<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, 1999
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: 333-53841
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 April 30, 1999 there were 9,297,427 shares of the Corporation's Common
Stock, par value $.01 per share, outstanding.
Total number of pages in this report: 19
<PAGE>
WAM!NET Inc.
INDEX TO FORM 10-Q
Part I--Financial Information
Page No.
--------
Item 1--Financial Statements
Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998........................................... 3
Consolidated Statements of Operations for the three months
in the periods ended March 31, 1999 and 1998 (unaudited)........ 5
Consolidated Statements of Cash Flows for the three months
in the periods ended March 31, 1999 and 1998 (unaudited)........ 6
Notes to Consolidated Financial Statements (unaudited)............ 8
Item 2--Management's Discussion and Analysis of Results of
Operations and Financial Condition........................... 9
Item 3--Quantitative and Qualitative Disclosures About Market Risk.... 16
Part II--Other Information
Item 2--Changes in Sercurities and Use of Proceeds.................... 17
Item 6--Exhibits and Reports on Form 8-K.............................. 17
Signature --................................................................ 18
Exhibit Index--............................................................. 19
-2-
<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,
1999 1998
--------- ----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............................................. $ 30,171 $ 6,272
Accounts receivable, net of allowance of $546 and $430, respectively... 4,008 3,466
Inventory.............................................................. 1,744 1,534
Prepaid expenses and other current assets.............................. 3,547 3,187
-------- --------
Total current assets.............................................. 39,470 14,459
Property and equipment:
Building and land...................................................... 39,605 605
Network equipment...................................................... 57,446 50,907
Other support equipment................................................ 20,211 18,046
Furniture and fixtures................................................. 4,165 2,802
Leasehold improvements................................................. 5,689 6,506
-------- --------
127,116 78,866
Accumulated depreciation............................................... 21,403 16,399
-------- --------
105,713 62,467
Goodwill, net of accumulated amortization of $6,954 and
$5,308, respectively.................................................
25,773 27,734
Deferred financing charges, net of accumulated amortization of
$7,219 and $5,959, respectively................................. 18,922 20,183
Other assets........................................................... 662 616
-------- --------
Total assets...................................................... $190,540 $125,459
======== ========
</TABLE>
-3-
<PAGE>
WAM!NET Inc.
Consolidated Balance Sheets (continued)
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Liabilities and shareholders' deficit
Current liabilities:
Accounts payable................................................ $ 11,630 $ 17,098
Accrued salaries and wages...................................... 3,013 4,801
Accrued expenses................................................ 3,336 3,176
Current portion of equipment financing and obligations
under capitalized leases..................................... 8,287 5,324
-------- --------
Total current liabilities.................................. 26,266 30,399
Long-term debt:
Subordinated notes payable...................................... 27,861 27,403
Line of credit.................................................. 24,500 24,000
Equipment financing............................................. 12,164 13,536
13.25% Senior Discounted Notes.................................. 143,481 138,975
Redeemable Preferred Stock, Class A, $10.00 par value:
Authorized shares--115,206
Issued and outstanding shares--115,206 and 100,000
at March 31, 1999 and December 31, 1998................. 1,152 1,000
Shareholders' deficit:
Convertible Preferred Stock, Class B, $.01 par value:
Authorized, issued and outstanding--5,710,425 and 0........ 57 --
Convertible Preferred Stock, Class C, $.01 par value:
Authorized, issued and outstanding--878,527 and 0 ......... 9 --
Convertible Preferred Stock, Class D $.01 par value:
Authorized, issued and outstanding--2,196,317 and 0........ 22 --
Undesignated shares, $.01 par value--1,099,525
Common Stock, $.01 par value:
Authorized shares--490,000,000
Issued and outstanding shares--9,297,427 and 9,288,194 at
March 31, 1999 and December 31, 1998 ................... 93 93
Additional paid-in capital................................. 156,598 54,302
Accumulated deficit........................................ (201,182) (164,387)
Cumulative foreign currency translation adjustment......... (481) 138
-------- --------
Total shareholders' deficit................................ (44,884) (109,854)
-------- --------
Total liabilities and shareholders' deficit................ $190,540 $125,459
======== ========
</TABLE>
See accompanying notes.
-4-
<PAGE>
WAM!NET Inc.
Consolidated Statements of Operations
(dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1999 1998
---------- ----------
(Unaudited)
<S> <C> <C>
Revenues:
WAM!NET revenues..................................... $ 3,763 $ 1,320
Less rebates......................................... (635) (271)
---------- ----------
Net WAM!NET user fees..................................... 3,128 1,049
Software and hardware sales............................... 1,739 831
---------- ----------
Total revenues............................................ 4,867 1,880
Operating expenses:
Network communication fees........................... 6,477 3,152
Cost of software and hardware........................ 823 261
Network operations................................... 5,285 3,259
Sales and marketing.................................. 7,026 2,352
General and administrative........................... 3,971 14,467
Depreciation and amortization........................ 8,206 1,921
---------- ----------
31,788 25,412
---------- ----------
Loss from operations...................................... (26,921) (23,532)
Other income (expense):
Interest income...................................... 200 293
Interest (expense)................................... (10,074) (3,444)
---------- ----------
Net loss.................................................. $ (36,795) $ (26,683)
Less preferred dividends.................................. (555) (18)
---------- ----------
Net loss applicable to common stock....................... $ (37,350) $ (26,701)
========== ==========
Net loss applicable per common share - basic and diluted.. $ (4.01) $ (3.65)
========== ==========
Weighted average number of common shares outstanding...... 9,294,127 7,305,734
========== ==========
</TABLE>
See accompanying notes.
-5-
<PAGE>
WAM!NET Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Operating activities
Net loss.......................................................... $(36,795) $(26,683)
Adjustments to reconcile net loss to net cash used
in operating activities:
Noncash interest expense, including related warrants values.. 8,564 2,274
Value of stock options issued to employees and consultants... 87 11,914
Depreciation and amortization................................ 8,206 2,024
Changes in operating assets and liabilities:
Accounts receivable..................................... (542) 633
Inventory............................................... (210) 399
Prepaid expenses and other assets....................... (420) (211)
Accounts payable........................................ (5,467) 439
Income taxes............................................ -- 251
Accrued expenses........................................ (962) 1,008
-------- --------
Net cash used in operating activities............................. (27,539) (7,952)
Investing activities
Purchases of property and equipment............................... (9,791) (10,143)
Purchase of 4-Sight (net of cash acquired)........................ -- (16,315)
-------- --------
Net cash used in investing activities............................. (9,791) (26,458)
Financing activities
Proceeds from exercise of stock options........................... 5 --
Net proceeds from sale of convertible preferred stock............. 59,514 --
Proceeds from 13.25% Senior Discount Notes........................ -- 120,626
Proceeds from line of credit...................................... 500 5,203
Payments on line of credit........................................ -- (24,003)
Proceeds from equipment financing................................. 3,000 1,809
Payments on equipment financing................................... (1,472) (948)
Capitalized financing costs....................................... -- (1,824)
-------- --------
Net cash provided by financing activities......................... 61,547 100,863
Effect of foreign currencies on cash (318) 33
-------- --------
Increase (decrease) in cash and cash equivalents.................. 23,899 66,486
Cash and cash equivalents at beginning of period.................. 6,272 274
-------- --------
Cash and cash equivalents at end of period........................ $ 30,171 $ 66,760
======== ========
</TABLE>
See accompanying notes.
-6-
<PAGE>
WAM!NET Inc.
Consolidated Statements of Cash Flows (continued)
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1999 1998
------- -------
(Unaudited)
<S> <C> <C>
Supplemental schedule of noncash financing activities
Conversion of accrued interest to subordinated debt................ $ 458 $ 585
Conversion of accrued dividends to preferred stock................. 152 --
Issuance of convertible preferred stock in exchange for land,
building and furniture & fixtures............................ 40,000 --
Issuance of common stock relating to acquisition................... -- 20,000
Conversion of convertible subordinated debenture for common stock.. -- 25
Supplemental schedule of cash flow information
Cash paid for interest............................................. $ 1,033 $ 677
</TABLE>
See accompanying notes.
