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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 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 No.: 333-53841
WAM!NET INC.
(Exact Name of Registrant as specified in its charter)
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Minnesota 41-1795247
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
6100 West 110th Street
Minneapolis, Minnesota 55438
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 886-5100
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 for such shorter period that the
Registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. X No
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As of March 15, 1999, there were 9,297,427 shares of the Company's Common
Stock outstanding. The aggregate market value of the voting stock of the
company held by non-affiliates is $36,522,096.
Documents Incorporated by Reference--Not applicable.
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FORM 10-K
TABLE OF CONTENTS
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ITEM PAGE
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PART I
ITEM 1. BUSINESS........................................................................................ 1
ITEM 2. PROPERTIES...................................................................................... 24
ITEM 3. LEGAL PROCEEDINGS............................................................................... 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................. 25
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................... 25
ITEM 6. SELECTED FINANCIAL DATA......................................................................... 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................... 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................................... 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............ 39
PART II
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................. 40
ITEM 11. EXECUTIVE COMPENSATION.......................................................................... 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................. 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................. 51
PART III
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K................................ 57
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS.................................................. 62
SIGNATURES - WAM!NET INC.................................................................................. 63
FINANCIAL STATEMENT SCHEDULES............................................................................. F-1
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PART I
ITEM 1. BUSINESS.
OVERVIEW
The Company provides a managed, high speed, digital data delivery network
service (the "WAM!NET(R) 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, the 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.
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.
Since March 1996, when the Company first commercially released and
commenced marketing the WAM!NET Service to the Graphic Arts industry, the
Company has a customer base of more than 1,450 customer locations. In November
1997, the WAM!NET Service received an award from the Graphic Arts Technical
Foundation (an independent trade association) for developing the product or
service that will most likely change the manner in which the Graphic Arts
industry conducts business. WAM!NET customers include Graphics Arts industry
leaders such as Time Inc., RR Donnelley & Sons Company ("RR Donnelley"), Quad
Graphics, The Walt Disney Company ("Disney"), J.C. Penney Company and Fox
Broadcasting Company ("Fox Broadcasting"). The WAM!NET Service was released in
the United Kingdom during the fourth quarter of 1998.
The Company has also developed and released to its Graphic Arts customers
advanced software applications, 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
commercially released to the
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printed catalog division of Sears and four of its primary vendors on November 1,
1998, and is expected to be released nationally in the second quarter of, 1999.
The WAM!NET Service was also released in the United Kingdom during the fourth
quarter of 1998.
The Company's diversified product line addresses the requirements of
customers exchanging 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.
RECENT DEVELOPMENTS
. SGI Investment. 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 also 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.
. Global Infrastructure Expansion. Building an international network to provide
trans-Atlantic, trans-Pacific and intra-European connectivity was one of the
Company's primary goals in 1998. At the beginning of 1998, the Company had 16
Distribution Hubs and two network operations centers ("NOCS") in North
America. During 1998, the Company added nine Distribution Hubs in North
America, seven in Europe, and one in Asia (Tokyo). The Company has also added
a third NOC in Brussels, Belgium, to support the Company's European
expansion.
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. Network Traffic Growth. As the Company has grown its installed base of
customers to over 1,450, the data traffic traveling over the WAM!NET Network
has increased more than six-fold in 1998 compared to 1997. During October
1998, the Company posted its first month of billable network traffic greater
than two terabytes (1 terabyte = 1 thousand gigabytes = 1 million megabytes),
up from 0.9 terabytes in January, 1998. Traffic for the month ended February
1999 totaled 2.5 terabytes.
. International Market Expansion. On March 13, 1998, the Company acquired 4-
Sight Limited, a private limited company incorporated under the laws of
England and Wales ("4-Sight"), which was subsequently integrated into Wam!Net
Limited, a wholly-owned subsidiary of the Company ("WAM!NET U.K."). With the
acquisition and integration of 4-Sight Limited into WAM!NET U.K., the WAM!NET
Service is being introduced in Europe and Japan. The Company is utilizing
WAM!NET U.K.'s existing distribution infrastructure in these regions to
convert the previous 4-Sight Limited business from selling software and
hardware bundles to selling WAM!NET service contracts. The Company believes
it can convince the more than 30,000 WAM!NET U.K. software users to upgrade
to the WAM!NET Service. In September 1998, the WAM!NET Service was launched
in the U.K., followed by Germany, the nations of the Benelux region and
Scandinavia in October and November 1998. In September 1998, the Company and
Hermstedt AG, the leading manufacturer of ISDN card equipment in Germany,
announced a joint, global marketing and promotion campaign for the WAM!NET
Service and Hermstedt hardware. The Company believes that this will enable it
to address Hermstedt's 50,000 installed customer base and provide an
opportunity to present those customers with the WAM!NET Service.
Additionally, in September 1998, WAM!NET entered into a co-marketing
agreement with Deutsche Telekom AG to provide the WAM!NET Service to Deutsche
Telekom customers in Germany. The combination of these two co-marketing
agreements, with the leading ISDN equipment manufacturer and telephony
services provider, respectively, places the Company in a strong position to
address the German market.
. Greater Network Accessibility. 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. Transmission Manager was released in
March of 1999.
. WAM!BASE. Sears' printed catalog division and four of its primary vendors
became the Company's first commercial WAM!BASE service customers on November
1, 1998, following a six month beta test. During the beta test, the amount of
data being moved over the WAM!NET Network resulting from digital images being
loaded into the WAM!BASE application grew from an average of three gigabytes
per month per customer to over 150 gigabytes in one month for one of the
primary vendors. During 1998, the Company also developed an innovative
distribution channel made up of "Digital Asset Management" ("DAM") firms who
will market the WAM!BASE service to their client base in the Graphic Arts
industry. In the third quarter of 1998, the Company signed-up over 35 DAM
distributors as part of the Company's "MasterMind" channel. The WAM!BASE
service is expected to be released nationally in the second quarter of 1999.
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. Entertainment Industry. 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 expects
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.
MARKET OPPORTUNITY
The Company believes that the increasing digitalization of work product and
workflow in data intensive and time sensitive industries is driving the demand
for managed, secure and reliable electronic data transportation and archiving
services. Based on information derived from independent studies, the Company
believes that the Graphic Arts industry will spend approximately $10.0 billion
between 1998 and 2000 on the digitalization of its production and printing
process, ranging from computer publishers investing at the desktop level to
commercial printers investing in computer-to-plate ("CTP") technology, which
facilitates a fully digital work product. Despite this movement toward the
digital transport and storage of data, many companies continue to use overland
or air courier services to deliver magnetic tape or optical disk copies of data
to others who desire access to such data due to the lack of reliable, cost
effective electronic transport mechanisms. This non-digital step results in a
method of transporting data which can both significantly lengthen production
cycle time and lead to possible errors. The same fundamental issues exist in the
movie, television and entertainment industry and in medical imaging. The Company
believes the current potential market for managed digital data transportation
and asset storage services is $4.3 billion and $2.3 billion, respectively, in
the Graphic Arts industry, and $1.8 billion and more than $10.0 billion,
respectively, in the entertainment industry.
The Company believes that existing electronic means for transporting large
digital data files have proven to be ineffective and/or prohibitively expensive
for most companies. Large files may take up to several days to transport using
the Internet or the fastest standard telephone modems (56,000 bps) and may lose
significant quality in transmission. The use of the Internet and standard
telephone modems can also lead to other significant disadvantages, most notably
high telephone usage charges and a lack of security, accountability and
reliability of transmission. Other dedicated technologies, such as point-to-
point telephone lines, offer more speed than the Internet (which is not managed)
or a standard telephone modem, but at a significantly higher cost. Such
technologies may also lead to data degradation and integration obstacles. Large
data files can be transported reliably in minutes over dedicated point to point
telephone lines (such as DS1 and DS3 lines); however, the substantial equipment
necessary at each dedicated connecting point and the sizable costs of leasing a
dedicated point to point telephone line makes this means of transport
uneconomical for most companies transporting large data files.
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COMPETITIVE ADVANTAGES
The Company believes it is uniquely positioned to meet the growing need for
a cost-effective and reliable means of electronically transporting, storing and
retrieving digital data based on the following competitive advantages:
. Purpose-Built Network. The WAM!NET Service allows customers to move large
data files via the WAM!NET Network, a global network that integrates the
Company's Industry Smart software applications with a purpose-built network
of Company-owned Distribution Hubs. The Distribution Hubs are interconnected
redundantly with high-bandwidth leased telephone circuits. The Company
currently maintains 33 Distribution Hubs, located in 23 major U.S. and
Canadian cities as well as in London and Manchester, England; Paris, France;
Amsterdam, The Netherlands; Stockholm, Sweden; Frankfurt, Hamburg and Munich,
Germany; Brussels, Belgium; and Tokyo, Japan. The Company operates three
mirrored NOCs in Minneapolis, Las Vegas and Brussels through which it
monitors all data transmission on a 24 hour a day, seven day a week basis.
The Company believes that the WAM!NET Network provides reliable and secure
data transmission with guaranteed delivery and no degradation in quality.
. Diversified Solutions. The Company offers its customers a choice of solutions
based on their particular needs. For example, the Company provides each data
intensive subscriber with all of the hardware, software, transmission
facilities and management services necessary to use the WAM!NET Service.
Installation of the service, which is performed on behalf of the Company by
national service providers, consists of connecting data intensive customers
to the nearest Distribution Hub through a Company-owned network access device
and an appropriate communications link (such as T1, ISDN, frame relay, SMDS,
ADSL or other suitable facility) matched to the customer's transfer speed and
throughput requirements. The WAM!NET Service is designed for ease of use,
with a point and click e-mail type interface and a simple "pay by the
megabyte" pricing model. The WAM!NET Service can also be accessed remotely by
less data-intensive customers, through a dial-up connection to the WAM!NET
Network. The Company's strategy is to offer customers the WAM!NET Service at
rates competitive with overland and air courier services furnished on an
annual or multi-year subscription basis. There is no up-front capital
investment by the customer, who is charged based on a minimum monthly usage
fee and volume of data sent per transaction.
. Industry Smart Applications. The Company collaborates with leading
participants in its target markets and designs software applications
addressing industry-specific workflow requirements. These Industry Smart
applications, combined with the guaranteed delivery of the WAM!NET Service,
allow work partners in separate locations to collaborate digitally in real
time. The WAM!PROOF application allows customers to directly output across
the WAM!NET Network to remote locations, thereby eliminating the need to
deliver physical proofs by overnight courier. The WAM!BASE application allows
users to store and retrieve data, eliminating the need for redundant archives
and shrinking work cycle time by providing more immediate remote access to
desired data files.
. Customer Support and Customer Information System. The Company has implemented
extensive customer service functions, including customer support technicians
who are available 24 hours a day, seven days a week, who are trained
extensively in the Company's service offerings and who understand the
industry-specific workflow of the Company's customers. The CIS allows
customers to view data files, verify account information and check the status
of transactions on-line, as well
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as to log help requests. The Company also provides its customers itemized
information regarding the size, cost, and destination of each "shipment" that
may be electronically imported directly into the customer's own accounting
system. This information facilitates capturing of project-specific costs and
billing of services on a job-by-job basis.
. First to Market Advantage. By being the first to market a managed, high-speed
digital data delivery network with Industry Smart applications, the Company
believes it is becoming the industry standard in the Graphic Arts industry
and is positioned to become the industry standard in its other target
industries. The Company has found that industry leaders such as Time, Inc.,
RR Donnelley and World Color, each of which were early WAM!NET Service
customers, actively encourage their workflow partners to subscribe to the
WAM!NET Service to increase workflow efficiencies. Potential entrants into
the managed digital data delivery field would need to deploy a global,
purpose-built network integrated with customized value-added applications,
and simultaneously convert industry leaders and their workflow partners, more
than 1,450 of whom already subscribe to the WAM!NET Service. Current
customers of the WAM!NET Service include 14 of the 20 largest publishers, 12
of the 20 largest printers, 17 of the 20 largest advertising agencies, and 14
of the 20 largest pre-press graphic arts agencies in the U.S., as well as the
corporate marketing communications departments of many U.S. corporations.
. Strategic Relationships with MCI WorldCom and SGI. Both MCI WorldCom, Inc.
("MCI WorldCom") and SGI have made strategic investments and created
alliances with the Company. MCI WorldCom provides telecommunication and other
services to the Company on a non-exclusive basis. The Company anticipates
that its relationship with MCI WorldCom will enable it to access the
worldwide infrastructure, sales and marketing work force, telephony
technologies, high bandwidth carrier service and other services of MCI
WorldCom and its affiliates, including UUNet. In addition, in connection with
SGI Investment, the Company and SGI have entered into a preferred provider
relationship pursuant to which the Company will purchase hardware, software
and services from SGI based on SGI's most favored pricing models, and SGI
will act as sales agent for the Company's products in the entertainment
industry.
BUSINESS STRATEGY
The Company's objective is to become the leading provider of enhanced,
managed digital data delivery and archiving services to industries comprised of
participants requiring high-speed digital access to shared data. WAM!NET's
strategy to achieve this objective and to build a long-term sustainable
competitive advantage is to:
. Increase its Customer Base to Create Critical Mass. The Company's sales and
marketing strategy has been designed to rapidly penetrate its initial target
market, the Graphic Arts industry. Elements of this strategy include: (i)
creating the WAM!NET Service as a turn-key, single source service solution;
(ii) implementing an easy to understand "pay by the megabyte" pricing model,
eliminating the need for any capital investment by customers; (iii) designing
aggressive advertising, trade show attendance, event marketing and direct
selling to drive trials, including introductory product trials for industry
leaders; (iv) building a direct sales force to target leading industry
participants who, in turn, encourage their workflow partners to subscribe to
the WAM!NET Service; and (v) implementing programs in which large receivers
of data (e.g., printers) promote and market the WAM!NET Service, along with
the WAM!NET direct sales force, to customers and workflow partners. As the
Company increases its number of installed customer locations and
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as its customers increase the number of workflow partners with whom they
exchange data, the amount of data transmitted through the WAM!NET Service is
expected to increase exponentially.
. Apply Industry Smart Network Model to Other Industries. The Company believes
that the WAM!NET Industry Smart network model can provide the benefits and
advantages it offers the Graphic Arts industry to other industries with
similar data transportation, storage and retrieval requirements. Some of the
Company's entertainment industry prospective customers, such as Fox
Broadcasting and Disney, currently subscribe to the WAM!NET Service for their
Graphic Arts-related needs. Through its relationship with SGI, the Company
will continue to develop Industry Smart applications and sales and marketing
strategies suitable to the entertainment industry. The Company is also
collaborating with industry leaders in the medical imaging industry to
develop and implement Industry Smart applications in connection with
marketing to that industry.
. Maximize WAM!NET Network Accessibility. The Company's product line is
designed to maximize customer access to the WAM!NET Service worldwide,
regardless of the volume of data to be transmitted or stored. While data-
intensive customers may be connected to the WAM!NET Service through a single
source, turn-key solution utilizing a Company-owned network access device and
an appropriate communications link matched to the customer's requirements,
lower data-intensive customers may access the WAM!NET Service remotely
through the currently available dial-up version of Transmission Manager or
through wireless technologies. The Company is presently testing and expects
to provide access to the WAM!NET Service through the Internet during 1999.
. Drive Utilization Through Value-Added Services and Volume Discounts. The
Company believes that Industry Smart applications, such as the Customer
Information System, the WAM!PROOF service, the WAM!BASE service and
compressed video viewing, will provide significant benefits to its customers
and stimulate increased usage of the WAM!NET Service. The Company also offers
volume discounts and a variety of promotional programs for industry leaders
to induce customers to connect with their trading partners and send
increasingly large volumes of data traffic across the WAM!NET Network. The
combination of additional customers and increased utilization of the WAM!NET
Network is expected to lower the Company's average network cost per
subscriber.
. Expand and Enhance Infrastructure and Develop Worldwide Capabilities. The
Company intends to invest in resources and systems to ensure that the
Company's operating infrastructure and support services provide its
subscribers with optimal digital connectivity with guaranteed performance at
competitive rates. Primarily through its acquisition of 4-Sight, the Company
is currently expanding into parts of Europe and Asia for the purpose of
providing its customers with desired international connectivity. The Company
has expanded the WAM!NET Network into seven countries beyond the U.S. and
Canada, with Distribution Hubs in London and Manchester, England; Frankfurt,
Hamburg and Munich, Germany; Paris, France; Amsterdam, the Netherlands;
Stockholm, Sweden; Brussels, Belgium; and Tokyo, Japan. During 1999, the
Company expects to further develop its international service infrastructure
by providing installation and customer support via third parties, expanding
local sales and distribution relationships and establishing additional
Distribution Hubs and regional NOCs in selected countries. The Company
released Transmission Manager(R), the fifth generation software application
developed by the newly integrated Company and WAM!NET U.K. applications and
network engineering departments, on March 1, 1999 which will permit less
volume intensive customers to gain remote access to the WAM!NET Network. The
Company believes that WAM!NET U.K.'s more than 30,000 customers in 42
countries are prime candidates for the Transmission Manager application. The
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Company is transitioning WAM!NET U.K.'s existing distribution infrastructure
in Europe and Japan from selling software and hardware bundles to selling
WAM!NET Service contracts. By utilizing WAM!NET U.K.'s infrastructure and
investment, the Company believes it has reduced the time that it would have
taken to enter certain international markets by at least twelve months. The
Company may also establish its international presence through other
acquisitions, joint ventures or other similar business transactions.
. Reduce Costs and Improve Operating Margins. The Company seeks to reduce costs
and improve operating margins by (i) spreading the cost of installing and
operating the WAM!NET Network over a large base of customers; (ii) designing
the network to use more expensive hub equipment in a few national and
regional operational centers and less expensive equipment at each customer
site; (iii) deploying the dial-up version of the Transmission Manager
application ("On Ramps") for less volume intensive customers; (iv) pursuing
programs to reduce the costs of capital equipment, including obtaining mass
purchasing discounts for network infrastructure and customer premises
equipment; (v) utilizing network management tools to optimize existing and
planned network capacity as volume increases and traffic patterns begin to
emerge; (vi) deploying new, lower-cost last mile local loop technologies to
connect customer sites to Distribution Hubs, including wireless technologies
and remote dial-up capabilities; and (vii) deriving other incremental revenue
from value-added services such as the WAM!BASE service, which can be
delivered over the existing WAM!NET Network infrastructure. The Company also
expects its operating margins to improve as a result of anticipated cost
reductions associated with increasing competition in both the local and long
distance markets.
TARGET MARKET OVERVIEW
The WAM!NET Service has been designed to support a community of interest
among interdependent participants in time sensitive and data intensive
industries with highly collaborative workflows. The Company is currently
providing its services to the Graphic Arts industry, and is beginning to market
the WAM!NET Service to other communities of interest with similar data
transportation and archiving needs as those found in the Graphic Arts industry,
including the entertainment and medical imaging industries. The Company intends
to apply its business strategy to these other industries by capitalizing on the
network, operations, service, application engineering and sales/marketing
infrastructure already developed by the Company and by developing and offering
Industry Smart applications that are tailored to the workflow requirements of
those industries.
Graphic Arts. The Graphic Arts industry is comprised of printers, pre-press
production firms, advertising agencies, publishing firms, graphic artists and
list management firms who design, prepare and produce printed materials. Based
on industry information and research performed for the Company, the Company
estimates the total potential size of the managed data delivery service and the
digital asset storage markets for the Graphic Arts industry in the United States
to be $4.3 billion and $2.3 billion, respectively. The Company's estimate of the
number of potential sites in key segments of the Graphic Arts industry is
outlined below, based on information contained in industry research reports.
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POTENTIAL SITES BY MARKET SEGMENT AND FIRM SIZE
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LARGE MEDIUM SMALL TOTAL
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Printers(1).................................. 1,088 4,169 64,830 70,087
Pre-Press(1)................................. 108 427 4,584 5,119
Publishers(2)................................ 597 3,031 39,522 43,150
Ad Agencies/Graphic Designers(3)............. 1,615 10,742 68,478 80,835
Corporate Communications(4).................. 2,402 5,405 112,294 120,101
List Management(4)........................... 103 231 649 983
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Total Sites................................ 5,913 24,005 290,357 320,275
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(1) Large, medium and small means having at least 100, at least 25 but less than
100 or less than 25 employees, respectively.
(2) Large, medium and small means having at least 250, at least 50 but less than
250 or less than 50 employees, respectively.
(3) Large, medium and small means (i) advertising agencies having at least 100,
at least 25 but less than 100 or less than 25 employees, respectively; and
(ii) direct mail advertising, commercial photography and graphic art design
firms having at least 25, at least 5 but less than 25 or less than 5
employees, respectively.
(4) Large, medium and small means having at least 25, at least 5 but less than
25 or less than 5 employees, respectively.
The materials created and printed by the Graphic Arts industry include
books, magazines, newspapers, catalogues, circular advertisements, billboard
advertisements, marketing materials, brochures, packaging and multi-media
materials. According to industry data, approximately 50% of content in the
Graphic Arts industry is currently created in a digital format using specialized
software applications such as Adobe PhotoShop(R) and QuarkXpress(R), and by the
year 2000, more than 64% of the Graphic Arts industry is expected to be using
digital page/imaging software. File assembly and printing preparation activities
are also becoming digital with the increasing use of digital scanners and
cameras. Analog images, including photographs, can now be easily scanned and
digitally incorporated into the production process. Additionally, adoption of
CTP technologies by large- and medium-sized printers facilitates a fully digital
workflow throughout the entire creation and printing process.
The digitalization of the printing process has resulted in the need for
both higher bandwidth connectivity to move data intensive printing jobs through
the print production process and for storage solutions which provide asset
management capabilities and collaborative access to the stored digital assets.
Today, the majority of work files are stored on magnetic or optical disks and
transported via local or overnight couriers, such as Federal Express and United
Parcel Service. The Company anticipates that large portions of data will
increasingly be delivered via digital networks, driven primarily by the need to
compress time schedules and reduce production costs. The Company expects that
once market leaders and other influential participants in these industries
become significant users
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of managed data delivery services, other industry participants will follow in an
effort to remain competitive.
The Company believes it is well positioned to take advantage of the
following factors, identified by industry research reports, which indicate that
between 1996 and the year 2000: (i) the percentage of print jobs transferred
across networks will quadruple, representing over 40% of all print jobs and two
thirds of print job revenue; (ii) more than 50% of all publishing workflow and
more than 60% of all creative services workflow will be conducted almost
entirely over networks; (iii) businesses with the equivalent of T1 wide area
connectivity will increase 5 times; (iv) manufacturers will integrate CTP
equipment creating a total digital pre-press workflow; (v) high resolution
digital cameras will be affordable for most Graphic Arts users; and (vi) most
medium to large printers and pre-press firms will offer digital content
management services to support re-purposing of digital data into other products.
Entertainment Industry. The entertainment industry, which in terms of data
transport needs is similar to the Graphic Arts industry, provides another
potential community of interest for the expansion of the WAM!NET Service. This
industry consists of many subsectors, including television and radio
advertising, feature films, broadcast, cable and satellite video, high-
definition television, home video, video games and video applications on the
Internet. An adjunct market to the entertainment industry is the distance
learning market, which includes corporate (training, marketing and
communications) and educational distance learning. Each of these subsectors is
moving away from traditional analog media, such as film, photographs and other
physical media expression, and toward digital media. Digital tools previously
available only to large media customers (such as television networks and major
film studios) are now widely available to the entire industry. The Company
believes the WAM!NET Service will be attractively priced for a wide spectrum of
customers, including the independent contractor/artist, small to large
production and post-production studios and global media conglomerates.
In contrast to the Graphic Arts industry, however, which involves the
creation of static or still imagery, the entertainment industry principally
produces motion imagery coupled with digital audio. As a comparison, the range
of data transmission requirements varies to a much greater extent. While some
applications involve the transport of compressed video many involve the
transport of uncompressed video and HDTV. For comparison, an uncompressed 30-
second television advertisement is comprised of approximately 40 times the
amount of digital data found in a typical full page magazine advertisement. The
Company believes the WAM!NET Network is capable of accommodating the high-speed
data transfer rates necessary to transport motion imaging in the entertainment
industry.
The Company's initial entry into the entertainment industry is focused on
connecting post production facilities with advertising agencies to transfer
compressed television advertisements for review purposes during the
advertisement production cycle. Review quality work is typically transported via
couriers and disk. The Company believes that by using the WAM!NET Service,
companies will be able to reduce their advertisement production cycles by
several days. In addition, network clearance applications are also being
pursued. The network clearance process involves sending compressed version of
completed advertisements to the various network clearance groups for their
approval to air advertisements. Additionally, the large data transport and video
storage and retrieval represents a dynamic opportunity for the WAM!BASE service
and compressed video viewing and is expected to drive the rapid growth of this
business unit. Both of these opportunities will be pursued jointly with SGI.
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Medical Imaging. The emergence of digital imaging in the medical industry
has created another community of interest with potentially promising
applications for the WAM!NET Service. The increasing availability of advanced
computer technology combined with continued pressures to contain health care
costs is resulting in significant portions of the medical imaging workflow being
completely digitalized, including output from medical scanning equipment such as
Computed Tomography ("CT") and Magnetic Resonance Imaging ("MRI") devices. These
devices capture and display patient data in digital formats, generating data
files often in excess of 35 megabytes per file.
The Company has identified multiple steps in the medical imaging workflow
process which may effectively be addressed by the WAM!NET Service. For example,
radiologists and other healthcare professionals who examine the output generated
by CT and MRI devices are often located in facilities separate from the
facilities where the digital images are created. Furthermore, the increasing
prominence of health maintenance organizations and other provider alliances,
where member patients can go to any facility within the provider's network, may
require an increased ability to retrieve and transport medical data between
physically separate facilities. Currently, most files are either printed to film
or copied to optical disks and then physically transported via courier services
between facilities. In cases where digital images are printed to film,
healthcare professionals lose the ability to do real time reads of the images.
