<PAGE>
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission file number: _____________________
WAM!NET INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1795247
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6100 WEST 110TH STREET
MINNEAPOLIS, MINNESOTA 55438
(Address of principal executive offices)
(Zip Code)
(612) 886-5100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [_] No [X]
As of May 28, 1998 there were 9,277,112 shares of the Corporation's Common
Stock, par value $.01 per share, outstanding.
Total number of pages in this report: 17
<PAGE>
WAM!NET INC.
INDEX TO FORM 10-Q
PART I--Financial Information
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
ITEM 1--Financial Statements
Consolidated Balance Sheets as of March 31, 1998 (unaudited) and
December 31, 1997................................................. 2
Consolidated Statements of Operations for the three months in the
periods ended March 31, 1998 and 1997 (unaudited)................. 4
Consolidated Statements of Cash Flows for the three months in the
periods ended March 31, 1998 and 1997 (unaudited)................. 5
Notes to Consolidated Financial Statements (unaudited)............. 7
ITEM 2--Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................. 9
ITEM 3--Quantitative and Qualitative Disclosures About Market Risk... 13
PART II--Other Information
ITEM 2--Changes in Securities and Use of Proceeds.................. 14
ITEM 4--Submission of Matters to a Vote of Security Holders........ 14
ITEM 5--Other Information.......................................... 14
ITEM 6--Exhibits and Reports on Form 8-K........................... 15
Signatures--........................................................... 16
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL INFORMATION
WAM!NET INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 66,760 $ 274
Accounts receivable, net of allowance of $10 and
$10, respectively.................................. 3,493 459
Inventory........................................... 940 --
Prepaid expenses and other current assets........... 765 554
-------- -------
Total current assets.............................. 71,958 1,287
Property and equipment:
Network equipment................................... 22,296 15,618
Other support equipment............................. 8,183 5,242
Furniture and fixtures.............................. 3,052 1,078
Leasehold improvements.............................. 266 259
-------- -------
33,797 22,197
Accumulated depreciation............................ 4,403 2,877
-------- -------
29,394 19,320
Goodwill, net of accumulated amortization of $762
and $6, respectively............................... 32,446 479
Deferred Charges.................................... 3,972 --
-------- -------
Total assets...................................... $137,770 $21,086
======== =======
</TABLE>
2
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WAM!NET INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................................... $ 3,805 $ 2,460
Accrued salaries and wages.......................... 369 360
Accrued expenses.................................... 3,287 2,159
Current portion of equipment financing and
obligations under capitalized leases............... 3,541 3,129
Accrued taxes payable............................... 1,147 --
-------- --------
Total current liabilities......................... 12,149 8,108
Long-term debt:
Subordinated notes payable.......................... 22,368 21,784
Line of credit...................................... 14,431
Equipment financing................................. 6,883 6,434
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
Shareholders' deficit:
Undesignated shares, $.01 par value--9,900,000
Common Stock, $.01 par value:
Authorized shares--90,000,000
Issued and outstanding shares--6,699,740, and
9,265,530 at March 31, 1998 and December 31,
1997............................................. 93 67
Additional paid-in capital........................ 53,712 11,771
Accumulated deficit............................... (69,192) (42,509)
Cumulative foreign currency translation
adjustment....................................... 71 --
-------- --------
Total shareholders' deficit....................... (15,316) (30,671)
-------- --------
Total liabilities and shareholders' deficit....... $137,770 $ 21,086
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
WAM!NET INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
Revenues:
WAM!NET revenues....................................... $ 117 $ 1,320
Less rebates........................................... -- (271)
--------- ---------
Net WAM!NET user fees.................................... 117 1,049
Software and hardware sales.............................. -- 822
Other service fees....................................... 5 9
--------- ---------
Total revenues....................................... 122 1,880
Operating expenses:
Network communication fees............................. 863 3,152
Cost of software and hardware.......................... 261
Network operations..................................... 849 3,259
Sales and marketing.................................... 1,229 2,352
General and administrative............................. 977 14,467
Depreciation and amortization.......................... 287 1,921
--------- ---------
4,205 25,412
--------- ---------
Loss from operations..................................... (4,083) (23,532)
Other income (expense):
Interest income........................................ 150 293
Interest (expense)..................................... 778 3,444
--------- ---------
Net loss................................................. $ (4,711) $ (26,683)
Less preferred dividends............................... (18) (18)
--------- ---------
Net loss applicable to common stock...................... $ (4,729) $ (26,701)
========= =========
Net loss applicable per common share..................... $ (0.83) $ (3.65)
========= =========
Weighted average number of common shares outstanding..... 5,700,005 7,305,734
========= =========
</TABLE>
See accompanying notes.