-7-
<PAGE>
WAM!NET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998. The
December 31, 1998 balance sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles Certain amounts for the prior year have been reclassified to conform
to current year presentation.
2. Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries: FreeMail, Inc., NetCo Communications of
Canada, Inc. and WAM!NET U.K. Limited (formerly 4-Sight Limited). All
intercompany transactions have been eliminated.
3. Preferred Stock
In January 1999, the Company issued the 1999 MCI WorldCom Convertible Note and
in January 1999 and March 1999, the Company borrowed $10.0 million and $15.0
million, respectively, thereunder. The 1999 MCI WorldCom Convertible Note was
converted into 2,196,317 shares of the Company's Class D Convertible Preferred
Stock, par value $.01 per share (the "Class D Preferred Stock"), immediately
prior to the closing of the Silicon Graphics, Inc. Investment ("SGI
Investment"). In connection with the MCI WorldCom Convertible Note, the Company
issued warrants to purchase a total of 350,000 shares of Common Stock. The
warrants have an exercise price of $.01 and are exercisable from April 30, 1999
until April 30, 2004.
In March 1999, the Company entered into the SGI Investment, providing for the
purchase by SGI of 5,710,425 shares of the Company's Class B Convertible
Preferred Stock, par value $.01 per share (the "Class B Preferred Stock"), and
878,527 shares of the Company's Class C Convertible Preferred Stock, par value
$.01 per share (the "Class C Preferred Stock"). The holders of a majority of the
Class B Preferred Stock will have the right to designate one member of the
Company's Board of Directors. The aggregate consideration received by the
Company for the Class B Preferred Stock and the Class C Preferred Stock was $75
million, of which $35 million was paid in cash and $40 million was paid by
transfer to the Company of a campus facility. The Class B Preferred Stock and
the Class C Preferred Stock will be convertible on a one-to one basis into
Common Stock and will have the right to vote such percentage with the Common
Stock as a single class. The Class B Preferred Stock and Class C Preferred Stock
are convertible immediately following the issuance date and 18 months following
the issuance date, respectively. The shares of Common Stock into which the Class
B Preferred Stock and the Class C Preferred Stock are subject to certain
registration rights.
-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
The following discussion and analysis is based on the historical and pro
forma results of WAM!NET Inc. (the "Company") and should be read in conjunction
with the Company's Financial Statements included herein.
Overview
The Company provides a managed, high speed, digital data delivery network
service (the "WAM!NET Service"). The WAM!NET Service allows users to
transmit, receive and store large digital data files. The Company has developed
applications for companies in the graphic arts, printing, publishing,
advertising, pre-press and corporate communication (collectively, "Graphic
Arts") and entertainment industries, and is evaluating applications of the
WAM!NET Service for the medical imaging industry as well. The Company integrates
industry-specific software applications with commercially available computer and
telephony technologies to provide its customers with rapid, secure and reliable
transportation and storage of digital data. The Company provides customers with
a choice of solutions for their data transportation and workflow needs, ranging
from a turn-key, single source solution for high-volume data requirements to
solutions for subscribers having less intensive data requirements. The Company
focuses its software development, service, sales and marketing efforts on
vertical markets within targeted industries by providing services and products
specifically tailored for an industry sector, "Industry Smart(TM)" applications,
which serve to improve a customer's productivity and output under a simple,
monthly fee and usage pricing plan that requires no up-front capital investment
by the customer. The WAM!NET Service connects customers and trading partners
within an industry, thereby implementing the Company's Industry Smart approach.
The Company's applications combine rapid, secure data transportation services
with industry specific software applications that allow remote users to work
together, eliminate production deadlines imposed by courier schedules, eliminate
delays and copying errors associated with the transportation of physical media
(such as disks or tapes) and permit access to and use of the Company's remote
storage and retrieval services.
The Company has initially capitalized on the growing need to transmit data
in the Graphic Arts industry. The Company believes that the WAM!NET Service is
achieving wide acceptance among leading firms within the Graphic Arts industry.
The Company expects that this acceptance will in turn encourage other industry
participants with whom such firms share digital information (their "workflow
community of interest") to subscribe to the WAM!NET Service.
The Company has also developed and released advanced software applications
to its Graphic Arts customers such as an on-line "Customer Information System"
("CIS") that includes digital job tracking and a billing system, and
WAM!PROOF(R), an application enabling remote proofing. The WAM!PROOF(R) service
was commercially released in the second quarter of 1998. The WAM!BASE(R)
service, a remote data archiving, retrieval and distribution system, was
released to the printed catalog division of Sears, Roebuck & Company and four of
its primary vendors on November 1, 1998, and is expected to be released
nationally during 1999. The WAM!NET(R) service was also released in the United
Kingdom during the fourth quarter of 1998. The Company is developing separate
applications for the WAM!BASE(R) service, the first directed to high volume,
long-term data storage suitable to the requirements of computer-to-plate
printing systems, and the second directed to video-on-demand entertainment
applications. The Company is also developing an Internet Gateway application
providing access to the WAM!NET(R) network for use by workflow partners with
incidental data transport requirements. The Company is also developing an
application for remote rendering of computer animations for the entertainment
industry. The Company intends to introduce these new applications during 1999.
-9-
<PAGE>
The Company's diversified product line addresses the requirements of
customers who exchange data with workflow partners, regardless of the volume of
data transmitted or stored. In addition to the Company's current single source,
turn-key solution for data-intensive customers, the Company has developed
software applications which permit access to the WAM!NET Service by customers
with lower data volume requirements. The first such application is a fifth
generation graphical user interface, Transmission Manager, which provides
worldwide access to the Company's redundantly interconnected proprietary
purpose-built network hubs ("Distribution Hubs") via leased high-bandwidth
telephone circuits (the "WAM!NET Network"). The dial-up version of Transmission
Manager utilizes ISDN telephone circuits and was released in March of 1999.
The Company intends to continue its strategy of providing Industry Smart
solutions for vertical markets requiring mass transport and storage of digital
data beyond the Graphics Arts industry. The Company has created two new business
units, WAM!NET Entertainment and WAM!NET Medical, to develop and market Industry
Smart network services and applications for the entertainment and medical
industries. In particular, the Company is developing Industry Smart solutions to
address the video data transportation and storage and related workflow needs of
the entertainment industry and is also considering applications for its WAM!NET
Service for the transportation, storage and retrieval of medical images and data
for use by the medical industry.
On March 4, 1999, the Company consummated the "SGI Investment," a
transaction with Silicon Graphics, Inc. ("SGI"), which provided for an equity
investment by SGI of $75.0 million and the establishment of certain strategic
relationships between the Company and SGI, including a preferred provider
relationship pursuant to which the Company will be able to purchase hardware,
software and services from SGI based on SGI's most favored pricing models. In
addition, SGI will act as sales agent for the Company's products in the
entertainment industry. The Company believes that the SGI Investment will
provide many strategic benefits, including:
- a networking and storage partnering relationship with an established
industry leader;
- access to a powerful new distribution channel for the WAM!NET Service,
including premier accounts in the entertainment industry; and
- the ability to partner with SGI's professional services group on
large, multi-year, multi-site deals which require customization and
involve complex implementation.
Transmission Manager was released in March of 1999. The release of
Transmission Manager will provide a common user interface for both high and low
data volume customers and will enable WAM!NET U.K. customers (more than 30,000
worldwide) to upgrade to this product and connect to the WAM!NET Network. The
Company's goal is to digitally connect both high and low volume customers
through the WAM!NET Network worldwide beginning in early 1999. Increasing the
number of customers, both large and small, significantly increases the value of
the WAM!NET Network and product offerings.
In February 1999, WAM!NET's entertainment group began offering its
entertainment customers the WAM!NET Service and a compressed video viewing
application. The Company expects its initial focus to be on selling existing
WAM!NET transportation and storage service to the post-production market
connecting post-production facilities with advertising agencies for the delivery
of review quality video during the television advertisement creation process.
