for Time
Inc. Inc." which is appended to this Agreement as Exhibit 1;
(b) Maintain, support and repair the WAM!NET Network;
(c) Install, configure, test and make operational all Equipment and
Software, including the installation of Destination NADs as
NetCo may be directed periodically by Time Inc.;
(d) Furnish by December 1997, appropriate back-up SBS satellite
communication between a NOC and the Destination NADs chosen by
Time Inc.;
(e) Furnish training and training materials;
(f) Furnish telephone support twenty four (24) hours per day, seven
(7) days per week, including weekends and holidays;
(g) Install and support a graphic user interface which allows Time
Inc. to customize the destination of each Simultaneous
Broadcast to all or any combination of Destination NADs chosen
by Time Inc.;
(h) At the direction of Time Inc., disconnect Equipment provided
under this Agreement and discontinue furnishing Services under
this Agreement to Printers whose services are no longer then
being used by Time Inc.;
(i) Develop and implement by October 1997, Software, including a
graphic user interface, which will permit Time Inc. to use the
Services (i) to track the status of Simultaneous Broadcasts to
Destination NADs, (ii) to determine immediately if a fault or
error is the reason for any delay in delivery of Simultaneous
Broadcasts to Destination NADs, (iii) confirm the receipt of
data files by a Printer; and
(j) Develop and implement by October, 1997, Software, including a
graphic user interface, which will permit Time Inc. and
Printers (i) to view data files queued on a NAD and awaiting
shipment across the WAM!NET Network or awaiting delivery from a
NAD into a computer network, (ii) to reorder the priority of
shipment or delivery, as the case may be, and (iii) delete a
data file awaiting shipment from a NAD.
-4-
<PAGE>
2.2. Time Inc. Installation. In order to furnish the Services contemplated
----------------------
by this Agreement, NetCo will install at Time Inc.'s principal office the
following Equipment, Software and communications connections:
(a) Two (2) NADs in Time Inc.'s IT Net Ops. Center independently
accessible from Time Inc.'s internal computer network;
(b) Dual T1 telephone service respectively connecting each such NAD
to a separate Hub, with each such NAD to HUB connection made
via a diversely routed connection to a Central Office of a
different Local Carrier;
(c) Software, including graphic user interfaces, permitting
connection of each NAD to Time Inc.'s internal computer network
for purposes of implementing the Services; and
(d) Software, including a graphic user interface, allowing Time
Inc. to designate. Destination NADs intended by Time Inc. as
the recipients of discrete Simultaneous Broadcasts.
(e) Prior to interconnection of Time Inc.'s internal computer
network with the WAM!NET network, and subject to the terms of
an appropriate test specification and an appropriate
confidentiality agreement, each to be mutually agreed between
NetCo and Science Applications International Corporation
("SAIC"), security consultants to Time Inc., NetCo will provide
SAIC with information necessary for SAIC to assess firewall,
separation and other security features of the NADs being
installed on Time Inc.'s premises, and of the WAM!NET Network,
but not with any passwords, encryption keys, control lists,
file configurations, transport protocols, codes, or other
information, which may operate, alter or disable any such
security features. NetCo will pay the reasonable charges of
SAIC incurred in conducting such assessment, not to exceed Ten
Thousand Dollars ($10,000).
2.3. Printer Installations. In order to furnish the Services contemplated
---------------------
by this Agreement, NetCo will install at each Printer's facility the following
Equipment, Software and communications connections, in accordance with Time
Inc.'s instructions:
(a) Two (2) NADs, each of which shall be independently accessible
from a Printer's internal computer network, and one of which
shall be used for stand by purposes if the other becomes
inoperable for any reason;
(b) T1 telephone service connecting the routinely operational NAD
installed on a Printer's premises pursuant to this Agreement to
a Hub;
(c) By December 1997, one (1) SBS satellite receiver and ancillary
reception equipment and SBS software (i) that is suitable for
receiving electronic data in the event of any interruption of
land-line telephone connection and (ii) that is connected for
communications to the routinely operational NAD installed on a
Printer's premises pursuant to this Agreement;
-5-
<PAGE>
(d) Software permitting connection of each NAD to the Printer's own
internal computer network for purposes of implementing the
Services; and
(e) If economically practicable to NetCo and desired by Time Inc.,
a Redundant Line connecting the NAD used principally for
standby purposes with a HUB.
2.4. Simultaneous Broadcast. The Services will permit Time Inc. to make
----------------------
Simultaneous Broadcasts to Destination NADs designated by Time Inc. to receive
each broadcast. Time Inc. may customize the designation for each Simultaneous
Broadcast.
2.5. Interactive Service. Each NAD installed on Time Inc.'s premises or,
-------------------
at Time Inc.'s direction, on each Printer's premises will permit interactive
communication. For purposes hereof, "interactive communications" means
communications meeting the functional specifications to reasonably agreed
between Time Inc. and NetCo. Time Inc. and NetCo each agree to use their
reasonable best efforts, respectively, to promptly undertake to develop and
agree upon such specifications. NetCo shall have a reasonable time following
such agreement to implement, make operational and deliver the interactive
communications conforming to such agreed specifications.
2.6. Satellite Transmission Priority. By December, 1997, and at Time
-------------------------------
Inc.'s periodic elections, NetCo will provide Time Inc. with first priority SBS
satellite communication in the event of land-line communications interruption,
and will discontinue such priority at Time Inc.'s direction.
2.7. Network Monitoring. NetCo will continually staff and operate the
------------------
WAM!NET Operations Center, seven (7) days per week, twenty four (24) hours per
day, week ends and holidays included, and will constantly monitor the WAM!NET
Network in order to identify within fifteen (15) minutes of occurrence any
equipment or line malfunction interfering with data transmissions between NADs
installed pursuant to the terms of this Agreement. NetCo will furnish Time Inc.
with monthly status reports showing the incidence of any equipment or line
malfunctions affecting data transmissions between NADs installed pursuant to the
terms of this Agreement, and, upon Time Inc.'s reasonable request, will furnish
Time Inc. the opportunity to review all records maintained by NetCo bearing upon
the operational performance of the WAM!NET Network and of the NOCs and Hubs.
2.8. Corrections; Redundancies. NetCo will use its best efforts to
-------------------------
correct within two (2) hours of occurrence any malfunction interfering with
land-line telephone communication between NADs installed pursuant to the terms
of this Agreement. If NetCo is unable to correct such malfunction within the
time so limited, NetCo (i) will implement, from and after December, 1997, data
transmissions through SBS satellite communication to the Destination NAD(s)
unreachable by land-line communications, or (ii) until SBS satellite
communication becomes available in December, 1997, will route the communication
through the Redundant Line if the same has been installed pursuant to this
Agreement. Time Inc. may independently switch from land-line communication to
either the Redundant Line or SBS satellite communication, as the case may be,
prior to the expiration of two (2) hours following the occurrence of any such
malfunction.
2.9. Installation; Disconnection. Promptly upon receipt of Time Inc.'s
---------------------------
written instructions, NetCo will order T1 service and thereafter, concurrently
with the installation of T1 service, install operational Services with any
Printer designated by Time Inc. for installation. Promptly upon receipt of Time
Inc.'s written instructions, NetCo will disconnect Services from any Printer
designated by Time Inc. for disconnection from Services. The payment obligation
for a Printer whose installation has been disconnected pursuant to this Section
2.10 shall continue until the earliest of (i) the
-6-
<PAGE>
termination of NetCo's purchase obligation for the local telephone service to
such Printer, or (ii) sixty (60) days following NetCo's receipt of such written
instructions.
2.10. Initial Redundant Lines. NetCo will install a Redundant Line to each
-----------------------
of the Printers listed on Exhibit 2 concurrently with the installation of
Services for each such Printer. Subject to the provisions of Section 2.3(e),
NetCo will install a Redundant Line at other or additional Printers as directed
by Time Inc. in writing.
Section 3. - Prices and Payment
3.1. General. For the Term of this Agreement, Time Inc. will pay NetCo
-------
each of the amounts set forth in this Section 3 for the Services enumerated in
Section 2. Any item of Service enumerated in Section 2 that is not separately
charged for in this Section 3 shall be deemed to be comprehended in the amounts
due as Base Charges.
3.2. Base Charges. As Base Charges, Time Inc. will pay each of the
------------
following sums monthly for the Services and Equipment identified in Section 2.2:
3.2.1. The sum of Twenty-two Thousand Dollars ($22,000) for the Two
(2) NADs and Dual T1 service installed at Time Inc. as enumerated in Section
2.2; it being understood that the annualized amount hereof is Two Hundred Sixty
Four Thousand Dollars ($264,000).
3.2.2. The sum of One Thousand Dollars ($1,000) for each NAD with T1
service connections installed at a Printer as enumerated in Sections 2.3(a) and
2.3(b); it being understood that the annualized amount hereof for each such NAD
and T1 service is Twelve Thousand Dollars ($12,000).
3.2.3. The sum of Five Hundred Dollars ($500) for each NAD installed
on a Printer's Premises without T1 connection principally for standby use
pursuant to Section 2.3(a); it being understood that the annualized amount
hereof is Six Thousand Dollars ($6,000).
3.3. SBS Availability Charges. When SBS satellite services become
------------------------
available, Time Inc. will pay monthly the sum of One Thousand Five Hundred
Dollars ($1,500) for each installation of SBS satellite reception capability at
the premises of a Printer as contemplated by Section 2.1, subparagraph (c); it
being understood that the annualized amount hereof is Eighteen Thousand Dollars
($18,000) per installed site for the availability of such SBS satellite
communications.
3.4. SBS Priority Charges. When SBS satellite services become available,
--------------------
Time Inc. will pay monthly the sum of Five Hundred Dollars ($500) for each NAD
designated by Time Inc. for Satellite Transmission Priority as contemplated by
Section 2.6; it being understood that the annualized amount hereof is Twelve
Thousand Dollars for each NAD designated by Time Inc. for Satellite Transmission
Priority.
3.5. Redundant Land-Lines Charges. Time Inc. will pay monthly the sum of
----------------------------
One Thousand Dollars ($1,000) for each Redundant Line contemplated by Section
2.3(e); it being understood that the annualized amount hereof is Twelve Thousand
Dollars ($12,000) for the availability of each Redundant Line.
3.6. Interactive Service Charges. Time Inc. will pay monthly the sum
---------------------------
Three Hundred Dollars ($300) for each NAD installed with Interactive Service
capability in accordance with Section
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2.5; it being understood that the annualized amount hereof is Three Thousand Six
Hundred Dollars ($3,600) for each NAD installed with Interactive Service
capability.
3.7. Excess Service Charges. Time Inc. will pay monthly an additional
----------------------
amount calculated as the sum of all of the following:
3.7.1. Four cents ($0.04) for each megabyte of data transmitted from
a NAD installed on Time Inc.'s premises that is in excess of six thousand five
hundred (6,500) Gigabytes transmitted during the Initial Term or during each
year of the Renewal Term from all NADs installed on Time Inc.'s premises. For
purposes hereof, the computation of Gigabytes transmitted per year is not
cumulative from the Initial Term or a year of the Renewal Term to any other
year.
3.7.2. Twenty-five cents ($0.25) each megabyte of data transmitted
from a NAD installed on a Printer's premises that is in excess of Four Thousand
(4,000) Megabytes transmitted during such month from all NADs installed on that
same Printer's premises.
3.7.3. Four cents ($0.04) for each megabyte of data transmitted
during a month for Interactive Services.
3.7.4. Thirty-five cents ($0.35) for each megabyte of data
transmitted during a month via SBS satellite services; provided, however, if the
event or occurrence necessitating the usage of SBS satellite services is due to
any fault of NetCo, then the price for each such megabyte of data shall be four
cents ($0.04). For purposes hereof, the phrase "fault of Netco" does not include
a disruption, for any reason whatsoever, in telephone service provided by any
telephone carrier.
3.8. Commencement of Payment Obligations. Time Inc.'s payment obligation
-----------------------------------
for each of the several Services comprehended in Section 2 hereof shall commence
when such item of Service is installed, made operational on Time Inc.'s premises
or on a Printer's Premises, as the case may be, and has begun to operate in
accordance with the respective provisions of this Agreement to the reasonable
satisfaction of Time Inc. NetCo will certify the installation and operational
capability of each such item of Service to Time Inc. The applicable Service
Charge for an item of Service that becomes installed and operational during a
month shall be prorated for the number of days during such month that the item
of Service has been installed and operational.
3.9. Payments Due. All amounts payable by Time Inc. to NetCo under this
------------
agreement shall be due and payable no later than thirty (30) days following
NetCo's invoice therefor to Time Inc.
3.10. Credits; Graphic User Interfaces, SBS Backup. Time Inc. may deduct
--------------------------------------------
monthly from any amounts then owed to NetCo under this Agreement, and shall not
be thereafter obligated to pay, a sum (herein the "Credit") calculated in
accordance with this Section 3.10, for each month, or portion thereof, that
NetCo has failed to deliver and implement (a) the graphic user interface
specified in Section 2.1(i), (b) the graphic user interface specified in Section
2.1(j), or (c) that NetCo has failed to deliver and install the SBS satellite
receiver and ancillary reception equipment and SBS software specified in Section
2.3(c). "Delivery" for purposes hereof shall be deemed to have occurred when (d)
each such graphic user interface has been installed, made operational and begun
to perform the functions specified in Section 2.1(i) and Section 2.1(j),
respectively, and (e) such receiver, equipment and software have been installed
and made operational to perform the functions specified in Section 2.3(c), in
each such case to the reasonable satisfaction of Time Inc.
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3.10.1. Onset of Credit. The Credit shall be due to Time Inc. for
---------------
each month commencing November, 1997 respecting either of the graphic user
interfaces specified, respectively, in Section 2.1(i) or Section 2.1(j), and for
each month commencing January, 1998 respecting the SBS satellite receiver and
ancillary reception equipment and SBS software specified in Section 2.3(c) of
this Agreement.
3.10.2. Amount of Credit. The amount of the Credit shall be an
----------------
increasing amount, initially equal to ten percent (10%) of the aggregate Service
Charges payable by Time Inc. under this Agreement, and thereafter increasing
each month that any Credit is due by an additional amount equal to ten percent
(10%) of such aggregate Service Charges. After four months of applied credit,
the amount of credit shall be established at forty percent (40%) of the
aggregate Service Charges payable by Time Inc. for each additional month that
any credit is due.