Current methods of storing medical images also present file transportation and
storage problems. Analog files need to be manually located, copied and couriered
to the healthcare professional for examination. It is estimated that 10%-25% of
images stored in a non-digital film format are not readily accessible when
needed and often lost entirely. Digital file storage is emerging as an option,
but optical disks still need to be located, copied and then transported to
remote sites.
As a result, hospitals are beginning to explore real-time remote imaging
and archiving creating efficiencies by, for example, allowing radiologists to
collaborate more effectively. As documented in the January 1998 Journal of
Diagnostic Imaging, Hammersmith Hospital in London, England, found that the
change from hardcopy to digital archiving reduced staffing requirements by eight
positions, saved an estimated $0.7 million per year, and increased workload by
4,500 exams per year without adding additional radiologists. The Company
believes the industry will need to eliminate multiple archives to adopt full
digital implementation and provide affordable long-term on-line storage.
The Company believes that medical service providers, particularly those of
substantial size or that span a number of separate facilities, have significant
medical imaging requirements. The Company is presently conducting a pilot
project of the WAM!NET Service with two medical facilities that are transporting
and retrieving medical images through the WAM!NET Network. The WAM!NET Service
has been configured to comply with Digital Imaging and Communications in
Medicine ("DICOM") industry standards for compatibility with medical imaging
equipment which are the industry accepted standards utilized by major medical
imaging equipment manufacturers in the domestic healthcare industry. If and when
WAM!NET Service is offered for treatment or diagnostic purposes, it would be
subject to regulation by the Food and Drug Administration.
WAM!NET U.K. BUSINESS
On March 13, 1998, the Company acquired 4-Sight, which was subsequently
integrated into WAM!NET U.K. (the "4-Sight Acquisition"). WAM!NET U.K. is a
provider of data transmission software and related products and applications
targeted to the Graphic Arts industry, primarily utilizing ISDN lines, with
particular emphasis on European, Asian and North American markets and is engaged
primarily in software development and distribution on a global basis through
resellers. As a result of the Company's acquisition of WAM!NET U.K. and the
companies' shared resources and facilities,
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WAM!NET U.K. is currently able to provide certain managed network services
related to delivering files. This is accomplished by modifying its software
applications to allow access to the WAM!NET Network. The software user is
generally responsible for all software and hardware installation, procuring an
ISDN telephony connection and verifying the integrity of their files being sent
over a public network infrastructure. By exploiting the synergies in coupling 4-
Sight's data transportation software with the Company's managed, network
infrastructure the Company has been able to achieve broader market coverage in
the Graphic Arts industry by combining WAM!NET U.K.'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. At December 31, 1998, WAM!NET
U.K. had a customer base of more than 30,000 customer locations, including 3,000
sites in the United States, prior to its acquisition by the Company.
WAM!NET U.K.'s products have been designed to work with public ISDN
telephony infrastructures used widely in Europe and Japan and to a lesser extent
in the United States. WAM!NET U.K. has formal sales agreements with resellers
who distribute WAM!NET U.K.'s products in 19 countries. WAM!NET U.K.'s software
products are installed at over 12,000 sites in the United Kingdom, where the
Company estimates it has a 90% market share in the Graphic Arts market segment.
Key users of WAM!NET U.K. software in the United States include Xerox
Corporation ("Xerox"), Ogilvy & Mather Worldwide, Inc., McCann-Erickson and the
National Geographic Society.
Key Benefits from the 4-Sight. Acquisition. The Company has realized
multiple benefits from the 4-Sight Acquisition including:
. Providing Additional Network Access. WAM!NET U.K.'s software applications
have been modified to allow access to the WAM!NET Network. New versions of
WAM!NET U.K. software can be introduced which are WAM!NET Service
compatible and can be used to send to and receive data from other WAM!NET
locations. The Company believes this will significantly improve its ability
to attract and retain customers at the lower end of the market segment
where ISDN lines are most common. The Company has achieved broader market
coverage in the Graphic Arts market by combining WAM!NET U.K.'s
international presence and penetration of the lower volume user market with
the Company's domestic presence and penetration of the higher volume user
market. In addition, many of the Company's current customers have workflow
partners who use WAM!NET U.K. software. Modifying WAM!NET U.K. technology
has allowed WAM!NET U.K. customers to transmit data to WAM!NET Service
customers with whom they require periodic data exchange and thereby
increase traffic over the WAM!NET Network.
. Facilitating WAM!NET U.K. Customer Upgrades. WAM!NET U.K. software upgrades
that are WAM!NET Service compatible are marketed to existing WAM!NET U.K.
customers and bundled with WAM!NET Service contracts. In addition, the
Company could potentially re-provision local loop ISDN lines for the
current WAM!NET U.K. customer base or upgrade higher traffic sites to
network access devices.
. Accelerating International Expansion. WAM!NET U.K. has already invested in
developing distribution channels in the United Kingdom, Germany, the
nations of the Benelux region, Scandinavia and Japan, and has plans to
expand distribution capabilities in France and other Asian markets. The
Company has greatly benefited from the formal working relationships WAM!NET
U.K. has developed with dealers, by the people it employs to manage dealer
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relationships in these international markets and by the working knowledge
WAM!NET U.K. employees have developed regarding unique business practices
in these international markets. The Company believes that it can utilize
WAM!NET U.K.'s existing distribution infrastructure and investment to
bundle the WAM!NET Services with new versions of WAM!NET U.K.'s
transmission software, such as Transmission Manager. By utilizing WAM!NET
U.K.'s infrastructure and investment, the Company has reduced the time that
it would have taken it to enter certain international markets by nine to
twelve months.
. Accelerate Development Activities. WAM!NET U.K. has invested significant
resources to build software development competencies in data transmission
user applications. In addition, WAM!NET U.K. has developed capabilities to
localize its software applications for use in specific international
markets including the French, German, Benelux and Japanese markets. These
capabilities may augment the Company's development staff and help increase
application development staffing expertise.
PRODUCTS AND SERVICES
The WAM!NET Service. To send or receive a data file over the WAM!NET
Network, a customer uses a proprietary software program designed and furnished
by the Company. High volume customers use proprietary software-driven network
access devices to access the WAM!NET Network, while lower volume customers use
Transmission Manager. Whether the customer accesses the network remotely or by
using a network access device, the WAM!NET Service appears as an icon on the
customer's desktop, like a multi-layered e-mail or fax application. Clients can
use the application to manage an address book of WAM!NET users with whom they
both send and receive packages of files and to set application default
parameters. To send a package, the user "highlights" and "drags" a file to the
appropriate address which appears across the top of the user interface. Once a
file is dropped onto an address tile, a packing slip is automatically opened and
the user is prompted to fill out basic packing slip information. Additional
files can be added to the package to be included in the transmission. Similarly,
additional sites can be identified for simultaneous package delivery. The user
then selects the send button and the package is automatically delivered to the
user's network access device for processing, coding and routing. Once a package
has been delivered to a network access device, the package will be transported
regardless of whether the sending or receiving computer is operating. If the
destination computer is unavailable, the package will be held for delivery until
the destination computer becomes available to receive the file. Unlike a dial-up
network, where both computers need to be on and available at either end or there
will be a busy signal, the WAM!NET Service store and forward function holds the
file in transit until the file can be delivered. To receive a package, customers
are prompted on screen to view packages that have been received by their network
access device. Files can be transferred from the network access device to the
client's local area network ("LAN") either by dragging and dropping files from
the network access device icon to the local network or by using a file retrieval
menu.
The WAM!NET Network can also be accessed remotely by Transmission Manager.
This software allows current users who upgrade to the new software as well as
new subscribers to utilize WAM!NET's range of services without the use of
customer premise equipment.
Each transaction over the WAM!NET Service is tracked and accounted for as
an individual "shipment" of data. On a monthly basis, the Company furnishes its
customers with an invoice summarizing the customer's WAM!NET Service use and
charges. If requested by a customer, the Company will also deliver to such
customer an electronic data file over the WAM!NET Service that
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contains itemized information regarding the size, cost and destination of each
shipment as well as information regarding other services used by the customer.
This data file may be imported directly into the customer's own accounting
system, providing what the Company believes to be a valuable service for
customers who need to capture costs and bill for services on a job-by-job basis.
Customer Care and the Customer Information System. The Company has
implemented extensive customer support functions, including customer support
technicians available 24 hours a day, seven days a week. These technicians are
trained to understand the Company's product and service offerings, and the
industry specific workflow of the Company's customers. Customer support
technicians routinely answer customer questions concerning product functions,
update address books, handle upgrade requests, and resolve product use issues.
In addition, customer calls are logged into call management software for
tracking and analysis purposes.
The Company's CIS application allows customers to verify account
information and check the status of their transactions on-line. The CIS appears
as an icon on the customer's computer desk-top. When activated, the CIS accesses
a menu which provides the customer with several options, including viewing
packages, viewing account information or logging a help request. The "view
packages" option allows customers to view sent and received package activity for
user definable time periods between one hour and 90 days. This option also
provides key transmission statistics for each package sent or received including
date, time, size, content and file type. The account information option allows
customers to view relevant account information, including billing information,
site contact names and phone numbers and also enables customers to update
account information on-line. The "help" option allows customers to log a help
request by e-mailing questions or requests directly to the Company's customer
support group.
WAM!PROOF. The Company has developed an application, the WAM!PROOF
application, which allows customers to directly output across the WAM!NET
Network to proofing devices located at remote locations. The WAM!PROOF service
was released in the second quarter of 1998. Proofs, which are physical
representations of printed output, are created throughout the production process
at major check points. Because workflow participants are often located in
geographically diverse locations, proofs have historically been printed and
delivered by overnight couriers to remote participants. WAM!PROOF application
enables customers to print proofs in geographically diverse locations as if they
were printing to a workflow participant on their LAN, thereby reducing
turnaround times and creating workflow efficiencies. The Company has
collaborated with leading manufacturers of printing/proofing devices to ensure
compatibility with the WAM!PROOF application. "WAM!PROOF Ready"
printing/proofing devices include devices made by Canon, Inc., Hewlett Packard
Company ("HP"), Ambition Corp., Eastman Kodak Company, Tektronix, Inc. and
Xerox. Heavy users of the WAM!PROOF service often generate 100% more traffic per
month than before their use of the application.
WAM!BASE. The Company has also developed a wide area data repository
service, the WAM!BASE service, which provides WAM!NET Service users access to a
remote data archive and allows them to store, retrieve and manage data on a per-
megabyte cost basis. The first customer to use the WAM!BASE service, Sears,
completed beta testing and began commercial usage of the WAM!BASE service on
November 1, 1998, and the WAM!BASE service is expected to be released nationally
in the second quarter of 1999. The ability to manage and access digital assets
is becoming significantly more challenging due to increasing digitalization in
the Company's target industries. The implementation of a workable and cost-
effective data management solution requires the integration of hardware,
software and networking to make data accessible to multiple workflow partners
and to
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eliminate redundant processes and storage facilities. The implementation of such
a system requires substantial investments in capital equipment, systems
integration and archive management and often takes months to complete. Typical
problems that can occur include inadequate scalability, high operations costs
and lack of high-speed and secure network infrastructure needed to share large
digital data files, all of which are eliminated through the use of the WAM!BASE
service.
The Company believes that the WAM!BASE service provides a collaborative
digital asset management service that addresses significant data management and
storage issues for its customers, and can potentially eliminate the need for
investment in capital and archive management. Given the speed at which
technology changes and the need to ensure reliable access to stored images, many
participants are unwilling to make these investments. Because it has been
designed to be scaleable to the needs of entire industries, the WAM!BASE service
can spread infrastructure and operating costs across numerous users. The
WAM!BASE service is designed to offer a turn-key archiving system that is cost
competitive in relation to an individual customer's investment in a local,
stand-alone archiving system. Customers send their data files over the WAM!NET
Service to the WAM!BASE repository where files are stored in customer
configurable libraries. Customers are charged a monthly per megabyte fee for
storage. Since customers are using the WAM!NET Service to retrieve data from the
WAM!BASE repository, they can obtain quick and secure access to their data.
The WAM!BASE service provides collaborative access to stored data files.
With existing systems, industry participants working on the same job often store
multiple copies of the same data files because they do not have a collaborative
means of sharing file access. Participants who use the WAM!BASE service and
store files in their private library space, can control security access to each
individual file in their library, and can change security access privileges at
any time. This eliminates the need to store redundant copies of files at
multiple participant sites, can shrink cycle time by providing more immediate
access to important data files, and supports the job driven workflow by enabling
customers to control security access to images on a job-by-job basis.
The WAM!BASE service uses two mirrored storage facilities linked by high
bandwidth data connections. The initial WAM!BASE storage centers are located in
Minneapolis and Las Vegas within the NOCs already located in each city. Each
storage facility is connected to the WAM!NET Network through redundant links and
customer data files are stored in both locations. Customers may use proprietary
software provided by the Company to upload data to the storage facilities and to
browse, retrieve and forward files stored in the repository. Customers are able
to restrict access to individual files, groupings of files or complete libraries
of files, manage the distribution of files, and are also able to catalogue,
identify and search for stored files using assigned attributes.
SERVICE CONTRACTS
The Company believes that the WAM!NET Service is achieving wide acceptance
among leading participants in the Graphic Arts industry, which in turn
encourages those with whom information is shared to subscribe to the WAM!NET
Service. As of December 31, 1998, more than 1,450 network access device
customer locations were connected to the WAM!NET Network. As of December 31,
1998, the Company's mix of service contracts was as follows:
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<TABLE>
<CAPTION>
SERVICE LEVEL (IN MEGABYTES PER HOUR) # OF CONTRACTS % OF CONTRACTS
------------------------------------- -------------- --------------
<S> <C> <C>
40 MPH Service............................. 94 7 %
120 MPH Service............................ 724 49
200 MPH Service*........................... 75 5
400 MPH Service............................ 459 31
1,000 MPH Service.......................... 19 1
Other...................................... 106 7
----- ---
Total...................................... 1,477 100%
===== ===
</TABLE>
___________________
*Released in January 1998.
The Company's standard WAM!NET Service contract is structured to assess
charges based on the minimum throughput capability (i.e., the minimum number of
megabytes per hour of the customer's data that the Company is obligated to
transfer via the WAM!NET Network), the monthly minimum volume and any usage in
excess of such monthly minimum volume. The pricing structure varies depending on
the monthly minimum fee and on volume, with higher minimum fees and higher
volumes generally resulting in lower per megabyte charges. During most of 1998,
the pricing structure required each WAM!NET customer to sign a service contract
for a fixed term of one to three years, at a specified location with minimum
monthly fees ranging from $250 to $2,500 per month up to the specified volume.
The standard service contract is automatically renewable for additional one year
periods at the Company's then prevailing pricing structure, unless the customer
gives notice of termination at least 60 days prior to any automatic renewal
date. During the fourth quarter of 1998, the Company implemented a new three
zone pricing model in the U.S. and Canada. The new pricing model maintains much
of the original model's simplicity but charges higher monthly minimums outside
major metropolitan areas where local loop telecommunication charges are more
expensive.
Each service contract also grants the customer a limited, non-transferable
license to use the Company's proprietary software and certain other intellectual
property solely in connection with the customer's use of the WAM!NET Service.
Under each service contract, a customer generally agrees to pay all taxes and
fees imposed by governmental authorities, to be responsible for all loss or
damage to the network access device, to maintain certain insurance coverage for
the network access device, to preserve the Company's ownership of the licensed
intellectual property, to keep the network access device at the leased location,
to return the network access device and all licensed intellectual property at
the termination of the service contract, and to pay all of the Company's costs
of enforcement in the event the customer breaches the service contract.
In addition to the standard service contract, the Company also negotiates
custom service contracts with large users of the Company's services. These
custom service contracts generally address specific customer workflow
requirements or multi-site installations and typically contain scheduled
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rebates and discounts based upon the number of third party trading partners who
become connected to the WAM!NET Network and upon the volume of data received
from those third parties. These custom service contracts also typically contain
negotiated provisions relating to issues of non-infringement, indemnification
and damages for breach.
The Company has begun to offer the WAM!BASE and the WAM!PROOF service as
add-on features to the WAM!NET Service. Subscribers for the WAM!BASE and
WAM!PROOF service sign an addendum to their WAM!NET service contract that
separately licenses the software necessary to utilize the WAM!BASE or WAM!PROOF
service, as the case may be, and contains other appropriate terms. The Company
furnishes the WAM!BASE software without charge to customers who agree to minimum
monthly WAM!BASE storage fees. WAM!PROOF customers are charged for usage on a
per megabyte basis like any other transmission over the WAM!NET Network. The
Company requires a nominal one-time license fee covering the costs incurred by
the Company to furnish the WAM!PROOF software. Additional WAM!BASE fees are
charged to the customer for library set up and administration which is often
done through an authorized third party. Additionally, the Company is evaluating
digital storage of large (terabyte and petabyte-sized) entertainment industry
files currently being stored on tape.
SALES AND MARKETING
Over the course of the year ended December 31, 1998, the Company has spent
significant time and resources developing and building international marketing
and sales expertise. The Company's sales force has been expanded from 15 U.S.
based sales people to over 150 sales and marketing people worldwide, located in
major markets such as New York, Chicago, Los Angeles, Boston, Washington D.C.,
Minneapolis, San Francisco, Dallas, Atlanta, Denver, Seattle, Toronto, Montreal,
London, Amsterdam, Hamburg, and Oslo. Originally focused on just the Graphic
Arts market, the sales division also covers the entertainment industry. In
addition, the Company has grown its marketing effort, which now has
responsibility for the definition, commercialization, promotion, pricing and
ongoing management of the Company's products and services. The marketing
division is divided into three functional groups, based on customer needs and
demands, including a product marketing group, a segment marketing group and
communications group. The product marketing group is concerned with definition,
development and integration of service products across all vertical market
segments. The segment marketing group is responsible for planning, launching and
coordinating ongoing marketing activities (promotions, pricing, etc.) within
specific vertical market segments, including the Graphic Arts industry, the
medical industry and the entertainment industry. The communications group is
responsible for working with segment groups to design and create marketing
materials and integrated marketing programs including direct mail promotions,
brochures, advertisements, web-based marketing materials and public relations.
The sales organization is also divided into specific groups, including a new
sales group, an account management group, a national accounts group, an
entertainment group and WAM!BASE group.
Primary marketing and sales strategies focus on making inroads with major
participants in the Company's target industries. In the Graphic Arts industry,
the Company's initial sales focus was on signing large commercial printers, the
final data destination in the digital workflow. Once several printers subscribed
to the WAM!NET Service, the Company's sales organization sought to connect the
printer's customers (pre-press firms, advertising agencies and publishers) to
the WAM!NET Network using a combination of sales and marketing strategies. Such
strategies include implementing promotional programs in which printers promoted
and marketed the WAM!NET Service to their
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customers and workflow partners along with the Company's direct sales force.
Similar strategies are being applied by the Company to its entertainment and
medical imagery initiatives.
In connection with the SGI Investment, the Company and SGI have entered
into a strategic relationship where, among other things, SGI will act as sales
agent for the Company's products in the entertainment industry.
As more customers subscribe to the WAM!NET Service, the Company expects the
rate of growth and strategic focus of its sales force to balance new site
acquisition and increasing utilization from its existing customers. As a
result, the sales organization may employ additional digital consultants to work
with customers to help them better utilize WAM!NET services, increase their
acceptance of Industry Smart applications such as the WAM!BASE and WAM!PROOF
applications, and expand the circle of WAM!NET users with whom they send and
receive data.
The Company's product marketing will focus on commercializing new features
and new products that are also intended to help increase the utilization of the
WAM!NET Network. This will include full scale commercialization of Industry
Smart applications such as the WAM!PROOF and WAM!BASE applications and the
addition of new Industry Smart features into existing products, including
directory services with white and yellow pages functionality, and directed
billing capabilities which will enable customers to reverse bill or bill third
parties for data transportation services.
The Company has network access devices in 44 states, Canada and the United
Kingdom. No single state or province accounted for more than 10% of the
Company's revenues for 1998 on a consolidated basis. For the year ended December
31, 1998, the Company derived approximately 46.8% of its revenues from sales in
the United States, 42.2% from the United Kingdom, 8.9% from the rest of Europe,
and 2.1% from the rest of the world.
INSTALLATION SERVICES
The Company believes its ability to deliver consistently high quality
installation services will materially affect its ability to attract and retain
customers. The Company, therefore, has expended considerable resources to build
an installation function which coordinates and performs all aspects of service
installation for the customer. When a new contract is signed, an installation
project manager is assigned to manage the installation. Site surveys are
completed to capture and confirm key customer information including network
access device placement, appropriate service level, account information and
network connectivity requirements. The project manager coordinates installation
of the network access device with on-site third-party installers and the
Company's circuit engineers, who test and certify connectivity and throughput
between the customer's site and the Distribution Hub.
Installation of the WAM!NET Service consists of installing a simple,
graphical user interface ("GUI") on the customer's computer or LAN, connecting
the customer's computer or network to a network access device, and connecting
the network access device through telephone service to the nearest Distribution
Hub. The Company has entered into arrangements with third-party field
maintenance providers, to offer installation, maintenance and repair services on
customer sites.
NETWORK ARCHITECTURE
The WAM!NET Network is comprised of international, domestic, regional and
local Distribution Hubs that are owned by the Company and interconnected
redundantly with high-
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bandwidth leased telephone circuits. The Company currently maintains 33
Distribution Hubs, located in 23 major U.S. and Canadian cities, nine cities in
Europe and one in Asia. The Company also operates three mirrored NOCs located in
Minneapolis, Las Vegas and Brussels through which it manages and operates all
data transport. The Company has also contracted with an independent third-party
for the provision of satellite transmission services for added redundancy with
respect to services provided to Time. The Company is currently negotiating to
employ satellite services to add redundancy and last mile local loop
capabilities to the WAM!NET Network.
The WAM!NET Service uses technology similar to the Internet, such as ISDN,
DS1 lines, DS3 lines, frame relay and ATM. Because the WAM!NET Service provides
managed data package traffic, the available bandwidth of the WAM!NET Network is
not cluttered with large amount of random data traffic that typically exists on
a public network such as the Internet. The Company has sized aggregation points
throughout the WAM!NET Network to ensure that no backbone connection (a
connection between Distribution Hubs) is smaller than any "last mile" connection
(i.e., from a customer site to a Distribution Hub).
The hub infrastructure consists of large Cisco Systems, Inc. ("Cisco")
routers which are co-located with MCI WorldCom or other facility management
providers points of presence and which primarily route data traffic across the
Company's network of Distribution Hubs. The 33 Distribution Hubs are
interconnected with a meshed DS3 asynchronous transfer mode (a communications
protocol that divides digital data into small packets of fixed length to
facilitate high speed switching ("ATM")) backbone provided by MCI WorldCom.
Additional network diversity is provided by a layer of private lines leased from
Sprint Corporation ("Sprint") which primarily serve as network back-up. Local
loop connections between Distribution Hubs and network access devices at
customer sites are provided almost exclusively by MCI WorldCom and regional Bell
operating companies. The Company's policy is to procure local loop lines from
the lowest-cost, highest-quality provider. Network traffic patterns are
continuously monitored. Operating agreements with MCI WorldCom enable the
Company to increase backbone bandwidth to accommodate planned growth on an as-
needed basis.
The WAM!NET Network incorporates multiple firewalls, constant monitoring
and other security features to prevent unauthorized access or tampering with
either the Company's or the customers' data systems. For security purposes, the
WAM!NET Network is designed to prevent customers from gaining unauthorized
access to the WAM!NET Network through a network access device, from logging onto
any other device attached to the WAM!NET Network and from exploring the WAM!NET
Service or activating or controlling any of its other functions. The Company's
software installed on the user's computer only delivers files to or from
authorized network access devices.
NETWORK MANAGEMENT
The Company provides customers toll-free access to its technical services
support team 24 hours a day, seven days a week. The Company believes that
because its customers are in time sensitive, data intensive industries, they
rely on the WAM!NET Service to provide guaranteed delivery and throughput. The
Company has sought to build reliability into its network by interconnecting all
Distribution Hubs and NOCs with at least two redundant paths so that in the
event of network line failures data can still be transmitted. In addition,
automated network monitoring software from Hewlett Packard has been installed
and configured to provide continuous monitoring capabilities, including an alarm
system that automatically alerts network engineers of problems. Key aspects of
the WAM!NET Network are continuously monitored, including NOC equipment,
Distribution Hub equipment,
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backbone lines, local customer connections and the network access devices. The
network management team is trained to proactively work with telephony and on-
site service providers using specially developed processes to identify and
resolve network issues quickly and efficiently.
MANUFACTURING
The Company currently conducts limited equipment assembly functions. The
Company presently installs proprietary software and assembles standard computer,
router and power management equipment components into steel housings for use as
network access devices, Distribution Hubs and equipment in the NOCs. The
equipment housing is manufactured by a third party to the Company's
specifications. The Company currently contracts with third parties for
installation of network access devices at customer sites. The Company installs
Distribution Hubs and equipment in the NOCs. The Company intends to outsource
the assembly of network access devices.
SUPPLIER RELATIONSHIPS
Equipment. In connection with the SGI Investment, the Company and SGI
entered into a preferred provider agreement with SGI dated March 4, 1999 (the
"Preferred Provider Agreement") pursuant to which the Company will be able to
purchase hardware, software and services from SGI based on SGI's most favored
pricing models. The Company also has procurement arrangements with Cisco and
Osicom Technologies, Inc. for certain computer equipment, routers and computer
interface cards used in the WAM!NET Network. These arrangements qualify the
Company for discounts off participant list pricing for such equipment. The
Company is presently negotiating more formal supply arrangements with Cisco. The
Company also purchases certain high volume data storage equipment from HP and
Hitachi Data Systems Corporation under supply agreements.