Additional segments, including network clearance for television advertisements,
large data file transfer and storage applications and video on demand are also
being targeted. The Company believes that this opportunity will be further
expanded and leveraged by WAM!NET's relationship with SGI and will target higher
bandwidth transport applications, video storage and distribution and rendering
applications.
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 in the future. The Company has incurred an accumulated deficit of
approximately $201.2 million through March 31, 1999.
-10-
<PAGE>
Revenue. The Company's revenue is derived primarily from WAM!NET Service
contracts which usually are 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, ranging from $650 per month to $4,000 per month for high volume users
requiring equipment and phone service installed by the Company, from $45 per
month to $180 per month for less volume intensive users who access the service
using ISDN dial up connections, and intends to offer a pay by transaction system
(Internet Gateway) for low volume users accessing the service over the internet.
The Company begins to earn gross revenue following installation of service at a
customer's premises; however, the Company incurs cost of service rebates which
offset such gross revenue. Furthermore, free trial periods under the Company's
various promotional programs have ranged from 60 days to six months and have
been extended to 60% of the Company's customer base. 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 93% 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 sector
of the media 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 the entertainment and medical imaging industries. The Company
also plans to continue to develop new Industry Smart applications to increase
the volume of files transferred over the WAM!NET Network.
In connection with the SGI Investment, SGI and the Company entered into the
Preferred Provider Agreement pursuant to which both parties have developed a
list of existing SGI customers in the entertainment industry which the Company
believes represents a significant sales revenue opportunity for it over the next
three years. The Company and SGI have agreed to jointly develop a marketing,
sales and implementation plan to address these accounts, including field
resource commitments, compensation to SGI for field activities and professional
services, and such other matters applicable to the sale of the WAM!NET Service
to such potential customers. In addition, SGI and the Company intend to explore
a broader strategic relationship that is intended to enable the Company to
obtain the benefit of SGI's presence in the entertainment industry, other
selected commercial accounts and the U.S. federal government sector.
Network Communications Fees. Network communications fees include both the
costs of the high bandwidth carrier services interconnecting the Company's
national infrastructure of network operating centers ("NOCs") and Distribution
Hubs and the costs of local telephone circuits connecting network access devices
to the nearest Distribution Hub. Local telephone circuit connections account for
approximately 80% of these charges, with significant differences between urban
and rural connection costs. National carrier service, provided primarily by MCI
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 the increasing utilization of the WAM!NET Network. The
Company actively seeks to obtain and deploy technologies that will reduce the
costs of local telephone circuit connections, such as wireless technologies and
remote dial-up capabilities. The Company also intends to use its network
management tools to optimize the use of existing and planned network capacity as
volume increases and traffic patterns begin to emerge. The Company has
implemented new pricing strategies for its services which take into account the
significant cost differential between urban and rural local telephone circuit
connections. The Company also believes that growing competition among telephony
and communications providers may reduce the cost of local telephone circuit
connections.
Network Operations Expense. Network operations expense represents costs
directly associated with developing, maintaining, managing and servicing the
global WAM!NET Network. Such costs include direct labor, vendor service fees,
point-of-presence charges 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, European and Asian operations. Costs associated with the
development of the WAM!BASE,
-11-
<PAGE>
WAM!PROOF and other network applications related to medical media transport and
storage 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.
Pursuant to the Preferred Provider Agreement, the Company has agreed to
purchase hardware, software and services from SGI over a four year period with a
firm commitment to purchase $35 million during the period commencing January 1,
1999 and ending December 31, 2000. The Company has the ability to purchase such
products at prices based on SGI's most favored pricing models. The Company
believes that the discounted prices, reduced commissions and lower servicing
fees for such products will result in lower network operations expenses in the
future.
Sales and Marketing Expense. The Company's sales and marketing efforts are
intended to create global 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 global media industry,
to generate increased traffic among its existing customers and to market the
WAM!NET media transport 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, 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; however, the cost of general and
administrative expense as a percentage of revenue is expected to decline.
Depreciation and Amortization. To facilitate entry into its target markets,
the Company furnishes its global 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 network access devices it
furnishes to customers for their use of the WAM!NET Service. Depreciation and
amortization expense includes depreciation of network access devices,
Distribution Hubs and equipment located in the NOCs. The Company's network
infrastructure is generally organized to use the most expensive equipment in the
NOCs, less expensive equipment for Distribution Hubs and the least expensive
equipment in the network access devices. The Company anticipates substantial
capital investments for additional North American and international Distribution
Hubs, WAM!BASE storage facilities to be located in the existing NOCs and network
access devices to be located at customer premises. As a result, the Company
anticipates that depreciation and amortization expense will continue to increase
in future periods as the Company continues to purchase equipment.
Results of Operations
Three Month Period Ended March 31, 1999 Compared with Three Month Period Ended
March 31, 1998
Revenue. Revenue for the three month period ended March 31, 1999 was
$3,762,467 compared to $1,320,026 for the three month period ended March 31,
1998, an increase of $2,442,441, or 185.0%. This increase in revenue was
primarily due to increased market penetration of the North American graphic-arts
segment by the Company's high end media transport service and an increase of the
average monthly invoice for high volume users to $756 for the period ending
March 31, 1999 from $664 for the period ending March 31, 1998, an increase of
$92 or 13.9%. Installed network access device media transport services increased
from 744 sites for the three month
-12-
<PAGE>
period ended March 31, 1998 to 1,676 sites for the three month period ended
March 31,1999; an increase of 932 sites or 125.3%. Service rebates for the years
ended March 31, 1999 and March 31, 1998 were $634,859 or 16.9% of gross revenue,
and $271,000 or 20.5% of gross revenue, respectively; an increase of $363,859 or
134.3%. Service rebates are primarily the result of marketing programs that
allow customers who sign up for the Company's high end media transport services
to participate in a trial period that under certain circumstances can rebate the
associated monthly minimum charges for a period of two to six months. During
1998, approximately 60% of newly installed customers participated in a trial
period and approximately 93% of those customers have remained on the network
after the lapse of their initial trial period. Revenue for software and hardware
sales for the three month period ended March 31, 1999 was $1,738,998, compared
to $831,000 for the three month period ended March 31, 1998, an increase of
$907,998, or 109.3%. Software and hardware sales revenue for the three month
period ended March 31, 1999 were primarily derived from continuing
media-transport software sales of WAM!NET U.K. following its integration with
4-Sight Limited ("4-Sight") on March 13, 1999.
Operating Expenses. Network communications fees for the three month period
ended March 31, 1999 were $6,477,253, compared to $3,151,571 for the three month
period ended March 31, 1998, an increase of $3,325,682, or 105.5%. This increase
was due primarily to an increase of 125% in the number of customers purchasing
the Company's media transport services. Network communications fees represent
the largest direct cost associated with providing the Company's media transport
service to customers. Although network communications fees increased 105.5% from
the period ending March 31, 1998 to the period ending March 31, 1999, the
average monthly communications fees incurred by the Company to provide media
transport services to a single North American customer was $1,112 for the period
ending March 31, 1999 compared to $1,558 for the period ending March 31, 1998, a
decrease of $446 or 40.1%.
Network operations expense for the three month period ended March 31, 1999
was $5,285,349, compared to $3,259,126 for the three month period ended March
31, 1998, an increase of $2,026,223, or 62.2%. This increase was due to several
significant factors relating to the design and implementation of the Company's
global media transport infrastructure and the shift from a primarily North
American operational focus to a global operational focus.
Sales and marketing expense for the three month period ended March 31, 1999
was $7,025,933, compared to $2,352,529 for the three month period ended March
31, 1998, an increase of $4,673,404, or 198.7%. This increase is primarily due
(i) to the expansion of the North American sales and marketing force and the
creation of a European sales and marketing force to increase market penetration,
(ii) enhancing product recognition within the existing North American market and
(iii) implementing global sales and marketing strategies throughout Europe and
Asia.