Section 4. - Commencement of Services
4.1. Tampering or Removal. As a condition to the provision of Services to
--------------------
any Printer, NetCo may require such Printer to execute and deliver to NetCo and
agreement prohibiting such Printer (i) from tampering with any Equipment, (ii)
from seeking access to the WAM!NET Network for any purpose not expressly
authorized by NetCo, or (iii) from moving the Equipment without NetCo's prior
consent.
4.2. UCC Filings. As a further condition to the provision of Services to
-----------
any Printer, NetCo may require such Printer to execute and deliver to NetCo (i)
documentation duly executed in recordable form and reasonably sufficient in
NetCo's opinion to grant, perfect and preserve to NetCo a security interest in
the Equipment furnished to the Printer in accordance with Section 2.3, and (ii)
the written agreement of the Printer to peaceably return the Equipment to NetCo
at (a) the termination of this Agreement or (b) the earlier instruction of Time
Inc., and to indemnify NetCo against any loss, costs or expenses suffered or
incurred by NetCo as a result of damage or destruction of the Equipment or as a
result of a proceeding necessary to return the Equipment to NetCo.
4.3. Insurance. As a further condition to the provision of Services to
---------
any Printer, NetCo may require the Printer to furnish an appropriate certificate
of insurance insuring the Equipment furnished to the Printer in accordance with
Section 2.3 against loss or casualty in appropriate amounts, and naming NetCo as
an additional loss payee. It is hereby acknowledged and agreed that the fair
market value of each NAD Fifteen Thousand Dollars ($15,000). NetCo will provide
reasonable estimates of fair market value for other items of Equipment which may
be furnished to Printers pursuant to this agreement.
4.4. Procedure. NetCo will prepare and furnish all documents required by
---------
this Section 4 to each Printer for signature and return to NetCo.
4.5. Security Assessment. No interconnection between Time Inc.'s internal
-------------------
computer network and the WAM!NET Network shall occur until and unless Time Inc.
has received the favorable report of SAIC pursuant to Section 2.2(e).
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Section 5. - Warranties
5.1. Up-Time Inc. NetCo warrants under this Agreement the architecture,
-----------
redundancy and operational capability of the WAM!NET Network to deliver
electronic data without interruption or failure in accordance with the warranty
of delivery set forth in Section 5.2 of this Agreement.
5.2. Delivery. NetCo warrants under this Agreement the delivery of
--------
electronic data without degradation from a sending NAD located at Time Inc.'s
premises to the receiving NAD located at the Printer's premises selected by Time
Inc. for receipt of such delivery at no less that Four Hundred (400) megabytes
per hour, subject to interruption in the T1 service connecting the NAD located
on the Printer's premises with a Hub. The "subject to" clause of the foregoing
warranty is inapplicable if the Printer's premises is also served by SBS
satellite service or a Redundant Line.
5.3. NetCo warrants under this Agreement that the Interactive Service will
conform to specifications determined in accordance with Section 2.5.
5.4. Equipment and Software. NetCo warrants the Equipment and the
----------------------
Software will be free from defects in materials and workmanship.
5.5. Non-Infringement. NetCo warrants that the sale and/or use of
----------------
Services does not infringe any patent or technology of any third party.
5.6. Exclusion. NETCO MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED,
---------
INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
OTHERWISE. NETCO IS NOT RESPONSIBLE FOR, AND TIME INC. WILL NOT MAKE ANY CLAIM
AGAINST NETCO, FOR ANY CONSEQUENTIAL, SPECIAL, OR INDIRECT DAMAGES.
5.7. Limitation. Except for the warranty in Section 5.5, if NetCo fails
----------
to comply with the warranties given in this Service Agreement, its liability
shall not exceed $100 per occurrence to a maximum, for all such occurrences, of
the total of the Service Charges that have been paid by Time Inc. during the
calendar year in which such event(s) occurred. "Occurrence" for these purposes
means a single transmission of data from a sending NAD into the WAM!NET Network
regardless of the number of Destination NADs. Under no circumstance shall NetCo
be liable upon any claim, regardless of cause or kind, for any amount in excess
of the Services Charges received by NetCo during the calendar year in which the
claim first arose.
5.8. Indemnity. NetCo shall indemnify and hold Time Inc. harmless against
---------
any losses, claims, damages or liabilities, including reasonable fees of
counsel, to which Time Inc. may become subject insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise or are based upon a
claim that Time Inc.'s use of the Services infringe the patent or other
intellectual property rights of any third party. Promptly after Time Inc.'s
receipt of notice of the commencement of any action of or the intent to commence
any action, Time Inc. will, if a claim in respect thereof is to be made against
NetCo, notify NetCo in writing of the commencement thereof or of the intent to
commence an action, as the case may be, and omission so to notify NetCo will
relieve NetCo from any liability hereunder as to the particular item for which
indemnification is then being sought. In case any such action is brought against
Time Inc. and it notify NetCo of the commencement thereof, NetCo will be
entitled to participate therein and, to the extent that NetCo may wish, to
assume the defense thereof, with counsel who shall be to Time Inc.'s reasonable
satisfaction, and after notice from NetCo to Time
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<PAGE>
Inc. of NetCo's election so to assume the defense thereof, NetCo will not be
liable to Time Inc. for any legal or other expenses Time Inc. may subsequently
incur in connection with the defense thereof. NetCo shall not be liable to Time
Inc. on account of any settlement of any claim or action effected without
NetCo's consent. NetCo shall not be liable to Time Inc. for any lost
opportunity, consequential or other damages whatsoever due to Time Inc.'s
inability to use the Services.
Section 6. - Quarterly Performance Reviews
Netco and Time Inc. shall conduct quarterly performance reviews of matters
appropriate to this Agreement, including NetCo's provision of Services, and
future products, services and coordinated efforts that may be appropriate to
this Agreement.
Section 7. - NetCo Insurance Requirements
7.1. NetCo shall obtain, pay for and maintain the following types and
amounts of insurance covering the performance of work under this Agreement: (a)
Workers' Compensation and Occupational Disease insurance as required by law; (b)
Employers' Liability insurance with limits of $500,000 per occurrence; (c)
Comprehensive General Liability insurance with limits of not less than
$2,000,000 per occurrence for bodily injury and $1,000,000 per occurrence for
property damage; and (d) if automobiles are used in connection with work to be
performed under this Agreement, Comprehensive Automobile Liability insurance
covering all owned or rented vehicles, each with limits of not less than
$1,000,000 per occurrence for bodily injury and $500,000 per occurrence for
property damage.
7.2. NetCo shall provide certificates of insurance evidencing such
insurance signed by an authorized representative of the insurance company. Such
insurance shall provide that in the event of any material change in coverage or
cancellation, at least ten (10) days prior written notice shall be provided to
Time Inc.
Section 8. - Loss, Damages; Insurance.
Time Inc. is responsible for any loss, theft, destruction or damage
(collectively "Loss") of or to the Equipment, to the extent of its then fair
market value, located on Time Inc.'s premises from any cause at all, whether or
not insured, until it is delivered to NetCo at the end of this Agreement. Time
Inc. shall pay all Service Charges even if there is a Loss. Time Inc. shall
notify NetCo in writing immediately of any Loss. It is agreed Netco's Equipment
to be located on Time Inc.'s Premises is valued at Thirty Five Thousand Dollars
($35,000). Time Inc. will furnish NetCo upon request with certification
satisfactory to NetCo's insurance carrier that the Equipment is located on Time
Inc.'s premises.
Section 9. - Software, Software License
The Software is furnished by NetCo solely for use in connection with the
Data Transportation and Delivery Services and is protected by copyright and is
subject to pending US patents. NetCo grants to Time Inc. and to each Printer a
limited license for the term of this Agreement to use the Software in connection
with the Data Transportation and Delivery Service. Time Inc. agrees that it will
not use the Software for any purpose other than the transmission of data across
the WAM!NET network pursuant to this Service Agreement Time Inc. covenants and
agrees to transfer to NetCo any right that Time Inc. may have or claim that is
derived from any reverse engineering of the Software or
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<PAGE>
that may be otherwise inconsistent with NetCo's sole and exclusive ownership of
the Software or of the Services.
Section 10. - Initial Term
The Initial Term of this Agreement shall commence on the day first above
written and, unless earlier terminated in accordance with Section 12, shall
continue for one (1) year until July 18, 1998, and then terminate, unless
extended for the Renewal Term provided in Section 6.
Section 11. - Renewal Term
Time Inc. shall have the option to extend this Agreement, upon the same
terms and conditions of this Agreement, for two successive periods of one (1)
year each (each a "Renewal Term") commencing, respectively immediately upon
expiration of the Initial Term or the first Renewal Term, as the case may be,
and expiring, unless earlier terminated in accordance with Section 12, at five
o'clock p.m., New York time, on the day preceding the anniversary of such
commencement. This option shall be exercised by Time Inc. by notice given no
later that sixty (60) days prior to the expiration of the Initial Term or the
first Renewal Period, as the case may be.
Section 12. - Default and Remedies
12.1. Default for Bankruptcy or Insolvency. The filing by either party of
------------------------------------
a voluntary petition under any chapter of the United States Bankruptcy Act or
any similar state or foreign law, the filing of an involuntary petition against
either party under the United State Bankruptcy Act which is not dismissed within
sixty (60) days, the insolvency of either party, or the appointment of a
receiver for either party, which is not dismissed within sixty (60) days shall
also constitute a default by that party.
12.2. NetCo's Default. If NetCo defaults, Time Inc. may terminate this
---------------
Agreement by notice effective immediately upon NetCo's receipt.
12.2.1. Material Obligations. NetCo's failure to comply with any
--------------------
material obligations under this Agreement for a period of thirty (30) days
following notice from Time Inc. shall constitute a default by NetCo. The term
"material obligations" expressly include NetCo's warranties set forth in Section
5 of this Agreement.
12.2.2. Premium Charges. In addition, if Time Inc. incurs premiums
---------------
totaling greater than Five Thousand Dollars ($5,000) per month for any two (2)
months due to NetCo's breach of warranty, including, without limitation, NetCo's
warranty of delivery set forth in Section 5.2, then, in that event, Time Inc.
may terminate this Agreement upon sixty days prior notice. Such termination
shall relieve Time Inc. of all payment obligations under this Agreement, and
shall be without cost or penalty to Time. For purposes hereof, "premium" means
costs charged to Time by a Printer for production delays in a Printer's
scheduled production occasioned by the absence of data files necessary to
complete the production.
12.3. Time Inc.'s Default. Any of the following will constitute a default
-------------------
by Time Inc.: (a) failure to pay any Service Charges or any other payment within
thirty (30) days of its due date; (b) failure to comply with or perform any
other material term of this Service Agreement required of Time Inc., and such
failure continues for 10 days after following notification from NetCo. If Time
Inc. defaults, NetCo may do one or more of the following: (a) upon sixty (60)
days prior written notice to
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<PAGE>
Time Inc., cancel or terminate this Agreement or any or all other agreements
that NetCo has entered into with Time Inc.; (b) require Time Inc. to immediately
pay NetCo, as compensation for loss of bargain, a sum equal to the present
value, discounted eight percent (8%), of all unpaid monthly Service Charges that
would have been payable during the term of this Agreement but for its early
termination, together with any other amounts then or later due; (c) upon sixty
(60) days prior written notice to Time Inc. discontinue providing Data
Transportation and Delivery Services; or (d) exercise any other right or remedy
available at law. These remedies are cumulative, and NetCo's exercise of any
remedy will not prevent NetCo from then or later exercising any other remedy.
12.4. Without Default. Either party may terminate this Agreement upon
---------------
thirty (30) day's prior notice in the event that Time does not receive the
favorable report of SAIC pursuant to Section 2.2(e). In the event of such
cancellation, neither party shall be liable to the other for any damages or
penalties.
Section 13. - Obligations on Termination
Within thirty (30) days after the end of the term of this Agreement, Time
Inc. will return the Equipment, including any Software, to NetCo in good and
serviceable condition, ordinary wear and tear excepted, and will certify to
NetCo in writing that Time Inc. have returned, or destroyed, all copies to the
Software. The Software License shall terminate at the same time that the term of
this Service Agreement is terminated.
Section 14. - Confidential Information
14.1. Confidential Information Defined. "Confidential Information" shall
--------------------------------
mean any information of a confidential or proprietary nature which is disclosed
by either party ("Disclosing Party") to the other party ("Confidant") including,
but not limited to, all information of a confidential or proprietary nature,
software, firmware, all processes and process controls, security procedures, all
technical, know-how and/or trade secrets whatsoever which relate to the business
of the Disclosing Party, and all marketing and sales information relating to the
marketing or sales of any product or service of the Disclosing Party.
Confidential Information does not include any information which a Confidant can
establish (i) was in that Confidant's possession prior to first receipt of the
same, directly or indirectly, from the Disclosing Party, but was not received or
derived from the Disclosing Party; (ii) is or becomes part of the public domain
without breach of this Agreement by the Confidant; (iii) was heretofore or
hereafter furnished to the Confidant by another party as a matter of right
without restriction on disclosure; (iv) was developed by the Confidant
independently and without any use of any Confidential Information, (v) was
disclosed to any third party by the Disclosing Party without any restriction on
further dissemination or (vi) was forced to disclose pursuant to any law,
regulation or governmental order or by any judgment, order, decree or award of a
competent court.
14.2. Ownership And Limitations on Use of Confidential Information. All
------------------------------------------------------------
Confidential Information disclosed by a Disclosing Party to the Confidant under
this Agreement shall remain the property of the Disclosing Party. Confidant
covenants (i) to maintain in confidence all Confidential Information received
from the Disclosing Party, (ii) only to use the Confidential Information for the
purposes and under the circumstances provided in this Agreement, (iii) not use
the Confidential Information for its or his own benefit or for the benefit of
any third party, and (iv) unless required to do so by law, not to disclose any
Confidential Information to any third party. Confidant shall give the Disclosing
Party prompt written notice of the commencement or any suit or proceeding in
which Confidant may be required to disclose any such Confidential Information,
and shall give the Disclosing
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Party a further written notice immediately upon receipt of any motion or other
request to have any tribunal issue an order for the disclosure of any
Confidential Information. Confidant shall give the Disclosing Party at least
fifteen (15) days prior written notice of its intention to make a disclosure of
Confidential Information believed to be required by law to any third party which
written notice shall set forth (a) the nature of the information proposed to be
disclosed and (b) the basis for the conclusion that such disclosure is required
by law. Confidant shall seek to maintain the confidentiality of such
Confidential Information by, for example, seeking a protective order limiting
the use and disclosure of such Confidential Information to the limited purposes
of such suit or proceeding.