Installation and Field Maintenance. The Company has an agreement with
third-party field maintenance providers to offer installation, maintenance and
repair services on customer sites.
Telephone Carriage and Infrastructure Support. The Company currently
leases local loop and long distance telephone services in the United States from
MCI WorldCom. In addition, the Company has procurement agreements with Sprint,
Deutsche Telecom, Inc., Madge Network Ltd. and Tanet Ltd.
The supplier agreements described or contemplated above contain commitments
on behalf of the suppliers from one to three years.
COMPETITION
Despite what the Company believes to be meaningful product differentiation,
the Company faces competition in the provision of digital data transportation
and archiving services, including from companies that have substantially greater
financial, technological, marketing, and research and development resources than
it and which have an established presence in markets that the Company serves.
The Company's competitors (or potential competitors, including MCI WorldCom)
include major long-distance companies, regional Bell operating companies,
Internet service providers, systems integrators, such as Digital Art Exchange,
and other smaller companies which manage routers as part of more comprehensive
public, private and virtual private wide area network service offerings. Some
companies have begun to offer data communications networks which use standard
communication technology in conjunction with emerging frame-relay and ATM
technology. The architecture of these
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networks is similar to that of the WAM!NET Service. These competitors, including
the Sprint DRUMS network, MCI SMDS telecommunications service and a joint
venture arrangement between AT&T Corp. and Xerox, offer some of the services the
Company offers or plans to offer in the future. Additionally, a new competitive
service called the Graphic Arts Digital Network by VIO which directly targets
the WAM!NET Service was announced in Spring 1997, and was released in October of
1998. This service is provided by a joint venture between British
Telecommunications and Scitex. Pricing is similar to WAM!NET's with a monthly
service fee and per megabyte pricing for transport. In addition, while the
Internet is not currently an effective competitor to the WAM!NET Service,
efforts are under way, through a consortium of research universities, the
Federal Government's Very-High-Performance Backbone Network Service and several
major corporations, to create "Internet2." Press stories on Internet2 suggest
that it will include commercial channels through which large amounts of data can
be moved securely between researchers or companies. The commercial availability
of Internet2 is not expected before 2003.
In addition, the Company faces competition from overland and air courier
services, who transport magnetic tape or optical disk copies of digital data to
their desired locations.
The Company believes the major competitive factors in the digital data
delivery industry are price, reliability and capacity. The Company's
technologically higher-end competitors that offer high bandwidth dedicated lines
have the capability of reliably providing high capacity transmission, but with
the comparatively higher user costs involved in leasing dedicated point to point
lines, dedicated equipment costs and attendant information management fees.
Lower-end competitors, such as standard telephone modems or the Internet, can
compete with the Company on a cost basis, but do not provide the managed
reliability or capacity of the WAM!NET System. The Company believes that it is
the only provider of a turn-key, managed digital data delivery service with a
purpose-built network tailored to target industries' needs which addresses the
price, reliability and capacity requirements of data intensive industries.
GOVERNMENT REGULATION, STANDARDS
North America. The Company purchases telephone equipment, routers and
relays that are used in the WAM!NET Network from telecommunications equipment
manufacturers and combines that equipment with Company-provided software and
telephone circuits provided by common carriers regulated by the Federal
Communications Commission (the "FCC"), the Canadian Radio-Television and
Telecommunications Commission (the "CRTC") and various state regulatory
agencies. The Company believes that under the FCC's interpretation of the
Communications Act of 1934, as amended, the services which it offers to its
customers are interstate information (enhanced) services. Consequently, it is
not required to obtain licenses or other approvals from the FCC or state
regulatory agencies to offer such services. If the Company's services were
deemed to be intrastate services, certain state regulatory agencies might seek
to assert jurisdiction over the Company's offerings. If that were to occur, the
Company could be required to expend substantial time and money to acquire the
appropriate licenses and to comply with state regulations. The Company also
believes that, under the CRTC's interpretation of Canadian law, the services
that the Company offers do not require it to obtain telecommunications permits
or approvals in Canada.
Worldwide. The Company believes that European Union directives require
that member states permit the provision of the Company's services on a
competitive basis. Bilateral agreements exist between the United States and
Japan and the United States and Hong Kong which encourage cross-border provision
of enhanced services like those offered by the Company. Pursuant to commitments
in
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the World Trade Organization ("WTO") General Agreement on Trade and Services,
over fifty governments have agreed to permit provision of enhanced services
(i.e., value-added) by nationals of WTO member countries. Nevertheless, certain
other countries in Europe, Asia and elsewhere in the world might seek to license
and regulate the Company's services. Any such license or regulation may limit,
delay or increase the costs of operations as associated with the international
locations to which the Company may desire to expand.
Medical Imaging. The Company intends to offer its WAM!NET Service and
WAM!BASE service as medical imaging applications for transmitting, storing and
retrieving medical data for primary diagnostic purposes. The Company is
currently participating in a test of the medical image transmission application
of the WAM!NET Service between a hospital and a remotely located clinic. Any
medical imaging applications offered for primary diagnostic purposes are
required to comply with the Food and Drug Act, and regulations promulgated
thereunder by the FDA. Under recently adopted FDA regulations, both the WAM!NET
Service's data transmission application and the WAM!BASE data storage and
retrieval application are classified as Class I devices that do not perform
"irreversible data compression." Prior to adoption of those regulations, both
the transmission and storage functions were classified as Class II devices, and
the Company had received marketing clearance from the FDA for data transmission
pursuant to a 510(k) Premarket Notification filing. The Company's medical image
transmission, storage and retrieval applications conform to the DICOM standards.
The Company works with medical imaging equipment manufacturers to ensure
compatibility of the WAM!NET and WAM!BASE applications with their medical
imaging equipment. The manufacture of network access devices for medical imaging
applications and their provision as part of the Company's services are subject
to regulation by numerous governmental authorities, principally the FDA and
corresponding foreign agencies, including regulations concerning compliance with
Quality Systems Regulation ("QSR"), or good manufacturing practices, and
labeling. The Company is also required to register with the FDA as a medical
device manufacturer. As such, the Company's facilities are subject to inspection
by the FDA for compliance with QSR. These regulations require that the Company
manufacture its products and maintain its documents in a prescribed manner. As a
medical device manufacturer, the Company is further required to comply with FDA
requirements regarding the reporting of adverse events and malfunctions that
would likely cause or contribute to death or serious injury. FDA regulations
also govern product labeling and can prohibit a manufacturer from marketing an
approved device for unapproved applications. If the FDA believes that a
manufacturer is not in compliance with the law, it can institute enforcement
proceedings to detain or seize products, issue a recall, enjoin future
violations and assess criminal and civil penalties against the manufacturer, its
officers and employees.
PRODUCT DEVELOPMENT
Certain of the Company's employees have significant experience in the
development, design, engineering, implementation and management of complex
software and networking systems. The Company's current development activities
are focused on completing development of additional functions, including the
next generation of network and transportation management software and protocols
necessary to provide applications such as broadcast transmissions, queue
management, directed billing, directory services and job ticketing, including
integrating such features into the shipping and customer information management
facilities. The Company utilizes its technical capabilities to monitor and
evaluate developments in computer hardware and software and in relay and
telephony equipment and, to the extent possible, to incorporate appropriate
advancements or enhancements into the WAM!NET Service in a timely fashion.
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INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
It is the Company's policy to protect its intellectual property, to seek
patent protection for those aspects of its technology that the Company believes
may be patentable and to preserve any copyrights or trade secrets (to the extent
not disclosed in any patent) that may be applicable to the WAM!NET Service, the
WAM!PROOF and WAM!BASE services and their related software.
The Company is designing or has designed most of the proprietary software
necessary for the management of the WAM!NET Service, including network access
device operations and the GUI, CIS, WAM!PROOF and WAM!BASE applications. The
Company believes that its proprietary software and trade secrets applicable to
the operation of the WAM!NET Service and the WAM!BASE data archiving system may
be of equal or greater importance to the Company than patent or copyright
protection. The Company is not aware of any claims of infringement of patents or
other intellectual property belonging to others. However, the Company has
conducted only a limited inquiry regarding the possibility of other
infringement. Given the recent acquisition of WAM!NET U.K., with its substantial
international presence, the Company will increasingly offer its products and
services in foreign countries. However, some of these countries may lack
intellectual property protection that is comparable to that afforded by the
intellectual property laws of the United States.
The Company has entered into confidentiality agreements with certain of its
employees, consultants and others to protect the Company's proprietary
information and trade secrets.
LIABILITY AND INSURANCE
The WAM!NET Service uses an assemblage of telecommunications equipment,
software, operating protocols and proprietary applications for high speed
transmission of large quantities of data among multiple locations. In such
operations, it is possible that data files may be lost, altered or distorted.
Moreover, the Company's targeted industries' businesses are extremely time
sensitive, and delays in delivering data may cause a significant loss to a
customer using the network for managed data delivery service. The WAM!NET
Service, and future enhancements or adaptations, may contain undetected design
faults and software "bugs" that, despite testing by the Company, are discovered
only after the system has been installed and used by customers. Such faults or
errors could cause delays or require design modifications that could adversely
affect the Company's competitive position and results of operations. The Company
obtains contractual agreements from its customers limiting the Company's
liability for damages resulting from errors in the transportation of data to a
maximum of $100 per transmission. Nevertheless, the Company may still be subject
to significant claims for data losses in the transportation of data over the
WAM!NET Service. In addition to general business liability insurance coverage,
the Company presently maintains errors and omissions insurance coverage issued
by Chubb Custom Insurance Company in the amount of $2.0 million per occurrence
and $5.0 million for all occurrences relating to the transportation of data over
the WAM!NET Service. The Company also presently maintains $2.0 million of
business interruption insurance coverage against losses from floods, earthquakes
and other natural disasters.
EMPLOYEES
Including its officers, as of March 15, 1999, the Company employed 631
persons. The Company's executive and technical personnel have significant
experience in the design, programming, implementation, marketing, sales and
support of complex data networks and software programs. The
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Company considers its employee relations to be good. None of the Company's
current employees are subject to a collective bargaining agreement.
ITEM 2. PROPERTIES.
The Company occupies approximately 45,000 square feet of office space
located in a modern facility in an industrial park complex in Bloomington,
Minnesota, a suburb of Minneapolis. The building is occupied under a 99 month
lease which expires in November 2005. To meet its future space requirements, the
Company acquired a facility in Eagan, a suburb of Minneapolis. The Company will
initially occupy 160,000 square feet in this facility and will lease the
remainder of the space to SGI pursuant to a short-term lease. The Company
expects that all Minnesota headquartered employees will be relocated to this
facility during the summer of 1999. The Company will also be relocating its
Minneapolis NOC in this facility. The Company has also acquired, through the
acquisition of 4-Sight, a 9,000 square foot office space in Bournemouth, Dorset,
England.
SGI leases certain of the space in the Eagan, Minnesota office facility
from the Company. The term of the lease with SGI shall commence on March 4, 1999
and end on May 31, 2004. Effective as of June 1, 2001 and on each June 1
thereafter until June 1, 2003, SGI shall have the option to terminate the lease
by delivering to the Company at least six (6) months' prior written notice of
termination (which notice shall be delivered not sooner than June 1, 2001,
providing a termination date of not sooner than six (6) months thereafter). From
June 1, 1999 through May 31, 2001, SGI will occupy 326,000 square feet (67.8% of
the square footage of the interior common area) and will pay a base rent in the
amount of $12.00 per square foot of rentable area per year. With respect to the
portion of the premises which SGI continues to occupy under the lease from and
after June 1, 2001, the base rent shall be in the amount of $12.60 per square
foot of rentable area per year. SGI shall pay as additional rent its
proportionate share of all taxes and operating expenses. The proportionate share
will be determined by dividing the then existing SGI rentable area of the
premises by the total rentable area.
The Company's leased properties also include: (i) an approximately 18,000
square foot manufacturing and warehousing facility located in Minneapolis, (ii)
an approximately 1,540 square foot office facility located in Minneapolis, where
one of the Company's NOCs is located, (iii) an approximately 7,970 square foot
facility located in Las Vegas, Nevada where the Company's other NOC is located
and which serves as a backup customer service center, (iv) the Company occupies
20,000 square feet of office space in Brussels, Belgium; this facility contains
the Company's European NOC and customer service operations, (v) an approximately
1,500 square foot office facility located in Missoula, Montana where the
headquarters of FreeMail, Inc., a wholly-owned subsidiary of the Company, is
located, (vi) small offices in Toronto, New York, Chicago, and Washington, D.C.
for use by the Company's business development managers and account executives
stationed in those cities, (vii) an approximately 18,800 square foot office
facility located in Minneapolis, which previously served as the Company's
headquarters and which the Company intends to sub-lease, (viii) a 16,000 square
foot office space located in Bournemouth, Dorset, England under a 100 month
lease which expires in September of 2006, and (ix) small offices in Hamburg,
Germany, Woburn, Massachusetts, West Des Moines, Iowa, Hague, Holland,
Gothenburg, Sweden, Copenhagen, Denmark and Paris, France for WAM!NET U.K.'s
sales and marketing personnel stationed in those cities.
ITEM 3. LEGAL PROCEEDINGS.
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The Company is aware that certain holders of warrants issued in connection
with bridge loans in 1995 and 1996 have commenced litigation seeking a reduction
in the exercise price of these warrants and seeking attorney's fees. Although
the warrants provide for downward adjustments under certain circumstances, the
Company believes no adjustment is required. Should the warrant holders initiate
litigation and should that litigation be successful, the gross proceeds
receivable by the Company from exercise of those warrants would be reduced from
approximately $8.4 million to $4.9 million. The Company will vigorously defend
such litigation.
The Company is engaged in certain legal proceedings and claims arising in
the ordinary course of its business. The ultimate liabilities, if any, which may
result from these or other pending or threatened legal actions against the
Company cannot be determined at this time. However, it is the opinion of
management that facts known at the present time do not indicate that there is a
probability that such litigation will have a material effect on the financial
position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) There is no established public trading market for the Company's
outstanding common stock.
(b) As of March 15, 1999, there were 74 holders of record of the
outstanding common stock of the Company.
(c) The Company has paid no cash dividends on its common stock.
(d) Not applicable.
(e) RECENT SALES OF UNREGISTERED SECURITIES:
On March 5, 1998, the Company consummated an offering (the "1998
Offering"), pursuant to which the Company sold 208,530 units (the "1998 Units")
consisting of $208,530,000 aggregate principal amount at maturity of the 1998
Notes and 625,590 warrants (the "1998 Warrants") to purchase an aggregate of
1,257,436 shares of Common Stock. Each 1998 Unit consists of $1,000 principal
amount at maturity of the 1998 Notes and three 1998 Warrants, each 1998 Warrant
entitling the holder thereof to purchase 2.01 shares of Common Stock. The 1998
Units were initially sold to the lead underwriters; Merrill Lynch & Co., Credit
Suisse First Boston and First Chicago Capital Markets, Inc., under an exemption
from registration requirements of Section 5 of the Securities Act of 1933, as
amended (the "Securities Act") pursuant to the provisions of Section 4(2) of the
Securities Act. Subsequently, 208,030 of the 1998 Units were sold pursuant to
Rule 144A under the Securities Act, and 500 Units were sold pursuant to
Regulation S under the Securities Act.
On January 13, 1999, the Company issued the 13.25% Subordinated Unsecured
Convertible Note due August 28, 2005 (the "1999 MCI WorldCom Convertible Note")
pursuant to the Subordinated Unsecured Convertible Note and Warrant Purchase
Agreement by and between MCI
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WorldCom and the Company (the "1999 MCI WorldCom Convertible Note Purchase
Agreement") and on January 13 and March 4, 1999, respectively, the Company
borrowed $10.0 million and $15.0 million thereunder. 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 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 from April 30, 1999 until April 30,
2004, (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
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.
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 pursuant to the provisions of Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical consolidated financial
data for the Company and its subsidiaries for each of the years in the four year
period ended December 31, 1998. The 4-Sight Acquisition occurred on March 13,
1998 and the operating results of WAM!NET U.K. are included in the Company's
operating results from that date through December 31, 1998. The Company's
development and expansion activities during the periods presented below
significantly affect the period-to-period comparability of the historical data
presented for the Company. The financial data should be read in conjunction with
the financial statements and related notes thereto of the Company included
elsewhere in this Annual Report on Form 10-K.
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<TABLE>
<CAPTION>
WAM!NET INC.
---------------------------------------------
Year Ended December 31, (1)
---------------------------------------------
1995 1996 1997 1998
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 180 $ 279 $ 1,555 $ 17,629
Operating expenses....................... 1,437 7,036 31,037 119,981
Operating income (loss).................. (1,257) (6,757) (29,482) (102,352)
Interest income (expense), net........... (20) (839) (4,154) (20,878)
Income (loss) before income taxes........ (1,277) (7,596) (33,636) (123,230)
Net income (loss)........................ (1,277) (7,596) (33,636) (121,878)
OTHER DATA:
EBITDA(2)................................ $(1,226) $(6,310) $(26,814) $ (84,684)
Depreciation and amortization............ 31 447 2,668 17,668
Capital expenditures..................... 657 4,244 16,599 54,584
Net cash used in operating activities.... (747) (6,218) (23,917) (57,892)
Net cash used in investing activities.... (657) (5,244) (15,599) (71,304)
Net cash provided by financing
activities............................. (2,372) 24,578 25,346 135,194
Ratio of earnings to fixed charges(3).... -- -- -- --
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents................ $(1,328) $15,444 $ 274 $ 6,272
Total assets............................. 2,075 20,070 29,134 125,459
Total debt(4)............................ 1,900 20,473 54,826 210,238
Shareholders' deficit(5)................. (371) (2,683) (30,671) (109,854)
</TABLE>
(1) The Company was organized in September 1994 and commenced operations in
March 1995.
(2) EBITDA represents earnings (loss) from operations before taking into
consideration net interest expense, income tax expense, depreciation
expense and amortization expense. The Company has included information
concerning EBITDA as it is used by certain investors as a measure of a
company's ability to service its debt. EBITDA should not be considered as
an alternative to net income or any other measure of performance or
liquidity as determined in accordance with generally accepted accounting
principles or as an indicator of the Company's overall financial
performance. In addition, the measure of EBITDA presented herein by the
Company may not be comparable to other similarly titled measures of other
companies.
(3) The ratio of earnings to fixed charges is calculated by dividing (i) net
income (loss) before taxes plus fixed charges by (ii) fixed charges. Fixed
charges consist of interest incurred and the portion of rent expense which
is deemed representative of interest. Earnings were insufficient to cover
fixed charges by $1,242, $6,653, $29,180 and $99,027 for the Company for
the years ended December 31, 1995, 1996, 1997 and 1998.
(4) Total debt includes long-term debt, redeemable preferred stock, current
portion of long-term debt and obligations under capitalized leases.
(5) The estimated value of warrants issued to debtholders and of options
issued to consultants is reflected as both an asset and an element
of paid in capital.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 $250 per month to $3,000 per month. 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.
Revenue is primarily driven by the number of installed customer locations
(network access device's), the length of time a customer has been using the
service, the number of work flow (trading) partners with whom a customer
exchanges data and the size of the files exchanged.
Network Communications Fees. Network communications fees include both the
costs of the high bandwidth carrier services interconnecting the Company's
national infrastructure of NOCs and Distribution Hubs and the costs of local
telephone circuits connecting 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
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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 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, European and Asian operations. Costs associated with
the development of the WAM!BASE, 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 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.
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
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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
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
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Revenue. Revenue for the year ended December 31, 1998 was $8,776,512
compared to $1,627,590 for the year ended December 31, 1997, an increase of
$7,148,922, or 439.2%. 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. Installed network access device media
transport services increased from 474 sites for the year ended December 31, 1997
to 1,477 sites for the year ended December 31,1998; an increase of 1,003 sites
or 212%. For the years ending December 31, 1997 and December 31, 1998, average
monthly gross of the Company's media transport revenue per customer increased
from $526 to $761, respectively, an increase of $235 or %44.6. Service rebates
for the years ended December 31, 1997 and December 31, 1998 were $150,400, 9.2%
of gross revenue, and $1,976,904, 22.5% of gross revenue, respectively; an
increase of $1,826,504 or 1,214%. 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 year ended December 31, 1997 was $0,
compared to $10,829,671 for the year ended December 31, 1998. Software and
hardware sales revenue for the year ended December 31, 1998 were primarily
derived from continuing media-transport software sales of WAM!NET U.K. following
its integration with 4-sight on March 13, 1998.
Operating Expenses. Network communications fees for the year ended December
31, 1998 were $18,259,389, compared to $7,363,667 for the year ended December
31, 1997, an increase of $10,895,722, or 148.0%. This increase was due primarily
to an increase of 201% in 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 148% from the year ending
December 31, 1997 to the year ending December 31, 1998, the average monthly
communications fees incurred by the Company to provide media transport services
to a single customer declined from $2,421 for the period ending December 31,
1997 to $1,336 for the period ending December 31, 1998; a decline of $1,085 or
44.8%.
Network operations expense for the year ended December 31, 1998 was
$29,704,742, compared to $7,477,753 for the year ended December 31, 1997, an
increase of $22,226,989, or 297.2%. 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 primary North American operational
focus to a global operational focus. The Company expects to incur significant
expenses from global network operations; however, as a percentage of global
revenue these expenses are expected to decline in future periods.
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Sales and marketing expense for the year ended December 31, 1998 was
$21,997,438, compared to $9,207,486 for the year ended December 31, 1997, an
increase of $12,789,952, or 138.9%. 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. The Company expects to incur significant expenses from its global sales
and marketing efforts; however, as a percentage of global revenue these expenses
are expected to decline in future periods.
General and administrative expense for the year ended December 31, 1998 was
$28,815,594, compared to $4,320,128 for the year ended December 31, 1997, an
increase of $24,495,466, or 567.0%. 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. The balance of the
increase in general and administrative expenses was due to the increased global
support requirements of the Company's expanding operations. The Company expects
to continue to incur significant general and administrative expenses; however,
as a percentage of global revenue these expenses are expected to decline in
future periods.
Depreciation and amortization for the year ended December 31, 1998 was
$17,667,765, compared to $2,668,177 for the year ended December 31, 1997, an
increase of $14,999,588, or 562.2%. This increase is primarily due to the
purchasing of network equipment and other support equipment in the amount of
$54,584,000 and the increase of $32,557,000 in goodwill that resulted from the
acquisition of WAM!NET U.K.
Interest expense for the year ended December 31, 1998 was $22,626,008,
compared to $4,355,676 for the year ended December 31, 1997, an increase of
$18,270,332, or 419.5%. The increase was primarily due to the increase in long-
term unsecured debt the Company incurred during 1998 to fund its operations and
acquisition, consisting primarily of the Company's 13.25% Senior Discounted
Notes due 2005 (the "1998 Notes") in the amount of $138,975,000 and the
equipment financing increase of $7,102,000.
Interest income for the year ended December 31, 1998 was $1,748,340,
compared to $202,035 for the year ended December 31, 1997, an increase of
$1,546,305, or 765.4%. The increase in interest income was primarily due to the
increase in the Company's average monthly balance of cash and cash equivalents,
which was $34,815,203 for the year ended December 31, 1998 over the average
monthly balance of $3,105,890 for the year ended December 31, 1997. During 1998
the Company invested a large portion of the cash proceeds from its offering of
the 1998 Notes into highly liquid investments with staggered maturities ranging
from 30 to 180 days, corresponding with the Company's operational cash
requirements. These investments consisted 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 year ended December 31,
1998 was $3,537,413, compared to $0 for the year ended December 31, 1997. 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 year ended December 31, 1998, the Company experienced
net losses of $121,878,317 and paid no income taxes. These losses are available
to offset future taxable income
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through the year 2013 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. An income tax benefit of $1,352,000 related to U.K. income tax and
V.A.T. benefits was realized by the Company in the year ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
- - -----------------------------------------------------------------------
Revenue. Revenue for the year ended December 31, 1997 was $1,627,590
compared to $110,424 for the year ended December 31, 1996, an increase of
$1,517,166, or 1,373.9%. This was primarily due to a 1,375.8% increase in the
number of subscribers to the WAM!NET Service from approximately 33 installed
customer sites on December 31, 1996 to approximately 487 installed customer
sites on December 31, 1997. At December 31, 1997, the Company had contracts to
install network access devices at 578 customer sites awaiting installation of
telephone service. Service rebates for the year ended December 31, 1997 were
$150,400, or 9.2% of revenue. Service rebates for the year ended December 31,
1996 were $0.
Other service fees revenue for the year ended December 31, 1997 was
$77,748, compared to $168,290 for the year ended December 31, 1996, a decrease
of $90,542, or 53.8%. Other service fees revenue is primarily derived from minor
transactions with currently existing WAM!NET Service customers which includes
consulting services and hardware sales. The decrease was primarily due to the
expiration of a contractual consulting relationship that the Company had in
place with a customer during 1996.
OPERATING EXPENSES
Network communications fees for the year ended December 31, 1997 were
$7,363,667, compared to $816,403 for the year ended December 31, 1996, an
increase of $6,547,264, or 802.0%. Network operations expense for the year ended
December 31, 1997 was $7,477,753, compared to $1,108,807 for the year ended
December 31, 1996, an increase of $6,368,946, or 574.4%. These increases were
primarily due to the 1,375.8% increase in customers that subscribed to the
WAM!NET Service during 1997.
Sales and marketing expense for the year ended December 31, 1997 was
$9,207,486, compared to $2,052,860 for the year ended December 31, 1996, an
increase of $7,154,626, or 348.5%. This increase was primarily due to costs
associated with building the Company's direct sales force and marketing
department as well as higher outside advertising agency and trade show
expenditures.
General and administrative expense for the year ended December 31, 1997 was
$4,320,128, compared to $2,609,879 for the year ended December 31, 1996, an
increase of $1,710,249, or 65.5%. General and administrative expense increased
during 1997 as operational support requirements intensified due to the rapid
expansion of the Company's services and corporate facilities.