General and administrative expense for the three month period ended March
31, 1999 was $3,970,682, compared to $14,466,910 for the three month period
ended March 31, 1998, a decrease of $10,496,228, or 72.6%. The increase in
general and administrative expenses during 1998 was primarily the result of
large non-cash compensation expenses relating to the vesting of certain option
and warrant contracts held by various officers of the Company which totaled
$12,528,726. This decrease is primarily due to a $11,539,000 non-cash
compensation charge relating to the vesting of certain option contracts held by
various officers of the Company in the period ended March 31, 1998. After
adjusting for this charge, general and administrative expense increased
$1,042,772 or 35.6% over the comparable adjusted period of the previous year.
The adjusted increase in general and administrative expense was due to vastly
increased operational support requirements due to the rapid expansion of the
Company's global services and corporate facilities.
Depreciation and amortization for the three month period ended March 31,
1999 was $8,205,818, compared to $1,921,248 for the three month period ended
March 31, 1998, an increase of $6,284,570, or 327.1%. This increase is primarily
due to the purchasing of network equipment and other support equipment used in
the expansion of the network during 1998 and 1999 in the amount of $56,797,000
and the increase of $32,557,000 in goodwill that resulted from the acquisition
of 4-Sight.
-13-
<PAGE>
Interest expense for the three month period ended March 31, 1999 was
$10,073,504, compared to $3,444,282 for the three month period ended March 31,
1998, an increase of $6,629,222, or 192.5%. The increase was primarily due to
the increase in long-term unsecured debt the Company incurred during 1998 to
fund its operations and the acquisition of 4-Sight, consisting primarily of the
Company's 13.25% Senior Discounted Notes due 2005 (the "1998 Notes") in the
amount of $138,975,368. At March 31, 1999, equipment financing borrowings were
$20,450,401 compared to $10,424,421 at March 31, 1998 an increase of $10,025,980
or 96.2%. In the three month period ended March 31, 1999, the Company had also
incurred interest expense in the amount of $2,796,500 in connection with the
13.25% Subordinated Unsecured Convertible Note due August 28, 2005 (the "1999
MCI WorldCom Convertible Note").
Interest income for the three month period ended March 31, 1999 was
$199,813, compared to $293,671 for the three month period ended March 31, 1998,
a decrease of $93,858, or 32.0%. The decrease in interest income was primarily
due to the decrease in the Company's average monthly balance of cash and cash
equivalents, which was $26,334,201 for the three month period ended March 31,
1999 compared to the average monthly balance of $52,243,321 for the three month
period ended March 31, 1998. The Company invests a large portion of its cash
proceeds into highly liquid investments with staggered maturities ranging from
30 to 180 days, corresponding with the Company's operational cash requirements.
These investments consist of high-grade (A1/P1) rated commercial paper,
certificates of deposits and securities backed by the United States government.
The cost of hardware and software sales for the three month period ended
March 31, 1999 was $822,779, compared to $261,000 for the three month period
ended March 31, 1998, an increase of $561,779, or 215.2%. These costs are
directly related to the software and hardware sales revenue associated with the
acquisition of 4-Sight and its subsequent integration into WAM!NET U.K.
Income Taxes. For the three month period ended March 31, 1999, the Company
experienced net losses of $36,812,339 and paid no income taxes. These losses are
available to offset future taxable income through the year 2014 and are subject
to the limitations of Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"). These limitations may result in expiration of net
operating loss carry-forwards before they can be utilized.
Liquidity and Capital Resources
The Company continues to incur substantial operating losses as a direct
result of its continuing efforts to expand the WAM!NET Network throughout North
America, Europe and Asia. Net losses since the Company's inception have resulted
in an accumulated deficit balance of approximately $201.2 million. Though these
losses are not unexpected, the Company's ability to continue to fund these
operating losses and its ability to continue to purchase and install the
required WAM!NET Network hardware to provide the WAM!NET Service to its
increasing global customer base depends on its ability to obtain additional
sources of funds for working capital during 1999. Sources of such funds which
the Company will continue to seek include but are not limited to long- and
short-term secured equipment financing from vendors, financial institutions and
banks, long-term unsecured senior debt, long-term property mortgages on its
existing facilities and the issuance of the Company's equity securities. Though
the Company believes it can secure additional funding by one or more of the
above sources, there can be no assurances that such funding can be obtained.
From inception through March 31, 1999, the Company has derived substantially all
of its operating capital from the issuance of short- and long-term debt and
equity instruments. At March 31, 1999, the Company had a total of approximately
$216.3 million in long-term debt, of which approximately $8.3 million becomes
payable in the next twelve months.
The Company's available operating capital as of March 31, 1999, as
evidenced by cash, cash equivalent investments and commitments from financial
institutions for additional equipment financing, totaled approximately $50
million. If additional sources of funding cannot be obtained during the course
of the Company's fiscal year ending December 31, 1999, due to a constraint of
available operating capital, the Company will be required to significantly slow
its global market penetration, network growth and product development. In
addition, should the Company be unable to generate cash to fund its operations
and network growth during 1999, management expects
-14-
<PAGE>
that it would implement plans to reduce cash expenditures. The reduction of cash
expenditures would have a material adverse effect on the Company's global
revenue and network expansion plans. The Company believes that the most evident
and clearly measurable impact resulting from these reductions would be a
significant decrease of installed network customers for the year ending December
31, 1999. A material reduction in the base of installed customers would slow the
growth of the Company's recurring revenue stream, which is dependent upon
customer utilization of the Company's excess network capacity. Reductions in
network utilization would directly impact the Company's network revenue and
could ultimately defer overall profitability of the Company's service and
products. Another possible impact of the above outlined expenditure reductions,
would be potentially material delays in software product development, the impact
of which could further erode customer retention and network utilization.
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 $171.7 million net cash
proceeds from the issuance of long- and short-term debt and collateralized
equipment financing. An additional $61.9 million of net cash proceeds has been
received from the sale of equity securities. The Company has utilized these
proceeds by investing $77.7 million into its globally expanding WAM!NET Network
and investing $20.3 million to acquire 4-Sight. Since inception, the Company
has also expended $140.6 million to fund its globally expanding operating
activities. To date, the Company has not generated positive cash flow 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 short- and long-term debt and equity
instruments.
During September of 1997, the Company established the revolving credit
facility (the "Revolving Credit Facility") pursuant to an agreement with the
First National Bank of Chicago, the proceeds of which were 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. MCI WorldCom guaranteed the Company's obligations under the Revolving
Credit Facility. At March 31, 1999, the Company had $24.5 million borrowed under
the Revolving Credit Facility. Interest and principal on the Revolving Credit
Facility become payable in September 1999. Borrowings by the Company under the
Revolving Credit Facility require the prior consent of MCI WorldCom. The Company
expects to repay all amounts outstanding under the Revolving Credit Facility
prior to September 1999.
On January 13, 1999, the Company issued the 1999 MCI WorldCom Convertible
Note pursuant to the Subordinated Unsecured Convertible Note and Warrant
Purchase Agreement by and between MCI WorldCom and the Company, dated January
13, 1999 (the "1999 MCI WorldCom Convertible Note Purchase Agreement"). Under
the 1999 MCI WorldCom Convertible Note the Company borrowed $10.0 million on
January 13, 1999 and $15.0 million on March 4, 1999. The 1999 MCI WorldCom
Convertible Note automatically converted into 2,196,317 shares of the Company's
Class D Convertible Preferred Stock, par value $.01 per share (the "Class D
Preferred Stock"), immediately prior to the closing of the SGI Investment. The
Class D Preferred Stock is immediately convertible in the aggregate into
approximately 2.9% of the Common Stock (calculated on a fully diluted basis). In
connection with the issuance of the 1999 MCI WorldCom Convertible Note, the
Company also (i) issued warrants to purchase 150,000 shares of Common Stock at
an exercise price of $.01 per share after April 30, 1999 and exerciable until
April 30, 2004 and (ii) expects to issue warrants to purchase 200,000 shares of
Common Stock at an exercise price of $.01 per share, (together the "1999
MCI WorldCom Warrants"). The Class D Preferred Stock and the 1999 MCI WorldCom
Warrants are subject to certain registration rights.