4
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WAM!NET INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss................................................. $ (4,711) $ (26,683)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash interest expense related to warrants........... 307 2,274
Capitalized financing costs............................ -- (1,824)
Value of stock options issued to employees and
consultants........................................... -- 11,914
Foreign currency translation adjustment................ -- 33
Depreciation and amortization.......................... 287 2,024
Changes in operating assets and liabilities:
Accounts receivable.................................. (32) 633
Inventory............................................ -- 399
Prepaid expenses and other current assets............ (17) (211)
Accounts payable..................................... 905 439
Income taxes......................................... -- 251
Accrued expenses..................................... (84) 1,008
-------- ---------
Net cash used in operating activities.................... (3,345) (9,743)
INVESTING ACTIVITIES
Purchases of property and equipment...................... (3,904) (10,143)
Purchase of 4-Sight...................................... -- (20,253)
Proceeds from sale of investments........................ 1,000 --
-------- ---------
Net cash used in investing activities.................... (2,904) (30,396)
FINANCING ACTIVITIES
Proceeds from 13.25% Senior Discounted Notes............. -- 120,626
Proceeds from line of credit............................. -- 5,203
Payments on line of credit............................... -- (24,003)
Proceeds from equipment financing........................ -- 1,809
Payments on bridge financing............................. (1,075) (948)
Payments on equipment financing.......................... (21) --
-------- ---------
Net cash provided by (used in) financing activities...... (1,096) 102,687
-------- ---------
(Decrease) increase in cash and cash equivalents......... (7,345) 62,548
Cash and cash equivalents at beginning of period......... 14,444 4,212
-------- ---------
Cash and cash equivalents at end of period............... $ 7,099 $ 66,760
======== =========
</TABLE>
See accompanying notes.
5
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WAM!NET INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1998
------------------
(UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Conversion of accrued interest to subordinated debt....... $ 366 $ 585
Issuance of common stock relating to acquisition.......... -- 20,000
Warrant valuation reclassed to deferred charges from line
of credit................................................ -- 4,104
Accumulated and unpaid dividends.......................... 18 18
Conversion of convertible subordinated debenture for
common stock............................................. -- 25
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest.................................... 283 677
</TABLE>
See accompanying notes.
6
<PAGE>
WAM!NET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared by
WAM!NET Inc. (the "Company") without audit and reflect all adjustments
(consisting only of normal and recurring adjustments and accruals) which are,
in the opinion of management, necessary to present a fair statement of the
results for the interim periods presented. The statements have been prepared
in accordance with the regulations of the Securities and Exchange Commission,
but omit certain information and footnote disclosures necessary to present the
statements in accordance with generally accepted accounting principles. The
results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year. These
financial statements should be read in conjunction with the Company's audited
Consolidated Financial Statements for the year ended December 31, 1997. The
December 31, 1997 balance sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
2. CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries: FreeMail, Inc., NetCo Communications
Corporation of Canada, Inc. and 4-Sight Limited plc. All intercompany
transactions have been eliminated.
3. NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share", which the Company adopted on December 31, 1997.
All loss per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements. Basic
earnings per share is computed on the basis of the average number of common
shares outstanding. Diluted earnings per share is not presented as the effect
of outstanding options and warrants is antidilutive.
4. DEBT OFFERING
In February 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 $1,000 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 results in net proceeds to the
Company of $120,622,093.
5. ACQUISITION
In March 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.
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.
7
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WAM!NET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
ENDED
MARCH 31,
1998
------------
UNAUDITED
<S> <C>
Revenues........................................................... $ 5,363
Net loss........................................................... $(26,725)
Net loss per share................................................. $ (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.
8
<PAGE>
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements set forth below constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or
achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements.
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 network of Company owned
national, regional and local hubs ("Distribution Hubs") interconnected
redundantly with high-bandwidth leased telephone circuits (the "WAM!NET
Network") and a managed, high speed digital data delivery network service (the
"WAM!NET Service"). The Company announced the commercial release of the
WAM!NET Service in February 1996 at a major industry trade show for the
printing, publishing, advertising, pre-press, corporate communication and
graphic arts industries (collectively "Graphic Arts"). 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.
On March 13, 1998, the Company consummated the purchase of 4-Sight Limited,
a private limited company incorporated under the laws of England and Wales
("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
acquisition of the entire share capital of 4-Sight for $20.0 million in cash,
which will be paid out of the proceeds of the Offering, and up to 3,250,000
shares of Common Stock (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. (See Item 5 below.)