Depreciation and amortization for the year ended December 31, 1997 was
$2,668,177, compared to $447,233 for the year ended December 31, 1996, an
increase of $2,220,944, or 496.6%. As a percentage of total revenue,
depreciation and amortization was 171.6% in 1997 compared to 160.5% in 1996.
This increase is primarily due to an increase in the installed communications
backbone equipment and equipment installed on customers' premises as a result of
the increase in the number of customers.
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Interest expense for the year ended December 31, 1997 was $4,355,676,
compared to $903,443 for the year ended December 31, 1996, an increase of
$3,452,233, or 382.1%. The increase was primarily due to the Company's financing
of its 1997 operations through the issuance of various debt instruments,
including $24 million of long term subordinated notes to MCI WorldCom and $18.8
million in borrowings from the Company's revolving credit facility (the
"Revolving Credit Facility") and $9.6 million of equipment financing.
Income Taxes. For the year ended December 31, 1997, the Company
experienced net losses of $33,636,000 and paid no income taxes. These losses are
available to offset future taxable income through the year 2012 and are subject
to the limitations of Section 382 of the Code. These limitations may result in
expiration of net operating loss carryforwards 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 its media network throughout North
America, Europe and Asia. Net losses since the Company's inception have
resulted in an accumulated deficit balance of approximately $164.4 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 December 31, 1998, the Company has derived substantially
all of its operating capital from the issuance of short- and long-term debt and
equity instruments. At December 31, 1998, the Company had a total of
approximately $209.2 million in long-term debt, of which approximately $5.3
million becomes payable during 1999.
The Company's available operating capital as of March 10, 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 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.
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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 $71.9 million into its globally expanding WAM!NET Network
and investing $20.3 million to acquire WAM!NET U.K.. Since inception, the
Company has also expended $112.8 million to fund its globally expanding
operating activities. To date, the Company has not generated cash from
operating activities and remains dependent upon its ability to generate
operating capital for its global expansion from credit facilities or other
borrowings, or the issuance of additional short- and long-term debt and equity
instruments.
During September of 1997, the Company established the Revolving Credit
Facility, 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. The Revolving Credit
Facility was established under an agreement with The First National Bank of
Chicago. In addition, MCI WorldCom guaranteed the Company's obligations under
the Revolving Credit Facility. At December 31, 1998, the Company had $24.0
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.
In December 1997, the Company acquired the outstanding common stock of
FreeMail, Inc. ("FreeMail"). In connection with the acquisition, the Company
issued to FreeMail 125,000 shares of Common Stock, with a fair value of
approximately $488,000, as consideration. The Company is also obligated to pay
the former shareholders of FreeMail as additional contingent consideration, on a
quarterly basis, amounts equal to five percent of the gross collected revenue
derived by the Company from certain identified FreeMail products; however, the
total amounts of the quarterly payments shall not exceed $3,012,500. As of
December 31, 1998, the Company did not record a liability relating to the
FreeMail revenue because no revenue had been collected.
On March 5, 1998, the Company consummated the offering of the 1998 Units,
each consisting of $1,000 principal amount of 1998 Notes and three 1998 Warrants
resulting in net proceeds to the Company of approximately $120.6 million. Cash
interest does not accrue nor is payable on the 1998 Notes prior to March 1,
2002. Thereafter, cash interest on the 1998 Notes will accrue at a rate of
13.25% 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 1998
Offering as follows: (i) $20.0 million to pay the cash portion of the 4-Sight
Acquisition, (ii) approximately $25.0 million to repay borrowings under the
Revolving Credit Facility and (iii) the balance to further the Company's
business development and expansion strategy, to enhance the WAM!NET Service
infrastructure and develop additional value-added features and services, to
optimize marketing, sales and customer support and service capabilities and for
working capital and other general corporate purposes.
On January 13, 1999, the Company issued the 1999 MCI WorldCom Convertible
Note to MCI WorldCom in a principal amount up to $25.0 million due August 28,
1999. On January 13 and March 4, 1999, respectively, the Company borrowed $10.0
million and $15.0 million thereunder. The 1999 MCI WorldCom Convertible Note
automatically converted into 2,196,317 shares of the Company's
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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 issued the 1999 MCI WorldCom Warrants to MCI WorldCom. 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 (a) 5,710,425 shares of the Class B Preferred Stock and (b)
878,527 shares of the Class C Preferred Stock, which Class B Preferred Stock and
Class C Preferred Stock are convertible in the aggregate into approximately 8.7%
of the Common Stock (calculated on a fully 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
Class B Preferred Stock and the Class C Preferred Stock are subject to certain
registration rights.
In consideration for the SGI Preferred Stock, the Company has received
$75.0 million, of which $35.0 million was paid in cash and $40.0 million was
paid by way of transfer to the Company of SGI's corporate campus office facility
located in Eagan, Minnesota. See "Properties."
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 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.
Pursuant to an agreement with MCI WorldCom, if the Company is not publicly
held by 2001, under certain circumstances and subject to certain conditions, the
Company may be required to buy and MCI WorldCom may be required to sell, the
1996 MCI WorldCom Securities (as defined herein) pursuant to a tender offer and
pricing methodology described herein under "Certain Relationships and Related
Transactions." If the Company fails to timely pay the purchase price for the
1996 MCI WorldCom Securities, MCI WorldCom will be relieved of all obligations
to sell such securities to the Company, the Company will have no right to cause
MCI WorldCom to sell such securities and the Company will not be obligated to
pay the purchase price for such securities. See "Certain Relationships and
Related Transactions."
During the year ended December 31, 1998, the Company received less than 5%
of its total revenue from sales and operations in Asian countries. As a result,
the Company had limited exposure
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to the particular risks attendant to doing business in Asia and did not
experience any material adverse effects from the Asian economic crisis; however,
the Company presently intends to expand its operations in that region. The
Company is currently unable to determine the effect, if any, that recent
economic downturns in Asia, particularly Japan, will have on the Company's
future business, operating results or liquidity, although the Company intends to
exercise prudence and sound business judgment prior to making any future
investments in Asia.
During the year ended December 31, 1998, the Company's revenue originating
outside the U.S. was 53% of total revenues. Currently, the Company does not
employ currency hedging strategies to reduce the risks associated with the
fluctuation of foreign currency exchange rates. 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 is unable to determine what effect, if any, the
adoption and use of the Euro will have in the future on the Company's business,
operating results, liquidity and financial condition. See "Quantitative and
Qualitative Disclosures About Market Risk."
YEAR 2000 COMPLIANCE
Many computer systems and applications experience problems handling dates
beyond the year 1999 and will need to be modified before the year 2000 in order
to remain functional. As for many other companies, the year 2000 computer issue
poses a potential risk for the Company as a user of information systems in the
operation of its business, as a provider of managed, high speed, digital data
delivery network service and the related computer technology and software to
customers, and as a customer of other organizations whose operations may be
affected by year 2000 compliance issues.
The Company has completed an assessment of its core business information
systems, many of which are provided by outside suppliers, for year 2000
readiness and is extending that review to include a wide variety of other
information systems and related business processes used in its operations. The
Company plans to have changes to critical systems implemented by the third
quarter of 1999 to allow time for testing. Most of the Company's mission-
critical applications are believed to be year 2000 compliant. Although its
assessment is ongoing, the Company currently believes that resolving these
matters will not have a material adverse effect on its financial condition or
results of operations.
The Company is also assessing the possible effect on its operations of the
year 2000 readiness of critical suppliers of products and services. These
include not just suppliers of components but also the Company's outsourcing
partners in manufacturing as well as suppliers of basic utilities. The
Company's reliance on its key suppliers, and therefore on the proper functioning
of their information systems and software, is increasing, and there can be no
assurance that another company's failure to address year 2000 issues could not
have a material adverse effect on the Company.
Telecommunication and data traffic between customers who are connected to
the WAM!NET Network are routed over high-bandwidth leased telephone circuits.
In addition, most customers are connected to the WAM!NET Network through
facilities of the incumbent local telephone company. Consequently, customers
may not be able to complete telephone calls or data transmissions if the
computer, telecommunications or other systems of the service provider over which
the call or transmission is routed is not year 2000 compliant. To the extent
that any disruption caused by the
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failure of a service provider to make its systems year 2000 compliant is
substantial, it could have a material adverse effect on the Company's results of
operations.
The Company has not incurred material historical costs for year 2000
awareness, inventory assessment, analysis, conversion, testing or contingency
planning. Certain of the costs associated with the Company's internal Year 2000
compliance effort (exclusive of any potential costs related to any customer or
other claim) cannot effectively be isolated from other operating expenses,
because investing in new systems is both an ordinary cost of doing business and
a means to year 2000 compliance. The Company's current estimates indicate the
total costs to insure year 2000 compliance will not be material. The Company
believes that it is unlikely to experience a material adverse impact on its
financial condition or results of operations due to year 2000 compliance issues.
However, since the assessment process is ongoing, year 2000 complications are
not fully known, and potential liability issues are not clear, the full
potential impact of the year 2000 on the Company is not known at this time.
The information regarding year 2000 issues provided in this Form 10-K is
based on the Company's current assessment of ongoing activities and is subject
to change as the Company continuously monitors these activities. The Company is
currently evaluating the need for contingency plans associated with potential
year 2000 problems. The Year 2000 disclosure set forth above is a "year 2000
statement" as defined in the Year 2000 Information and Readiness Disclosure Act
of 1998 (the "Year 2000 Act") and, to the extent the disclosure related to year
2000 processing of the Company or to products or services offered by the
Company, is also a "year 2000 readiness disclosure" as defined in the Year 2000
Act.
In a recent Securities and Exchange Commission release regarding Year 2000
disclosure, the Securities and Exchange Commission stated that public companies
must disclose the most reasonably likely worst case Year 2000 scenario.
Although it is not possible to assess the likelihood of any of the following
events, each must be included in a consideration of worst case scenarios:
widespread failure of electrical, gas, and similar supplies serving the Company;
widespread disruption of the services provided by common communications
carriers; similar disruption to the means and modes of transportation for the
Company and its employees, contractors, suppliers, and customers; significant
disruption to the Company's ability to gain access to, and remain working in,
office buildings and other facilities; the failure of substantial numbers of the
Company's critical computer hardware and software systems, including both
internal business systems and systems controlling operational facilities such as
electrical generation, transmission, and distribution systems; and the failure
of outside entities' systems, including systems related to banking and finance.
Among other things, the Company could face substantial claims by customers or
loss of revenue due to service interruptions, inability to fulfill contractual
obligations or to bill customers accurately and on a timely basis, and increased
expenses associated with litigation, stabilization of operations following
critical system failures and the execution of contingency plans. The Company
could also experience an inability by customers and others to pay, on a timely
basis or at all, obligations owed to the Company. Under these circumstances, the
adverse effects on the Company would be material, although not quantifiable at
this time. Further, the cumulative effect of these failures could have a
substantial adverse effect on the economy, domestically and internationally.
The adverse effect on the Company from a domestic or global recession or
depression also could be material, although not quantifiable at this time.
The Company will continue to monitor business conditions to assess and
quantify material adverse effects, if any, that may result from the Year 2000
problem.
37
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Currency Exchange Rates. The Company's revenue originating
outside the U.S. for the year ending December 31, 1998 was 53% 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 December 31, 1998 would not have had a
material effect on the Company's pretax earnings over the next fiscal year
ending December 1, 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.
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 year ended December 31, 1998, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
An index to the financial statements and the required financial statement
schedules is set forth in Item 14.
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
39
<PAGE>
PART II
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's executive officers and directors are:
<TABLE>
<CAPTION>
NAME Age Position with the Company
- - ------------------------------ --- ------------------------------------------------------------------------
<S> <C> <C>
Edward J. Driscoll III........ 38 Chairman of the Board, Chief Executive Officer, President and Treasurer
Allen L. Witters.............. 40 Chief Technology Officer
Bradley E. Sparks............. 52 Executive Vice President and Chief Financial Officer
James R. Clancy............... 37 Senior Vice President of Corporate Development
David T. Ottinger............. 50 Senior Vice President of Operations and Engineering
John R. Kauffman.............. 41 Vice President of Global Marketing
David A. Townend.............. 40 Managing Director, WAM!NET U.K.
Raymond E. Kang............... 39 Vice President of Product Marketing and Development
Gary C. Jader................. 47 Vice President and General Manager of Medical Services
Carrie J. Maurer.............. 32 Vice President, Global Operations
Mark Marlow................... 34 Director of Finance
Curtis G. Gray................ 50 Director
K. William Grothe, Jr......... 43 Director
Robert L. Hoffman............. 70 Director
Susan Mayer................... 49 Director
</TABLE>
The Board of Directors of the Company consists of five directors, two of
whom (currently Messrs. Driscoll, Hoffman are elected by the holders of the
Common Stock, three of whom (currently Ms. Mayer and Messrs. Grothe and Gray)
are elected by the holders of the Company's Class A Preferred Stock.
Edward J. Driscoll III is a founder and principal shareholder of the
Company and has served as its Chairman of the Board, Chief Executive Officer,
President and Treasurer since inception. Previously, Mr. Driscoll was the
principal shareholder, Chief Executive Officer, and a director of Cybernet
Systems, Inc. ("Cybernet"). Mr. Driscoll founded Cybernet in 1991 to provide
network integration services to the pre-press industry. Prior to founding
Cybernet, he held various marketing and management positions, most recently as
general manager of Roland Marketing, Inc., a regional wholesale produce
marketing and packaging company. He holds a Bachelor of Arts degree in economics
from St. John's University, Minnesota and a Master of Business Administration
degree from the University of St. Thomas.
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<PAGE>
Allen L. Witters is a founder and principal shareholder of the Company and
has served as its Chief Technology Officer since inception. He is principally
responsible for designing and implementing the WAM!NET Service architecture. Mr.
Witters has been engaged in technical consulting to the computer industry since
1975, including serving as a technical consultant from 1992 to 1996 for
Cybernet, and has broad experience in the invention, design, engineering and
implementation of software, networks, and network management systems. From 1987
to 1992, Mr. Witters was the Chief Executive Officer and a principal shareholder
of Datamap, Inc., a company that was engaged in the development and sale of GIS
(geographic information systems) software. In 1994, Mr. Witters filed a petition
for bankruptcy under Chapter 7 of the United States Bankruptcy Code.
Bradley E. Sparks joined the Company in September 1998 and currently serves
as Executive Vice President and Chief Financial Officer. Mr. Sparks has more
than 20 years of experience in corporate planning, management and finance. For
the past three and a half years, Mr. Sparks served as Chief Financial Officer
for the wireless telecommunications firm, Omnipoint Corporation, and was
instrumental in its 1996 initial public offering. At Omnipoint, Mr. Sparks
focused on arranging more than $3 billion of financing with a variety of
financial instruments including public equity, high yield debt, private
placements and bank financing. Prior to that time, Mr. Sparks was employed by
MCI Communications Corporation (now MCI WorldCom), where, from 1993 to 1995 he
held the position of Vice President and Controller and was responsible for
internal controls and, from 1988 to 1993, he served as Vice President and
Treasurer, responsible for the company's financing and capital structure. Prior
to that, Mr. Sparks served twelve years in corporate planning and finance for
Ryder System, Inc.
James R. Clancy joined the Company in April 1996 first serving as Chief
Marketing and Sales Officer until February 1999 and currently serves as Senior
Vice President of Corporate Development. From 1994 to 1996, Mr. Clancy was
employed by the Ceridian Corporation as Director of Marketing and Strategic
Planning. From 1988 to 1994, Mr. Clancy was employed by General Mills, Inc., in
various marketing and marketing management capacities. Prior to General Mills,
Mr. Clancy was a founder/President and General Manager of two Macintosh supply
manufacturing companies, respectively. Mr. Clancy holds a Bachelor of Arts
degree in economics from Moorhead State University and a Master of Business
Administration degree from the Wharton School of Business.
David T. Ottinger joined the Company in November 1997 as Senior Vice
President of Operations and Engineering. From April 1997 to November 1997, he
served as President and Chief Executive Officer of NetAccess, Inc., a network
security company. From April 1996 to April 1997, he served as Vice President,
Professional Services of Parallel Technologies, Inc. From October 1993 to April
1996, he served as Vice President, Network Services of COMDISCO Network
Services.
John R. Kauffman joined the Company in January 1998 first serving as Vice
President of Strategic Marketing and Communications until February 1999 and
currently serves as Vice President of Global Marketing. From 1991 to December
1997, Mr. Kauffman was President of Kauffman Marketing Group, Inc., where from
November 1995 to November 1997, he provided strategic positioning and outside
marketing services to the Company. Prior to 1991, Mr. Kauffman was President of
Kauffman Stewart Advertising.
David A. Townend joined the Company in March 1998 upon the consummation of
the 4-Sight Acquisition, and currently serves as Managing Director of WAM!NET
U.K. Mr. Townend founded 4-Sight and has been its Managing Director for more
than the past five years.
41
<PAGE>
Raymond E. Kang joined the Company in March 1998 and currently serves as
Vice President of Product Marketing and Development. Prior to joining the
Company, Mr. Kang was employed by MCI Telecommunications for fourteen years in
various management and sales positions, most recently as Director of Broadband
and Multimedia Marketing.
Carrie J. Maurer joined the Company in November 1996 as the Director,
Installation & Customer Service and is currently the Vice President, Global
Operations. Prior to joining the Company, Ms. Maurer was employed from 1994 to
1996 by COMDISCO Network Services as the Director of Implementation Services.
From 1984 to 1994, she was employed in various customer service management
positions with Minnesota Mutual.
Gary C. Jader joined the Company in February 1998 and currently serves as
Vice President and General Manager of Medical Services. Prior to joining the
Company, Mr. Jader was employed from 1996 to February 1998 by NeuroMotion Inc.,
a medical device company, as Vice President, Marketing and Sales. From 1991 to
1996, Mr. Jader was employed by 3M Corporation as Marketing Supervisor.
Mark Marlow joined the Company in May 1995 and currently serves as its
Director of Finance. From 1994 until May 1995, he was employed as an accounting
senior by the public accounting firm of Brunberg, Thorsen and Associates,
Minneapolis, Minnesota. From 1991 to 1994, he was employed as an assistant
controller at Miller, Johnson and Kuehn, Incorporated, a licensed securities
brokerage firm. Mr. Marlow is a certified public accountant, holds a Bachelor of
Science degree in accounting from the University of Minnesota and also holds a
general securities license.
Curtis G. Gray has served as a Director of the Company since 1996 and since
November 1991 has served as MCI WorldCom's Vice President of Enhanced Data
Networks. Mr. Gray has more than 20 years of experience in the data
communication arena, including through his own consulting firm and engineering
and management positions with GTE Laboratories and Blue Cross and Blue Shield
Association. Mr. Gray received his Masters and Bachelors degrees in Engineering
from the University of Wisconsin.
K. William Grothe, Jr. has served as a Director of the Company since 1996
and has served as Vice President of Corporate Development of MCI WorldCom since
January 1996. From July 1990 to January 1996, Mr. Grothe was Senior Vice
President and Chief Financial Officer of MobileCom, a national paging company
headquartered in Jackson Mississippi. Mr. Grothe is a Certified Public
Accountant and received a Bachelor of Science degree in Accounting from the
University of Illinois.
Robert L. Hoffman has served as a Director of the Company since October
1995. Mr. Hoffman is a founder and shareholder of the law firm of Larkin,
Hoffman, Daly & Lindgren, Ltd, where he has practiced for more than the past
five years, and has served as its Chairman of the Board and President. He has
been extensively involved in land use and development for the past 35 years as
both an attorney and in various elective and appointive offices, including 14
years as a member of the Bloomington City Council, seven years as a member of
the Metropolitan Council, a land use law instructor at Hamline University School
of Law, a member of the Urban Land Institute Development Policies and
Regulations Council and a member of the Land Use Advisory Group for the Public
Technologies Institute of Washington, D.C.
Susan Mayer has served as a Director of the Company since October 1998 and
currently serves as an MCI WorldCom Senior Vice President. Ms. Mayer is also
President, MCI WorldCom Fund, a
42
<PAGE>
venture fund created to invest in technologies, products and services that
complement MCI WorldCom's strategic direction. Previously, she was Senior Vice
President, ventures and alliances of MCI Communications Corporation, responsible
for strategy development, and mergers and acquisitions, and President and Chief
Operating Officer of SkyMCI, an MCI company that marketed a full range of data,
information and training services. Ms. Mayer joined MCI WorldCom in July 1993.
Previously, Ms. Mayer was with NHP, Inc., where she was responsible for the
development and implementation of acquisition and financing strategies. She also
previously served as general manager of COMSAT Video Enterprises, and vice
president of corporate development for COMSAT Corp., and was manager of strategy
consulting for The Boston Consulting Group.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to each of the Company's executive officers other than the
Chief Executive Officer (collectively, the "Named Executive Officers") whose
salaries and bonus exceed $100,000 for services rendered in all capacities to
the Company for each of the years ended December 31, 1997 and 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------ -----------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS RESTRICTED SECURITIES ALL OTHER
--------------------------- ---- ------ ----- ---------- ---------- ---------
STOCK UNDERLYING COMPEN-
----- ---------- -------
AWARD(S) OPTIONS (#) SATION
-------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Edward J. Driscoll III.......................... 1998 $ 195,000 $ -- (1) $-- 750,000 --
Chairman of the Board, Chief Executive 1997 150,000 75,000 -- -- --
Officer, President and Treasurer
1996 101,250 67,500 -- 2,000,000 --
Allen L. Witters................................ 1998 195,000 -- (1) -- 750,000 --
Chief Technology Officer 1997 150,000 75,000 -- -- --
1996 101,250 67,500 -- 2,000,000 --
James R. Clancy................................. 1998 170,000 -- (1) -- -- --
Senior Vice President of Corporate 1997 135,000 67,500 -- 500,000 --
Development
1996 55,580 40,000 -- 375,000 --
David T. Ottinger............................... 1998 120,000 10,000 (1) -- -- --
</TABLE>
43
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1997 16,000 (2) 5,000
Senior Vice President of Operations and 1997 -- -- -- 150,000 --
Engineering
1996 -- -- -- -- --
John R. Kauffman................................. 1998 150,000 100,000 (1) -- 350,000 --
Vice President of Global Marketing 1997 -- -- -- 225,000 --
1996 -- -- -- -- --
</TABLE>
_____________________
(1) The total bonuses for the year ended December 31, 1998 for Messrs.
Driscoll, Witters, Clancy, Ottinger and Kauffman have yet to be determined
by the Board of Directors.
(2) David T. Ottinger's employment with the Company began in November of 1997.
The following table sets forth certain information for the fiscal year
ended December 31, 1998 with respect to stock options granted to the Named
Executive Officers. For the fiscal year ended December 31, 1998, no stock
appreciation rights were granted to the Named Executive Officers and no stock
options were granted to the Named Executive Officers at an option price below
market value on the date of the grant, as determined by the Board of Directors
of the Company. The potential realized dollar value of an option grant is the
product of (a) the difference between (1) the product of the per-share market
price at the time of the grant (which the Company determined was $3.90 on
January 1, 1998 and $8.00 on July 1, 1998, which was the price per share
attributable to the Company's common stock in the immediately preceding arm's
length transaction with an independent third party) and the sum of 1 plus the
adjusted stock price appreciation rate and (2) the per-share exercise price of
the option, and (b) the number of securities underlying the grant at fiscal
year-end.
STOCK OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE AT
ASSUMED ANNUAL RATES OF
STOCK APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
--------------------------------------------------- -----------
% OF TOTAL
----------
NUMBER OF OPTIONS EXERCISE
--------- ------- --------
SECURITIES GRANTED TO OR BASE
---------- ---------- -------
NAME UNDERLYING OPTIONS EMPLOYEES PRICE EXPIRATION
- - ----- ------------------ --------- ----- ----------
GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% 10%
----------- -------------- ------ ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Edward J. Driscoll III....... 750,000 16% $8.00 7/01/08 $1,657,689 $3,663,060
Allen L. Witters............. 750,000 16% 8.00 7/01/08 1,657,689 3,663,060
James R. Clancy.............. -- -- -- -- -- --
David T. Ottinger............ -- -- -- -- -- --
John R. Kauffman............. 350,000 8% 3.90 1/01/06 377,124 833,346
</TABLE>
The following table sets forth certain information with respect to the value
of unexercised stock options held by the Named Executive Officers as of December
31, 1998.
44
<PAGE>
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT FY-END (#) OPTIONS AT FY-END
--------------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ----------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Edward J. Driscoll III....... 2,750,000 -- $14,080,000 $ --
Allen L. Witters............. 2,750,000 -- 14,080,000 --
James R. Clancy.............. 583,333 291,667 4,106,664 2,053,336
David T. Ottinger............ 50,000 100,000 205,000 410,000
John R. Kauffman............. 410,000 165,000 2,342,500 676,500
</TABLE>
DIRECTORS' COMPENSATION
The Company does not grant compensation to its directors other than as set
forth below. Each director is reimbursed for reasonable out-of-pocket expenses
incurred in connection with attendance at meetings of the Board of Directors.
In January 1996 Mr. Robert L. Hoffman was granted 75,000 stock options at an
exercise price of $0.96 per share, which options expire November 30, 2005, all
of which were vested and exercisable of December 31, 1998. Other than Mr.
Hoffman, no director received compensation in any form for services rendered as
a director from the Company during fiscal year 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Company's Compensation Committee is or has been an officer
or employee of the Company or any of its subsidiaries. During 1998, no executive
officer of the Company served on the Compensation Committee or as a director of
another entity in which any such entity's executive officers served on the
Company's Compensation Committee or Board of Directors. K. William Grothe, Jr.
a member of the Compensation Committee, is an officer of MCI WorldCom, a
significant shareholder of the Company. See "Certain Relationships and Related
Transactions."