14.3. Limitation On Disclosure of Agreement. Neither Party shall disclose
-------------------------------------
the contents of this Agreement, except in accordance with the requirements of
law, including any registration or reporting requirement imposed under the
Securities Act of 1933, as amended, or under the Securities Exchange Act of
1934, as amended.
Section 15. - Miscellaneous Provisions
15.1. Publicity. Neither party shall use the name of the other party in
---------
any news release, public announcement, advertisement or other form of publicity
without the prior written consent of the other party. NetCo will provide Time
Inc. with the text of all promotional materials wherein Time Inc. is mentioned
as a customer in advance for approval which shall not be unnecessarily withheld
or delayed. Except as expressly permitted herein, NetCo may not use any logo,
trademark or trade name of Time Inc. for any purpose without prior express
written consent of Time Inc. NetCo grants Time Inc. permission during the term
of this Agreement to use the trademarks and trade names used by NetCo in
connection with the products and services covered by this Agreement. Such
permission is expressly limited to uses by Time Inc. necessary to the
performance of Time Inc.'s obligations under this Agreement. Time Inc. hereby
acknowledges NetCo's exclusive ownership of such marks and names and that
NetCo's marks and names are renowned both worldwide and specifically in the U.S.
Time Inc. agrees not to take any action inconsistent with such ownership and
further agrees to take any action, including without limitation the conduct of
legal proceedings at NetCo's expense, which NetCo reasonably deems necessary to
establish and preserve NetCo's exclusive rights in and to its trademarks and
trade names. Reproductions of NetCo's trademarks, logos, symbols, etc., shall be
true photographic reproductions.
15.2. Further Documents. Time Inc. agrees to execute upon NetCo's request
-----------------
from time to time any additional documents reasonably necessary for NetCo to
perfect or continue a security interest in the Equipment installed on Time
Inc.'s premises.
15.3. Removal; Environment; Tampering. Time Inc. may not disconnect or
-------------------------------
reconnect the Equipment without prior notice to NetCo and NetCo's prior consent,
which shall not be unreasonably withheld. Netco shall not be responsible for any
failure of Services resulting from an unauthorized disconnection or reconnection
of the Equipment. Time Inc. will provide at its expense a suitable environment
for the Equipment. Time Inc. will not make any alterations, additions or
replacements to the Equipment without NetCo's prior written consent, and will
not tamper with the Equipment or seek access to the WAM!NET Network for any
purpose not expressly authorized by NetCo. Time Inc. will not remove, make or
permit any alterations in any labels or other identifying markings placed by
NetCo on any of its products and services covered by this Agreement. NetCo win
relocate the Equipment for Time Inc. upon Time Inc.'s payment of circuit and
miscellaneous out-of-pocket reinstallation charges incurred by NetCo.
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15.4. Taxes and Fees. When required by any state, local or other
--------------
government authority, Time Inc. will pay when due, any taxes or fees, including
UCC filing fees, relating to this Agreement or to the Equipment, that are now or
in the future assessed, levied or required, by any state, local or other
government authority. NetCo may, but is not obligated to, pay any or all such
taxes or fees on Time Inc.'s behalf, and Time Inc. will reimburse NetCo for such
taxes or fees promptly against invoice accompanied by evidence of payment. NetCo
will file all personal property, use or other tax returns (unless NetCo notifies
Time Inc. otherwise in writing).
15.5. Security Regulations. Time Inc. and NetCo, their employees,
--------------------
representatives and agents, will comply with all security regulations in effect
from time to time at each other's premises and with all policies and procedures
of the other respecting security.
15.6. No Rights or Licenses. No rights to manufacture are granted by
---------------------
NetCo to Time Inc. under this Agreement. Moreover, no licenses are granted or
implied by this Agreement under any patents owned or controlled by NetCo or
under which NetCo has rights, except the right to market and sell the products
and services covered by this Agreement during the term and as contemplated
herein.
15.7. Modifications. NetCo reserves the right to make design
-------------
modifications in any of the Equipment and Services covered by this Agreement at
any time, provided that Services are not adversely affected thereby, but shall
not be obligated, except as otherwise expressly agreed herein, to implement such
modifications in the products and services that have previously been delivered
to Time Inc.
15.8. Waiver and Amendment. No waiver, amendment or modification,
--------------------
including those by custom, usage of trade, or course of dealing, of any
provision of this Agreement will be effective unless in writing and signed by
the party against whom such waiver, amendment or modification is sought to be
enforced. No waiver by any party of any default in performance by the other
party under this Agreement or of any breach or series of breaches by the other
party of any of the terms or conditions of this Agreement shall constitute a
waiver of any subsequent default in performance under this Agreement or any
subsequent breach of any terms or conditions of that Agreement. Performance of
any obligation required of a party under this Agreement may be waived only by a
written waiver signed by a duly authorized officer of the other party, that
waiver shall be effective only with respect to the specific obligation described
in that waiver.
15.9. Entire Agreement. The parties acknowledge that this Agreement
----------------
expresses their entire understanding and agreement, and that there have been no
warranties, representations, covenants or understandings made by either party to
the other except expressly set forth in this Agreement. The parties further
acknowledge that this Agreement supersedes, terminates and otherwise renders
null and void any and all prior Agreements or contracts, whether written or
oral, entered into between NetCo and Time Inc. with respect to the matters
expressly set forth in this Agreement.
15.10. Survival. Rights and obligations relating to each party's
--------
respective ownership of any Confidential Information shall survive the
termination of this Agreement.
15.11. No Association. This Agreement is not intended to create, nor shall
--------------
it be construed as, a joint venture, association, partnership, franchise or
other form of business or relationship. Neither party shall have nor hold itself
out as having any right or power or authority to assume, create, or incur any
expense, liability or obligation, expressed or implied, on behalf of the other
party, except as expressly provided herein.
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15.12. Governing Law. This Agreement shall be governed by the laws of the
-------------
State of New York, exclusive of the conflicts of law provisions thereof.
15.13. Except as otherwise provided in this Agreement, neither Netco nor
Time Inc. shall be liable to the other, or to any third party claiming under
either of them respectively, for any special, indirect or consequential damages
(such as lost business profits) in connection with or arising out of this
Agreement.
15.14. Force Majeur. Neither party shall be responsible or deemed to be in
------------
default for nonperformance or delays in performance of this Agreement due to
causes beyond its control and not occasioned by the fault or negligence of such
party to be excused, including, but not limited to, civil war, insurrections,
unforeseeable strikes, riots, fires, floods, explosions, earthquakes, acts of
God or the public enemy, and any stature, order, regulation, proclamation,
ordinance, demand or requirement of any governmental agency imposed after the
effective date. Upon the occurrence of such event, the party so affected, upon
giving prompt written notice to the other party, shall be excused from such
performance to the extent of such prevention, restriction or interference
provided that the party so affected shall take all reasonable steps to avoid or
remove such causes of nonperformance and shall continue performance hereunder
with dispatch whenever such causes are removed. In the event that a party's
performance of its obligations is excused in accordance with this Section for a
period in excess of thirty (30) days in the aggregate, the other party may
terminate its obligations under this Agreement upon written notice to the party
whose performance of its obligations was excused.
15.15. Captions. Captions appearing in this Agreement are for convenience
--------
of reference only, and shall not be considered a part of this Agreement.
15.16. Interpretation and Construction. Wherever possible, each provision
-------------------------------
of this Agreement will be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable under any applicable law or rule in any
jurisdiction, such provision will be ineffective only to the extent of such
invalidity, illegality, or unenforceability in such jurisdiction without
invalidating the remainder of this Agreement in such jurisdiction or any
provision hereof in any other jurisdiction.
15.17. Notices. Any notice permitted or required under this Agreement
-------
shall be given by NetCo or by Time Inc. by registered or certified mail, postage
prepaid mail to other party at its address appearing on the first page of this
Agreement. Notice so given shall be effective on receipt. Any instruction
contemplated by Section 2.9 may be given orally and confirmed by facsimile
transmission.
Section 16. - Condition Subsequent
16.1. WorldCom's Assurance. It is expressly a condition subsequent to
--------------------
this Agreement that Time Inc. shall have received from WorldCom Inc.
("WorldCom"), no later than the tenth (10th) day following the effective day of
this Agreement, the written agreement of WorldCom to furnish or to cause NetCo
to furnish, in the event of NetCo's financial inability to perform its material
obligations under this Agreement, all Services contracted for by Time Inc., for
a period commencing upon such inability and continuing for one hundred twenty
(120) days following WorldCom's written notification to Time Inc. that WorldCom
intends to furnish, or to cause NetCo to furnish, such Services.
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16.2. Right to Cancel. In the absence of WorldCom's timely written
---------------
agreement in accordance with Section 15.1, Time Inc. may cancel this Agreement
upon written notice without any obligation, cost or penalty.
SIGNATURES:
We have carefully reviewed this agreement and accept its terms and
conditions. We are executing this Agreement to be effective as of the month, day
and year first written above.
NetCo Communications Corporation Time Inc.
By: /s/ Edward J. Driscoll By: /s/ Guy Gleysteen
----------------------------------------- ----------------------------
Name: Edward J. Driscoll Name: Guy Gleysteen
--------------------------------------- --------------------------
Title: President and Chief Executive Officer Title: Director of Printing
-------------------------------------- -------------------------
Attachments:
Exhibit 1: Service Level Agreement
Exhibit 2: Redundant Line Installations
-17-
<PAGE>
Exhibit 10.12
STANDBY AGREEMENT
Standby Agreement ("Agreement") made effective as of this 19th day of July,
1997, by and between:
WorldCom Inc., a Georgia corporation, having its principal place
of business at 515 East Amite Street, Jackson, Mississippi 39201
("WCOM").
and
Time Inc. ("Time"), a Delaware corporation, havings its principal
place of business at Time Life Building, Rockefeller Center, New
York, NY 10020.
PREMISES:
Time and NetCo Communications Corporation ("NetCo") are parties to a
certain Services Provision Agreement ("SPA") dated as effective July 18, 1997,
pursuant to which NetCo has agreed to furnish Time with Data Transportation and
Delivery Services.
WCOM is the principal provider of telephony services to NetCo.
As an express condition subsequent to the continuation of the term of the
SPA, Time requires that WCOM agree to furnish or to cause NetCo to furnish, in
the event of NetCo's financial inability to perform its material obligations
under the SPA, all Services contracted for by Time Inc., for a period commencing
upon such inability and continuing for one hundred twenty (120) days following
WorldCom's written notification to Time Inc. that WorldCom intends to furnish,
or to cause NetCo to furnish, such Services.
WCOM is agreeable to furnishing or to causing NetCo to furnish, in the
event of NetCo's financial inability to perform its material obligations under
the SPA, all services contracted for by Time Inc., under the SPA.
In consideration of the premises and of benefits which may be derived
indirectly by WCOM as a result of the SPA, WCOM and Time agree as follows:
<PAGE>
AGREEMENT:
1. The foregoing premises are repeated herein and made a part hereof.
A copy of the SPA is attached hereto as Exhibit 1. Capitalized
terms not otherwise defined herein shall have the meanings ascribed
to them in the SPA.
to furnish or to cause NetCo to furnish, in the event of NetCo's financial
inability to perform its material obligations under this Agreement, all Services
contracted for by Time Inc., for a period commencing upon such inability and
continuing for one hundred twenty (120) days following WorldCom's written
notification to Time Inc. that WorldCom intends to furnish, or to cause NetCo to
furnish, such Services.
2. In the event of NetCo's financial inability to perform its material
obligations under the SPA, WCOM will furnish, or cause NetCo to
furnish, all Services contracted for by Time Inc., for a period
commencing upon such inability and continuing for one hundred
twenty (120) days following WCOM's written notification to Time
that WCOM intends to furnish, or to cause NetCo to furnish, such
Services. WCOM shall have no other responsibility or obligation to
Time under this Agreement or the SPA.
3. Time accepts this Agreement as satisfaction of the Condition
Subsequent to the SPA.
4. Nothing in this Agreement shall be deemed to create any right or
remedy of any kind whatsoever in any person or party who is not
signatory to this Agreement.
(The balance of this page is left intentionally blank.)
-2-
<PAGE>
SIGNATURES:
We have carefully reviewed this agreement and accept its terms and
conditions. We are executing this Agreement to be effective as of the month,
day and year first written above.
WorldCom Inc. Time Inc.
By: /s/ K. William Grothe, Jr. By: /s/ Guy Gleysteen
----------------------------- -------------------------
Name: /s/ K. William Grothe, Jr. Name: Guy Gleysteen
--------------------------- -----------------------
Title: Vice President Title: Director of Printing
-------------------------- ----------------------
Attachments:
Exhibit 1: Service Provision Agreement
<PAGE>
Exhibit 10.17
WAM!NET INC.
6100 West 110th Street
Minneapolis, MN 55438
February 11, 1998
K. William Grothe, Jr.
Vice President-Corporate Development
WorldCom Inc.
515 East Amite Street
Jackson, Mississippi 39201
Re: WAM!NET - WorldCom
------------------
Dear Bill:
As you are aware, in connection with WAM!NET Inc.'s ("WAM!NET")
proposed Rule 144A High Yield Offering ("Offering"), Merrill Lynch & Co. (one of
the initial purchasers and managing underwriter) has requested that certain of
the existing indebtedness of WAM!NET to WorldCom Inc. ("WorldCom") be modified
to explicitly provide that such indebtedness is subordinate to the indebtedness
represented by the notes in the Offering ("Notes"). This letter is intended to
memorialize the agreement of WorldCom and WAM!NET with respect to such
modification.