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 and the expiration of a
promotional period, if any, extended to such customer. 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. 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
9
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expects the use of promotional programs in the Graphic Arts industry to
decline with increasing penetration of the market, but the Company 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 network operations centers ("NOCs") and
Distribution Hubs and the costs of local telephone circuits connecting network
access devices ("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 Inc., 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 a remote data archiving, retrieval and distribution system
("WAM!BASE"), an application enabling remote proofing ("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.
10
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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, 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. 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.
11
<PAGE>
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
13 1/4% Senior Discount Notes due 2005 (the "Notes") issued in March 1998.
Income Taxes
For the three months ended March 31, 1998, the Company experienced net
operating 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.
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.
During September of 1997, the Company established a revolving credit
facility with The First Bank of Chicago, an affiliate of First Chicago Capital
Markets, Inc., (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 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 31, 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.
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
12
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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 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.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the General Instructions to Rule 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 7 and by Rule
305 of Regulation S-K are inapplicable to the Corporation at this time.
13
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PART II--OTHER INFORMATION
ITEM 2--CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 5, 1998, the Company sold 208,530 Units consisting of $208,530,000
aggregate principal amount at maturity of 13 1/4% Senior Discount Notes due
2005 and 625,590 Warrants to purchase an aggregate of 1,257,436 shares of
Common Stock of the Company. Each Unit consists of $1,000 principal amount at
maturity of Notes and three Warrants, each Warrant entitling the holder
thereof to purchase 2.01 shares of Common Stock. 208,030 Units were sold
pursuant to Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act"), and 500 Units were sold pursuant to Regulation S under the
Securities Act.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 7, 1998, by consent of the majority of the shareholders of the
Company, in an action taken at a Special Meeting of Shareholders, the
following matters were resolved:
a) The Amended and Restated Articles of Incorporation were approved and
adopted. The amendment to the Corporation's Articles of Incorporation
made certain modifications which, along with other minor modifications
(i) changed the Company's name to WAM!NET Inc., (ii) increased the
Company's authorized shares of Common Stock from twenty million
(20,000,000) shares to one hundred million (100,000,000) shares, and
(iii) provided that shareholder action 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 at which there
is a quorum, except as otherwise required by statute.
b) Amendments to the Netco Communications Corporation 1994 Stock Option
Plan (the "1994 Stock Option Plan") were approved and adopted. The
amendments to the 1994 Stock Option Plan (i) increased the number of
shares which may be issued pursuant to the options granted pursuant to
the 1994 Stock Option Plan from six hundred thousand (600,000) to four
million four hundred fourteen thousand two hundred eighty (4,414,280),
(ii) expanded the class of person eligible to receive options under the
1994 Stock Option Plan to include consultants to the Company, and (iii)
expanded the Company's ability to grant options under the 1994 Stock
Option Plan to non-employee directors of the Company.
c) The acts of the directors taken on behalf of the Company were ratified
by a majority of the shareholders.
There were 1,154,013 shares of Common Stock represented in person or by
proxy at the meeting. Each of the aforementioned matters was approved
unanimously and without abstentions.
ITEM 5--OTHER INFORMATION
On February 10, 1998, the Company entered into an agreement (the "4-Sight
Agreement") to purchase the entire share capital of 4-Sight, for $20.0 million
in cash, which was paid out of the proceeds of the Offering, and 2,500,000
shares of Common Stock. The 4-Sight Acquisition was consummated on March 13,
1998.
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
Corporation 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.
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ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
a.Exhibits:
<TABLE>
<C> <S>
2.1 Agreement for the Sale and Purchase of the entire issued capital of
4-Sight Limited, dated February 11, 1998, among the Company, WAM!NET
(UK) Limited and the Selling Shareholders listed therein.*
3.1 Amended and Restated Articles of Incorporation of the Company.*
10.18 1994 Stock Option Plan.*
</TABLE>
* Incorporated herein by reference to the identically numbered exhibit
to the Company's Registration Statement on Form S-4, Registration No.
333-53841, as filed with the Securities and Exchange Commission on
May 28, 1998.
b.Current Reports on Form 8-K:
The Corporation did not file any reports on Form 8-K during the three
months ended March 31, 1998.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed by the
undersigned thereunto duly authorized.
WAM!NET INC.
Date: May 29, 1998
By: /s/ Edward J. Driscoll III
-------------------------------
Edward J. Driscoll III
President and Chief Executive
Officer
16
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
2.1 Agreement for the Sale and Purchase of the entire issued capital
of 4-Sight Limited, dated February 11, 1998, among the Company
WAM!NET (UK) Limited and the Selling Shareholders listed
therein.*
3.1 Amended and Restated Articles of Incorporation of the Company.*
10.18 1994 Stock Option Plan.*
</TABLE>
- --------
* Incorporated herein by reference to the identically numbered exhibit to the
Company's Registration Statement on Form S-4, Registration No. 333-53841.