EMPLOYMENT AGREEMENTS
Effective October 1, 1996, the Company entered into an employment agreement
with Edward J. Driscoll III which provides for: (i) an initial term of 27 months
and subsequent one-year renewals, (ii) an initial annual salary of $150,000,
subject to periodic review and adjustment, (iii) an additional bonus or other
compensation as may be established from time to time by the Board of Directors
based upon achievement of performance goals derived from the Company's annual
business plan, which sets forth revenue and profit measures of the Company, (iv)
use of a company automobile, (v) non-competition by Mr. Driscoll with the
business of the Company during the term of the agreement and for a period of two
years after its termination of employment and non-solicitation of the employees
or customers of the Company during such period, (vi) confidentiality with
respect to all information and trade secrets of the Company during the term of
employment and for a period of two years after the termination of employment and
(vii) automatic assignment to the Company of all ideas, inventions, discoveries
and improvements of Mr. Driscoll relating to the business of the Company. In the
event that the agreement is terminated by the Company without cause, Mr.
Driscoll is entitled to receive
45
<PAGE>
severance, payable in cash, in an amount equal to the sum of (a) the greater of
(x) his then base salary for two years or (y) the amounts reasonably estimated
to be due under the agreement for the two year period following termination and
(b) one half of the bonus to which he would have been entitled to in the year of
termination. In connection with this employment agreement, the Company and Mr.
Driscoll also entered into a stock option agreement which provides for the grant
of an option, expiring December 31, 2007, to purchase up to 2,000,000 shares of
Common Stock at a price of $0.96 per share. These options vested on January 2,
1998.
Effective October 1, 1996, the Company entered into an employment agreement
and a stock option agreement with Allen L. Witters on terms substantially the
same as those of the employment agreements with Mr. Driscoll. The stock options
issued to Mr. Witters also vested on January 2, 1998.
Effective April 16, 1996, the Company entered into an employment agreement
with James R. Clancy which provides for: (i) an annual salary of $85,000, (ii) a
bonus of up to $40,000, conditioned on achievement of certain operational
objectives, such operational objectives to include (a) the proposal of a written
plan and timeline for the development and implementation of a comprehensive
marketing plan for the Company's products during 1996 and 1997 and (b) such
other additional objectives that Mr. Clancy was to determine and achieve during
the first twelve month period following the effective date of his employment
agreement, (iii) confidentiality with respect to all information and trade
secrets of the Company during the term of employment and for a period of one
year after the termination of employment and (iv) non-competition by Mr. Clancy
with the business of the Company for a period of 18 months after the termination
of employment, and non-solicitation of the customers of the Company during such
period. The employment agreement is for an unspecified term on an "at will"
basis. In connection with this employment agreement, the Company and Mr. Clancy
have entered into incentive stock option agreements with respect to the grant of
options to purchase 875,000 shares of Common Stock at a purchase price of $0.96
per share. 750,000 options vest in annual increments ending May 1, 2000 and the
remaining 125,000 vested on January 2, 1998.
Effective September 8, 1998, the Company entered into an employment
agreement with Bradley E. Sparks which provides for (i) an initial monthly base
salary of $16,667; (ii) an annual bonus of up to 30% of his base salary
conditioned upon achievement of specific performance objectives; (iii) an
automobile allowance; (iv) non-competition with the Company during the term of
the agreement and for a period of one year after his termination of employment
and non-solicitation of Company employees during such period; (vi)
confidentiality with respect to all Company confidential information and trade
secrets of the Company during the terms of his employment and for a period of
one year after the termination of employment; and (vii) automatic assignment to
the Company of all ideas, inventions, discoveries and improvements of Mr. Sparks
relating to the business of the Company. In the event that the agreement is
terminated by the Company without cause, Mr. Sparks is entitled to receive as
severance pay an amount equal to six months of his base pay as of the date of
his termination, less customary payroll deductions, to be paid in monthly
installments. In connection with the agreement, the Company and Mr. Sparks also
entered into stock option agreements which provides for the grant of options to
purchase 400,000 shares of Common Stock at a price of $8.00 per share and
200,000 shares of Common Stock at a price of $12.00 per share.
Effective January 1, 1998, the Company entered into an employment agreement
with John R. Kauffman which provides for (i) an initial monthly base salary of
$12,500; (ii) non-competition with the Company during the term of the agreement
and for a period of one year after his termination of employment and non-
solicitation of Company employees during such period; (iii) confidentiality with
respect to all Company confidential information and trade secrets of the Company
during the terms of his employment and for a period of one year after the
termination of employment; and (iv) automatic assignment to the company
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<PAGE>
of all ideas, inventions, discoveries and improvements of Mr. Kauffman relating
to the business of the Company. In connection with the agreement, the Company
and Mr. Kauffman also entered into a stock option agreement which provided for
the grant of options to purchase 350,000 shares of Common Stock at a price of
$3.90 per share. Mr. Kauffman's employment agreement was subsequently amended to
provide Mr. Kauffman with quarterly bonuses of $25,000 per calendar quarter.
Prior to joining the Company as an employee, Mr. Kauffman served the Company as
a consultant and in connection therewith was granted options to purchase 225,000
shares of Common Stock at a purchase price of $.96 per share.
Effective November 3, 1997, the Company entered into an employment
agreement with David T. Ottinger which provides for (i) an initial monthly base
salary of $8,333; (ii) a initial bonus of up to $20,000 based upon achievement
of specific operational objectives; (iii) non-competition with the Company
during the term of the agreement and for a period of one year after his
termination of employment and non-solicitation of Company employees during such
period; (iii) confidentiality with respect to all Company confidential
information and trade secrets of the Company during the terms of his employment
and for a period of one year after the termination of employment; and (iv)
automatic assignment to the company of all ideas, inventions, discoveries and
improvements of Mr. Ottinger relating to the business of the Company. In
connection with the agreement, the Company and Mr. Ottinger also entered into a
stock option agreement which provided him with options to purchase 150,000
shares of Common Stock at a price of $3.90 per share.
The Company has implemented a quarterly bonus compensation program pursuant
to which directors and key managers can receive up to 30%, and other employees
up to 20%, of their annual salary in cash bonuses based upon individual
achievement and the achievement of corporate goals and objectives.
The Company's other officers and significant technical employees are
employed pursuant to annually renewing employment agreements which continue
until terminated by either the Company or the employee. Each such agreement
contains confidentiality and assignment of invention provisions in favor of the
Company. The Company currently has no retirement, pension, or insurance plans
for its officers. The Company may in the future adopt such plans and may also
adopt a compensation plan substantially increasing officers' salaries and other
compensation based upon the performance of the Company.
STOCK OPTION PLANS
The Company's Stock Option Plan (the "1994 Plan") was adopted in September
1994 by the Company's Board of Directors and was approved by the shareholders of
the Company in October 1994. The 1994 Plan has been subsequently amended, most
recently on April 24, 1998 (as so amended and restated, the "Amended 1994 Plan")
in conjunction with the adoption of the Company's 1998 Combined Stock Option
Plan (the "1998 Plan" and, collectively, the "Plans"), to reflect the Company's
name change to WAM!NET Inc., to incorporate prior amendments to the 1994 Plan,
to provide that no new options be granted under the Amended 1994 Plan and to
limit the number of shares of Common Stock available for issuance under the
Amended 1994 Plan to 7,000,000. Each Plan is currently administered by the
Company's Board of Directors. The 1998 Plan and the amendments to the 1994 Plan
adopted by the Board of Directors on April 24, 1998 received shareholder
approval on May 30, 1998.
The Amended 1994 Plan and the 1998 Plan provide for the granting of Common
Stock options which qualify as "incentive stock options" under Section 422 of
the Code, as well as the granting of
47
<PAGE>
"nonqualified options." Under each Plan, the Board or, if the Board appoints
one, a "Stock Option Committee" has complete discretion to select the optionees
and to establish the terms and conditions of each option, subject in all cases
to the applicable provisions of the Plan and the Code. Options granted under a
Plan are not transferable and are subject to various other conditions and
restrictions. Participation in the Amended 1994 Plan is limited to officers and
regular full-time executive, administrative, professional, production and
technical employees of the Company or a subsidiary of the Company, who are
salaried employees of the Company or such subsidiary, and consultants or the
Company or a subsidiary. Non-employee directors of the Company may be granted
nonqualified options. Participation in the 1998 Plan is limited to employees of
the Company or a subsidiary of the Company and to non-employee directors and
non-employee consultants. The 1998 Plan provides that without amending the 1998
Plan, the Stock Option Committee may grant options to eligible employees who are
foreign nationals on such terms and conditions different from those specified in
the 1998 Plan as may in the judgment of the committee be necessary or desirable
to foster and promote achievement of the purposes of the 1998 Plan, and, in
furtherance of such purposes, the Committee may make such addenda,
modifications, amendments, procedures and subplans as may be necessary or
advisable to comply with provisions of laws in other countries in which the
Company operates or has employees. An addendum to the 1998 Plan extends the
benefits of stock options granted under the 1998 Plan to employees of the
Company and its subsidiaries who are residents of the United Kingdom.
A total of 7,000,000 shares of Common Stock have been reserved for issuance
under the Amended 1994 Plan and a total of 25,000,000 shares of Common Stock
have been reserved for issuance under the 1998 Plan, subject to adjustment for
stock splits or recapitalizations. Shares subject to canceled, unexercised,
lapsed or terminated options are available for subsequently granted options
under a Plan. The exercise price of all incentive stock options granted under a
Plan must be at least equal to the fair market value of the shares on the date
of grant, and the maximum term of each option is ten years. Under the terms of
each Plan, the aggregate fair market value of the Common Stock (determined at
the date of the option grant) for which any employee may first exercise
incentive stock options in any calendar year may not exceed $100,000. Upon
exercise of an option, payment of the exercise price in cash is required, or, at
the discretion of the Company, by the delivery of Common Stock of the Company
already owned by the optionee or a promissory note for all or a portion of the
exercise price of the shares so purchased or a combination of the foregoing.
There is no express limitation on the duration of a Plan; provided, however,
that incentive stock options may not be granted after the date that is ten years
from the date of shareholder approval of a Plan. The Board may terminate either
Plan and, subject to certain limitations, may amend either Plan at any time. As
of the date hereof, there were 6,913,251 options issued and outstanding under
the Amended 1994 Plan, consisting of incentive stock options to employees to
purchase a total of 5,847,417 shares of Common Stock at exercise prices ranging
from $0.45 to $8.00 per share, and non-qualified stock options to purchase a
total of 1,065,834 shares of Common Stock at exercise prices ranging from $0.96
to 12.00 per share. As of the date hereof, there were 2,191,250 options issued
and outstanding under the 1998 Plan, consisting of incentive options to
employees and consultants to purchase a total of 552,000 shares of Common Stock
at an exercise price of $8.00 per share and non-qualified options to purchase a
total of 1,639,250 shares of Common Stock at exercise prices ranging from $8.00
to $12.00 per share.
In addition to options granted under the Plans, the Company has also
granted certain officers and consultants options to purchase a total of
5,125,000 shares of Common Stock at exercise prices ranging from $0.45 to $3.90
per share.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of the Company's
Common Stock as of March 15, 1999 for (i) each of the Company's executive
officers and directors, (ii) all executive officers and directors as a group and
(iii) each person known by the Company to own beneficially 5% or more of the
Company's outstanding shares of Common Stock. All persons indicated have sole
voting and dispositive power over such shares unless otherwise indicated. Except
as indicated below, none of the persons in the table have beneficial ownership
in any class of equity securities of any parent or subsidiary of the Company.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER Number of Shares Percentage of Total
------------------------
Beneficially Owned (1) SHARES OUTSTANDING (1)
---------------------- ----------------------
<S> <C> <C>
Edward J. Driscoll III/(2)/......................................... 4,750,000 (3) 39.4%
Allen L. Witters/(2)/............................................... 4,750,000 (3) 39.4
James R. Clancy/(2)/................................................ 645,833 (4) 6.5
Mark Marlow/(2)/.................................................... 81,666 (5) 0.9
John R. Kauffman/(2)/............................................... 485,000 (6) 5.0
David T. Ottinger/(2)/.............................................. 50,000 (7) 0.5
Gary C. Jader/(2)/.................................................. 50,000 (7) 0.5
Raymond E. Kang/(2)/................................................ 83,333 (8) 0.9
Carrie J. Maurer/(2)/............................................... 65,000 (9) 0.7
Bradley E. Sparks/(2)/.............................................. -- --
David A. Townend/(10)/.............................................. 1,317,300 14.2
Robert L. Hoffman................................................... 75,000 (11) 0.8
K. William Grothe, Jr./(12)/........................................ -- (13) --
Susan Mayer/(12)/................................................... -- (14) --
Curtis G. Gray/(12)/................................................ -- (15) --
MCI WorldCom, Inc./(12)/............................................ 36,794,680 (16) 79.8
Silicon Graphics, Inc............................................... 5,710,425 (17) 38.0
George L. Frisch.................................................... 625,000 (18) 6.5
James L. Ecker...................................................... 922,520 (19) 9.0
All executive officers and directors as a group (15 persons)........ 12.403,132 (3)(4)(5)(6)((7) 75.7
(8)(9)(10)(11)
</TABLE>
________________________
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes general voting power
and/or investment power with respect to securities. Shares of Common Stock
subject to options or warrants currently exercisable or exercisable within
60 days are deemed outstanding for purposes of computing the beneficial
ownership percentage of the person holding such options but are not deemed
outstanding for purposes of computing the percentage of any other person.
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<PAGE>
(2) Address: 6100 W. 110th Street, Minneapolis, Minnesota 55438.
(3) Includes 2,750,000 shares issuable upon exercise of stock options currently
exercisable.
(4) Includes 583,333 shares issuable upon exercise of stock options currently
exercisable and 62,500 shares issuable upon exercise of stock options
exercisable within 60 days.
(5) Includes 81,666 shares issuable upon exercise of stock options currently
exercisable.
(6) Includes 455,000 shares issuable upon exercise of stock options currently
exercisable and 30,000 shares issuable upon exercise of stock options
exercisable within 60 days.
(7) Includes 50,000 shares issuable upon exercise of stock options currently
exercisable.
(8) Includes 83,333 shares issuable upon exercise of stock options currently
exercisable.
(9) Includes 65,000 shares issuable upon exercise of stock options currently
exercisable.
(10) Address: 2 Poole Road, Bournemouth, Dorset, BH25QY England.
(11) Issuable upon exercise of stock options currently exercisable. Address:
Larkin, Hoffman, Daly & Lindgren, Ltd., 1500 Northwest Financial Center,
7900 Xerxes Avenue South, Bloomington, MN 55431.
(12) Address: 515 East Amite, Suite 400, Jackson, MS 39201.
(13) Mr. Grothe is the beneficial owner of 53,333 shares of Common Stock of MCI
WorldCom, representing fewer than 1% of the total shares outstanding, which
total includes 43,833 shares issuable upon exercise of stock options
exercisable within 60 days.
(14) Ms. Mayer is the beneficial owner of 25,122 shares of Common Stock of MCI
WorldCom, representing fewer than 1% of the total shares outstanding, which
total includes 4,970 shares issuable upon exercise of stock options
exercisable within 60 days.
(15) Mr. Gray is the beneficial owner of 98,000 shares of Common Stock of MCI
WorldCom, representing fewer than 1% of the total shares outstanding, which
total includes 58,000 shares issuable upon exercise of stock options
exercisable within 60 days.
(16) Includes 29,333,670 shares issuable upon exercise of warrants currently
exercisable and 200,000 shares issuable upon the exercise of warrants
exercisable within 60 days, 5,064,868 shares issuable upon conversion of a
convertible subordinated note in the principal amount of $5 million and
2,196,317 shares of Class D Convertible Preferred Stock. MCI WorldCom also
owns 115,206 shares of Class A Preferred Stock.
(17) Includes 5,710,425 shares of Class B Convertible Preferred Stock which are
immediately convertible. Silicon Graphics, Inc. also owns 878,527 shares
of Class C Convertible Preferred Stock. Address: 2011 N. Shoreline Blvd.,
Mountain View, CA 94043-1389.
(18) Includes 150,000 shares issuable upon exercise of warrants currently
exercisable, 200,000 shares issuable upon exercise of stock options
currently exercisable and 25,000 shares issuable upon exercise of stock
options exercisable within 60 days. Address: 5030 Woodlawn Blvd.,
Minneapolis, MN 55417.
(19) Includes 131,580 shares issuable upon exercise of a convertible
subordinated debenture, 416,665 shares issuable upon exercise of currently
exercisable warrants and 50,000 shares owned by the Ecker Family Limited
Partnership, of which he is a partner. Address: 5061 Interlachen Bluff,
Edina, MN 55436.
50
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
MCI WorldCom is a principal shareholder of the Company. As a result of the
consummation of the SGI Investment, MCI WorldCom will have the right to elect
the largest whole number that is less than the majority of all of the members of
the Board of Directors of the Company. In September 1996, the Company issued to
MCI WorldCom the 1996 MCI WorldCom Convertible Note. Interest on the 1996 MCI
WorldCom Convertible Note accrues at an annual rate of 10%, payable semi-
annually, commencing with the first payment on March 30, 1997. At any time prior
to September 30, 1999, MCI WorldCom may convert the principal amount of the 1996
MCI WorldCom Convertible Note into shares of Common Stock at a conversion price
of $1.00 per share, subject to adjustment in the event of stock splits,
reorganizations or recapitalizations. Payment of principal and interest on the
1996 MCI WorldCom Convertible Note is subordinated to existing and future
obligations of the Company for money borrowed from bank, trust, insurance or
other financial institutions. The shares of Common Stock underlying the 1996 MCI
WorldCom Convertible Note are subject to certain registration rights.
In November 1996, the Company and MCI WorldCom entered into a Preferred
Stock, Subordinated Note and Warrant Purchase Agreement (the "1996 MCI WorldCom
Agreement"). Pursuant to the 1996 MCI WorldCom Agreement, the Company issued
100,000 shares of its Class A Preferred Stock, par value $10.00 per share, to
MCI WorldCom for an aggregate purchase price of $1.0 million. In connection
with the SGI Investment, MCI WorldCom exchanged its shares of Class A Preferred
Stock for 115,206 shares of a new Series of Class A Preferred Stock, par value
$10.00 per share (the "Class A Preferred Stock") with terms substantially the
same as the original Class A Preferred Stock except with respect to matters
related to the Tender Valuation (as discussed below) and the right to elect
directors. Except for voting with respect to the election of directors, holders
of shares of Class A Preferred Stock are entitled to one vote for each share
held of record, voting together with the holders of Common Stock as a single
class, on all matters submitted to a vote of shareholders. Following the SGI
Investment, holders of Class A Preferred Stock, voting separately as a class,
will be entitled to elect one member less than a majority of all directors.
Pursuant to the 1996 MCI WorldCom Agreement, the Company also issued to MCI
WorldCom a $28.5 million Subordinated Note due December 31, 2003 (the "1996 MCI
WorldCom Subordinated Note"), of which $20.4 million aggregate principal amount
was outstanding as of December 31, 1998. The MCI WorldCom Subordinated Note
accrues interest at an annual rate of 7%, payable semi-annually, commencing
March 31, 1997. Payment of principal and interest on the 1996 MCI WorldCom
Subordinated Note is subordinated to existing and future obligations of the
Company for money borrowed from bank, trust, insurance or other financial
institutions.
In February 1998 MCI WorldCom agreed to defer all cash payments of
principal (or premium on) or interest on, or dividend, distribution, redemption
or other payment in respect of the 1996 MCI WorldCom Convertible Note, the Class
A Preferred Stock owned by MCI WorldCom and the 1996 MCI WorldCom Subordinated
Note until a date that is 180 days following the Stated Maturity of the 1998
Notes (the "Deferral Date"). The agreement also provides that the payment of the
principal of and interest on the 1996 MCI WorldCom Convertible Note and the 1996
MCI WorldCom Subordinated Note may be accelerated only in the event of the
acceleration of the payment of the principal amount of the 1998 Notes following
an Event of Default with respect to the 1998 Notes. The agreement grants MCI
WorldCom an option to convert (a) interest otherwise due on the 1996 MCI
WorldCom Convertible Note and deferred pursuant to MCI WorldCom's agreement, and
(b) the interest accrued on the outstanding principal amount of the 1996 MCI
WorldCom Subordinated Note
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<PAGE>
from December 31, 2003 through the date such amount is paid pursuant to MCI
WorldCom's agreement into shares of Common Stock at the per share price on the
date of such conversion.
Pursuant to the 1996 MCI WorldCom Agreement, the Company also issued to MCI
WorldCom warrants to purchase, on or before December 31, 2000, up to 20,787,500
shares of the Company's Common Stock at an initial exercise price of $0.96 per
share, subject to adjustment in the event of stock splits, reorganizations or
recapitalizations (the "1996 MCI WorldCom Warrants"). The exercise price
increased to $0.98 per share on March 31, 1997, and thereafter will
automatically increase by the amount of $0.02 per share on the last day of each
calendar quarter, subject to certain abatement provisions. The exercise price is
currently $1.09 per share. The 1996 MCI WorldCom Warrants are subject to certain
registration rights.
The 1996 MCI WorldCom Agreement (as amended) provides that if the Company
is not publicly held by the year 2001 its managers and Board of Directors will
obtain an independent valuation by a nationally recognized investment bank of
the fair market value per share of the Company's Common Stock, without any
premium allocated for any controlling interest (the "Tender Valuation"). Upon
receipt of the Tender Valuation, MCI WorldCom may, but is not required to,
tender (the "First Tender") to purchase all outstanding shares of Common Stock
and all outstanding options, warrants, convertible securities and other rights
to purchase shares of Common Stock (collectively, "Company Common Securities")
for at least the per share amount of the Tender Valuation. If the owners of a
majority of the then outstanding shares of the Company's Common Stock (excluding
shares held by MCI WorldCom or its affiliates) reject the First Tender, MCI
WorldCom will have 60 days following such rejection to again tender (the "Second
Tender") to purchase the same securities. During such 60-day period, the
Company will use its good faith efforts to determine what offer price would be
acceptable to the owners of such shares and will communicate such information to
MCI WorldCom. Subject to certain conditions, MCI WorldCom will sell and the
Company will purchase the 1996 MCI WorldCom Warrants, any shares acquired upon
exercise of the 1996 MCI WorldCom Warrants and any shares acquired upon the
conversion of the 1996 MCI WorldCom Convertible Note (collectively, the "1996
MCI WorldCom Securities") if (i) MCI WorldCom fails to make the First Tender
within 90 days after receipt of the Tender Valuation; (ii) owners of a majority
of the then outstanding shares of Common Stock (excluding shares held by MCI
WorldCom or its affiliates) reject the First Tender and 1996 MCI WorldCom makes
no Second Tender; or (iii) owners of a majority of the then outstanding shares
of Common Stock (excluding shares held by MCI WorldCom or its affiliates) reject
the Second Tender. The Company's purchase price for the 1996 MCI WorldCom
Securities will be as follows:
(a) If MCI WorldCom fails to make the First Tender, an amount equal to the
Tender Valuation (or the spread between the Tender Valuation and the
exercise price in the case of warrants).
(b) If the First Tender is rejected by the Company's shareholders and MCI
WorldCom does not make the Second Tender, an amount equal to the
purchase price offered by MCI WorldCom in the First Tender (or the
spread between the offer price and the exercise price in the case of
warrants).
(c) If the Second Tender is rejected by the Company's shareholders, an
amount equal to the purchase price offered by MCI WorldCom in the
Second Tender (or the spread between the offer price and the exercise
price in the case of warrants).
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<PAGE>
The Company will have nine months in which to pay the purchase price for
the 1996 MCI WorldCom Securities. From the time the obligation of the Company to
purchase the 1996 MCI WorldCom Securities arises until the expiration of such
nine-month period, Edward J. Driscoll III and Allen L. Witters will jointly hold
a limited proxy with regard to all of the 1996 MCI WorldCom Securities. If the
Company fails to timely pay the purchase price for the 1996 MCI WorldCom
Securities, MCI WorldCom will be relieved of all obligations to sell such
securities to the Company, the Company will have no right to cause MCI WorldCom
to sell such securities and the Company will not be obligated to pay the
purchase price for such securities. The parties have agreed to waive their
respective obligations thereunder if the Company determines to become, and
thereafter becomes, a publicly-held company.
In December 1996, MCI WorldCom, Edward J. Driscoll III and Allen L. Witters
executed a Right of Refusal Agreement which provides: (i) for a restriction on
transfer by Mr. Driscoll and Mr. Witters of the shares of Common Stock of the
Company held by them as of the date thereof (the "Subject Shares") and (ii) that
in the event Mr. Driscoll or Mr. Witters desires to sell his Subject Shares,
then he shall offer to the other a right of first refusal and, in the event the
other does not elect to purchase such Subject Shares, he shall offer to MCI
WorldCom a right of second refusal.
In September 1997, the Company entered into the Revolving Credit Facility.
The maximum amount that can be borrowed under the Revolving Credit Facility is
$25.0 million. MCI WorldCom has guaranteed the payment of all amounts owed under
the Revolving Credit Facility, and, accordingly, the Company must obtain MCI
WorldCom's consent prior to obtaining any advances under the Revolving Credit
Facility. At December 31, 1998, the amount outstanding under the Revolving
Credit Agreement was $24,000,000. In consideration of MCI WorldCom's guaranty,
the Company granted to MCI WorldCom 8,396,170 Class A warrants and 14,204,835
Class B warrants to purchase shares of Common Stock at an initial exercise price
of $3.90 per share, subject to adjustment in the event of stock splits,
reorganizations or recapitalizations. The Class A warrants may be exercised at
any time on or before December 31, 2000. The Class B warrants begin to vest
after September 1999 depending upon the outstanding balance under the Revolving
Credit Facility at certain times and whether certain qualified repayments are
made thereunder. If the Company repays all obligations under the Revolving
Credit Facility prior to September 1999 with certain qualified repayments, no
Class B warrants will vest. The Company intends to repay all obligations
thereunder prior to the September 1999 vesting date of the Class B warrants.