On March 4, 1999, the Company consummated the SGI Investment pursuant to
which SGI purchased 5,710,425 shares of the Company's Class B Convertible
Preferred Stock, par value $.01 per share (the "Class B Preferred Stock"), and
878,527 shares of the Company's Class C Convertible Preferred Stock, par value
$.01 per share (the "Class C Preferred Stock" and together with the Class B
Preferred Stock, the "SGI Preferred Stock"). The SGI Preferred Stock is subject
to certain registration rights. The holders of the Class B Preferred Stock,
voting separately as a class, have the right to designate one member of the
Company's Board of Directors. The SGI Preferred Stock is convertible in the
aggregate into approximately 8.7% of the Common Stock (calculated on a fully
-15-
<PAGE>
diluted basis); provided that the Class C Preferred Stock may not be converted
until the earlier of September 4, 2000 or a public offering of the Common Stock
at a minimum specified price. The aggregate consideration received by the
Company in the SGI Investment was $75.0 million, of which $35.0 million was paid
in cash and $40.0 million was paid by transfer to the Company of a corporate
campus office facility located in Eagan, Minnesota.
In connection with the SGI Investment, SGI and the Company entered into the
Preferred Provider Agreement pursuant to which both parties have developed a
list of existing SGI customers in the entertainment industry which the Company
believes represents a significant sales revenue opportunity for it over the next
three years. The Company and SGI have agreed to jointly develop a marketing,
sales and implementation plan to address these accounts, including field
resource commitments, compensation to SGI for field activities and professional
services, and such other matters applicable to the sale of the WAM!NET Service
to such potential customers. In addition, SGI and the Company intend to explore
a broader strategic relationship that the Company believes will enable it to
obtain the benefit of SGI's presence in the entertainment industry and other
selected commercial accounts.
Pursuant to the Preferred Provider Agreement, the Company has agreed to
purchase hardware, software and services from SGI over a four year period with a
firm commitment to purchase $35 million during the period commencing December 1,
1998 and ending December 31, 2000. The Company has the ability to purchase such
products at prices based on SGI's most favored pricing models. The Company
believes that the discounted prices, reduced commissions and lower servicing
fees for such products will result in lower network operations expenses in the
future.
Item 3--Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Rates. The Company's revenue originating outside
the U.S. for the period ending March 31, 1998 was 38% of total revenues. As the
Company expands its operations into countries outside of the U.S., 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 the Company 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. In addition, the Company may acquire interests in
companies that operate in countries where the removal or conversion of currency
is restricted. The Company cannot be certain that countries that do not have
such restrictions regarding removal or conversion of currency at the time it
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. The Company does not currently hedge against such fluctuations.
Gains and losses from such fluctuations have not been material to the Company's
consolidated results of operations. A 10% shift in such local currencies against
the U.S. dollar as of March 31, 1999 would not have had a material effect on the
Company's pretax earnings over the fiscal quarter ending March 31, 1999.
Currently, all of the Company's contracts are denominated in U.S. dollars except
for those contracts entered into by WAM!NET U.K. which denominates all of its
contracts in pounds sterling other than its German sales contracts which are
denominated in Euro, the single European currency.
The Company's international business is subject to risks typical of an
international business, including, but not limited to: differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially and adversely impacted by
changes in these or other factors.
Interest Rates. The Company invests its cash in a variety of financial
instruments, including bank time deposits and fixed rate obligations of
governmental entities and agencies. These investments are denominated in U.S.
dollars. Cash balances in foreign currencies overseas are operating balances and
are invested in short-term time deposits of the local operating bank.
-16-
<PAGE>
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates. Due in part to these
factors, the future investment income of the Company may fall short of
expectations due to changes in interest rates, or the Company may suffer losses
in principal if forced to sell securities which have seen a decline in market
value due to changes in interest rates. The Company's investment securities are
held for purposes other than trading.
The Company is exposed to market risk from changes in the interest rates on
certain of its outstanding debt. The outstanding loan balance under the
Revolving Credit Facility bears interest at a variable rate based on prevailing
short-term interest rates in the U.S. and Europe. Based on the average
outstanding bank debt for the period ended March 31, 1999, a 100 basis point
change in interest rates would not change interest expense by a material amount.
For fixed rate debt such as the Company's 1998 Notes, interest rate changes
effect the fair market value thereof, but do not impact earnings or cash flows.
Part II--OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
(c) The information required by this Item 2 of Part II has been previously
reported in Item 2 of Part I of this Form 10-Q, and is incorporated herein by
reference. For a complete discussion of the transactions involving recent sales
of unregistered securities of the Company please see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The sale and purchase of the 1999 MCI WorldCom Note and the conversion
thereof into the Class D Preferred Stock and the sale and purchase of the Class
B Preferred Stock, the Class C Preferred Stock and the 1999 MCI WorldCom
Warrants were exempt from the registration requirements of Section 5 of the
Securities Act of 1933 (the "Securities Act") pursuant to the provisions of
Section 4(2) of the Securities Act.
Item 6--Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index
(b) The Company filed the following Current Reports on Form 8-K during the
three-month period ending March 31, 1999:
Current Report on Form 8-K, filed on March 9, 1999, announcing the
consummation of the SGI Investment.
-17-
<PAGE>
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 17, 1999
By: /s/ Bradley E. Sparks
----------------------------
Bradley E. Sparks
Executive Vice President and Chief
Financial Officer
-18-
<PAGE>
EXHIBIT INDEX
Item
Number Description
- ------ -----------
2.1 (1) Agreement for the Sale and Purchase of the entire issued share
capital of WAM!NET U.K. Limited dated February 11, 1998, among
the Company, WAM!NET (UK) Limited and the Selling Shareholders
listed therein.
2.2 (1) 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 (1) Amended and Restated Articles of Incorporation of the Company.
3.2 (1) By-Laws of the Company.
4.1 (1) Indenture dated as of March 5, 1998, between the Company, as
Issuer, and First Trust National Association, as Trustee.
4.2a (1) Certificate for the Rule 144A Original Notes ($200,000,000).
4.2b (1) Certificate for the Rule 144A Original Notes ($8,030,000).
4.3 (1) Certificate for the Regulation S Original Notes.
4.4 (1) Certificate for the Rule 144A Warrants.
4.5 (1) Certificate for the Regulation S Warrants.
4.6a (1) Rule 144A Unit Certificate. (200,000 Units)
4.6b (1) Rule 144A Unit Certificate. (8,030 Units)
4.7 (1) Certificate for the Regulation S Units.
4.8 (1) Form of Certificate for the Exchange Notes (incorporated herein
by reference and included in Exhibit 4.1 to the Company's
Registration Statement on Form S-4 filed with Securities and
Exchange Commission on May 28, 1998).
4.9 (1) Common Stock Certificate.
4.10 (1) 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 (1) 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 (1) 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.
4.13 (2) Certificate Representing 100,000 Shares of Class A Preferred
Stock of the Company issued to WorldCom Inc. on December 16, 1996
(Incorporated herein by reference to exhibit 10.5 of the Company's
Registration Statement on Form S-4 (File No. 333-53841) filed with
the Securities and Exchange Commission on May 28, 1998).
4.14 (2) Warrants to purchase 4,157,500 Shares of Common Stock of the
Company exercisable on or before December 31, 2000, issued to
WorldCom Inc. on December 16, 1996 (Incorporated herein by
reference to exhibit 10.6 of the Company's Registration Statement
on Form S-4 (File No. 333-53841) filed with the Securities and
Exchange Commission on May 28, 1998).
4.15 (2) Certificate for 13.25% Subordinated Unsecured Convertible Note due
August 28, 2005 ($25,000,000 Note) issued to MCI WorldCom, Inc.
on January 13, 1999.