In this regard, reference is hereby made to WAM!NET's (i) 10%
Convertible Subordinated Note, due September 30, 1999 ("10% Subordinated Note"),
(ii) 7% Subordinated Note, due December 31, 2003 ("7% Subordinated Note"), and
(iii) 100,000 shares of Series A Preferred Stock ("Preferred Stock"), all of
which are held by WorldCom (the 10% Subordinated Note, 7% Subordinated Note and
the Preferred Stock, collectively, are referred to herein as the "Subordinated
Securities"). The parties desire to modify the terms of the Subordinated
Securities as follows:
1. All payment obligations of WAM!NET in respect of the Subordinated
Securities shall be subordinate to the prior payment in full of the Notes to the
extent provided herein;
<PAGE>
K. William Grothe, Jr.
February 11, 1998
Page 2
2. No payment of principal (or premium on) or interest on, or
dividend, distribution or other payment, in respect of such Subordinated
Securities shall be made prior to the date that is 180 days following the stated
maturity of the principal of the Notes, except that prior to such time the
Subordinated Securities may be redeemed or retired by the Issuer (or payment of
interest or dividends may be made) with, or converted into capital stock of
WAM!NET or options, warrants or other rights to purchase any such capital stock;
3. The payment of the principal of and interest on the 10%
Subordinated Note and the 7% Subordinated Note may be accelerated only in the
event of the acceleration of the payment of the principal amount of the Notes
following an event of default with respect to the Notes; provided that (i) any
payment in respect of such Subordinated Securities following the acceleration
thereof shall be subordinated to the prior payment in full of all amounts due in
respect of the Notes, and (ii) in the event of the recission of any such
acceleration of the Notes, the acceleration of such Subordinated Securities
shall be deemed rescinded upon notice to such effect to the holder of the
Subordinated Securities.
It is the understanding of the parties that WorldCom shall have the
option to convert (a) the interest due on the 10% Subordinated Note and deferred
pursuant to paragraph 2 above, and (b) the interest accrued (at a rate of 7% per
annum) on the outstanding principal amount of the 7% Subordinated Note from
December 31, 2003 through the date such amount is paid pursuant to paragraph 2
into shares of common stock, par value $.01, of WAM!NET, at the price per share
then existing on the date of such conversion. The price per share shall be the
average closing price per share of WAM!NET common stock as reported on NASDAQ or
any national securities exchange on which such stock trades for the ten trading
days preceding the date of conversion, if the common stock is then publicly
traded, or the fair value of such shares, as determined by mutual agreement of
the parties, if the common stock is not then publicly traded.
The provisions included herein will be operative only in the event
that the Offering is consummated, and are expected to be incorporated into
amendments to the agreements governing the Subordinated Securities, as deemed
necessary and appropriate by the parties.
<PAGE>
K. William Grothe, Jr.
February 11, 1998
Page 3
If you are in agreement with foregoing, please sign in the space
provided below.
Very truly yours,
WAM!NET INC.
By: /s/ Edward J. Driscoll, III
---------------------------
Edward J. Driscoll, III
President
Accepted and Agreed:
WORLDCOM INC.
By: /s/ K. William Grothe, Jr.
--------------------------
William Grothe, Jr.
<PAGE>
EXHIBIT 10.20
WAM!NET INC.
1998 COMBINED STOCK OPTION PLAN
1. Purpose. The purpose of the WAM!NET Inc. 1998 Combined Stock Option
-------
Plan (the "Plan") is to provide a continuing long-term incentive to selected
eligible officers and key employees (including foreign nationals) of WAM!NET
Inc. (the "Corporation") and of any subsidiary corporation of the Corporation
(the "Subsidiary"), as herein defined, to Non-Employee Directors of the
Corporation and to Non-Employee Consultants to the Corporation; to provide a
means of rewarding outstanding performance; and to enable the Corporation to
maintain a competitive position to attract and retain key personnel necessary
for continued growth and profitability.
2. Definitions. The following words and phrases as used herein shall
-----------
have the meanings set forth below:
2.1. "Addendum" shall mean an addendum attached to the Plan which
provides for certain grants of Options to employees of the Corporation or a
Subsidiary who are foreign nationals, and is intended to conform to the laws of
such employees' country of citizenship with respect to such Options and the
granting thereof.
2.2. "Board" shall mean the Board of Directors of the Corporation.
2.3. "Code" shall mean the Internal Revenue Code of 1986, as amended.
2.4. "Committee" shall mean the Stock Option Committee of the Board, or
such other committee of the Board as may be designated by the Board, from time
to time, for the purpose of administering this plan as contemplated by Section 4
hereof.
2.5. "Common Stock" shall mean the common stock, $0.01 par value, of
the Corporation.
2.6. "Corporation" shall mean WAM!NET Inc., (f/k/a Netco Communications
Corporation), a Minnesota corporation.
2.7. "Non-Employee Consultant" shall mean an individual who is retained
to provide consulting or legal services to the Corporation or a Subsidiary, and
who is not an employee of the Corporation or any Subsidiary.
2.8. "Non-Employee Director" shall mean a member of the Board who is
not an employee of the Corporation or any Subsidiary.
2.9. "Fair Market Value" of any security on any given date shall be
determined by the Committee as follows: (a) if the security is listed for
trading on one or more national securities exchanges, or is quoted on NASDAQ
National Market, the last reported sales price on the principal such exchange or
NASDAQ on the date in question, or if such security shall not have
<PAGE>
WAM!NET Inc.
1998 Combined Stock option Plan
been traded on such principal exchange on such date, NASDAQ on the first day
prior thereto on which such security was so traded; or (b) if the security is
not listed for trading on a national securities exchange or NASDAQ National
Market, but is traded in the over-the-counter market, including NASDAQ, closing
bid price for such security on the date in question, or if there is no such bid
price for such security on such date, the closing bid price on the first day
prior thereto on which such price existed; or (c) if neither (a) nor (b) is
applicable, by any means deemed fair and reasonable by the Committee, which
determination shall be final and binding on all parties.
2.10. "ISO" shall mean any stock option granted pursuant to this Plan
as an "incentive stock option" within the meaning of Section 422 of the Code.
2.11. "NQO" shall mean any stock option granted pursuant to this Plan,
which is not an ISO.
2.12. "Option" shall mean any stock option granted pursuant to this
Plan.
2.13. "Optionee" shall mean any person who is the holder of an Option
granted pursuant to this Plan.
2.14. "Plan" shall mean this 1998 Combined Stock Option Plan of the
Corporation.
2.15. "Subsidiary" shall mean any corporation which at the time
qualifies as a subsidiary of the Corporation under Section 425(f) of the Code.
2.16. "Tax Date" shall mean the date on which the amount of tax to be
withheld is determined under the Code.
3. Shares Available Under Plan. The number of shares which may be
---------------------------
issued pursuant to Options granted under this Plan, including Options granted
pursuant to an Addendum, shall not exceed 25,000,000 shares of the Common Stock
of the Corporation; provided, however, that shares which become available as a
result of canceled, unexercised, lapsed or terminated Options granted under this
Plan shall be available for issuance pursuant to Options subsequently granted
under this Plan, and the number of shares for which Options have been granted or
are available for grant under this Plan shall be proportionately increased or
decreased in accordance with Section 8 hereof upon occurrence of any event
described therein. The shares issued upon exercise of Options granted under this
Plan may be authorized and unissued shares or shares previously acquired or to
be acquired by the Corporation.
4. Administration.
--------------
4.1. The Plan will be administered by the Board of Directors or by a
Committee (the "Committee") selected by the Board and consisting of at least
three members, none of whom for at least one year prior to service on the
Committee has been eligible to receive any Option under the Plan, or under any
other benefit plan of the Corporation or any of its affiliates entitling the
participants therein to acquire stock or stock options of the Corporation or any
of its Subsidiaries. The Board or such Committee are hereinafter described as
the Committee.
2.
<PAGE>
WAM!NET Inc.
1998 Combined Stock option Plan
4.2. The Committee will have plenary authority, subject to provisions
of the Plan, to determine when and to whom Options will be granted, the term of
each Option, the number of shares covered by it, the participation by the
Optionee in other plans, and any other terms or conditions of each Option. The
Committee shall determine with respect to each grant of an Option whether a
participant shall receive an ISO or an NQO, or an Option pursuant to the
provisions of an Addendum. The number of shares, the term and the other terms
and conditions of a particular kind of Option need not be the same, even as to
options granted at the same time. The Committee's recommendations regarding
option grants and terms and conditions thereof will be conclusive.
4.3. The Committee will have the sole responsibility for construing and
interpreting the Plan, for establishing and amending any rules and regulations
as it deems necessary or desirable for the proper administration of the Plan,
and for resolving all questions arising under the Plan. Any decision or action
taken by the Committee arising out of or about the construction, administration,
interpretation and effect of the Plan and of its rules and regulations will, to
the extent permitted by law, be within its absolute discretion, except as
otherwise specifically provided herein, and will be conclusive and binding on
all Optionees, all successors, and any other person, whether that person is
claiming under or through any Optionee or otherwise.
4.4. The Committee will designate one of its members as chairman. It
will hold its meetings at the times and places as it may determine. A majority
of its members will constitute a quorum, and all determinations of the Committee
will be made by a majority of its members. Any determination reduced to writing
and signed by all members will be fully as effective as if it had been made by a
majority vote at a meeting duly called and held. The Committee may appoint a
secretary, who need not be a member of the Committee, and may make such rules
and regulations for the conduct of its business as it may deem advisable.
4.5. No member of the Committee will be liable, in the absence of bad
faith, for any act or omission with respect to his services on the Committee.
Service on the Committee will constitute service as a member of the Board, so
that the members of the Committee will be entitled to indemnification and
reimbursement as Board members pursuant to the Corporation's Bylaws.
4.6. The Committee will regularly inform the Board as to its actions
with respect to all Options granted under the Plan and the terms and conditions
and any such Options in a manner, at any times, and in any form as the Board may
reasonably request.
5. Participants.
------------
5.1. Participation in this Plan shall be limited to employees of the
Corporation or of a Subsidiary and to Non-Employee Directors and Non-Employee
Consultants. Non-Employee Directors and Non-Employee Consultants shall
participate under this Plan only as specified in Section 14 hereof.
3.
<PAGE>
WAM!NET Inc.
1998 Combined Stock option Plan
5.2. Without amending the Plan, the Committee may grant Options to
employees of the Corporation or of any Subsidiary who are foreign nationals on
such terms and conditions different from those specified in this Plan as may in
the judgment of the Committee be necessary or desirable to foster and promote
achievement of the purposes of the Plan, and, in furtherance of such purposes
the Committee may make such Addenda, modification, amendments, procedures,
subplans and the like as may be necessary or advisable to comply with provisions
of laws in other countries in which the Corporation or any Subsidiary operates
or has employees.
5.3. Subject to other provisions of this Plan, Options may be granted
to the same participants on more than one occasion.
5.4. Except with respect to Options granted to Non-Employee Directors
or Non-Employee Consultants under Section 15, the Committee's determination
under the Plan including, without limitation, determination of the persons to
receive Options, the form, amount and type of such Options, and the terms and
provisions of Options need not be uniform and may be made selectively among
otherwise eligible participants, whether or not the participants are similarly
situated.
6. Terms and Conditions.
--------------------
6.1. Each Option granted under the Plan shall be evidenced by a written
agreement, which shall be subject to the provisions of this Plan and to such
other terms and conditions as the Corporation may deem appropriate.
6.2. Each Option agreement shall specify the period for which the
Option thereunder is granted which in no event shall exceed ten years from the
date of the grant for any Option designated by the Committee as an ISO or ten
years and one day from the date of grant for any Option and shall provide that
the Option shall expire at the end of such period.
6.3. The exercise price per share shall be determined by the Committee
at the time any Option is granted and, if the Option is an ISO, shall be no less
than one hundred percent (100%) of Fair Market Value of the Common Stock of the
Corporation on the date the Option is granted, as determined by the Committee.
6.4. The aggregate Fair Market Value (determined as of the time the
Option is granted) of the Common Stock with respect to which an ISO under this
Plan or any other plan of the Corporation or its Subsidiaries is exercisable for
the first time by an Optionee during any calendar year shall not exceed
$100,000.
6.5. An Option shall be exercisable at such time or times, and with
respect to such minimum number of shares, as may be determined by the
Corporation at the time of the grant. The Option agreement may require, if so
determined by the Corporation, that no part of the Option may be exercised until
the Optionee shall have remained in the employ of the Corporation or of a
Subsidiary for such period after the date of the Option as the Corporation may
specify.
4.
<PAGE>
WAM!NET Inc.
1998 Combined Stock option Plan
6.6. The Corporation may prescribe the form of legend which shall be
affixed to the stock certificate representing shares to be issued and the shares
shall be subject to the provisions of any repurchase agreement or other
agreement restricting the sale or transfer thereof. Such agreements or
restrictions shall be noted on the certificate representing the shares to be
issued.
6.7. Each Incentive Stock Option granted hereunder shall not be
transferable by the Optionee other than by will or by the laws of descent and
distribution, and shall be, during the Optionee's lifetime, exercisable only by
the Optionee or Optionee's guardian or legal representative. Each Non-Qualified
Stock Option granted hereunder may be transferred by the Optionee for estate
planning purposes subject to prior or other written approval by the Committee in
its sole discretion or pursuant to any policy and requirements concerning such
transfers then in effect as the Committee may in its discretion establish, amend
or revoke from time to time; by will or the laws of descent and distribution; or
pursuant to a qualified domestic relations order as defined in Section 414 of
the Code or Section 206 of the Employee Retirement Income Security Act, or rules
thereunder. Except as permitted by the preceding sentences, each Option granted
under the Plan and the rights and privileges thereby conferred shall not be
transferred, assigned or pledged in any way (whether by operation of law or
otherwise), and shall not be subject to execution, attachment or similar
process. Any attempt to so transfer, assign, pledge or otherwise dispose of an
Option, or of any right or privilege conferred thereby, contrary to the
provisions of the Option or the Plan, or any levy of any attachment or similar
process upon such rights and privileges, shall be void and unenforceable against
the Corporation.
7. Exercise of Option.
------------------
7.1. Each exercise of an Option granted hereunder, whether in whole or
in part, shall be by written notice thereof, delivered to the Secretary of the
Corporation (or such other person as may be designated). The notice shall state
the number of shares with respect to which the Options are being exercised and
shall be accompanied by payment in full for the number of shares so designated.
Shares shall be registered in the name of the Optionee unless the Optionee
otherwise directs in his or her notice of election.