The Class A warrants and Class B warrants are subject to certain registration
rights.
MCI WorldCom has also guaranteed the performance of the Company's
obligations under a Service Provision Agreement, dated July 18, 1997, between
the Company and Time.
The Company has entered into service arrangements with MCI WorldCom,
including an Application for Data Services pursuant to which MCI WorldCom
provides the Company with interexchange telecommunications service, frame relay
service and ATM service, and co-location agreements pursuant to which the
Company leases space for its Distribution Hubs. The Company believes that these
arrangements are on terms that are similar to those that could be obtained from
an independent third party on an arm's-length basis. Pursuant to the Company's
agreements with MCI WorldCom, the Company has guaranteed monthly usage levels of
data communications with MCI WorldCom totaling in aggregate approximately $4.1
million, $2.8 million and $1.1
53
<PAGE>
million for the years ended December 31, 1999, 2000 and 2001, respectively. In
the event these agreements are terminated prior to their expiration date, the
Company will be liable to MCI WorldCom for termination contingencies totaling in
aggregate approximately $4.4 million, $2.6 million and $1.1 million for the
years ended December 31, 1998, 1999 and 2000, respectively. The Company's data
communications expense under telecommunication contracts with MCI WorldCom was
approximately $342,573, $5.5 million and $11.8 million for the years ended
December 31, 1996, 1997 and 1998, respectively. In addition, in connection with
the issuance of the 1999 MCI WorldCom Convertible Note, the Company has agreed
to make available to MCI WorldCom certain technology developed by the Company to
be integrated with MCI WorldCom's infrastructure and product/service suites on
terms mutually acceptable to each of the Company and MCI WorldCom, provided that
such technology is provided on such terms and conditions that are at least as
favorable, when viewed in their entirety, as the Company provides (or may in the
future have provided) to any other person or entity not affiliated with MCI
WorldCom.
On January 13, 1999, the Company issued the 1999 MCI WorldCom Convertible
Note to MCI WorldCom in a principal amount up to $25.0 million due August 28,
1999. On January 13 and March 4, 1999, respectively, the Company borrowed $10.0
million and $15.0 million thereunder. The 1999 MCI WorldCom Convertible Note
automatically converted into 2,196,317 shares of the Company's 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
issued the 1999 MCI WorldCom Warrants to MCI WorldCom. 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 (a) 5,710,425 shares of the Class B Preferred Stock and (b)
878,527 shares of the Class C Preferred Stock, which Class B Preferred Stock and
Class C Preferred Stock are convertible in the aggregate into approximately 8.7%
of the Common Stock (calculated on a fully 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
Class B Preferred Stock and the Class C Preferred Stock are subject to certain
registration rights.
SGI, as the holder of Class B Preferred Stock has the exclusive right,
voting separately as a class, to elect one member to the Company's Board of
Directors.
In consideration for the SGI Preferred Stock, the Company has received
$75.0 million, of which $35.0 million was paid in cash and $40.0 million was
paid by way of transfer to the Company of SGI's corporate campus office facility
located in Eagan, Minnesota. See "Properties."
In connection with the SGI Investment, SGI and the Company entered into the
Preferred Provider Agreement, pursuant to which the Company has 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.
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<PAGE>
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.
Immediately prior to the issuance of the SGI Preferred Stock, MCI WorldCom
(a) converted the 1999 MCI WorldCom Convertible Note into 2,196,317 shares of
Class D Preferred Stock which are immediately convertible into approximately
2.9% of the Common Stock calculated on a fully diluted basis, and (b) exchanged
100,000 shares (100%) of the Company's Class A Preferred Stock, par value $10.00
per share (which had entitled MCI WorldCom to elect a majority of the members of
the Company's Board of Directors), into 115,206 shares (100%) of 1999 Class A
Preferred Stock, par value $10.00 per share (the "1999 Class A Preferred Stock")
(which now entitles MCI WorldCom to elect the largest whole number that is less
than a majority of all of the members of the Company's Board of Directors).
Concurrently with the closing of the SGI Investment, SGI, MCI WorldCom and
the Company entered into a Stockholder's Agreement, dated as of March 4, 1999
(the "1999 Stockholders Agreement") pursuant to which SGI and MCI WorldCom have
each agreed to provide the other party with certain tag-along rights with
respect to the transfer of any shares of the SGI Stock or the Class D Preferred
Stock. In addition, the parties agreed that the terms of future material
agreements between the Company and MCI WorldCom must be approved by a majority
of the disinterested directors of the Company.
Edward J. Driscoll, Jr., purchased 250,000 shares of Common Stock at the
Company's inception in 1994. As consideration for such shares, Mr. Driscoll paid
the Company $500 and agreed to provide certain consulting services to the
Company. In January 1998, Mr. Driscoll was granted an option to purchase up to
200,000 shares of the Company's Common Stock at a price of $3.90 per share as
partial consideration for his agreement to provide certain services to the
Company. Mr. Driscoll is a shareholder of Larkin, Hoffmann, Daly & Lindgren,
Ltd., which provides certain legal services to the Company. Mr. Driscoll is the
father of Edward J. Driscoll III, the Company's Chairman of the Board, President
and Chief Executive Officer.
George H. Frisch, who provides certain legal services to the Company,
purchased 250,000 shares of Common Stock at the Company's inception in 1994. As
consideration for such shares, Mr. Frisch paid the Company $500 and agreed to
provide certain legal services to the Company. In November 1995, Mr. Frisch was
granted warrants to purchase an additional 150,000 shares of the Company's
Common Stock at the price of $0.60 per share as partial consideration for his
agreement to provide additional legal services to the Company. In addition, Mr.
Frisch was granted, in July 1997, an option to purchase up to 100,000 shares of
the Company's Common Stock at a price of $0.96 per share and Mr. Frisch was
granted, in January 1998, an option to purchase up to 200,000 shares of the
Company's Common Stock at a price of $3.90 per share, in each case as partial
consideration for his agreement to provide additional legal services to the
Company.
The Company's marketing services were performed by Kauffman Marketing
Group, Inc. from November 1995 to December 1997. The former President of
Kauffman Marketing Group, Inc., John Kauffman, joined the Company as Vice
President of Strategic Marketing and Communications in December 1997. During the
years ended December 31, 1995, 1996 and 1997, the Company incurred
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<PAGE>
marketing expenses of approximately $0.0, $0.3 million and $1.6 million,
respectively, to such firm for marketing services. In addition, Mr. Kauffman was
granted, in July 1997, an option to purchase up to 225,000 shares of Common
Stock at a price of $0.96 per share and Mr. Kauffman was granted, in January
1998, an option to purchase up to 350,000 shares of Common Stock at a price of
$3.90 per share.
In consideration for David Townend's sale of 31,680,000 ordinary shares of
4-Sight Limited to the Company and its subsidiaries in connection with the 4-
Sight Acquisition, Mr. Townend received $7,991,094 and 1,317,300 shares of
Common Stock. In addition, Mr. Townend is entitled to receive 48.95% of the
750,000 shares of Common Stock which comprises the deferred consideration for
the purchase of 4-Sight Limited, which shares are conditioned upon the
achievement of certain revenue goals by the Company following the 4-Sight
Acquisition.
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<PAGE>
PART III
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K-.
(a) Financial Statements. See index immediately following signature page.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the quarter
ended December 31, 1998.
(c) Exhibits
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)
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<PAGE>
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 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 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 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 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 Subordinate Unsecured Convertible Note and Warrant Purchase Agreement
between the Company and MCI WorldCom, Inc. dated January 13, 1999.
58
<PAGE>
4.18 Preferred Stock Purchase Agreement by and between the Company and
Silicon Graphics, Inc. dated as of March 3, 1999.
4.19 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 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 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 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 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 Certificate representing 115,206 shares of Class A Preferred Stock of
the Company issued to MCI WorldCom. Inc. on March 4, 1999.
4.25 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 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 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 Stockholders Agreement by and among the Company, Silicon Graphics,
Inc. and MCI WorldCom, Inc. dated as of March 4, 1999.
4.29 Class A Preferred Stock Exchange Agreement by and between the Company
and MCI WorldCom, Inc. dated as of March 4, 1999.
4.30 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.
59
<PAGE>
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.
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
60
<PAGE>
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 Intentionally omitted
10.23 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 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 Employment Agreement dated January 1, 1998 by and between John R.
Kauffman and the Company.
10.26 Employment Agreement dated November 3, 1997 by and between David T.
Ottinger and the Company.
10.27 Employment Agreement dated September 8, 1998 by and between the
Bradley E. Sparks and the Company.
12.1 Statement re: Computation of Ratios.
21.1 List of Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP
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.
61
<PAGE>
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Form 10-K and those that
may be made in the future by or on behalf of the Company, the Company notes that
there are various factors that could cause actual results to differ materially
from those set forth in any such forward-looking statements. The forward-
looking statements contained in this Form 10-K were prepared by management and
are qualified by, and subject to, significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
or impossible to predict and many of which are beyond the control of the
Company. Factors which could cause or contribute to such differences include,
but are not limited to: (1) the ability of the Company to consummate
acquisitions, integrate such acquisitions into existing operations, manage
expansion, achieve operating efficiencies and control costs in its operations;
(2) the Company's success in retaining key employees, including its Chief
Executive Officer and Chief Financial Officer and the senior management teams of
its primary operating units; (3) pressures from competitors with greater
resources than those of the Company, as well as competitive pressures arising
from changes in technology and customer requirements; (4) the availability of
raw intellectual property information from alternative sources for little or no
cost; (5) disruptions to operations resulting from Year 2000 issues that might
originate with third parties; and (6) the concentration of ownership among the
certain stockholders such as MCI WorldCom and SGI who have the ability to
control the Company, including the election of directors and the direction of
the affairs and operations of the business. Accordingly, there can be no
assurance that the forward-looking statements contained in this Form 10-K will
be realized or that actual results will not be significantly higher or lower.
The statements have not been audited by, examined by, compiled by or subjected
to agreed-upon procedures by independent accountants, and no third-party has
independently verified or reviewed such statements. Readers of this Form 10-K
should consider these facts in evaluating the information contained herein. In
addition, the business and operations of the Company are subject to substantial
risks which increase the uncertainty inherent in the forward-looking statements
contained in this Form 10-K. The inclusion of the forward-looking statements
contained in this Form 10-K should not be regarded as a representation by the
Company or any other person that the forward-looking statements contained in
this Form 10-K will be achieved. In light of the foregoing, readers of this
Form 10-K are cautioned not to place undue reliance on the forward-looking
statements contained herein. These risks and others that are detailed in this
Form 10-K and other documents that the Company files from time to time with the
Securities and Exchange Commission, including quarterly reports on Form 10-Q and
any current reports on Form 8-K must be considered by any investor or potential
investor in the Company.
62
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 31st day of March, 1998.
WAM!NET INC.
By: /s/ Bradley E. Sparks
___________________________
Name: Bradley E. Sparks
Title: Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on its behalf by the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Edward J. Driscoll III Chairman of the Board, March 31, 1999
_________________________________ Chief Executive Officer,
Edward J. Driscoll III President and Treasurer
/s/ Robert L. Hoffman Director March 31, 1999
_________________________________
Robert L. Hoffman
/s/ Curtis G. Gray Director March 31, 1999
_________________________________
Curtis G. Gray
/s/ K. William Grothe, Jr. Director March 31, 1999
_________________________________
K. William Grothe, Jr.
/s/ Susan Mayer Director March 31, 1999
_________________________________
Susan Mayer
</TABLE>
63
<PAGE>
WAM!NET INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors........................................... F-1
Consolidated Financial Statements
Consolidated Balance Sheets.............................................. F-2
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Shareholders' Deficit......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-8
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors
WAM!NET Inc.
We have audited the accompanying consolidated balance sheets of WAM!NET Inc. as
of December 31, 1997 and 1998, and the related consolidated statements of
operations, shareholders' deficit and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of WAM!NET
Inc. at December 31, 1997 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 19, 1999
F-1
<PAGE>
WAM!NET Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 274 $ 6,272
Accounts receivable, net of allowance of $40 and $430,
respectively 459 3,466
Inventory - 1,534
Prepaid expenses and other current assets 554 3,187
-------------------------------
Total current assets 1,287 14,459
Property and equipment:
Network equipment 15,618 51,512
Other support equipment 5,242 18,046
Furniture and fixtures 1,078 2,802
Leasehold improvements 259 6,506
-------------------------------
22,197 78,866
Accumulated depreciation 2,877 16,399
-------------------------------
19,320 62,467
Goodwill, net of accumulated amortization of $6 and
$5,308, respectively 479 27,734
Deferred financing charges, net of accumulated
amortization of $1,624 and $5,959, respectively 8,048 20,183
Other assets - 616
--------------------------------
Total assets $29,134 $125,459
================================
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
-----------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,460 $ 17,098
Accrued salaries and wages 360 4,801
Accrued expenses 2,159 3,176
Current portion of equipment financing and obligations
under capitalized leases 3,129 5,324
-----------------------------------
Total current liabilities 8,108 30,399
Long-term debt:
13.25% Senior Discounted Notes - 138,975
Line of credit 18,800 24,000
Equipment financing 6,434 13,536
Subordinated notes payable 25,463 27,403
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 - 49,500,000
Common Stock, $.01 par value:
Authorized shares - 450,000,000
Issued and outstanding shares - 6,699,740 and 9,288,194
at December 31, 1997 and 1998 67 93
Additional paid-in capital 11,771 54,302
Accumulated deficit (42,509) (164,387)
Other accumulated comprehensive income - 138
-----------------------------------
Total shareholders' deficit (30,671) (109,854)
-----------------------------------
Total liabilities and shareholders' deficit $ 29,134 $ 125,459
===================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
WAM!NET Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
-----------------------------------------------------
<S> <C> <C> <C>
Revenues:
WAM!NET revenues $ 110 $ 1,628 $ 8,776
Less rebates - (150) (1,977)
-----------------------------------------------------
Net WAM!NET user fees 110 1,478 6,799
Software and hardware sales - - 10,830
Other services fees 169 77 -
-----------------------------------------------------
Total revenues 279 1,555 17,629
Operating expenses:
Network communication fees 816 7,364 18,259
Cost of software and hardware - - 3,537
Network operations 1,109 7,478 29,705
Sales and marketing 2,054 9,207 21,996
General and administrative 2,610 4,320 28,816
Depreciation and amortization 447 2,668 17,668
-----------------------------------------------------
7,036 31,037 119,981
-----------------------------------------------------
Loss from operations (6,757) (29,482) (102,352)
Other income (expense):
Interest income 64 202 1,748
Interest (expense) (903) (4,356) (22,626)
-----------------------------------------------------
Net loss before income tax benefit (7,596) (33,636) (123,230)
Income tax benefit - - 1,352
-----------------------------------------------------
Net loss (7,596) (33,636) (121,878)
Less preferred dividends - (70) (70)
-----------------------------------------------------
Net loss applicable to common stock $ (7,596) $ (33,706) $ (121,948)
=====================================================
Net loss applicable per common share -
basic and diluted $(1.18) $(5.19) $(13.87)
=====================================================
Weighted average number of common shares
outstanding 6,445,785 6,496,345 8,793,961
=====================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
WAM!NET Inc.
Consolidated Statements of Shareholders' Deficit
(In thousands)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
------------------
DESCRIPTION ISSUED AMOUNT CAPITAL DEFICIT
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 6,415 $64 $ 863 $ (1,277)
Payments received on stock subscriptions - - - -
Value of warrants issued in connection
with bridge financing in July - - 121 -
Value of warrants issued in connection with
subordinated notes in March, June and December - 5,040
Value of warrants issued for services rendered - - 15 -
Value of warrants issued in connection with equipment lease - - 14 -
Issuance of Common Stock upon debt conversion in July,
conversion price of $1.90 per share 65 1 24 -
Payments received on sale of stock warrants - - 48 -
Net loss - - - (7,596)
----------------------------------------------
Balance at December 31, 1996 6,480 65 6,125 (8,873)
Accumulated and unpaid dividends in connection with Preferred Stock - - (70) -
Amortization of stock options - - 426 -
Value of warrants issued in connection with line of credit in September - - 4,766 -
Issuance of Common Stock upon merger with FreeMail 125 1 487 -
Issuance of Common Stock upon debt conversion in December,
conversion price of $1.90 per share 65 1 24 -
Exercise of stock options 30 - 13 -
Net loss - - - (33,636)
------------------------------------------------
Balance at December 31, 1997 6,700 67 11,771 (42,509)
Accumulated and unpaid dividends in connection with Preferred Stock - - (70) -
Amortization of stock options - - 12,538 -
Value of warrants issued in connection with Senior Discounted Notes - - 10,047 -
Issuance of Common Stock upon merger with 4-Sight 2,500 25 19,975 -
Issuance of Common Stock upon debt conversion in December 65 1 24 -
Exercise of stock options 23 - 17 -
Comprehensive loss:
Net loss - - - (121,878)
Foreign currency translation adjustment - - - -
Total comprehensive loss ----------------------------------------------
Balance at December 31, 1998 9,288 $93 $54,302 $(164,387)
==============================================
<CAPTION>
ACCUMULATED
COMMON OTHER
STOCK COMPREHENSIVE
DESCRIPTION SUBSCRIPTION INCOME TOTAL
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 $(20) $ - $ (370)
Payments received on stock subscriptions 20 - 20
Value of warrants issued in connection
with bridge financing in July - - 121
Value of warrants issued in connection with
subordinated notes in March, June and December - - 5,040
Value of warrants issued for services rendered - - 15
Value of warrants issued in connection with equipment lease - - 14
Issuance of Common Stock upon debt conversion in July,
conversion price of $1.90 per share - - 25
Payments received on sale of stock warrants - - 48
Net loss - - (7,596)
-----------------------------------------
Balance at December 31, 1996 - - (2,683)
Accumulated and unpaid dividends in connection with Preferred Stock - - (70)
Amortization of stock options - - 426
Value of warrants issued in connection with line of credit in September - - 4,766
Issuance of Common Stock upon merger with FreeMail - - 488
Issuance of Common Stock upon debt conversion in December,
conversion price of $1.90 per share - - 25
Exercise of stock options - - 13
Net loss - - (33,636)
------------------------------------------
Balance at December 31, 1997 - - (30,671)
Accumulated and unpaid dividends in connection with Preferred Stock - - (70)
Amortization of stock options - - 12,538
Value of warrants issued in connection with Senior Discounted Notes - - 10,047
Issuance of Common Stock upon merger with 4-Sight - - 20,000
Issuance of Common Stock upon debt conversion in December - - 25
Exercise of stock options - - 17
Comprehensive loss:
Net loss - - (121,878)
Foreign currency translation adjustment - 138 138
---------
Total comprehensive loss 121,740
-----------------------------------------
Balance at December 31, 1998 - $138 $(109,854)
=========================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
WAM!NET Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
----------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(7,596) $(33,636) $(121,878)
Adjustments to reconcile net loss to net cash used in operating
activities:
Noncash interest expense, including related warrant values 306 1,624 18,295
Value of stock options issued to employees and consultants 15 426 12,522
Depreciation and amortization 447 2,668 17,814
Loss on disposal of property and equipment - 797 69
Changes in operating assets and liabilities:
Accounts receivable (14) (386) 647
Inventory (467)
Prepaid expenses and other assets (111) (415) (7,957)
Accounts payable 338 1,832 14,795
Accrued expenses 397 3,173 10,282
----------------------------------------
Net cash used in operating activities (6,218) (23,917) (55,878)
INVESTING ACTIVITIES
Purchases of property and equipment (4,244) (16,599) (54,584)
Patent expenditures - - (370)
Purchase of investments (1,000) - -
Purchase of 4-Sight (net of cash acquired) (16,350)
Proceeds from sale of investments - 1,000 -
----------------------------------------
Net cash used in investing activities (5,244) (15,599) (71,304)
FINANCING ACTIVITIES
Proceeds from sale of common stock 20 - -
Proceeds from sale of common stock warrants 48 - -
Proceeds from sale of preferred stock 1,000 - -
Proceeds from subordinated notes payable 24,000 - -
Payment of subordinated notes payable (250) - -
Proceeds from exercise of stock options - - 15
Proceeds from 13.25% Senior Discounted Notes - - 120,626
Proceeds from line of credit - 18,800 29,203
Payment on line of credit - - (24,003)
Proceeds from bridge financing 4,100 10,000 -
Payments on bridge financing (4,525) (11,075) -
Proceeds from equipment financing 245 8,158 14,348
Payments on equipment financing (60) (537) (4,995)
Capitalized financing costs - - (2,377)
----------------------------------------
Net cash provided by financing activities 24,578 25,346 132,817
Effect of foreign currencies on cash - - 363
----------------------------------------
Increase (decrease) in cash and cash equivalents 13,116 (14,170) 5,998
Cash and cash equivalents at beginning of year 1,328 14,444 274
----------------------------------------
Cash and cash equivalents at end of year $14,444 $ 274 $ 6,272
========================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
WAM!NET Inc.
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
----------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Value of interest cost assigned to warrants $5,176 $4,766 $10,047
Equipment financed through equipment financing - 1,764 -
Conversion of accrued interest to subordinated debt - 1,363 1,965
Issuance of common stock relating to acquisition - 488 20,000
Cashless exercise of stock options - 13 -
Conversion of convertible subordinated debenture for
common stock 25 25 25
Equipment financed through capital leases 239 - -
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest 358 1,208 2,276
</TABLE>
See accompanying notes.
F-7
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements
December 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
WAM!NET Inc. (the "Company") provides a managed, high speed digital data
delivery network service that integrates the Company's industry-specific work
flow applications with high speed storage and telephony technologies. The
Company offers digital data delivery service designed to provide its subscribers
with the rapid, secure, accurate and reliable transportation and management of
information.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries from their respective dates of acquisition:
FreeMail, Inc., NetCo Communications of Canada, Inc. and WAM!NET U.K. Limited
(formerly 4-Sight Limited). All intercompany transactions have been eliminated.
REVENUE RECOGNITION
The Company records revenue from its digital data delivery network services on a
monthly basis based upon service contracts signed with customers. The service
contracts call for monthly usage amounts by the customer. The Company records
the minimum monthly billing amount as revenue on a monthly basis over the life
of the service contract. If a customer's usage exceeds the maximum usage
specified in the service contract, the Company will record additional revenue in
the month that the overage occurs. The Company does not receive initial up-front
amounts or pre-payments from customers. The Company also incurs service rebates
that offset the gross revenue generated by the Company. Revenue from hardware
and software sales is recognized upon delivery of the hardware and software.
Upon delivery of the hardware and software, the Company has no remaining
obligations to the customer. Other service fees are recognized as revenue in the
period the service is provided to the customer.
F-8
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. Investments
classified as cash equivalents consist of high grade commercial paper (A1/P1),
certificates of deposit and United States Treasury Bills. Cash equivalents are
considered available for sale and are stated at cost which approximates fair
market value.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful life of three to seven years.
GOODWILL
The excess of the cost over the fair value of the net assets acquired is
amortized on a straight-line basis over a period of three to five years. The
Company periodically reviews the recoverability of goodwill based on estimated
future cash flows from the related operations.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The amount of impairment loss recorded will be measured as the
amount by which the carrying value of the assets exceeds the fair value of the
assets.
F-9
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred income taxes
are provided for temporary differences between the financial reporting and tax
bases of assets and liabilities.
PRODUCT DEVELOPMENT
Costs associated with the development of new products and services are charged
to operations in the year incurred. These costs for 1996, 1997 and 1998 were
$1,109,000, $3,364,000 and $13,447,000, respectively.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company translates the assets and liabilities of its foreign subsidiaries
stated in local functional currencies to U.S. dollars at the rates of exchange
in effect at the end of the period. Revenues and expenses are translated using
rates of exchange in effect during the period. The cumulative effect of foreign
currency translations is the only component of other comprehensive income.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist primarily of accounts receivable. The Company grants credit to customers
in the ordinary course of business. No single customer or region represents a
significant concentration of credit risk.
STOCK SPLIT
In February 1998, the Board of Directors declared a five-for-one Common Stock
split effected in the form of a stock dividend. All references to number of
shares, options and warrants and conversion price and exercise price per share
have been adjusted to reflect this stock split on a retroactive basis.
F-10
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE
Under Statement No. 128, Earnings per Share (Statement 128), basic earnings per
share is based on the weighted average shares of common stock outstanding during
the period. Diluted earnings per share includes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share as presented is
the same as basic earnings per share as the effect of outstanding options,
warrants and convertible securities is antidilutive.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the current
year presentation.
2. CASH REQUIREMENTS
The Company continues to incur substantial operating losses as a direct result
of its continuing efforts to expand its WAM!NET media network throughout North
America, Europe and Asia. Net losses since the Company's inception have resulted
in an accumulated deficit balance of $164.4 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 WAM!NET services 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 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 is optimistic regarding its ability to 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 December 31, 1998, the Company has
derived substantially all of its operating capital from the issuance of short-
and long-term debt and equity instruments. At December 31, 1998, the Company had
approximately $204.9 million in long-term debt, of which approximately $5.3
million becomes payable during 1999.
F-11
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
2. CASH REQUIREMENTS (CONTINUED)
The Company's available operating capital as of March 10, 1999 as evidenced by
cash, cash equivalent investments and commitments from financial institutions
for additional equipment financing totaled approximately $50 million dollars. If
additional sources of funding cannot be obtained, the Company would be required
to significantly slow its global market penetration, network growth and product
development due to a constraint of available operating capital. If the Company
encounters a constraint in the availability of operating capital to fund its
operations and network growth during 1999, management would implement plans to
reduce cash expenditures. Management believes such reductions would leave the
Company with adequate cash to continue operations through the end of 1999. The
reduction of cash expenditures would have a material adverse effect on the
Company's global revenue and network expansion plans. The most evident and
clearly measurable impact resulting from these reductions is a significant
decrease of installed network customers for the year ending December 31,1999.