4.16 (2) 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. on September 26, 1997 (Incorporated herein by
reference to exhibit 10.9 of the Company's Registration Statement
on Form S-4 (File No. 333-53841) filed with the Securities and
Exchange Commission on May 28, 1998).
4.17 (2) Subordinate Unsecured Convertible Note and Warrant Purchase
Agreement between the Company and MCI WorldCom, Inc. dated
January 13, 1999.
-19-
<PAGE>
4.18 (2) Preferred Stock Purchase Agreement by and between the Company and
Silicon Graphics, Inc. dated as of March 3, 1999.
4.19 (2) Certificate for 150,000 Warrants to purchase shares of Common
Stock for the purchase price of $.01 per share dated
January 13, 1999.
4.20 (2) Certificate of Designation of Rights and Preferences of Class A
Preferred Stock of the Company filed with the Secretary of State
of the State of Minnesota on March 4, 1999, as corrected and filed
with the Secretary of State of this State of Minnesota on
March 5, 1999.
4.21 (2) Certificate of Designation of Rights and Preferences of Class
B Convertible Preferred Stock of the Company filed with the
Secretary of State of the State of Minnesota on March 4, 1999.
4.22 (2) Certificate of Designation of Rights and Preferences of Class
C Convertible Preferred Stock of the Company filed with the
Secretary of State of the State of Minnesota on March 4, 1999.
4.23 (2) Certificate of Designation of Rights and Preferences of Class
D Convertible Preferred Stock of the Company filed with the
Secretary of State of the State of Minnesota on March 4, 1999.
4.24 (2) Certificate representing 115,206 shares of Class A Preferred Stock
of the Company issued to MCI WorldCom. Inc. on March 4, 1999.
4.25 (2) Certificate representing 5,710,425 shares of Class B Convertible
Preferred Stock of the Company issued to Silicon Graphics, Inc.
on March 4, 1999.
4.26 (2) Certificate representing 878,527 shares of Class C Convertible
Preferred Stock of the Company issued to Silicon Graphics, Inc.
on March 4, 1999.
4.27 (2) Certificate representing 2,196,317 shares of Class D Convertible
Preferred Stock of the Company issued to MCI WorldCom. Inc.
on March 4, 1999.
4.28 (2) Stockholders Agreement by and among the Company, Silicon
Graphics, Inc. and MCI WorldCom, Inc. dated as of March 4, 1999.
4.29 (2) Class A Preferred Stock Exchange Agreement by and between the
Company and MCI WorldCom, Inc. dated as of March 4, 1999.
4.30 (2) Class D Preferred Stock Conversion Agreement by and between the
Company and MCI WorldCom, Inc. dated as of March 4, 1999.
10.1 (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 (1) Ten Percent Convertible Note Purchase Agreement between the
Company and WorldCom Inc. dated September 12, 1996 ($5,000,000
Note).
10.3 (1) Preferred Stock, Subordinated Note and Warrant Purchase Agreement
between the Company and WorldCom Inc. dated November 14, 1996.
10.4 (1) $28,500,000 Seven Percent Subordinated Note due December 31, 2003,
payable to WorldCom Inc.
10.5 Intentionally omitted.
10.6 Intentionally omitted.
10.7 (1) Right of Refusal Agreement Among WorldCom Inc., Edward
Driscoll III and Alan L. Witters dated December 16, 1996.
10.8 (1) Guaranty Agreement dated September 26, 1997, by and between the
Company and WorldCom Inc.
10.9 Intentionally omitted.
10.10 (1) 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 (1) Service Provision Agreement dated as of July 18, 1997, by and
between the Company and Time Inc.
10.12 (1) Standby Agreement dated as of July 19, 1997 by and between
WorldCom Inc. and Time Inc.
10.13 (1) Employment Agreement dated as of November 14, 1996, by and between
the Company and Edward J.
Driscoll III.
10.14 (1) Employment Agreement dated as of November 14, 1996, by and between
the Company and Allen Witters.
10.15 (1) Employment Agreement dated as of April 16, 1996, by and between
the Company and James R. Clancy.
10.16 (1) Employment Agreement dated as of May 10, 1995, as amended, by and
between the Company and Mark Marlow.
-20-
<PAGE>
10.17 (1) 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 MCI WorldCom, Inc.
(incorporated herein by reference to exhibit No. 4.17 to the
Company's Registration Statement on Form S-4 (File No. 333-53841)
filed with the Securities and Exchange Commission on May 28, 1998)
10.18 (1) 1994 Stock Option Plan
10.19 (1) Amended and Restated 1994 Stock Option Plan
10.20 (1) 1998 Combined Stock Option Plan.
10.21 (1) Agreement dated June 5, 1997 between the Company and WorldCom,
Inc. regarding data services
provided by WorldCom, Inc. to the Company.
10.22 Preferred Provider Agreement by and between the Company and
Silicon Graphics, Inc., dated as of March 4, 1999 (portions of
this exhibit have been ommitted pursuant to a request for
confidential treatment and have been filed with the Securities
Commission under separate cover).
10.23 (2) Sale and Purchase Agreement by and between Silicon Graphics,
Inc., on behalf of itself and its wholly-owned subsidiary, Cray
Research, L.L.C., and the Company dated as of March 4, 1999.
10.24 (2) Lease by and between the Company and Silicon Graphics, Inc. on
behalf of itself and its
wholly-owned subsidiary, Cray Research, L.L.C., with respect to
the Company's corporate campus
facility located in Eagan, Minnesota dated as of March 4, 1999.
10.25 (2) Employment Agreement dated January 1, 1998 by and between John R.
Kauffman and the Company.
10.26 (2) Employment Agreement dated November 3, 1997 by and between
David T. Ottinger and the Company.
10.27 (2) Employment Agreement dated September 8, 1998 by and between the
Bradley E. Sparks and the Company.
27.1 Financial Data Schedule.
- ----------
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-4 (File No. 333-53841), filed with the SEC on May 28, 1998.
(2) Incorporated herein by reference to the Company's Annual Report on Form
10-K, filed with the SEC on March 31, 1999.
-21-
<PAGE>
Exhibit 10.22
PREFERRED PROVIDER AGREEMENT
This Preferred Provider Agreement (this "Agreement") is entered into as of
March 4, 1999 ("Effective Date") by and between WAM!NET Inc., a Minnesota
corporation having a place of business at 6100 West 110th Street, Minneapolis,
MN 55438 ("WNI"), and Silicon Graphics, Inc. a Delaware corporation having a
place of business at 2011 North Shoreline Blvd., Mountain View, CA 94043
("SGI").
RECITALS
WHEREAS, WNI and SGI desire to establish a strategic relationship, pursuant
to which SGI will invest in WNI pursuant to the terms of that certain Preferred
Stock Purchase Agreement (together with all agreements, instruments and
documents contemplated thereby and set forth as Exhibits thereto) of even date
herewith, WNI will purchase products, support and services from SGI, and SGI
will promote the services of WNI to SGI's customers;
WHEREAS, WNI desires to purchase certain products (whether or not
originally manufactured by SGI), support and services of SGI, including, without
limitation, computer hardware, storage, peripheral devices, network devices,
integrated products, software, technical and maintenance support, and custom
engineering and professional services (collectively, "SGI Products"); and
WHEREAS, WNI desires that SGI promote the sale of certain services of WNI,
including, without limitation, WAM!NET, WAM!BASE and entertainment specific
services ("WNI Services").
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, SGI and WNI, for themselves, their
successors and permitted assigns, hereby agree as follows:
ARTICLE I.
SGI PRODUCTS
1.1. General. WNI will, over a four (4) year period commencing January 1,
1999 and ending December 31, 2002 (the "Purchase Period"), purchase SGI Products
as provided in Sections 1.2 through 1.5 below. The parties agree that with
respect to purchases of SGI Products, and subject to the terms and conditions of
this Agreement, WNI will treat SGI as the preferred provider of such goods and
services and SGI will treat WNI as a preferred customer for such goods and
services.