7.2. Payment shall be made to the Corporation either (i) in cash,
including certified check, bank draft or money order, (ii) at the discretion of
the Corporation, by delivering Common Stock of the Corporation already owned by
the participant, (iii) at the discretion of the Corporation, by delivering a
promissory note, containing such terms and conditions acceptable to the
Corporation, for all or a portion of the purchase price of the shares so
purchased, or a combination of (i), (ii) and (iii). With respect to (ii), the
Fair Market Value of stock so delivered shall be determined as of the date
immediately preceding the date of exercise.
7.3. Upon notification of the amount due and prior to, or concurrently
with, the delivery to the Optionee of a certificate representing any shares
purchased pursuant to the exercise of an Option, the Optionee shall promptly pay
to the Corporation any amount necessary to satisfy applicable federal, state or
local withholding tax requirements.
5.
<PAGE>
WAM!NET Inc.
1998 Combined Stock option Plan
8. Adjustment of Option Stock. In case the shares issuable upon
--------------------------
exercise of any Option granted under the Plan at any time outstanding shall be
subdivided into a greater or combined into a lesser number of shares (whether
with or without par value), the number of shares purchasable upon exercise of
such Option immediately prior thereto shall be adjusted so that the Optionee
shall be entitled to receive a number of shares which he or she would have owned
or have been entitled to receive after the happening of such event had such
Option been exercised immediately prior to the happening of such subdivision or
combination or any record date with respect thereto. An adjustment made pursuant
to this paragraph shall become effective immediately after the effective date of
such subdivision or combination retroactive to the record date, if any, for such
subdivision or combination. The option price (as such amount may have
theretofore been adjusted pursuant to the provisions hereof) shall be adjusted
by multiplying the option price immediately prior to the adjustment of the
number of shares purchasable under the Option by a fraction, of which the
numerator shall be the number of shares purchasable upon the exercise of the
Option immediately prior to such adjustment, and of which the denominator shall
be the number of shares so purchasable immediately thereafter. Substituted
shares of stock shall be deemed shares under Section 3 of the Plan.
9. Change in Control.
-----------------
9.1. For purposes of this Section 9, a "Change in Control" of the
Corporation will mean (i) the sale, lease, exchange or other transfer of
substantially all of the assets of the Corporation (in one transaction or in a
series of related transactions) to a person or entity that is not controlled,
directly or indirectly, by the Corporation, (ii) a merger or consolidation to
which the Corporation is a party if the stockholders of the Corporation
immediately prior to effective date of such merger or consolidation do not have
"beneficial ownership" (as defined in Rule 13d-3 under the Securities Exchange
Act of 1934, as amended) immediately following the effective date of such merger
or consolidation of more than 80% of the combined voting power of the surviving
corporation's outstanding securities ordinarily having the right to vote at
elections of directors, or (iii) a change in control of the Corporation of a
nature that would be required to be reported pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended, whether or not the Corporation
is then subject to such reporting requirements, including, without limitation,
such time as (1) any person becomes, after the effective date of the Plan, the
"beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934, as amended), directly or indirectly, of 40% or more of the combined
voting power of the Corporation's outstanding securities ordinarily having the
right to vote at elections of directors, or (2) individuals who constitute the
Board of Directors on the effective date of the Plan cease for any reason to
constitute at least a majority of the Board, provided that any person becoming a
director subsequent to the effective date of the Plan whose election, or
nomination for election by the Corporation's stockholders, was approved by a
vote of at least a majority of the directors comprising the Board on the
effective date of the Plan will, for purposes of this Section 9.1, be considered
as though such persons were a member of the Board of Directors on the effective
date of the Plan.
9.2. Without limiting the authority of the Committee under Section 4 of
the Plan, if a Change in Control of the Corporation occurs, then, if approved by
the Committee in its sole
6.
<PAGE>
WAM!NET Inc.
1998 Combined Stock option Plan
discretion either in an agreement evidencing an Option grant at the time of
grant or at any time after the grant of an Option, all Options will become
immediately exercisable in full and will remain exercisable in accordance with
the terms of the Plan; provided, however, that a recipient of Incentive Stock
Options may elect that such acceleration of vesting not apply with respect to
some or all of the Incentive Stock Options granted to him by so notifying the
Committee in writing within three (3) business days of being notified of the
Committee's actions pursuant to this Section 9.
9.3. If a Change in Control of the Corporation occurs, then the
Committee in its sole discretion either in an agreement evidencing an Option
grant at the time of grant or at any time after the grant of an Option, and
without the consent of any Option recipient effected thereby, may determine that
some or all recipients holding outstanding Options will receive, with respect to
and in lieu of some or all of the shares of Option Stock, as of the effective
date of any such Change in Control of the Corporation, cash in an amount equal
to the excess of the Fair Market Value of such shares either immediately prior
to the effective date of such Change in Control of the Corporation or, if
greater, determined on the basis of the amount paid as consideration by the
other party(ies) to the Change in Control transaction over the exercise price
per share of such Options.
9.4. Notwithstanding anything in Section 9.2 or 9.3 of the Plan to the
contrary, if the Corporation is then subject to the provisions of Section 280G
of the Code, and if the acceleration of the vesting of an Option as provided in
Section 9.2 or the payment of cash in exchange for all or part of an Option as
provided in Section 9.3 (which acceleration or payment could be deemed a
"payment" within the meaning of Section 28OG(b)(2) of the Code), together with
any other payments which such recipient has the right to receive from the
Corporation or any corporation that is a member of an "affiliated group" (as
defined in Section 1504(a) of the Code without regard to Section 1504(b) of the
Code) of which the Corporation is a member, would constitute a "parachute
payment" (as defined in Section 28OG(b)(2) of the Code), then the payments to
such recipient pursuant to Section 9.2 or 9.3 will be reduced to the largest
amount as will result in no portion of such payments being subject to the excise
tax imposed by Section 4999 of the Code; provided, however, that if such
recipient is subject to a separate agreement with the Corporation or a
Subsidiary which specifically provides that payments attributable to one or more
forms of employee stock incentives or to payments made in lieu of employee stock
incentives will not reduce any other payments under such agreement, even if it
would constitute an excess parachute payment, then the limitations of this
Section 9.4 will, to that extent, not apply.
10. Assignments. Other than as provided in Section 6.7, any Option
-----------
granted under this Plan shall be exercisable only by the Optionee to whom
granted during his or her lifetime and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
11. Severance; Death; Disability. An Option shall terminate, and no
----------------------------
rights thereunder may be exercised, if the person to whom it is granted ceases
to be employed by the Corporation or by a Subsidiary except that:
7.
<PAGE>
WAM!NET Inc.
1998 Combined Stock option Plan
11.1. If the employment of the Optionee is terminated by any reason
other than his or her death or disability, the Optionee may at any time within
not more than three months after termination of his or her employment, exercise
his or her Option rights but only to the extent they were exercisable by the
Optionee on the date of termination of his or her employment; provided, however,
that if the employment is terminated as a result of the Optionee's deliberate,
willful or gross misconduct as determined by the Committee, all rights under the
Option shall terminate and expire upon such termination.
11.2. If the Optionee dies while in the employ of the Corporation or a
Subsidiary, or within not more than three months after termination of his or her
employment, the Optionee's rights under the Option may be exercised at any time
within one year following such death by his or her personal representative or by
the person or persons to whom such rights under the Option shall pass by will or
by the laws of descent and distribution, but only to the extent they were
exercisable by the Optionee on the date of death.
11.3. If the employment of the Optionee is terminated because of
permanent disability, the Optionee, or his or her legal representative, may at
any time within not more than one year after termination of his or her
employment, exercise his or her Option rights but only to the extent they were
exercisable by the Optionee on the date of termination of his or her employment.
11.4. The same exercise periods as provided in Sections 11.1, 11.2 and
11.3 shall also apply with respect to a tranferee of an Option pursuant to
Section 6.7, including the extension of the exercise period under Section 11.2
upon the death of the tranferee.
11.5. Any provision of Sections 11.1, 11.2 and 11.3 to the contrary
notwithstanding, no Option or any right claimed thereby, therein or thereunder
shall be exercisable by anyone after the expiration of the term of the Option.
11.6. Transfers of employment between the Corporation and a Subsidiary,
or between Subsidiaries, will not constitute termination of employment for
purposes of any Option granted under this Plan. The Committee may specify in the
terms and conditions of an Option whether any authorized leave of absence or
absence for military or government service or for any other reasons will
constitute a termination of employment for purposes of the Option and the Plan.
12. Rights of Participants. Neither the participant nor the personal
----------------------
representatives, heirs, or legatees of such participant shall be or have any of
the rights or privileges of a shareholder of the Corporation in respect of any
of the shares issuable upon the exercise of an Option granted under this Plan
unless and until certificates representing such shares shall have been issued
and delivered to the participant or to such personal representatives, heirs or
legatees.
13. Securities Registration. If any law or regulation of the
-----------------------
Securities and Exchange Commission or of any other body having jurisdiction
shall require the Corporation or the participant to take any action in
connection with the exercise of an Option, then notwithstanding any contrary
provision of an Option agreement or this Plan, the date for exercise of such
Option
8.
<PAGE>
WAM!NET Inc.
1998 Combined Stock option Plan
and the delivery of the shares purchased thereunder shall be deferred until the
completion of the necessary action. In the event that the Corporation shall deem
it necessary, the Corporation may condition the grant or exercise of an Option
granted under this Plan upon the receipt of a satisfactory certificate that the
Optionee is acquiring the Option or the shares obtained by exercise of the
Option for investment purposes and not with the view or intent to resell or
otherwise distribute such Option or shares. In such event, the stock certificate
evidencing such shares shall bear a legend referring to applicable laws
restricting transfer of such shares. In the event that the Corporation shall
deem it necessary to register under the Securities Act of 1933, as amended, or
any other applicable statute, any Options or any shares with respect to which an
Option shall have been granted or exercised, then the participant shall
cooperate with the Corporation and take such action as is necessary to permit
registration or qualification of such Options or shares.
14. Duration and Amendment.
----------------------
14.1. There is no express limitation upon the duration of the Plan,
except for the requirement of the Code that all ISO's must be granted within ten
years from the date the Plan is approved by the shareholders.
14.2. The Board may terminate or may amend the Plan at any time;
provided, however, that the Board may not, without approval of the shareholders
of the Corporation, (i) increase the maximum number of shares as to which
Options may be granted under the Plan, (ii) permit the granting of ISO's at less
than 100% of Fair Market Value at time of grant, (iii) change the class of
employees eligible to receive Options under the Plan, or (iv) permit Directors
to receive options under the Plan other than pursuant to Section 15 hereof; and,
provided further, that the Board may not amend the Plan more than once every six
months, other than to comport with changes in the Code, the Employee Retirement
Income Security Act, or rules thereunder.
15. Granting of Options to Non-Employee Directors and Non-Employee
--------------------------------------------------------------
Consultants.
- ------------
15.1. Non-Employee Directors and Non-Employee Consultants shall be
entitled to receive such Options under this Plan as may be granted to them from
time to time.
15.2. All Options granted to Non-Employee Directors and Non-Employee
Consultants shall be designated as NQOs, shall be evidenced by a written option
agreement signed by the Corporation and the Non-Employee Director or Non-
Employee Consultant, and shall be subject to the same terms and provisions as
are then in effect with respect to granting of NQOs to salaried officers and key
employees of the Corporation, except that the Option shall be exercisable as to
all or any part of the shares subject to the Option from the date the Option is
granted, and shall expire on the earliest of (i) twelve months after the
Optionee ceases to be a Non-Employee Director or a Non-Employee Consultant
(except by death), (ii) one year after the death of the optionee, or (iii) seven
years after the date of grant. Subject to the foregoing, all provisions of this
Plan not inconsistent with the foregoing shall apply to Options granted to Non-
Employee Directors, except that Non-Employee Directors shall always have the
right to deliver stock in exercise of options as provided in Section 7.2.
9.
<PAGE>
WAM!NET Inc.
1998 Combined Stock option Plan
16. Approval of Shareholders. This Plan expressly is subject to
------------------------
approval of holders of a majority of the outstanding shares of Common Stock of
the Corporation, and if it is not so approved on or before one year after the
date of adoption of this Plan by the Board, the Plan shall not come into effect,
and any Options granted pursuant to this Plan shall be deemed canceled.
17. Conditions of Employment. The granting of an Option to a
------------------------
participant under this Plan who is an employee shall impose no obligation on the
Corporation to continue the employment of any participant and shall not lessen
or affect the right of the Corporation to terminate the employment of the
participant.
18. Other Options. Nothing in the Plan will be construed to limit the
-------------
authority of the Corporation to exercise its corporate rights and powers,
including, by way of illustration and not by way of limitation, the right to
grant options for proper corporate purposes otherwise than under the Plan to any
employee or any other person, firm, corporation, association, or other entity,
or to grant options to, or assume options of, any person for the acquisition by
purchase, lease, merger, consolidation, or otherwise, of all or any part of the
business and assets of any person, firm, corporation, association, or other
entity.
19. Governing Law. The provisions of the Plan, including the
-------------
provisions and Rules of any Addendum, Appendix, or other document incorporated
herein, shall be governed by, interpreted and enforced in accordance with the
laws of the State of Minnesota, unless and to the extent they are pre-empted by
the laws of the United States of America. In the event that these laws conflict
with the laws of any other nation, the laws of the state of Minnesota or the
United States of America, as applicable, shall prevail to the maximum possible
extent.
10.
<PAGE>
ADDENDUM TO THE
WAM!NET INC. 1998 COMBINED STOCK OPTION PLAN
1998 SHARE OPTION SCHEME RULES
APPLICABLE TO UNITED KINGDOM EMPLOYEES
The following Rules comprise a scheme intended to extend the benefits of stock
options granted under the Plan to employees of WAM!NET Inc. who are residents in
the United Kingdom and to United Kingdom resident employees of companies of
which WAM!NET Inc. has control pursuant to Section 840 of the Act (as defined
below). These Rules are designed to qualify for approval as an approved share
option scheme under Schedule 9 (as defined below).
The Rules should be read in conjunction with the Plan and are subject to the
terms and conditions of the Plan except to the extent that the terms of the Plan
are specifically disapplied or are inconsistent with the terms of these Rules.
The Rules set out below apply to any grant of Options under the Plan to
individuals who are residents in the United Kingdom for United Kingdom tax
purposes and in respect of whom the limitations in Rule 4.1 below have not been
breached, and expressly stated to be subject to these Rules.