Material reductions to the base of installed customers 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
directly impact network revenue and may ultimately defer attainment of overall
profitability from the Company's WAM!NET transport products. Another definable
impact of the above outlined expenditure reductions, would be material delays in
software product development, the impact of which may further erode customer
retention and network utilization.
F-12
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
3. LONG-TERM DEBT
EQUIPMENT FINANCING NOTES PAYABLE
Equipment financing notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
----------------------------------
<S> <C> <C>
FINOVA Technology Finance; installment note; monthly payments of
$43,000 and an additional final installment of $242,000 including
interest imputed at 13.44%; secured by equipment; due April 2001 $1,518,000 $1,152,000
FINOVA Technology Finance; installment note; monthly payments of
$91,000 and an additional final installment of $509,000 including
interest imputed at 13.35%; secured by equipment; due May 2001 3,248,000 2,486,000
FINOVA Technology Finance; installment note; monthly payments of
$120,000 and an additional final installment of $627,000 including
interest imputed at 11.75%; secured by equipment; due October 2002 - 4,675,000
Transamerica Business Credit; installment note; monthly payments of
$46,000 and an additional final installment of $207,000 including
interest imputed at 13.53%; secured by equipment; due May 2001 1,606,000 1,250,000
Transamerica Business Credit; installment note; monthly payments of
$42,000 and an additional final installment of $187,000 including
interest imputed at 13.43%; secured by equipment; due May 2001 1,457,000 1,133,000
Transamerica Business Credit; installment note; monthly payments of
$41,000 and an additional final installment of $184,000 including
interest imputed at 13.11%; secured by equipment; due May 2001 - 1,138,000
Transamerica Business Credit; installment note; monthly payments of
$11,000 and an additional final installment of $48,000 including
interest imputed at 12.88%; secured by equipment; due July 2001 - 302,000
Transamerica Business Credit; installment note; monthly payments of
$75,000 and an additional final installment of $352,000 including
interest imputed at 11.66%; secured by equipment; due October 2001 - 2,348,000
Transamerica Business Credit; installment note; monthly payments of
$40,000 and an additional final installment of $187,000 including
interest imputed at 11.66%; secured by equipment; due October 2001 - 1,245,000
</TABLE>
F-13
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
3. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
-----------------------------------
<S> <C> <C>
Transamerica Business Credit; installment note; monthly payments of
$19,000 and an additional final installment of $88,000 including
interest imputed at 11.65%; secured by equipment; due December 2001
$ - $ 609,000
Leasetec Corporation; installment note; monthly payments of $47,000
including interest imputed at 13.50%; unsecured; due December 1998 521,000 -
Leasetec Corporation; installment note; monthly payments of $83,000
including interest imputed at 13.50%; unsecured; due April 1999 1,123,000 243,000
Icon Funding Corp.; installment note; monthly payments of $39,000
including interest imputed at 12.57%; secured by equipment; due July
2002 - 1,319,000
Icon Funding Corp.; installment note; monthly payments of $28,000
including interest imputed at 12.57%; secured by equipment; due July
2002 - 960,000
-----------------------------------
9,473,000 18,860,000
Less current portion 3,039,000 5,324,000
-----------------------------------
$6,434,000 $13,536,000
===================================
</TABLE>
Maturities of equipment notes payable as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 5,324,000
2000 5,759,000
2001 5,896,000
2002 1,881,000
$18,860,000
=================
</TABLE>
F-14
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
3. LONG-TERM DEBT (CONTINUED)
SENIOR DISCOUNT NOTES
On March 5, 1998, the Company sold 208,530 Units consisting of $1,000 principal
amount at maturity 13 1/4% Senior Discount Notes due 2005 ("Notes") and three
warrants. The aggregate principal amount of the Notes payable at maturity is
$208.6 million. The sale of the Units resulted in net proceeds to the Company of
$120.6 million. Cash interest does not accrue nor is it payable on the Notes
prior to March 1, 2002. Thereafter, cash interest on the Notes will accrue on
the Notes at a rate of 13 1/4% per annum (calculated on a semiannual bond
equivalent basis) and will be payable semiannually in arrears on March 1 and
September 1 of each year, commencing September 1, 2002.
In connection with the Notes, the Company issued 625,590 warrants to purchase a
total of 1,257,436 shares of Common Stock. Each warrant entitles the holder to
purchase 2.01 shares of Common Stock at an exercise price of $.01 per share. The
warrants were deemed to have a value of $10 million, which is being amortized as
interest expense over the life of the Notes.
LINE OF CREDIT AGREEMENT
In September 1997, the Company entered into a three year $25 million line of
credit agreement with a bank. The line of credit is guaranteed by MCI WorldCom
and the Company must obtain MCI WorldCom's consent prior to each borrowing under
the line. At December 31, 1998, the amount outstanding on the line of credit was
$24 million. The line of credit has both Eurodollar and Floating Rate advances.
The Eurodollar and Floating Rate accrue interest at 55 basis points above LIBOR
(5.12% at December 31, 1998) and prime (8.5% at December 31, 1998),
respectively. Interest on the LIBOR borrowings is payable upon maturity and on
the prime borrowings is payable quarterly.
F-15
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
3. LONG-TERM DEBT (CONTINUED)
In connection with MCI WorldCom's guarantee of the line of credit agreement, the
Company issued Class A warrants to purchase 8,396,170 common shares and Class B
Warrants to purchase 14,204,835 common shares at an initial exercise price of
$3.90 per share. The Class A warrants were immediately exercisable and expire on
December 31, 2000. The Class A warrants were deemed to have a value of $4.77
million which is being amortized as interest expense over the life of the
agreement. Amortization of the warrants for the year ended December 31, 1998 was
$1,589,000. The Class B warrants are exercisable based on a calculation that
factors the outstanding balance and repayments made on the line of credit during
the final 12 months of the agreement. The Class B warrants expire on December
31, 2000. It is management's intention to fully repay the credit facility before
the final 12 months of the agreement by the end of the second quarter 1999. The
Class B warrants were deemed to have no value based on management's intentions
and the unpredictability of the factors used to calculate the number of warrants
exercisable.
4. BRIDGE FINANCING
On December 29, 1995, the Company entered into a bridge financing agreement
(Bridge Loan) which provided funding up to $1.6 million. The Bridge Loan accrued
interest at 10% per annum and was payable on the earlier of December 31, 1996 or
the date of closing of a qualifying preferred stock financing. In connection
with the financing, the Company granted warrants to purchase 1,600,000 shares of
common stock at $1.00 per share. The warrants were deemed to have a value of
$109,000 which was recorded as interest expense over the life of the Bridge
Loan. Additionally, the Company granted the placement agent warrants to purchase
160,000 shares of common stock at $1.00 per share exercisable over five years.
F-16
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
4. BRIDGE FINANCING (CONTINUED)
On March 19, 1996, the Company issued a total of $1.0 million of subordinated
notes. The subordinated notes accrued interest at 10% per annum and were payable
on the earlier of December 31, 1996 or the date of closing of a qualifying
financing transaction. In connection with the issuance of the notes, the Company
granted warrants to purchase 1,000,000 shares of Common Stock at $1.50 per
share. The warrants were deemed to have a value of $57,000 which was recorded as
interest expense over the life of the subordinated notes. Additionally, the
Company granted the placement agent warrants to purchase 100,000 shares of
Common Stock at $1.50 per share.
On June 24, 1996, the Company issued $3.0 million of subordinated notes. The
subordinated notes accrued interest at 10% per annum and were payable on the
earlier of December 31, 1996 or the date of closing of a qualifying financing
transaction. In connection with the subordinated notes, the Company sold for a
price of $.01 each Common Stock warrants to purchase 600,000 shares of Common
Stock at $1.50 per share. The warrants to purchase 3,000,000 shares of Common
Stock were deemed to have a value of $120,000 which was recorded as interest
expense over the life of the subordinated notes. Additionally, the Company
granted the placement agent warrants to purchase 300,000 shares of Common Stock
at $1.50 per share.
On June 30, 1997, the Company entered into a promissory note agreement with
WorldCom which provided funding up to $10 million. The Company was advanced $10
million on the promissory note. The promissory note accrued interest at 12% per
annum and was paid in full as of December 31, 1997.
The valuation of the Common Stock in each transaction was negotiated between the
parties at arm's-length.
5. SUBORDINATED NOTES PAYABLE
In March through May of 1995, the Company issued a total of $250,000 of
convertible subordinated notes which are due December 31, 1999. Interest on the
notes accrues at an annual rate of 8%, payable semi-annually. The Company may
redeem the notes at any time commencing January 1, 1997, upon notice to the
holders at 110% of the face amount of the notes plus interest. The holder has
the right to convert the unpaid principal amount of the notes into shares of
Common Stock at a conversion price of $.38 per share.
F-17
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
5. SUBORDINATED NOTES PAYABLE
On May 24, 1995, $100,000 of the notes were converted into 263,160 shares of
Common Stock at the conversion price of $.38 per share. On July 3, 1996, $25,000
of the notes were converted into 65,790 shares of Common Stock at the conversion
price of $.38 per share. On December 31, 1997, $25,000 of the notes were
converted into 65,790 shares of Common Stock at the conversion price of $.38 per
share. On February 28, 1998, 25,000 of the notes were converted into 65,790
shares of Common Stock at the conversion price of $.38 per share.
In September 1996, the Company issued to MCI WorldCom a $5.0 million convertible
subordinated note due 2005. Interest on the note accrues at an annual rate of
10%. The Company may redeem the note at any time commencing January 1, 1998,
upon notice to the holder, at the outstanding principal amount of the note plus
interest. The holder has the right to convert the principal amount of the note
into shares of Common Stock at a conversion price of $1.00 per share. During
1998, $635,000 of accrued interest was converted into additional subordinated
notes.
In November 1996, the Company entered into a Redeemable Preferred Stock,
Subordinated Note and Common Stock Warrant Purchase Agreement ("Investment
Agreement") with MCI WorldCom. Pursuant to the agreement, the Company sold
100,000 shares of Class A Preferred Stock, $10.00 par value. The preferred
shares are required to be redeemed in 2005 at a price of $10.00 per share plus
an amount equal to all accumulated and unpaid dividends. Dividends are payable
at the rate of 7% ($.175 per quarter per share) and shall start to cumulate on
January 1, 1997, whether or not earned. Cumulated dividends on the preferred
stock were $140,000 at December 31, 1998. The Class A Preferred Shares also
carry voting rights equal to common shares and possess special voting rights
that entitle the holder to elect a majority of the Directors.
Under the Subordinated Note Agreement, the Company has available an aggregate
amount of $28.5 million. The Company has the option to issue additional notes
not more frequently than once each quarter, commencing with the calendar quarter
ending March 31, 1997. The note accrues interest at 7% per annum due 2005.
During 1998, $1,333,000 of accrued interest was converted into additional
subordinated notes. The amount outstanding on the subordinated note agreement
was $20.4 million and $21.7 million at December 31, 1997 and December 31, 1998,
respectively.
F-18
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
5. SUBORDINATED NOTES PAYABLE (CONTINUED)
In connection with the Investment Agreement, the Company sold, for a price of
$0.01 each, Common Stock Warrants entitling MCI WorldCom to purchase 20,787,500
shares of common stock at an initial exercise price of $.96 share. The warrants
were immediately exercisable and expire on December 31, 2000. The warrants were
deemed to have a value of $4.9 million which will be amortized as interest
expense over the life of the warrant agreement. Amortization of the warrants for
the years ended December 31, 1997 and 1998 was $1.2 million and $2.5 million,
respectively. The initial exercise price of $.96 per share increased to $.98 per
share on March 31, 1997, and shall thereafter increase by an amount of $0.16 per
share on the last day of each calendar quarter during the term of the warrant,
commencing with the calendar quarter ending June 30, 1997. The exercise price
was $1.09 per share on December 31, 1998.
On February 11, 1998, the Company and MCI WorldCom agreed to modify the 10%
Convertible Subordinated Note, due September 30, 1999, the 7% Subordinated Note,
due December 31, 2003 and the 100,000 shares of Series A Preferred Stock. All
principal and interest payment obligations of the Company in respect of the
above securities shall be subordinate to the prior payment in full of the Notes.
MCI WorldCom shall have the option to convert (a) the interest due on the 10%
Subordinated Note and (b) the interest accrued on the outstanding principal
amount of the 7% Subordinated Note from December 31, 2003 through the date such
amount is paid into shares of common stock, par value $.01, of the Company, at
the price per share then existing on the date of such conversion.
The carrying amounts of the Company's debt instruments in the balance sheets at
December 31, 1997 and 1998 approximate fair value.
F-19
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES
The Company enters into various term contracts with suppliers of
telecommunications services for the purpose of receiving discounts off the
standard service offerings. Some of these contracts will result in termination
liabilities if the contract is terminated prior to the expiration date of the
contract. The termination liabilities are generally based upon the minimum
monthly dollar amount committed to the vendor multiplied by a termination
liability percentage, multiplied by the number of months remaining in the
contract. Total data communications expense under telecommunication contracts
was $816,000, $7,364,000 and $16,535,000 for the years ended December 31, 1996,
1997 and 1998, respectively. The Company's data communications expense under
telecommunication contracts with MCI WorldCom was $342,573, $5,538,000 and
$11,840,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
Guaranteed monthly usage levels of data communications with certain of the
Company's telecommunication vendors and MCI WorldCom at December 31, 1998
aggregate to the following annual amounts:
<TABLE>
<CAPTION>
GUARANTEED GUARANTEED
USAGE USAGE
(ALL VENDORS) (WORLDCOM)
-----------------------------------
<S> <C> <C>
1999 $ 8,074,000 $4,140,000
2000 6,490,000 2,784,000
2001 3,039,000 1,140,000
2002 1,354,000 -
2003 665,000 -
-----------------------------------
$19,622,000 $8,064,000
===================================
</TABLE>
F-20
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The termination contingency of data communications with certain of the Company's
telecommunication vendors and MCI WorldCom at December 31, 1998 aggregates to
the following annual amounts:
<TABLE>
<CAPTION>
TERMINATION TERMINATION
CONTINGENCY CONTINGENCY
(ALL VENDORS) (WORLDCOM)
-----------------------------------
<S> <C> <C>
December 31:
1998 $ 9,805,000 $4,351,000
1999 5,822,000 2,633,000
2000 2,303,000 1,140,000
2001 509,000 -
2002 531,000 -
-----------------------------------
$18,970,000 $8,124,000
===================================
</TABLE>
The Company also has operating leases for its office space. Operating expenses
including maintenance, utilities, real estate taxes and insurance are paid by
the Company. Total rent expense under operating leases was $208,000, $592,000
and $2,189,000 for the years ended December 31, 1996, 1997 and 1998,
respectively. Future minimum lease obligations in excess of one year as of
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1999 $ 2,666,000
2000 2,373,000
2001 2,221,000
2002 2,185,000
2003 2,038,000
Thereafter 4,888,000
-----------
$16,371,000
===========
</TABLE>
F-21
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
During 1996, the Company entered into a sale-leaseback agreement for equipment.
The total lease obligation is $239,000 which is to be paid over a 30 month
period. In connection with this lease financing, the leasing company was granted
warrants to purchase 45,000 shares of Common Stock at $1.50 per share. The
warrants were deemed to have a value of $14,000 which will be recorded as
interest expense over the life of the agreement. The Company determined the fair
value of the warrants by considering the difference in interest charged on the
lease with and without the warrants in place. The minimum future obligation on
the capital lease is $0. The balance is paid in full.
7. INCOME TAXES
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $134 million. These carryforwards are available to offset future
taxable income through 2013 and are subject to the limitations of Internal
Revenue Code Section 382 resulting from changes in ownership.
The effective tax rate differs from the statutory rate primarily as a result of
the following:
<TABLE>
<CAPTION>
1996 1997 1998
-----------------------------------------
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
State income taxes 6.0 6.0 6.0
Foreign tax benefit - - (1.1)
Impact of net operating loss carryforward (40.0) (40.0) (40.0)
-----------------------------------------
- % - % (1.1)%
=========================================
</TABLE>
F-22
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
Income tax benefit consists of:
<TABLE>
<CAPTION>
1996 1997 1998
-----------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State - - -
Foreign - - (1,352,000)
Deferred:
Federal - - -
State - - -
Foreign - - -
-----------------------------------------
$ - $ - $(1,352,000)
=========================================
</TABLE>
Components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
-----------------------------------------
<S> <C> <C>
Deferred assets:
Net operating loss $ 15,691,000 $ 50,905,000
Warrant amortization 619,000 2,020,000
Stock option amortization 127,000 4,892,000
Other 84,000 199,000
-----------------------------------------
16,521,000 58,016,000
Deferred liability:
Depreciation and amortization (562,000) (1,602,000)
-----------------------------------------
Net deferred income tax assets 15,959,000 56,414,000
Valuation allowance (15,959,000) (56,414,000)
-----------------------------------------
Net deferred income taxes $ - $ -
=========================================
</TABLE>
F-23
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
8. CAPITAL STOCK
In February 1998, the Company amended the Articles of Incorporation to increase
its authorized capital from 20,000,000 shares to 100,000,000 shares, 90,000,000
of which are classified as common shares, 100,000 of which are Class A preferred
shares and 9,900,000 of which are undesignated shares.
In May 1998, the Company amended the Articles of Incorporation to increase its
authorized capital from 100,000,000 shares to 500,000,000 shares, 450,000,000 of
which are classified as common shares, 500,000 of which are Class A preferred
shares and 49,500,000 of which are undesignated shares.
9. STOCK OPTIONS AND WARRANTS
In September 1994, the Company adopted an Incentive Stock Option Plan (1994
Stock Option Plan) that includes incentive stock options to be granted to
certain eligible employees and non-employee directors of the Company. In
September 1998, the Company adopted a new incentive stock option plan. The 1998
Combined Stock Option Plan (the "Plan") includes incentive stock options to be
granted to certain eligible employees (including foreign nationals) and non-
employee consultants of the Company and any subsidiary corporation of the
Company. The Company has authorized the grant of options for up to 25,000,000
shares of the Company's Common Stock. The Company also amended the 1994 Stock
Option Plan. The number of shares reserved for option grants was reduced from
22,071,400 to 7,000,000, including those for which options have previously been
granted. The Company has authorized the grant of options to management personnel
for up to 5,125,000 shares of the Company's Common Stock outside the plan. A
majority of the options granted have ten year terms and vest and become fully
exercisable at the end of three years of continued employment.
In November 1996, the Chief Executive Officer and Chief Technology Officer were
each granted options to purchase 2,000,000 shares of Common Stock at an exercise
price of $.96. These options vested in incremental amounts based on the number
of installed customer sites and remain exercisable until December 31, 2007. In
1998, the Board of Directors agreed to amend the stock option agreements whereas
the shares became fully vested. The amendment constituted a repricing and,
accordingly, the Company recorded $11,405,000 as compensation expense in January
1998.
F-24
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
During 1997, the Company granted non-plan options to various consultants to
purchase 347,500 shares of the Company's Common Stock at an exercise price of
$.96 per share. The options were deemed to have a value of $92,000 which was
recognized as compensation expense.
During 1998, the Company granted options to purchase a total of 400,000 shares
at an exercise price of $3.90 per share to two consultants. The options were
deemed to have a value of $431,000, which was recognized as legal expense.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
AVAILABLE EXERCISE
FOR GRANT OPTIONS OUTSTANDING PRICE
--------------------------------
UNDER PLAN PLAN NON-PLAN PER SHARE
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Establishment of 1994 stock Option Plan 500,000 - - $ -
Additional shares reserved for issuance 2,500,000 - - -
Granted (532,500) 532,500 377,500 .45
---------------------------------------------------
Balance at December 31, 1995 2,467,500 532,500 377,500 .45
Additional shares reserved for issuance 4,071,400 - -
Granted (2,992,800) 2,992,800 4,000,000 1.09
Canceled 1,646,400 (1,646,400) - 1.48
---------------------------------------------------
Balance at December 31, 1996 5,192,500 1,878,900 4,377,500 .90
Additional shares reserved for issuance 15,000,000 - -
Granted (3,131,250) 3,131,250 347,500 1.38
Canceled 257,750 (257,750) - .86
Exercised - (30,000) - .45
---------------------------------------------------
Balance at December 31, 1997 17,319,000 4,722,400 4,725,000 1.09
Additional shares reserved for issuance 9,928,600
Granted (4,601,000) 4,601,000 400,000 7.31
Canceled 196,235 (196,235) - 4.60
Exercised - (22,664) - .77
---------------------------------------------------
Balance at December 31, 1998 22,842,835 9,104,501 5,125,000 $2.23
===================================================
</TABLE>
F-25
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about the stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .45 721,500 3.8 years $ .45 711,500 $ .45
.96 8,377,251 6.4 years .96 8,443,201 .96
3.90 1,246,750 6.7 years 3.90 460,831 3.90
8.00 3,684,000 9.4 years 8.00 1,503,000 8.00
12.00 200,000 9.7 years 12.00 - -
-------------- -------------
$ .45 - $12.00 14,229,501 7.1 years $ 3.17 9,118,532 $2.23
</TABLE>
The Company has shares exercisable within the plans of 1,167,795 and 4,213,532
at December 31, 1997 and 1998, respectively, at a weighted average exercise
price of $.81 and $3.61 per share, respectively. The Company also has shares
exercisable outside the plan of 914,000 and 4,905,000 at December 31, 1997 and
1998, respectively, at a weighted average exercise price of $.76 and $1.04 per
share, respectively. The fair value of options granted within the plan in 1996,
1997 and 1998 was $.27, $.34 and $.90 per share, respectively. The fair value of
options granted outside the plan in 1996, 1997 and 1998 was $.27, $.27 and $.25
per share.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation (Statement 123), requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
F-26
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a minimum value
option pricing model with the following weighted-average assumptions for 1996,
1997 and 1998: risk-free interest rate of 6.5%; 6.5% and 4.78%, respectively;
dividend yield of 0%; and a weighted-average expected life of the option of five
years.
The minimum value option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------------------------------------------------
<S> <C> <C> <C>
Net loss as reported $(7,596,000) $(33,636,000) $(121,878,000)
Pro forma net loss (7,763,000) (34,168,000) (127,272,000)
Net loss per common share as reported $ (1.18) $ (5.18) $ (13.87)
Pro forma net loss per common share (1.20) (5.26) (14.47)
</TABLE>
During the initial phase-in period, the effects of applying Statement 123 for
recognizing compensation cost may not be representative of the effects on
reported net loss or income for future years because the options in the
Incentive Stock Option Plans vest over several years and additional awards will
be made in the future.
During 1995, the Company granted a consultant warrants to purchase 150,000
shares of common stock at an exercise price of $.60 per share for services
provided. The warrants were immediately exercisable and expire November 17,
2002. The warrants were valued at $15,000 and were charged to expense. The
Company determined the fair value of the warrants by considering the difference
in fees charged by the consultant with and without the warrants in place.
F-27
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following is a table of the warrants to purchase shares of the Company's
Common Stock:
<TABLE>
<CAPTION>
WARRANTS EXERCISE PRICE EXPIRATION
OUTSTANDING EXERCISABLE PER SHARE DATE
----------------------------------------------------------------
Balance at December 31, 1994
Granted:
<S> <C> <C> <C> <C>
Note payable 416,665 416,665 $ .60 2000
Consulting Service 150,000 150,000 .60 2002
Bridge Loan #1 1,760,000 1,760,000 1.00 2000
----------------------------------------------------
Balance at December 31, 1995 2,326,665 2,326,665 .60 - 1.00
Granted:
Bridge Loan #2 1,100,000 1,100,000 1.50 2003
Bridge Loan #3 3,300,000 3,300,000 1.50 2003
Lease financing 45,000 45,000 1.50 2003
7% subordinated notes 20,787,500 20,787,500 1.50 2000
----------------------------------------------------
Balance at December 31, 1996 27,559,165 27,559,165 .60 - 1.50
Granted:
Line of credit 22,601,005 8,396,170 3.90 2000
----------------------------------------------------
Balance at December 31, 1997 50,160,170 35,955,335 $.60 - $3.90
Granted:
13 1/4% Senior Discount Note 1,257,436 1,257,436 .01 2005
----------------------------------------------------
Balance at December 31, 1998 51,417,606 37,212,771 $.01 - $3.90
====================================================
</TABLE>
10. EMPLOYMENT AGREEMENTS
In November 1996, the Company entered into Employment Agreements with its
President and Chief Executive Officer and its Chief Technology Officer. The
agreements provide for an annual base salary and a bonus and other compensation
as may be established from time to time by the Board of Directors. As part of
the agreements, the employees were each granted options to purchase 2,000,000
shares of Common Stock at an exercise price of $.96. The agreements contain
provisions providing for the maintenance of confidentiality of proprietary
information of the Company and a two-year non-competition clause in the event of
termination of employment. The agreements may be terminated by either party for
any reason at any time. If, however, the employees are terminated by the Company
without cause, the Company must pay salary to the employees equal to the
employees' then base salary for two years.
F-28
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
11. SAVINGS AND RETIREMENT PLAN
The Company has a savings and retirement plan covering all eligible employees.
The plan was adopted pursuant to 401(k) of the Internal Revenue Code.
Contributions to the plan are discretionary for the employees. The Company does
not make contributions to the plan.
12. ACQUISITIONS
In December 1997, the Company acquired the outstanding common stock of FreeMail,
Inc. (FreeMail). The results of operations of the acquired business are included
in the accompanying financial statements since the date of acquisition.