1.2. Firm Commitment. WNI shall have a firm and unconditional obligation to
purchase from SGI not less than $35 million of SGI Products during the period
commencing December 1, 1998 and ending December 31, 2000 (the "Firm
Commitment"). If WNI fails to satisfy its purchase commitment during such
period, as evidenced by its issuance to SGI of confirmed, irrevocable,
noncancellable purchase orders for an aggregate amount at least equal to the
Firm Commitment, then WNI shall pay to SGI a sum equal to 10% of the remaining
outstanding balance of the Firm Commitment.
1.3. Computer Hardware and Software Product Pricing; Preferred Provider.
1.3.1. Standard Product Pricing. With respect to SGI's standard
hardware and software products, and the associated standard customer
support programs, listed in SGI's published Price Book
<PAGE>
(the "Standard Products"), the pricing models SGI offers to WNI during the
Purchase Period will be based upon SGI's most favored pricing models (by
product) applicable to resellers (excluding US government, educational
institutions and associated agencies) with aggregate purchases at least
equal to the Firm Commitment.
1.3.2. Modified Product Pricing. With respect to Standard Products and
the associated customer support offerings that SGI agrees to modify or
build in accordance with WNI's stated requirements (the "Modified
Products"), the pricing that SGI offers to WNI during the Purchase Period
will be ** .
1.3.3. Limited Exclusive Provider. WNI agrees to purchase computer
hardware, software and support products of the type included within the
Standard Products and Modified Products, other than SGI Services (as
defined below), solely from SGI during the Purchase Period, subject to the
following terms and conditions: (a) the Standard and Modified Products then
being offered by SGI shall be suitable for WNI's requirements (a product is
suitable if it conforms to the specifications set by WNI for the specific
product); and (b) SGI's pricing to WNI for Standard and Modified Products
shall be at Competitive Prices (as defined below); provided however, that,
if SGI's pricing is not at Competitive Prices with regard to the applicable
Standard and Modified Products, SGI shall then have a period of seven (7)
business days in its sole discretion to reduce its pricing to Competitive
Prices and notify WNI of such price reduction.
1.3.3.1. Standard Products. For the purposes of this Section
1.3.3, "Competitive Prices" as it relates to Standard Products means
(i) with regard to servers, supercomputers, workstations and related
software, pricing over a six-month period that is not more than ** of
the price offered by a third-party vendor for products substantially
similar to the applicable Standard Products, and (ii) with regard to
storage, personal computers and related software, pricing over a
six-month period that is not more than ** of the price offered by a
third-party vendor for products substantially similar to the
applicable Standard Products.
1.3.3.2. Modified Products. For the purposes of this Section
1.3.3, "Competitive Prices" as it relates to Modified Products means
pricing and other material terms and conditions that are **.
1.4. SGI Services. With respect to technical consulting, application
development, hardware design, product development, custom manufacturing,
integration, custom product support and related professional and custom
engineering services as they pertain to Standard and/or Modified Products
offered by SGI (the "SGI Services"), WNI agrees that it will treat SGI as a
preferred provider and shall provide SGI with the opportunity to bid on any WNI
requirements or specifications for services similar to the SGI Services. **
1.5. Terms and Conditions. The terms and conditions governing the purchase
of the SGI Products by WNI will be set forth in the following agreements, as the
same may be amended, modified and supplemented from time to time: (a) the Master
Purchase Agreement , a general form of which is attached hereto as Exhibit A and
the specific terms of which shall be negotiated in good faith by the parties;
(b) with respect to Standard Products installed at WNI's facilities only, a
Customer Support Agreement, a general form of which is attached hereto as
Exhibit B and the specific terms of which shall be negotiated in good faith by
the parties; (c) a Master Services Agreement, the general terms of which
- --------
** Confidential information omitted and filed separately with the Securities
and Exchange Commission.
<PAGE>
are described in Exhibit C and the specific terms of which shall be negotiated
in good faith by the parties; and (d) with respect to Modified Products,
hardware and software products developed in connection with the Services and
which are installed at WNI's customers' facilities, a Field Support Agreement,
the general terms of which are described in Exhibit D and the specific terms of
which shall be negotiated in good faith by the parties.
1.6. SGI Indemnity for Third Party Suppliers. In the event that SGI engages
third parties in order to provide the SGI Products, SGI agrees to indemnify and
hold harmless WNI and any of its employees, directors, officers, agents or other
representatives in connection with any loss, damage or expense (including
reasonable attorneys' fees) resulting from any claim of a third party related to
the foregoing to the extent such claim arises as a result of SGI's negligence or
willful misconduct.
ARTICLE II.
WNI SERVICES
2.1. General. SGI and WNI have developed a list of existing SGI customers
in the entertainment industry which the parties believe in good faith represent
a sales revenue opportunity for WNI ** (based upon WNI list prices) over the
three (3) year period commencing on January 1, 1999 (the "Joint Customers"). WNI
and SGI will jointly develop a marketing, sales and implementation plan to
address these accounts, including field resource commitments, compensation to
SGI for field activities and professional services, and such other matters
applicable to the sale of WNI Services to such Joint Customers. In addition, SGI
and WNI will explore a broader strategic relationship that is intended to enable
WNI to obtain the benefit of SGI's presence in the entertainment industry, other
selected commercial accounts and the U.S federal government sector. Such
relationship will be embodied in one or more further agreements to be negotiated
in good faith between the parties.
ARTICLE III.
RESPONSIBLE EXECUTIVES AND MEETINGS
3.1. Responsible Executives. Upon execution of this Agreement, and from
time to time as appropriate, each party shall designate in a writing to the
other its executives responsible for managing the Preferred Provider
relationship described in this Agreement, as well as for discussing any emerging
issues concerning the relationship (the "Responsible Executives"). SGI's
Responsible Executives initially shall include a Senior Vice President from its
Server and Supercomputing Business; a Senior Vice President or Vice President
from its Customer and Professional Services Division; and a Senior Vice
President or Vice President from its Worldwide Sales and Marketing Division.
WNI's Responsible Executives initially shall include its Chief Executive
Officer, Chief Operating Officer and Chief Technical Officer. In addition, each
party shall designate one Responsible Executive who shall serve as the primary
point of contact for the other party with respect to the relationship described
in this Agreement.
3.2. Quarterly Management Meetings. During the Purchase Period, the
Responsible Executives of WNI and SGI shall meet on a quarterly basis, at times
and places to be agreed upon, to review the status of the relationship between
the parties, including forecasts for and analysis of sales of WNI Services and
purchases of SGI Products for each of the next four quarters and the remainder
of the Purchase Period. At least five (5) business days prior to a meeting, each
party shall submit an agenda of issues proposed to be discussed at the meeting.
Twice yearly at such meetings, the parties shall review
- ----------
** Confidential information omitted and filed separately with the Securities
and Exchange Commission.
<PAGE>
SGI's pricing with respect to Standard and Modified Products as set forth in
Section 1.3.3 above. The parties shall bear their respective costs and expenses
in connection with attending and participating at all such meetings.
ARTICLE IV.
CONFIDENTIALITY AND PUBLICITY
4.1. Confidentiality.
(a) "Confidential Information" means (i) any information relating to either
party's products, designs, schematics, diagrams, drawings, costs, prices,
finances, marketing or business plans, business opportunities, customers,
partners, research, development, know-how or trade secrets; (ii) all information
that, by the nature of the circumstances surrounding the disclosure, ought in
good faith to be treated as confidential; and (iii) the terms and conditions of
this Agreement. Confidential Information may include confidential, proprietary
and/or trade secret information that is owned by third parties, which have
granted sufficient rights to a party to permit that party to provide information
to the other party hereunder.
(b) Disclosure of Confidential Information. Each party agrees that it may
be desirable to disclose to the other party Confidential Information.
Confidential Information is provided hereunder solely for the purpose of
facilitating the relationship described in this Agreement and the parties agree
to maintain the Confidential Information in confidence; not to use any
Confidential Information for any purpose except as contemplated by this
Agreement; and not to disclose, or permit the disclosure of, the Confidential
Information to any third party. The use and access to Confidential Information
shall be limited by the parties to their respective directors, officers,
employees, counsel, accountants and agents who need to know such Confidential
Information, provided that the party so disclosing such information shall advise
each such recipient of the confidentiality obligations under this Article IV.