ARTICLE 1.
DEFINITIONS
-----------
1.1) In the Scheme the following words and expressions shall have the
following meanings:
(a) "Act" shall mean the United Kingdom Income and Corporation Taxes
Act 1988.
(b) "Adoption Date" shall mean the date on which the Scheme is adopted
by the Corporation in a general meeting of the Company's shareholders.
(c) "Announcement Date" shall mean any date on which the Company makes
a preliminary announcement of its final or interim results in respect of
any financial period.
(d) "Associated Company" shall mean any company which is an associated
company of the Corporation within the meaning of Section 416 of the Act.
(e) "Auditors" shall mean the auditors for the time being of the
Corporation.
(f) "Board" shall mean the board of directors of the Corporation.
(g) "Committee" shall mean the committee of the Board appointed
pursuant to Rule 9.1.
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<PAGE>
(h) "Control" has the meaning given to it by Section 840 of the Act
provided that for the purposes of Rule 7, "Change in Control" shall be
as defined in Rule 7.1.
(i) "Corporation" shall mean WAM!NET Inc., a Minnesota corporation
(j) "Date of Grant" shall mean, in relation to an Option, the date on
which the Option was or is to be granted pursuant to Rule 2.1.
(k) "Eligible Employee" shall mean any resident of the United Kingdom
for United Kingdom tax purposes who is an employee of the Corporation or
member of the Participating Group, but excluding any director of a
member or members of the Participating Group who is contracted to work
for less than 25 hours a week (excluding meal breaks) in that capacity
and also excluding any person who is prohibited from participating by
the provisions of paragraph 8 of Schedule 9.
(l) "Executive Share Option Scheme" shall mean any Share Option Scheme
in which participation is confined to those employees and directors as
may be selected at the discretion of the body administering the scheme.
(m) "Fair Market Value" shall mean, if the Shares are quoted for
trading on a recognized stock exchange (as defined in Section 841 of the
Act), on any given date a price equal to the middle market quotation of
a Share as derived from such exchange on the day immediately preceding
the Date of Grant or, if no such quotation shall exist on such day, the
last such quotation prior thereto, or if the Shares are not so quoted,
the price of a Share on the day immediately preceding the Date of Grant
as agreed in advance of grant with Shares Valuation Division in
accordance with the provisions of Part VIII of the Untied Kingdom
Taxation of Chargeable Gains Act 1992.
(n) "Group" shall mean the Corporation and all of the Subsidiaries, and
"member of the Group" shall be construed accordingly.
(o) "Holding Company" shall have the meaning given to it by Section 736
of the United Kingdom Companies Act 1985.
(p) "Operative Period" shall mean the period of ten years commencing on
the Adoption Date.
(q) "Option" shall mean a right to acquire Shares under the Scheme.
(r) "Participant" shall mean an Eligible Employee who has been granted
an Option which has neither ceased to be exercisable nor lapsed or,
where applicable, the personal representative(s) of any such person.
(s) "Participating Group" shall mean the Corporation and any members of
the Group which the Board has resolved shall participate in the Scheme,
and "member of the Participating Group" shall be construed accordingly.
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<PAGE>
(t) "Revenue Approval" shall mean approval of the Scheme by the Board
of Inland Revenue of the United Kingdom under Schedule 9.
(u) "Schedule 9" shall mean Schedule 9 to the Act.
(v) "Scheme" shall mean the scheme herein contained as from time to
time amended in accordance with the provisions and known as the 1998
Share Option Scheme Addendum to the WAM!NET 1998 Combined Stock Option
Plan.
(w) "Shares" shall mean ordinary shares of $0.01 par value each in the
capital of the Corporation as defined in the Corporation's Articles of
Incorporation and which satisfy the requirements of paragraphs 10 to 14
inclusive of Schedule 9.
(x) "Share Option Scheme" shall mean any scheme for employees which has
been approved by the Corporation in a general meeting of its
shareholders and provides for the grant of options to employees to
subscribe for Shares.
(y) "Subscription Price" shall mean the price per Share payable on the
exercise of an Option as determined by the Committee but in no event
less than the Fair Market Value of a Share or, should it be higher than
such Fair Market Value, the nominal or par value of a Share.
(z) "Subsidiary" shall mean a company which is both under the Control
of the Corporation and which is a subsidiary of the Corporation within
the meaning of Section 736 of the Companies Act 1985.
Any reference herein to a statutory provision shall include a reference to that
provision as amended or re-enacted from time to time. Where the context
permits, the singular shall include the plural and vice versa and the masculine
gender shall include the feminine. Any reference herein to a "Rule" shall be to
a rule of the Scheme save where the contrary is expressed.
ARTICLE 2.
GRANT OF OPTIONS
----------------
2.1) Notice of Grant. The Committee may at their discretion at any
---------------
time during the Operative Period give notice in writing to any Eligible Employee
granting him an Option subject to and in accordance with the terms of the Scheme
provided that any such grant shall only be made after the Adoption Date and
receipt of Revenue Approval.
The said notice shall inform him of the date on which it was granted, the number
of Shares in respect of which it was granted, the Subscription Price and any
performance targets or additional conditions to be satisfied as a condition of
the Option in accordance with Rule 3. Each Option shall be granted strictly on
the basis that participation in the Scheme will be deemed to constitute an
agreement to be bound by the rules of the Scheme.
<PAGE>
2.2) Surrender. Each Eligible Employee to whom an Option is granted
---------
may surrender the Option by giving notice to that effect to the Corporation,
such notice to be received within thirty days after the Date of Grant. The
Option shall, to the extent surrendered, be deemed never to have been granted.
2.3) Option Certificate. No payment will be required as consideration
------------------
for the grant of an Option. All Options shall be granted under seal or as a deed
and an option certificate will be issued to each Participant after the Date of
Grant.
2.4) Non-transferability. The grant of an Option shall be personal
-------------------
to the Participant and may not be transferred to or, subject to the provisions
of Rule 6.3, exercised by any other person.
2.5) Rights of Option. Any Options granted pursuant to Rule 2.1 shall
----------------
rank pari passu in all respects and shall not give any entitlement or rights to
holders other than those specified in the Scheme.
ARTICLE 3.
CONDITION PRECEDENT TO EXERCISE
-------------------------------
As of any Date of Grant the Committee specify that the exercise of any
Option granted shall be subject to such conditions (not already specified in
these Rules) as may be specified in the Option and a Participant may not
exercise his Option unless and until any such condition so specified has been
satisfied PROVIDED THAT:
3.1) Any condition that relates to performance howsoever measured shall
be objective and:
(a) if there is an event or change in circumstances which causes any
such condition (whether or not specified in these Rules) to become
inappropriate the Committee may, acting fairly and reasonably, alter,
add to or waive any part or all of the said condition save that the
condition in any amended form will be a fairer measure of performance
and will be equivalent to (and in any event no more difficult to satisfy
than) the terms of the said condition prior to such alteration or
addition; and
(b) except as otherwise determined by the Committee at the time at
which the Option is granted, the said condition shall cease to apply in
the event that an Option becomes exercisable in accordance with Rules
6.3 or 6.5(a) (other than the event of retirement on or after the age of
60 years or any other age at which he may be bound to retire in
accordance with the terms of a contract of employment);
3.2) Upon the occurrence of any of the events mentioned in Rule 7 or in
any other circumstances which it considers relevant, the Committee may, in
respect of any condition and/or circumstances not falling under Rule 3.1:
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<PAGE>
(a) waive all or some of such conditions; or
(b) make such adjustments, including the imposition of entirely
different conditions, to the conditions specified in the Option as it
may decide;
provided that no such adjustment shall be made unless the Auditors (acting as
experts and not as arbitrators) shall have confirmed in writing to the Committee
that the adjustment is, in their opinion, fair and reasonable.
ARTICLE 4.
LIMITATIONS ON GRANT OF OPTIONS
-------------------------------
The number of Shares over which the Committee may grant an Option to an Eligible
Employee on any date shall be limited so that the aggregate cost of acquiring
those Shares and any other shares which may be acquired in respect of options
previously granted to him under the Scheme and any other Executive Share Option
Scheme approved in accordance with Schedule 9 and established by the Corporation
or any Associated Company and not exercised does not exceed or further exceed
such amount as is for the time being specified for the purposes of paragraph 28
of Schedule 9 (which at the Adoption Date is (Pounds)30,000).
ARTICLE 5.
EXERCISE OF OPTIONS
-------------------
5.1) Notice of Exercise. An Option shall only be exercised by a
------------------
Participant within such period as may be applicable by virtue of the provisions
of Rule 6 and subject thereto the exercise shall be effected in such form and
manner as the Committee may from time to time prescribe. In the absence of the
Committee prescribing to the contrary, a Participant shall exercise an Option by
his giving to the Corporation at its principal place of business prior notice in
writing signed by the Participant, which notice shall specify the number of
Shares (which shall be a multiple of 10 or be equal to the balance of the Shares
remaining subject to the Option) in respect of which the Option is being
exercised and shall be accompanied both by payment in full of the aggregate
Subscription Price for the said Shares and the option certificate evidencing the
grant of the relevant Option for cancellation or amendment. The date of receipt
of such notice shall (in the absence of the Committee prescribing otherwise) be
deemed to be the date of exercise of the Option or of the relevant portion of
the Option, as the case may be.
5.2) Allotment/Transfer. The Corporation shall allot to the
------------------
Participant or a nominee for the Participant or procure the transfer to him of
the appropriate number of Shares and shall enter the Participant in the
Corporation's stock register of shareholders as the holder of such Shares within
thirty days after the date of exercise of the Option (the date of such entry
being, for the purpose of Rule 5.3, the "date of allotment") and provided that
the Corporation issues share certificates the Corporation shall deliver to the
Participant or his nominee a definitive share certificate in respect thereof.
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<PAGE>
5.3) Rights of Shares. Any Shares issued pursuant to the preceding
----------------
Rule 5.2 shall rank pari passu in all respects and form a uniform class with the
Shares in issue on the date of allotment save that they shall not rank for or be
entitled to any dividend or other distribution or any issue of Shares by way of
capitalization of profits or reserves or any issue of securities by way of
rights which under the terms of a resolution passed by the Corporation is to be
or is proposed to be paid or made to the holders of Shares on the register on a
date prior to the date of allotment.
5.4) Listing. At such time as the Shares are listed for trading on
-------
any stock exchange, the Corporation shall, at its expense, make application for
admission to the relevant list (or analogous procedure) of all Shares allotted
pursuant to the exercise of any Option.
5.5) Ineligibility. A person who is prohibited from participating by
-------------
the provisions of paragraph 8 of Schedule 9 may not exercise an Option.
ARTICLE 6.
TIME FOR EXERCISE OF OPTIONS
----------------------------
6.1) Time Limits.
-----------
(a) Subject as permitted by:
(1) Rule 6.3; and
(2) Rule 6.5; and
(3) Rule 7;
an Option may not be exercised earlier than three years after
the date on which it was granted.
(b) An Option may not be exercised later than ten years after the
date on which it was granted and, to the extent unexercised after
the expiry of the said period, it shall lapse and become of no
effect.
6.2) Subject as permitted by rules 6.3 and 6.5, an Option may not be
exercised by a Participant who has ceased to be an Eligible Employee.
6.3) Death of Participant. If a Participant dies while in the
--------------------
employment of a member of the Group or dies before the expiry of the period
allowed by Rule 6.5 his personal representative(s) may exercise any Option of
the Participant then subsisting at any time prior to the expiry of ten years
from the date on which it was granted and within but not later than twelve
months of his death, notwithstanding that such exercise may occur within three
years of the date on which the Option was granted and to the extent unexercised
after the said period of twelve months it shall lapse and become of no effect.
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<PAGE>
6.4) Cessation of Employment. Subject to Rule 6.5, if a Participant
-----------------------
ceases to be employed by the Group or being a director ceases to be contracted
to work for more than 25 hours per week in that capacity in either case
otherwise than by death any Option of his then subsisting shall lapse and become
of no effect.
6.5) If a Participant ceases to be employed by the Group or being a
director ceases to be contracted to work for more than 25 hours per week in that
capacity in either case otherwise than by death the following provisions shall
apply to any Option of his then subsisting:
(a) if he ceases to be so employed by reason of:
(1) injury, disability, redundancy (within the meaning of the
Employment Rights Act 1996); or
(2) retirement on reaching the age of 60 years or any other age at
which he is bound to retire in accordance with the terms of
his contract of employment; or
(3) the company by which he is employed ceasing to be a member of
the Group; or
(4) the undertaking in which he is employed being transferred to a
transferee which is not a member of the Group;
he may exercise his Option at any time or from time to time within
the period of six months (or such longer period as may be allowed
pursuant to the proviso to this Rule 6.5) after ceasing to be so
employed and, subject to Rule 6.3, at the expiry of that period his
Option, to the extent unexercised shall lapse and become of no
effect;
(b) if he ceases to be so employed for any other reason, the Option may
not be exercised at all unless the Committee shall (at its discretion
determined within three months after the Participant ceases to be so
employed) permit such exercise, in which event it may (and subject to
Rule 6.3 must, if at all) be exercised to the extent permitted by the
Committee within the period of six months after ceasing to be so
employed;
provided that the Committee may extend the period within which the Participant
may exercise his Option in any case falling within Rule 6.5(a) or Rule 6.5(b) to
such period ending not later than six months after the earliest date upon which
the exercise of that Option would not result in the Participant being chargeable
to income tax under the Tax Acts (as defined in Section 831 of the Act) in
respect of that exercise.
6.6) For the purposes of this Rule 6 where a Participant's employment
is terminated without notice it shall be deemed to cease on the date on which
the termination takes effect and where the said employment is terminated with
notice it shall be deemed to cease upon the date of the expiry of such notice
or, if earlier, cessation of employment.
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<PAGE>
ARTICLE 7.
CHANGE IN CONTROL OF THE CORPORATION
------------------------------------
7.1) Change in Control. For purposes of this Rule 7, a "Change in
-----------------
Control" of the Corporation will mean (i) the sale, lease, exchange or other
transfer of substantially all of the assets of the Corporation (in one
transaction or in a series of related transactions) to a person or entity that
is not controlled, directly or indirectly, by the Corporation, (ii) a merger or
consolidation to which the Corporation is a party if the stockholders of the
Corporation immediately prior to effective date of such merger or consolidation
do not have "beneficial ownership" (as defined in Rule 13d-3 under the United
States Securities Exchange Act of 1934, as amended) immediately following the
effective date of such merger or consolidation of more than 80% of the combined
voting power of the surviving corporation's outstanding securities ordinarily
having the right to vote at elections of directors, or (iii) a change in control
of the Corporation of a nature that would be required to be reported pursuant to
Section 13 or 15(d) of the United States Securities Exchange Act of 1934, as
amended, whether or not the Corporation is then subject to such reporting
requirements, including, without limitation, such time as (1) any person
becomes, after the Adoption Date, the "beneficial owner" (as defined in
Rule 13d-3 under the United States Securities Exchange Act of 1934, as amended),
directly or indirectly, of 40% or more of the combined voting power of the
Corporation's outstanding securities ordinarily having the right to vote at
elections of directors, or (2) individuals who constitute the Board on the
Adoption Date cease for any reason to constitute at least a majority of the
Board, provided that any person becoming a director subsequent to the Adoption
Date whose election, or nomination for election by the Corporation's
stockholders, was approved by a vote of at least a majority of the directors
comprising the Board on the Adoption Date will, for purposes of this Rule 7.1,
be considered as though such person was a member of the Board on the Adoption
Date.
7.2) If a Change in Control of the Corporation occurs, then each
Participant shall be notified by the Committee of whether or not such Change in
Control has resulted in the requirements of paragraphs 10 to 14 inclusive of
Schedule 9 ceasing to be satisfied and may, subject to Rules 3 and 5, exercise
his Option at any time and from time to time within the period of six months
following the Change in Control notwithstanding that such exercise may occur
within three years of the date on which the Option was granted and at the end of
that period all Options, to the extent unexercised, shall lapse.
ARTICLE 8.
VARIATIONS IN THE SHARE CAPITAL OF THE CORPORATION
--------------------------------------------------
8.1) Variation or Reorganization. If at any time after the date of
---------------------------
grant of an Option and before it ceases to be exercisable there is a variation
or reorganization of the share capital of the Corporation by virtue of which
Shares are subdivided into a greater or combined into a lesser number of shares
(whether with or without par value), the number of Shares issuable upon exercise
of such Option immediately prior thereto shall be adjusted so that the
Participant shall be entitled to receive a number of Shares which he or she
would have owned or have been
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<PAGE>
entitled to receive after the happening of such event had such Option been
exercised immediately prior to the happening of such subdivision or combination
or any record date with respect thereto. An adjustment made pursuant to this
Rule shall become effective immediately after the effective date of such
subdivision or combination retroactive to the record date, if any, for such
subdivision or combination. The Subscription Price (as such amount may have
theretofore been adjusted pursuant to the provisions hereof) shall be adjusted
by multiplying the Subscription Price immediately prior to the adjustment of the
number of Shares issuable under the Option by a fraction, of which the numerator
shall be the number of Shares issuable upon the exercise of the Option
immediately prior to such adjustment, and of which the denominator shall be the
number of Shares so issuable immediately thereafter. Substituted shares of stock
shall be deemed Shares for the purpose of this Scheme.
8.2) In the event of any other variation of the share capital of the
Corporation not falling within Rule 8.1, the Subscription Price and/or the
number of Shares in respect of which the Option may be exercised shall be
adjusted to such extent and in such manner as the Auditors shall in their
opinion consider and confirm in writing to the Committee to be fair and
reasonable.
8.3) Notwithstanding Rules 8.1 and 8.2, the aggregate Subscription
Price payable on the exercise of an Option previously granted hereunder shall
not be increased by any adjustment pursuant to Rule 8.1 or Rule 8.2 and any such
adjustments shall be subject to prior approval by the Board of Inland Revenue.
8.4) All Participants shall be notified in writing of any such
adjustments as soon as practicable thereafter and the Corporation shall be
entitled to call in the option certificates for the Options affected by such
adjustments for endorsement or replacement, as may appear appropriate.
ARTICLE 9.
ADMINISTRATION OF THE SCHEME
----------------------------
9.1) Committee. The Scheme shall in all respects be administered
---------
under the direction of a duly authorized Committee of the Board appointed by the
Board for that purpose. The Committee may make such rules for the conduct of the
Scheme, not being inconsistent with the provisions hereof, as it shall think
fit. Any dispute regarding the interpretation of the Scheme or the terms of any
Option shall be determined by the Committee in its discretion (after seeking
such advice as it shall consider necessary) and its decision shall be final and
binding.
9.2) Authorized Share Capital. The Corporation shall at all times
------------------------
maintain an amount of authorized and unissued Shares sufficient to satisfy
outstanding Options to subscribe for Shares under the Scheme.
9.3) Notices. Any notice or other communication under or in
-------
connection with the Scheme may be given by personal delivery or by sending the
same by post, in the case of a company to its registered office or its principal
place of business, and in the case of an individual to his last known address,
or, where he is a director or an employee of a member of the
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<PAGE>
Participating Group, either to his last known address or to the address of the
place of business at which he performs the whole or substantially the whole of
the duties of his office or employment.
ARTICLE 10.
AMENDMENT OF THE SCHEME
-----------------------
10.1) Board Resolution. The Board shall at any time be entitled to
----------------
amend by resolution all or any of the provisions of the Scheme, provided that:
(a) no amendment to the disadvantage of any Participant shall be made
unless:
(1) the Board shall have invited every such Participant to give an
indication as to whether or not he approves the amendment; and
(2) the amendment is approved by a majority of those Participants
who have given such an indication;
(b) no amendment to the advantage of any existing or future
Participants shall be made without the prior approval by ordinary
resolution of the shareholders of the Company in general meeting (except
for minor amendments to benefit the administration of the Scheme, to
take account of a change in legislation or to obtain or maintain any
favorable tax, exchange-control or regulatory treatment for Participants
or for any Participating Company);
(c) with the exception of amendments to any conditions attached to any
Option pursuant to Rule 3.1, no amendment made to the Scheme shall
become effective until it has been approved by the Board of Inland
Revenue and nothing shall be done to the Scheme which would prejudice
the obtaining of Revenue Approval or cause it to be withdrawn.
10.2) Revenue Approval. The Board may at any time by resolution and
----------------
without other formality amend the Scheme in any way to the extent necessary to
secure and maintain Revenue Approval and to ensure that Revenue Approval is not
withdrawn pursuant to any statutory modification of the provisions of the Act.
10.3) Notification. On any such amendment being made by the Board all
------------
Participants shall be notified in writing as soon as practicable thereafter.
10.4) Termination. The Board or the Corporation in a general meeting
-----------
of the shareholders shall be entitled by resolution to terminate the Scheme at
any time but Options previously granted shall continue to be valid and
exercisable in accordance with the provisions of the Scheme.
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<PAGE>
ARTICLE 11.
ADDITIONAL PROVISIONS
---------------------
11.1) Conflict. Every Option shall be subject to the condition that
--------
no Shares shall be issued to a Participant following the exercise of an Option
if such issue would be contrary to any enactment or regulation for the time
being in force of the United Kingdom or of any other country having jurisdiction
in relation thereto. The Corporation shall not be bound to take any action to
obtain the consent of any governmental authority to such issue or to take any
action to ensure that any such issue shall be in accordance with any such
enactment or regulation if such action could in the opinion of the Committee be
unduly onerous.
11.2) Employment. The rights and obligations of any individual under
----------
the terms of his employment with any member of the Group shall not be affected
by his participation in the Scheme or any right which he may have to participate
in the Scheme or any right which he may have to participate therein, and an
individual who participates therein shall waive any and all rights to
compensation or damages in consequence of the termination of his office or
employment for any reason whatsoever insofar as those rights arise or may arise
from his ceasing to have rights under or be entitled to exercise an Option as a
result of such termination.
11.3) Auditors. In any matter in which they are required to act
--------
hereunder the Auditors shall be deemed to be acting as experts and not as
arbitrators.
A-11
<PAGE>
THE APPENDIX TO THE
-------------------
1998 SHARE OPTION SCHEME ADDENDUM
---------------------------------
("THE SCHEME")
THE UNAPPROVED PART OF THE SCHEME
---------------------------------
1. This Appendix sets out the provisions of a sub-scheme to the Scheme, which
sub-scheme shall be known as the "Unapproved Part." It is intended that
the Unapproved Part of the Scheme shall not be approved by the Inland
Revenue.
2. The provisions of the Unapproved Part of the Scheme shall be all the
provisions set out in the Scheme and any Option granted under the
Unapproved Part shall be governed in accordance with those provisions but
with the following modifications:
(a) In Rule 1.1 of the Scheme a director or employee will not be
excluded from being an "Eligible Employee" by virtue of the
prohibition in the provisions of paragraph 8 of Schedule 9 and the
"Shares" need not satisfy the conditions specified in paragraphs 10
to 14 inclusive of Schedule 9.
(b) In Rule 1.1(y) of the Scheme, the Subscription Price shall be
determined by the Committee using a traded market value, if any, or
other fair market value as the Committee shall determine in its
discretion, but in any event without the necessity to obtain the
agreement of the Shares Valuation Division, provided that such
value shall not be less than the nominal or par value of a Share.
(c) Rule 4 of the Scheme shall not apply and for the avoidance of doubt
the Unapproved Part shall not include any restriction under
paragraph 28 of Schedule 9 (as amended by Section 114(2) of the
Finance Act 1996) on the number of Shares over which the Board may
grant an Option to an Eligible Employee.
(d) Rule 5.4 and the proviso to Rule 6.5 of the Scheme shall not apply.
(e) Rule 6.1(a) of the Scheme notwithstanding, an Option may be
exercised earlier than three years after the date on which it was
granted if and as provided in the Option Certificate.
(f) In Rules 6.1(b) and 6.3 of the Scheme the period of ten years shall
remain as stated except where Section 135 (Subsections (2) and (5))
of the Act provide for another period, in which case such other
period shall apply.
(g) Any requirement in any Rules of the Scheme relating to the approval
of the Board of Inland Revenue shall not apply for the purposes of
the Unapproved Part of the Scheme.
AA-1
<PAGE>
(h) Any Amendment made to the Scheme by virtue of any provision
contained therein shall be deemed to have been incorporated in the
Unapproved Part, at the date that any such amendment becomes
effective, unless the contrary is stipulated at the time. For the
avoidance of doubt the Board may amend this Appendix and the
Unapproved Part without such amendment having the effect of
amending the Scheme.
AA-2
<PAGE>
Exhibit 10.21
[WORLDCOM(SM) LOGO]
WORLDCOM DATA SERVICES
(REVENUE PLAN)
This Application for Data Services (the "Agreement") is made by NETCO
COMMUNICATIONS CORPORATION, ("Customer"), a Minnesota corporation with its
principal office at 333 N. Washington Avenue, Minneapolis, MN 55401,
("Customer"), and WORLDCOM, INC., a Georgia corporation ("WorldCom"), for
service described below.
1. SERVICES: Interexchange telecommunications service (the "Private Line
--------
Service") and frame relay service (the "Frame Relay Service") and ATM Service
(the "WorldCom ATM Service") shall be provided by WorldCom pursuant to the
applicable tariffs of WorldCom Network Services, Inc., a wholly-owned subsidiary
of WorldCom, (the "Tariffs"). The Tariffs provide terms and conditions of the
Service which include, but are not limited to, taxes, credit approval
procedures, Customer credits, termination liability, and limitations with
respect to the assignment of the Service. The Tariffs may be modified from time
to time by WorldCom in accordance with law and thereby affect the Service
furnished to Customer. For purposes of this Agreement, Private Line Service
Frame Relay Service and ATM Service shall be collectively referred to as the
"Service".
The ATM Service may include the following: (i) equipment necessary to support
the ATM Service including equipment located on Customer's premises and equipment
located on WorldCom's premises, (ii) local access facilities, (iii) a Network
Node (as described below) for each location requiring connectivity to the
WorldCom network, and (iv) maintenance of the equipment and services provided by
WorldCom. A "Network Node" includes a port connection, i.e., access to the
WorldCom network, and the permanent virtual circuits assigned to said port. ATM
Service configurations for each Network Node shall be described on WorldCom's
Service Orders in effect when the Service is ordered. Charges for ATM Service
shall be established by relevant Service Orders.
2. TERMS AND CONDITIONS: The parties agree that the terms and conditions of
--------------------
this Agreement shall supplement, or to the extent they are inconsistent with the
Tariffs, supersede the terms and conditions of the Tariffs.
3. MINIMUM MONTHLY COMMITMENT: Commencing as of the Commitment Commencing Date
--------------------------
set forth below and continuing through the Commitment Ending Date below,
Customer agrees to maintain each month: (i) the aggregate base rate charges
for Domestic Private Line Service (before the application of discounts) and/or
(ii) the aggregate base rate charges for Domestic Frame Relay Services (before
the application of discounts) and (iii) the aggregate base rate charges for
Domestic ATM Services (before the
<PAGE>
application of discounts) (collectively the "Aggregate Base Rate Charges") as
follows:
Minimum Monthly Commitment: $250,000.00
(Based on the Customer's monthly Qualifying Charges for Service before the
application of discounts)
4. REVENUE PLAN SERVICE TERM/COMMENCEMENT/COMMITMENT:
-------------------------------------------------
Customer Commitment Period: Thirty-Six (36) Month(s)
Commencement Date: For the purposes of this Agreement, the "Commencement
Date" will be the next billing cycle following the date this Agreement has been
fully executed by both parties and Customer has received a satisfactory credit
review and approval from WorldCom's Credit Department, and all security
documentation, if any, required by WorldCom has been properly executed and
delivered to WorldCom (collectively, the "Credit Review").
Commitment Commencement Date: is to be nine (9) months following the
Commencement Date above
Commitment Ending Date: is to be thirty-six (36) months following the
Commitment Commencement Date above
Page 1 of 5
Terms and conditions contained herein will be offered for fifteen (15) days from
May 28, 1997 Mail to: Sales Contract Admin., WorldCom, Inc., 515 East Amite,
Suite 400, Jackson, MS 39201
<PAGE>
5. APPLICATION OF DISCOUNTS: Commencing as of the Commencement Date set forth
------------------------
in Section 4 above and continuing through the Commitment Ending Date, WorldCom
agrees to aggregate: (i) monthly Qualifying Charges for Private Line Service
(before the application of discounts), and (ii) monthly recurring Network Node
charges for Frame Relay Service (before the application of discounts) and (iii)
monthly recurring Network Node charges for ATM Service (before the application
of discounts) in determining Customer's monthly revenue level and corresponding
discount for Private Line Service, Domestic Frame Relay Service and Domestic ATM
Service.