The party receiving any Confidential Information (the "Recipient") shall
reproduce and include in all copies of Confidential Information prepared by
Recipient the copyright notices and proprietary legends of the party disclosing
such information (the "Discloser") as they appear therein as furnished to
Recipient by Discloser. Recipient shall not remove any proprietary, copyright,
mask work, trademarks or other legend from any form of Confidential Information.
The parties acknowledge and agree that harm not adequately compensable might
result from unauthorized disclosure of Confidential Information. Either party
may seek injunctive relief, without posting a bond, if the other party breaches
its obligations of confidentiality as set forth in this Article 4.
(c) Exclusions to Obligations of Confidentiality. Recipient shall have no
obligation to maintain the confidentiality of information provided by the other
party that: (a) is known to Recipient at the time of disclosure; (b) is
independently developed by Recipient provided Recipient can show by written
evidence to Discloser's reasonable satisfaction that such development was
accomplished by or on behalf of Recipient without the use of or any reference to
Confidential Information supplied by the other party; (c) becomes rightfully
known to Recipient from a source other than the other party without restriction
on subsequent disclosure or use; (d) is or becomes a part of the public domain
through no wrongful act of Recipient; or, (e) is rightfully received by the
Recipient from a third party without any duty of confidentiality. Further,
Recipient may disclose Confidential Information if it is advised by counsel that
such disclosure is required, pursuant to law, regulation, judicial or government
request, requirement or order, provided that Recipient gives the other party
prompt and sufficient prior notice to contest, or to seek a protective order
restricting further disclosure of Confidential Information provided in response
to, such request, requirement or order.
<PAGE>
(d) No Ownership Interest Transferred. Recipient acknowledges that it is
granted only the limited right to use Confidential Information provided pursuant
to this Agreement. Neither party transfers to the other any right of ownership
in or title to any Confidential Information or other intellectual property
hereunder, either expressly, by implication, estoppel or otherwise.
4.2. Publicity. Unless otherwise agreed by the parties in writing, no press
releases, conferences, interviews or other public announcements, in whatever
form, shall be made or given by either party regarding the subject matter of
this Agreement. The parties agree to cooperate with each other in promoting the
existence of this strategic relationship and in otherwise supporting each
other's marketing and public relations efforts. Each party also agrees that,
upon the reasonable request of the other party, it will provide customer
satisfaction references with respect to the other party provided such references
can be made in good faith.
ARTICLE V.
MISCELLANEOUS
5.1. No Agency. Nothing in this Agreement shall constitute or be deemed to
constitute a partnership or joint venture between the parties hereto or
constitute or be deemed to constitute any party the agent or employee of the
other party for any purpose whatsoever and neither party shall have authority or
power to bind the other or to contract in the name of, or to create a liability
against, the other in any way or for any purpose.
5.2. Entire Agreement. This Agreement and any other writing signed by the
parties that specifically references this Agreement constitute the entire
agreement between the parties with respect to the subject matter hereof and
supersede all prior agreements, understandings and negotiations, both written
and oral, between the parties with respect to the subject matter hereof. This
Agreement is not intended to confer upon any person other than the parties
hereto and their successors and permitted assigns any rights or remedies
hereunder.
5.3. Termination. After the end of the Purchase Period, either party may
terminate this Agreement upon thirty (30) days prior written notice to the
other.
5.4. Information. Subject to applicable law and privileges, each party
hereto covenants and agrees to provide the other party with all information
regarding itself and transactions under this Agreement that the other party
reasonably believes are required to comply with all applicable federal, state,
county and local laws, ordinances, regulations and codes, including, but not
limited to, securities laws and regulations.
5.5. Mediation. SGI and WNI agree to negotiate in good faith in an effort
to resolve any dispute related to this Agreement that may arise between the
parties, prior to the institution of litigation. If the dispute cannot be
resolved promptly by negotiation, then the Responsible Executives shall meet at
a time and place they mutually agree to negotiate in good faith to resolve the
dispute. If the dispute is not resolved by such negotiation among the
Responsible Executives, either party may give the other party written notice
that the dispute should be submitted to mediation. The mediation shall include
the Responsible Executives and also at least one other executive from each
party. Promptly thereafter, a mutually acceptable mediator shall be chose by the
parties, who shall share the cost of mediation services equally. If the dispute
has not been resolved by mediation within 60 days after the date of written
notice requesting mediation, then either party may initiate litigation and
pursue all and any remedies at law or at equity that such party is entitled to.
Nothing contained in this paragraph shall prohibit a party, in the case of
irreparable harm, from seeking an immediate injunction or other provisional
remedy.
<PAGE>
5.6. Notices. Any notice, instruction, direction or demand under the terms
of this Agreement required to be in writing will be duly given upon delivery, if
delivered by hand, facsimile transmission, or US mail, to the following
addresses:
(a) If to WNI, to:
WAM!NET INC.
6100 West 110th Street
Minneapolis, MN 55438
Attention: President
Telephone: 612-886-5100
Telefax: 612-887-2165
With a copy to:
Willkie Farr & Gallagher
787 Seventh Avenue
New York, NY 10019-6099
Attention: Daniel D. Rubino
Telephone: 212-728-8000
Facsimile: 212-728-8111
(b) If to SGI, to:
Silicon Graphics, Inc.
2011 North Shoreline Blvd.
Mountain View, CA 94043
Attention: Neil McGowan
Telephone: 650-933-3799
Telefax: 650-932-0208
With a copy to: SGI Legal Services
or to such other addresses or telecopy numbers as
may be specified by like notice to the other parties.
5.7. Governing Law. This Agreement shall be construed in accordance with
and governed by the substantive internal laws of the State of Minnesota, without
regard to its choice of law rules.
5.8. Severability. If any provision of this Agreement shall be invalid or
unenforceable, such invalidity or unenforceability shall not render the entire
Agreement invalid. Rather, the Agreement shall be construed as if not containing
the particular invalid or unenforceable provision, and the rights and
obligations of each party shall be construed and enforced accordingly.
5.9. Survival. The parties' obligations under Articles IV and V shall
survive any termination and/or expiration of this Agreement.
5.10. Amendment. This Agreement may only be amended by a written agreement
executed by both parties hereto.
5.11. Counterparts. This Agreement may be executed in separate
counterparts, each of which shall be deemed an original and all of which, when
taken together, shall constitute one agreement.
5.12. Assignment. No assignment of rights or delegation of duties arising
under this Agreement may be made by any party without the prior written consent
of the other party, which consent may not be unreasonably withheld or delayed.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their duly authorized representatives.
WAM!NET Inc.
By: /s/ Allen Witters
---------------------------
Name: Allen Witters
Title: Chief Technology Officer
Silicon Graphics, Inc.
By: /s/ William M. Kelley
---------------------------
Name: William M. Kelley
Title: Senior Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 30,171
<SECURITIES> 0
<RECEIVABLES> 4,554
<ALLOWANCES> 546
<INVENTORY> 1,744
<CURRENT-ASSETS> 39,470
<PP&E> 127,116
<DEPRECIATION> 21,403
<TOTAL-ASSETS> 190,540
<CURRENT-LIABILITIES> 26,266
<BONDS> 208,006
1,152
88
<COMMON> 93
<OTHER-SE> (44,884)
<TOTAL-LIABILITY-AND-EQUITY> 190,540
<SALES> 1,739
<TOTAL-REVENUES> 4,867
<CGS> 823
<TOTAL-COSTS> 7,300
<OTHER-EXPENSES> 24,488
<LOSS-PROVISION> 1,069
<INTEREST-EXPENSE> 10,074
<INCOME-PRETAX> (36,795)
<INCOME-TAX> 0
<INCOME-CONTINUING> (36,795)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,350)
<EPS-PRIMARY> (4.01)
<EPS-DILUTED> (4.01)
</TABLE>