6. PROPRIETARY INFORMATION:
-----------------------
(a) Confidential Information: The parties understand and agree that the
------------------------
terms and conditions of this Agreement, all documents referenced and invoices to
Customer for Service provided hereunder, communications between the parties
regarding this Agreement or the Service to be provided hereunder (including
price quotes to Customer for any Service proposed to be provided or actually
provided hereunder), as well as such information relevant to any other agreement
between the parties (collectively "Confidential Information"), are confidential
as between Customer and WorldCom.
(b) Limited Disclosure: A party shall not disclose Confidential Information
unless subject to discovery or disclosure pursuant to legal process, or to any
party other than the directors, officers, and employees of a party or a party's
agents including their respective brokers, lenders, insurance carriers or bona
fide prospective purchasers who have specifically agreed in writing to
nondisclosure of the terms and conditions hereof. Any disclosure hereof required
by legal process shall only be made after providing the non-disclosing party
with notice thereof in order to permit the non-disclosing party to seek an
appropriate protective order or exemption. Violation by a party or its agents of
the foregoing provisions shall entitle the non-disclosing party, at its option,
to obtain injunctive relief without a showing of irreparable harm or injury and
without bond.
(c) Press Releases: The parties further agree that any press release,
--------------
advertisement or publication generated by a party regarding this Agreement, the
Service provided hereunder or in which a party desires to mention the name of
the other party or the other party's parent or affiliated company(ies), will be
submitted to the non-publishing party for its written approval prior to
publication.
(d) Survival of Confidentiality: The provisions of this Section 6 will be
---------------------------
effective as of the date of this Agreement and remain in full force and effect
for a period which will be the longer of (i) one (1) year following the date of
this Agreement,
<PAGE>
or (ii) one (1) year from the termination of all Service hereunder.
7. LETTER OF AGENCY ("LOA"): The Undersigned [duly authorized representative
------------------------
of Customer] hereby authorizes WorldCom, if requested by Customer, to provision
Customer's Local Access. This LOA supersedes all previous LOAs and shall remain
in effect until canceled by Customer in writing.
8. PRICING: (a) Rates and discounts for domestic Private Line Service and
-------
domestic Frame Relay Service during the Service Commitment Period are as
described below.
(b) Rates and discounts for International Frame Relay Service shall be as
described below.
(c) Rates and discounts for International Private Line Service shall be as
described in the applicable tariffs.
(d) Rates for ATM shall be as described below.
A. WORLDCOM PRIVATE LINE - DS-1 PRICE SCHEDULE
-------------------------------------------
(based on thirty-six (36) month's($250,000) Total Minimum Monthly
Commitment)
MILES VGE
----- ---
1-250 .10
251-999 .0975
1000+ .095
Note: There is a $250.00 per DS-1 minimum. Pricing above is valid between
Tier A & B cities only.
B. WORLDCOM PRIVATE LINE - DS-3 PRICE SCHEDULE
-------------------------------------------
(based on thirty-six (36) month(s), $250,000/Total Minimum Monthly
Commitment)
Page 2 of 5
Terms and conditions contained herein will be offered for fifteen (15) days from
May 28, 1997 Mail to: Sales Contract Admin., WorldCom, Inc., 515 East Amite,
Suite 400, Jackson, MS 39201
<PAGE>
MILES VGE
----- ---
1-200 .059
201-500 .052
501-1000 .0505
1001+ .0495
Note: There is a $2,500.00 minimum per DS-3. Pricing above is valid between
Tier A cities only.
C. WORLDCOM FRAME RELAY NETWORK NODE BASE RATES (Domestic U.S. Only)
--------------------------------------------
Monthly Recurring
Port Speed (Kbps) Network Node Base Rates
----------------- -----------------------
56/64 $ 192.60
128 $ 360.00
256 $ 424.80
384 $ 626.40
512 $ 792.00
768 $1,015.20
1024 $1,267.20
1536 $1,598.40
WORLDCOM FRAME RELAY CIR BASE RATES (Domestic U.S. Only)
-----------------------------------
Monthly Recurring
CIR (Kbps) CIR Base Rates
---------- --------------
16 $16.30
32 $31.80
48 $46.10
64 $53.00
Greater than 64 $53.00 for the first 64Kbps plus
$13.25 for every additional
16Kbps increment
WORLDCOM DOMESTIC FRAME RELAY DISCOUNTS
---------------------------------------
(based on thirty-six (36) month(s), $250,000/Total Minimum Monthly
Commitment)
Monthly Volume Discount
-------------- --------
$250,000 29%
D. WORLDCOM INTERNATIONAL FRAME RELAY DISCOUNTS
--------------------------------------------
(based on thirty-six (36) month(s), $250,000/Total Minimum Monthly
Commitment)
Monthly Volume Discount
-------------- --------
$250,000 30%
<PAGE>
Note: Rates for International Frame Relay will be as set forth in Exhibit 1,
attached hereto and incorporated herein as reference.
E. WORLDCOM INTERNATIONAL PRIVATE LINE DISCOUNTS
---------------------------------------------
(based on thirty-six (36) month(s), $250,000/Total Minimum Monthly
Commitment)
Monthly Volume Discount
-------------- --------
Page 3 of 5
Terms and conditions contained herein will be offered for fifteen (15) days from
May 28, 1997 Mail to: Sales Contract Admin., WorldCom, Inc., 515 East Amite,
Suite 400, Jackson, MS 39201
<PAGE>
$250,000 21%
Note: Rates for International Private Line Service shall be as described in
the applicable tariffs.
F. WORLDCOM DOMESTIC NNI RATES AND DISCOUNTS
-----------------------------------------
(based on thirty-six (36) month(s), $250,000/Total Minimum Monthly
Commitment)
Monthly Volume Discount
-------------- --------
$250,000 29%
Note: Base pricing per DS-1 private port is $1,093.50.
G. WORLDCOM DOMESTIC ATM RATES AND DISCOUNTS
-----------------------------------------
(based on thirty-six (36) month(s), $250,000/Total Minimum Monthly
Commitment)
DS-3 port - $8,000.00
Per Meg VBR (Variable Bit Rate)
-------------------------------
1-8 $550.00
9-19 $250.00
20-29 $150.00
30+ $100.00
Monthly Volume Discount
-------------- --------
$250,000 40%
9. WAIVER OF DOMESTIC PRIVATE LINE INSTALLATION CHARGES:
----------------------------------------------------
Commencing with the Commencement Date and continuing through the Commitment
Ending Date, WorldCom agrees to waive WorldCom domestic installation charges and
LEC installation charges (collectively "Installation Waivers" in an amount not
to exceed three (3) times the Monthly Recurring IXC charges for domestic Private
Line Service ordered following the Commencement Date (the "New Service"). In the
event that Customer terminates this Agreement prior to the Commitment Ending
Date, WorldCom may debit Customer's account in the amount of such Installation
Waivers.
10. WAIVER OF DOMESTIC FRAME RELAY INSTALLATION CHARGES:
---------------------------------------------------
Commencing with the Commencement Date and continuing through the Commitment
Ending Date, WorldCom agrees to waive WorldCom domestic installation charges and
LEC installation charges (collectively "Installation Waivers") in an amount not
to exceed three (3) times the Monthly Recurring Network Node and PVC charges for
domestic Frame Relay Service ordered following the Commencement Date (the "New
Service"). In the event that Customer terminates this Agreement prior to the
Commitment Ending
<PAGE>
Date, WorldCom may debit Customer's account in the amount of such Installation
Waivers.
11. WAIVER OF INTERNATIONAL PRIVATE LINE INSTALLATION CHARGES:
---------------------------------------------------------
Commencing with the Commencement Date and continuing through the Commitment
Ending Date, WorldCom agrees to waive WorldCom U.S. 1/2 Channel installation
charges only (collectively "Installation Waivers") in an amount not to exceed
three (3) times the Monthly Recurring IXC charges for international Private Line
Service ordered following the Commencement Date (the "New Service"). In the
event that Customer terminates this Agreement prior to the Commitment Ending
Date, WorldCom may debit Customer's account in the amount of such Installation
Waivers.
12. WAIVER OF INTERNATIONAL FRAME RELAY INSTALLATION CHARGES:
--------------------------------------------------------
Commencing with the Commencement Date and continuing through the Commitment
Ending Date, WorldCom agrees to waive WorldCom international Frame Relay
installation charges for PORT/PVC charges and foreign LEC charges only
(collectively "Installation Waivers") in an amount not to exceed three (3) times
the Monthly Recurring Network Node and PVC charges
Page 4 of 5
Terms and conditions contained herein will be offered for fifteen (15) days from
May 28, 1997 Mail to: Sales Contract Admin., WorldCom, Inc., 515 East Amite,
Suite 400, Jackson, MS 39201
<PAGE>
13. for International Frame Relay Service ordered following the Commencement
Date (the "New Service"). In the event that Customer terminates this Agreement
prior to the Commitment Ending Date, WorldCom may debit Customer's account in
the amount of such Installation Waivers.
14. FACILITY NOTIFICATION/MINIMUM MONTHLY COMMITMENT REDUCTIONS:
-----------------------------------------------------------
A. FACILITY NOTIFICATION: WorldCom will notify Customer within fifteen (15)
days of the date of Customer's placement of such order for Service (the "Order
Placement Date") in the event that facilities are not available to provide the
Customer requested Service by the requested due date. WorldCom Notification to
Customer of a WorldCom facility problem within fifteen (15) days of Order
Placement Date does not relieve Customer of Minimum Monthly Commitment.
B. MINIMUM MONTHLY COMMITMENT REDUCTIONS: In the event WorldCom is unable to
provide Customer with ordered facilities within forty-five (45) days of
Customer's placement of such order to domestic Tier A cities as noted in Section
IV 9.01 of FCC #9 Tariff or within one hundred and twenty (120) days of
Customer's placement of such order to WorldCom-owned international Frame Relay
switch facilities (the "Qualifying Facilities"), then WorldCom shall reduce
Customer's Minimum Monthly Commitment in an amount equal to the monthly
recurring charge for such Qualifying Unprovided Facilities upon Customer's prior
written notice to WorldCom of the Unprovided Facilities upon Customer's prior
written notice to WorldCom of the existence of such Qualifying Unprovided
Facilities.
ENTIRE AGREEMENT: This Agreement (including any documents incorporated herein
- ----------------
by reference) constitutes the entire understanding between the parties and
supersedes any prior agreements and proposals between the parties, whether oral
or written, for Service provided hereunder.
<PAGE>
WORLDCOM, INC. NETCO COMMUNICATIONS CORPORATION
/s/ FRANK M. GRILLO /s/ EDWARD J. DRISCOLL
- -------------------- -----------------------
(Authorized Signature) (Authorized Signature)
FRANK M. GRILLO EDWARD J. DRISCOLL
- -------------------- -----------------------
(Print Name) (Print Name)
7/18/92 6/5/97
- -------------------- -----------------------
(Date Received) (Date Signed)
Page 5 of 5
Terms and conditions contained herein will be offered for fifteen (15) days from
May 28, 1997 Mail to: Sales Contract Admin., WorldCom, Inc., 515 East Amite,
Suite 400, Jackson, MS 39201
<PAGE>
EXHIBIT 12
Statement re Computation of Ratios
Ratio of Earnings to Fixed Charges
for 4-Sight Limited
<TABLE>
<CAPTION>
Three Months Ended
---------------------
8/31/96 9/30/97 12/31/96 12/31/97
-------- --------
<S> <C> <C> <C> <C>
Income before income taxes 2084 2,504 93 942
Interest expense 48 55 33 5
1/3 operating leases 6 6 2 2
---------------------------------------------
2138 2,565 128 949
Fixed charges:
Interest 48 55 33 5
Leases 6 6 2 2
---------------------------------------------
54 61 35 7
Ratio 39.6 42.0 3.7 135.6
</TABLE>
Page 1
<PAGE>
Exhibit 21
WAM!NET Inc.
Corporate Structure
(all subsidiaries are 100% directly or indirectly owned by Wam!Net Inc.)
WAM!NET Inc., a Minnesota corporation owns 100% of the following companies:
WAM!NET International Inc., a Minnesota corporation
FreeMail, Inc., a Minnesota corporation
Medical Digital, Inc., a Minnesota corporation
NetCo Communications of Canada, Inc., an Ontario corporation
WAM!NET ROC (Belgium), a Belgium corporation
WAM!NET Holdings (UK) Limited, a company incorporated under
the laws of England and Wales which owns 100% of the following company:
WAM!NET UK Limited, a company incorporated under the
laws of England and Wales which owns 100% of the following
companies:
4-Sight International Limited, a company
incorporated under the laws of England and Wales
4-Sight Software Limited, a company incorporated
under the laws of England and Wales
4-Sight, Inc., a Delaware corporation (US)
WAM!NET (Deutscheland) gmbH, a German corporation
WAM!NET (Netherlands) B.V., a company organized
under the laws of the Netherlands
<PAGE>
EXHIBIT 23.1
[Letterhead of Ernst & Young LLP]
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 9, 1998 (except Note 2, as to which the date is
March 12, 1998), in Amendment No. 1 to the Registration Statement (Form S-4) and
related Prospectus of WAM!NET, Inc. for the registration of $208,530,000 of
13 1/4% Senior Discount Notes due 2005, Series B.
s/ Ernst & Young LLP
Minneapolis, Minnesota
July 10, 1998
<PAGE>
EXHIBIT 23.2
[Letterhead of Ernst & Young, Chartered Accountants]
10 July 1998
The Directors
WAM!NET Inc.
6100 West 110th Street
Minneapolis
MN 55438
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) of WAM!NET, Inc. for the registration of
$208,530,000 of its 13 1/4% Senior Discount Notes due 2005 and to the
inclusion therein of our report dated May 28, 1998 with respect to the
consolidated financial statements of 4-Sight Limited.
Yours faithfully,
/s/ Ernst & Young