The Company issued 125,000 shares of Common Stock, with a fair value of
$488,000, as consideration in connection with the acquisition. The Company will
pay a quarterly payment to the former shareholders of FreeMail as additional
contingent consideration equal to 5% of the gross collected revenue derived by
the Company from certain identified FreeMail products. The total amounts of the
quarterly payments shall not exceed $3.0 million. As of December 31, 1998, the
Company did not record a liability relating to the FreeMail revenue since no
revenue from FreeMail products was collected. The acquisition was accounted for
as a purchase. The inclusion of the FreeMail operating results for periods prior
to the date of acquisition would not have materially affected results of
operations.
On March 13, 1998, the Company purchased all of the outstanding capital stock of
4-Sight Limited, a private limited company organized under the laws of the
United Kingdom ("4-Sight"), for $20 million in cash plus related acquisition
expenses of $500,000 and 2,500,000 shares of the Company's Common Stock valued
at $20.0 million. In addition, the former shareholders of 4-Sight will be
entitled to receive up to an additional 750,000 shares of the Company's Common
Stock in the event certain sales objectives are met over the next three years.
Specifically, 4-Sight's former shareholders shall be entitled to receive an
additional 625,000 shares of Common Stock if the cumulative Non-U.S./Canada
Revenues (defined below) for the period from March 13, 1998 to March 13, 2000
equal or exceed $50.0 million; and they shall be entitled to receive a further
125,000 shares of Common Stock if the cumulative Non-U.S./Canada Revenues during
the same three year period equal or exceed $70.0 million.
F-29
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
12. ACQUISITIONS (CONTINUED)
For the purpose of the foregoing, "Non-U.S./Canada Revenues" shall mean the
revenues attributable to customer sites located outside the United States and
Canada and receivable by the Company or any of its subsidiaries. The shares to
be issued as contingent consideration will result in the Company recording
additional goodwill, which will be amortized over its estimated useful life.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the operating results of 4-Sight have been included in the
consolidated operating results since the date of acquisition.
On acquisition, approximately $32.1 million of goodwill was recorded, which is
being amortized on a straight-line basis over five 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>
YEAR ENDED DECEMBER 31
1997 1998
-------------------------------------
(Unaudited)
<S> <C> <C>
Revenues $ 20,833,000 $ 21,109,000
Net loss (37,942,000) (121,922,000)
Net loss per share $ (4.22) $ (13.87)
</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.
13. RELATED PARTY TRANSACTIONS
On September 1, 1998, the Company entered into a $305,000 Secured Recourse
Promissory Note and Pledge Agreement (the "Note") with its Chief Technology
Officer (the "Maker"). The Note accrues interest at 7% per annum and is due on
December 15, 1999. As security for the repayment of the principal of and
interest on this Note, the Maker grants to the Company, 60,000 shares of the
Company's common stock, par value $.01 per share.
F-30
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company's corporate counsel owns 250,000 shares, and has been granted
warrants and options to purchase 450,000 shares of Company Common Stock. During
the years ended December 31, 1996, 1997 and 1998, the Company incurred legal
fees and expenses of approximately $102,000, $128,000 and $152,000,
respectively, to such counsel for services rendered in connection with
litigation and for general legal services.
The Company's corporate counsel is Larkin, Hoffman, Daly & Lingren, Ltd. One of
the partners of this firm is the father of the Company's President and Chief
Executive Officer and owns 250,000 shares of Common Stock of the Company and has
been granted an option to purchase 200,000 shares of the Company's Common Stock.
Additionally, Mr. Hoffman, a partner of this firm, is a director of the Company
and has been granted an option to purchase 75,000 shares of the Company's Common
Stock. During the years ended December 31, 1996, 1997 and 1998, the Company
incurred legal fees and expenses of approximately $75,000, $157,000 and
$1,111,000, respectively, to such counsel for services rendered in connection
with litigation and for general legal services.
The Company's marketing services were performed by Kauffman Marketing Group,
Inc. from November 1995 to December 1997. The former President of Kauffman
Marketing Group, Inc. joined the Company as the Vice President of Strategic
Marketing & Communications in December 1997. During the years ended December 31,
1996, 1997 and 1998, the Company incurred marketing expenses of approximately
$318,000, $1.6 million and $0, respectively, to such firm for strategic
positioning and outside marketing services.
Management believes the fees paid for all the above services rendered to the
Company were on terms at least as favorable to the Company as could have been
obtained from an unrelated party.
14. MAJOR CUSTOMERS
In 1997 three customers accounted for 24%, in aggregate, of net sales. In 1998,
no single customer accounted for more than 10% of net sales.
F-31
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
15. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company, operating in a single industry segment, provides a managed, high
speed digital data delivery network service. Information regarding operations in
different geographic areas is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
--------------------------------------------------------------
1996 1997 1998
--------------------------------------------------------------
Net sales to unaffiliated customers:
<S> <C> <C> <C>
United States $ 279,000 $ 1,555,000 $ 8,255,000
Europe - - 9,005,000
Rest of World - - 369,000
--------------------------------------------------------------
Total net sales $ 279,000 $ 1,555,000 $ 17,629,000
==============================================================
Operating (loss) income:
United States $(7,596,000) $(33,636,000) $(113,272,000)
Europe - - (8,606,000)
Rest of World - - -
--------------------------------------------------------------
Net loss $(7,596,000) (33,636,000) $(121,878,000)
==============================================================
Identifiable assets:
United States $20,070,000 $ 21,086,000 $ 89,698,000
Europe - - 18,358,000
Rest of World - - -
--------------------------------------------------------------
Total assets $20,070,000 $ 21,086,000 $ 108,056,000
==============================================================
</TABLE>
"United States" includes United States and Canada. "Rest of World" includes
principally Japan and the Asia-Pacific region. Net revenue from sales to
unaffiliated customers is based on the location of the customer. Operating
income and identifiable assets are classified based on the location of the
Company's facilities.
F-32
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
16. CONTINGENCY
The Company is aware that certain holders of warrants issued in connection with
the bridge loans in 1995 and 1996 believe that the exercise price of those
warrants should be adjusted downward. Although the warrants provide for downward
adjustments under certain circumstances, the Company believes no adjustment is
required. Should the warrant holders initiate litigation and should that
litigation be successful, the gross proceeds receivable by the Company from
exercise of those warrants would be reduced from approximately $8.4 million to
$4.9 million. The Company would vigorously defend any such litigation if
initiated in the future.
The Company is engaged in certain legal proceedings and claims arising in the
ordinary course of its business. The ultimate liabilities, if any, which may
result from these or other pending or threatened legal actions against the
Company cannot be determined at this time. However, it is the opinion of
management that facts known at the present time do not indicate that there is a
probability that such litigation will have a material effect on the financial
position of the Company.
17. SUBSEQUENT EVENTS
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.
F-33
<PAGE>
WAM!NET Inc.
Notes to Consolidated Financial Statements (continued)
17. SUBSEQUENT EVENTS (CONTINUED)
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 Preferred Stock and
878,527 shares of the Company's 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.
F-34
<PAGE>
EXHIBIT INDEX
Item No. 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)
<PAGE>
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 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 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 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 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 Subordinate Unsecured Convertible Note and Warrant Purchase Agreement
between the Company and MCI WorldCom, Inc. dated January 13, 1999.
<PAGE>
4.18 Preferred Stock Purchase Agreement by and between the Company and
Silicon Graphics, Inc. dated as of March 3, 1999.
4.19 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 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 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 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 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 Certificate representing 115,206 shares of Class A Preferred Stock of
the Company issued to MCI WorldCom. Inc. on March 4, 1999.
4.25 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 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 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 Stockholders Agreement by and among the Company, Silicon Graphics,
Inc. and MCI WorldCom, Inc. dated as of March 4, 1999.
4.29 Class A Preferred Stock Exchange Agreement by and between the Company
and MCI WorldCom, Inc. dated as of March 4, 1999.
4.30 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.
<PAGE>
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.
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
<PAGE>
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 Intentionally omitted.
10.23 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 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 Employment Agreement dated January 1, 1998 by and between John R.
Kauffman and the Company.
10.26 Employment Agreement dated November 3, 1997 by and between David T.
Ottinger and the Company.
10.27 Employment Agreement dated September 8, 1998 by and between the
Bradley E. Sparks and the Company.
12.1 Statement re: Computation of Ratios.
21.1 List of Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP
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.
<PAGE>
EXHIBIT 4.15
Registered Holder: MCI WORLDCOM, Inc.
$25,000,000
WAM!NET, Inc.
6100 WEST 110th STREET
MINNEAPOLIS, MINNESOTA 55438
13.25% Subordinated Unsecured Convertible Note
Due August 28, 2005
For Value Received, WAM!NET, Inc., a Minnesota corporation (hereinafter
called the "Issuer"), hereby promises to pay to the order of MCI WORLDCOM, Inc.,
or the registered holder (hereinafter referred to as the "Holder") the principal
amount of Twenty Five Million Dollars ($25,000,000) or such lesser amount as has
been actually advanced to the Issuer by the Holder pursuant to that certain
Subordinated Unsecured Convertible Note and Warrant Purchase Agreement of even
date herewith, upon presentation of this certificate, in legal tender of the
United States of America at the time of payment hereof, to the account of holder
according to Holder's written instructions, on August 28, 2005, being one
hundred eighty (180) days after the maturity of the Senior Notes, as hereinafter
defined. The indebtedness evidenced by this Subordinated Unsecured Convertible
Note (this or the "Note") constitutes "Deeply Subordinated Indebtedness" for
purposes of the Indenture (the "Indenture") relating to the Senior Notes as
defined below.
The Issuer further agrees to pay interest on the principal amount
remaining unpaid from time to time thereon from the date hereof at the rate of
thirteen and one-quarter percent (13.25%) per annum. Interest shall accrue on a
monthly basis from the date of purchase of the Note, and be payable upon the due
date of this Note. The Issuer shall, upon the due date and with or without
demand or other request by the registered Holder, mail a check or draft
representing such interest and the unpaid principal balance to the registered
holder at the address designated by the registered holder and appearing on the
books of registration maintained by the Issuer.
The following terms, covenants, statements of Holders' rights and
conditions shall apply to this Note.
ARTICLE 1.
SUBORDINATION
1.1. The Issuer and the Holder of this Note, by acceptance
hereof, agree that the payment of the principal and interest on this Note is, to
the extent stated herein expressly subordinated to the prior payment in full of
all existing
<PAGE>
obligations of the Issuer for money borrowed from a bank, trust,
insurance, or other financial institution engaged in the business of lending
money, and with respect to the Issuer's Senior Discount Notes due 2005 issued
March 5, 1998 ("Senior Notes"), which collectively are hereinafter referred to
as "Senior Indebtedness." In no event shall the Issuer make any payments in
respect of this Note prior to the date that is 180 days following the stated
maturity of the principal of any Senior Indebtedness, except: (a) that this Note
may be redeemed or retired by the Issuer or converted in accordance with the
terms hereof into capital stock of the Issuer; and (b) the payment principal of
and interest on this Note may be accelerated in accordance with the terms hereof
only in the event of the acceleration of the payment of the principal amount of
the Senior Notes following an event of default in respect of such Senior Notes,
provided that any payment in respect of this Note following the acceleration
thereof shall be subordinated to the prior payment in full of all amounts due in
respect of the Senior Notes and under the Indenture, and provided further, that
in the event of the recession of any such acceleration of the Senior Notes, the
acceleration of this Note shall be deemed rescinded upon notice to such effect
to the Holder from the Indenture trustee with respect to the Senior Notes.
ARTICLE 2.
EVENT OF DEFAULT
2.1. Each of the following shall constitute an Event of
Default:
(a) Failure to pay principal and interest when due;
(b) An assignment for the benefit of creditors of the Issuer,
adjudication of Issuer as a bankrupt, or petition for the reorganization of the
Issuer pursuant to Chapter X or XI of the United States Bankruptcy Act, as the
same may be amended.
2.2. Upon the occurrence of any Event of Default specified in
(b) above, the entire unpaid principal balance hereof, together with all accrued
and unpaid interest thereon and all other sums owing hereunder, shall become
immediately due and payable, without presentation, demand or further action of
any kind. Upon the occurrence of any Event of Default specified in (a) above,
the holder of this Note shall have the sole option of declaring the unpaid
principal balance hereof together with all other sums owing hereunder
immediately due and payable, without presentation, demand or further action of
any kind.
2.3. Upon the occurrence of any Event of Default and before
and after acceleration of the entire unpaid principal balance of this Note,
interest shall continue to accrue thereafter on the unpaid principal amount of
this Note at a rate equal to two percent (2%) per annum in excess of the then
-2-
<PAGE>
applicable rate of interest under this Note until this Note is paid in full,
including the period following entry of any judgment. Both before and after any
default, interest shall be calculated on the basis of a 360-day year but charged
on the basis of actual number of days elapsed in any calendar year or part
thereof.
2.4. Holder may waive any default before or after the same
has been declared without impairing the Holder's right to declare a subsequent
default hereunder, this right being a continuing right.
2.5. Upon an Event of Default, Holder shall not be deemed, by
any act of omission or commission to have waived any of its rights or remedies
unless such waiver is in writing and signed by Holder, and then only to the
extent specifically set forth in the writing. A waiver as to one event shall not
be construed as continuing or as a bar to or waiver of any right or remedy as to
a subsequent event.
ARTICLE 3.
PREPAYMENT BY ISSUER
3.1. This Note may be prepaid at any time after
April 30, 1999, in whole or in part, prior to maturity at the option of the
Issuer, on at least twenty (20) days' written notice by registered mail by the
Issuer to the Holder, upon payment of all, or such lesser portion of the
principal amount as specified in the notice, together with interest accrued to
the date fixed for prepayment. If the Holder hereof fails or neglects to present
this Note for payment at the time and place specified in such notice, this Note
shall continue to bear interest regardless of whether or not payment hereof is
refused upon the presentation of the same at or after the time specified in such
notice.
ARTICLE 4.
CONVERSION OF NOTE TO COMMON STOCK
AT THE OPTION OF HOLDER
4.1. The Holder of this Note shall have the right, at its
option in accordance with the terms of this Article 4, to convert the then
outstanding principal amount of this Note, or any portion thereof, and any
accrued interest thereon, into shares of the Capital Stock of the Issuer
("Stock") at a price per share determined as hereinafter described (such price
hereinafter referred to as the "Conversion Price") upon surrender of this Note
at the principal office of the Issuer, together with written notice (hereinafter
referred to as the "Conversion Notice"), in form appended hereto, of the
election executed by the Holder and specifying the name or names in which the
shares of Stock deliverable upon such conversion shall be registered,
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along with the addresses of the persons so named and, if required by the Issuer,
accompanied by a written instrument of transfer in form satisfactory to the
Issuer duly executed by the Holder; provided, however, that if this Note has
been called for prepayment according to the terms of Article 3 prior to the
receipt by Issuer of the Conversion Notice, the right of the Holder to convert
this Note shall terminate on the date fixed for prepayment.
4.2. If the Equity Offering as defined in Section 4A.1 is not
consummated by April 30, 1999, the Holder shall have the right, at its option,
to convert at any time after April 30, 1999 and prior to the due date of this
Note, the then outstanding principal amount of this Note, or any portions
thereof plus accrued interest thereon into Common Stock of the Issuer, par value
$.01 ("Common Stock"), at a Conversion Price equal to the per share fair market
value of the Common Stock as of the date of the receipt by Issuer of the
Conversion Notice from Holder with respect to its election to convert as
determined in accordance with Section 4.3.
4.3. In the event the Holder elects to convert part or all of
the outstanding principal and accrued interest thereon of this Note to Common
Stock under Section 4.2 above, the Issuer (acting through its directors who are
not affiliated with the Holder) and the Holder shall, within twenty (20) days of
the receipt of the Conversion Notice, utilize their reasonable efforts to reach
an agreement as to the per share fair market value of the Common Stock. In the
event the parties are unable to do so, WAM!NET's management and Board of
Directors shall promptly obtain from a nationally recognized investment banking
firm a valuation of the fair market value per share of WAM!NET's Common Stock.
In such case, the fees and expenses of the investment banking firm shall be
borne one-half by the Issuer and one-half by the Holder.
4.4. Stock issued on conversion of this Note pursuant to
Section 4.1 shall be delivered as follows:
(a) Within fifteen (15) days after the surrender of this Note
for conversion and the receipt of the Conversion Notice, the Issuer shall
deliver to the Holder, or to such person or persons so designated by the Holder
in the Conversion Notice, a certificate or certificates representing the number
of fully paid and non-assessable shares of Stock into which this Note or portion
thereof is to be converted in such name or names as are specified in the
Conversion Notice, together with any cash payable in lieu of any fractional
share as provided in Section 4.6. Such conversion shall be deemed to have been
effected at the close of business on the date when this Note shall have been
surrendered for conversion together with the Conversion Notice, so that the
person entitled to receive the shares of Stock upon conversion shall be treated
for all purposes as having become the record holder of such shares of Stock at
such time and the
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conversion shall be at the Conversion Price in effect at the
time.
(b) In the event less than the entire outstanding principal
balance of this Note shall be converted hereunder, this Note shall not be
surrendered for cancellation but shall have the fact and amount of conversion
recorded on the face of this Note by writing acknowledged by the Holder and the
Issuer.
4.5. In the case of any consolidation or merger of the Issuer
with another corporation, or the sale of all or substantially all of its assets
to another person, or any reorganization or reclassification of the capital
stock of the Issuer:
(a) as a condition of such consolidation, merger, sale,
reorganization or reclassification, lawful and adequate provision shall be made
whereby the Holder shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein and in lieu of the shares of the
Stock immediately theretofore subject to acquisition hereunder, such securities
or assets as may (by virtue of such consolidation, merger, sale, reorganization
or reclassification) be issued or payable with respect to or in exchange for a
number of outstanding shares of such Stock equal to the number of shares of such
Common Stock immediately theretofore so subject to acquisition hereunder had
such consolidation, merger, sale, reorganization or reclassification not taken
place, and in any such case appropriate provisions shall be made with respect to
the rights and interests of the Holder to the end that the provisions hereof
shall thereafter be applicable as nearly as may be, in relation to any
securities or assets thereafter deliverable upon the exercise of the conversion
option. The Issuer shall not effect any such consolidation, merger or sale,
unless prior to or simultaneously with the consummation thereof, the successor
person or persons purchasing such assets or succeeding or resulting from such
consolidation, merger, reorganization or reclassification shall assume by
written instrument executed and mailed or delivered to the Holder, the
obligation to deliver to such Holder such securities or assets as, in accordance
with the foregoing provisions, the Holder may be entitled to receive.
(b) In the event that the Issuer shall make any distribution
of its assets upon or with respect to its Common Stock, as a liquidating or
partial liquidation dividend, or other than as a dividend payable out of
earnings or any surplus legally available for dividends under the laws of the
State of Minnesota, the Holder shall, upon conversion of the Note in accordance
with the terms of the Note after the record date for such distribution or, in
the absence of a record date, after the date of such distribution, receive in
addition to the shares subscribed for, the amount of such assets (or, at the
option of the Issuer, a sum equal to the value thereof at the time of
distribution as
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<PAGE>
determined in good faith by the Board of Directors in its sole discretion) which
would have been distributed to the Holder if this Note had been converted
immediately prior to the record date for such distribution or, in the absence of
a record date, immediately prior to the date of such distribution.
4.6. Fractional shares shall not be issued upon conversion of
this Note but in any case where the Holder would, except for the provisions of
this Article, be entitled under the terms hereof to receive a fractional share,
the Issuer shall, upon any conversion for the largest number of whole shares
then called for, pay a sum in cash equal to the sum of the proportional part of
the per share Conversion Price represented by such fractional share.
ARTICLE 4A.
AUTOMATIC CONVERSION
4A.1. If on or before April 30, 1999, the Issuer consummates
an equity offering resulting in gross proceeds in cash and non-cash
consideration as provided in the Loan Agreement having an aggregate value of a
minimum of Seventy-Five Million Dollars ($75,000,000.00) (an "Equity Offering"),
the then outstanding principal amount of this Note and any accrued interest
thereon shall, upon such consummation automatically and without any action on
the part of the Holder or Issuer convert into the same class of shares sold in
the Equity Offering and at a Conversion Price equal to the offering price per
share in the Equity Offering.
ARTICLE 5.
REGISTRATION RIGHT
5.1. (a) If, commencing one (1) year after the date hereof,
the Issuer proposes to claim an exemption under Section 3(b) for a public
offering of any of its securities or to register under the Securities Act of
1933 (except by a claim of exemption or registration statement on a form that
does not permit the inclusion of shares by its security holders) any of its
securities, it will give written notice to the registered Holder of this Note,
and all registered Holders of shares of common stock acquired upon the
conversion of this Note, of its intention to do so and, on the written request
of any such registered holders given within twenty (20) days after receipt of
any such notice (which request must be made within five (5) years from the date
of this Note and which notice shall specify the shares of common stock intended
to be sold or disposed of by such registered holder and describe the nature of
any proposed sale or other disposition thereof), the Issuer will use its best
efforts to cause all such shares, the registered holders of which shall have
requested the registration or qualification thereof, to be included in such
notification of registration statement proposed
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to be filed by the Issuer; provided, however, that nothing herein shall prevent
the Issuer from, at any time, abandoning or delaying any such registration
initiated by it. If any such registration shall be underwritten in whole or in
part, the Issuer may require that the shares requested for inclusion pursuant to
this section be included in the underwriting on the same terms and conditions as
the securities otherwise being sold through the underwriters. If in the good
faith judgment, as expressed in writing delivered to the registered holder(s),
of the managing underwriter of such public offering the inclusion of all of the
shares originally covered by a request for registration would reduce the number
of shares to be offered by the Issuer or interfere with the successful marketing
of the shares of stock offered by the Issuer, the number of shares otherwise to
be included pursuant to this Section in the underwritten public offering may be
reduced; provided, however, that any such required reduction shall be pro rata
among all persons (other than the Issuer) who are participating in such
offering. Those shares which are thus excluded from the underwritten public
offering shall be withheld from the market for a period, not to exceed 90 days,
which the managing underwriter reasonably determines is necessary in order to
effect the underwritten public offering. All expenses of such offering, except
the fees of special counsel to such holders and brokers' commissions or
underwriting discounts payable by such holders, shall be borne by the Issuer.
(b) Further, on one occasion only, commencing one (1) year
after the date hereof, upon request by the holder of the Note and/or the holders
of shares issued upon the conversion of the Note who collectively have the right
to purchase at least 500,000 shares or hold directly at least 500,000 shares
purchased hereunder or have the right to purchase and hold directly an aggregate
of at least 500,000 shares purchasable or purchased hereunder, the Issuer will
promptly use its reasonable best efforts to register or qualify the Note or such
shares under Section 3(b) or Section 5 of the Securities Act of 1933 (and, upon
the request of such holders, under Rule 415 thereunder) and such state laws as
such holders may reasonably request; provided that (i) such request must be made
within five (5) years from the date of this Note; and (ii) the Issuer may delay
the filing of any registration statement requested pursuant to this section to a
date not more than ninety (90) days following the date of such request if in the
opinion of the Issuer's principal investment banker at the time of such request
such a delay is necessary in order not to adversely affect financing efforts
then underway at the Issuer, or if in the opinion of the Issuer such a delay is
necessary or advisable to avoid disclosure of material nonpublic information.
The costs and expenses directly related to any registration requested pursuant
to this section, including but not limited to legal fees of the Issuer's
counsel, audit fees, printing expense, filing fees and fees and expenses
relating to qualifications under state securities or blue sky laws incurred by
the Issuer shall be borne entirely by the Issuer; provided,
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however, that the persons for whose account the securities covered by such
registration are sold shall bear the expenses of underwriting commissions
applicable to their shares and fees of their legal counsel. If the holder of the
Note and the holders of shares of Common Stock underlying the Note are the only
persons whose shares are included in the registration pursuant to this section,
such holders shall bear the expense of inclusion of audited financial statements
in the registration statement which are not dated as of the Issuer's normal
fiscal year or are not otherwise prepared by the Issuer for its own business
purposes. The Issuer shall keep effective and maintain any registration,
qualification, notification or approval specified in this paragraph for such
period as may be necessary for the holders of the Note and such common stock to
dispose thereof, and from time to time shall amend or supplement, at the
holder's expense, the prospectus or offering circular used in connection
therewith to the extent necessary in order to comply with applicable law;
provided, that the Issuer shall not be obligated to maintain any registration
for a period of more than nine (9) months.
If, at the time any written request for registration is
received by the Issuer pursuant to this Section 5.1(b) the Issuer has determined
to proceed with the actual preparation and filing of a registration statement
under the Securities Act in connection with the proposed offer and sale for cash
of any of its securities by it or any of its security holders, such written
request shall be deemed to have been given pursuant to Section 5.1(a) rather
than to this Section 5.1(b), and the rights of the holders of the Note and/or
shares issued upon the conversion of the Note covered by such written request
shall be governed by Section 5.1(a) hereof.
(c) If and whenever the Issuer is required by the provisions
of Sections 5.1(a) or 5.1(b) hereof to effect the registration of shares issued
upon the exercise of the Note under the Securities Act, the Issuer will:
(i) Prepare and file with the Commission a
registration statement with respect to such securities, and use its
best efforts to cause such registration statement to become and remain
effective for such period as may be reasonably necessary to effect the
sale of such securities, not to exceed nine (9) months;
(ii) prepare and file with the Commission such
amendments to such registration statement and supplements to the
prospectus contained therein as may be necessary to keep such
registration statement effective for such period as may be reasonably
necessary to effect the sale of such securities, not to exceed nine (9)
months;
(iii) furnish to the security holders participating
in such registration and to the underwriters of the securities being
registered such reasonable number of
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copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such underwriters may reasonably
request in order to facilitate the public offering of such securities;
(iv) use its best efforts to register or qualify the
securities covered by such registration statement under such state
securities or blue sky laws of such jurisdictions as such participating
holders may reasonably request in writing within 30 days following the
original filing of such registration statement, except that the Issuer
shall not for any purpose be required to execute a general consent to
service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified;
(v) notify the security holders participating in such
registration, promptly after it shall receive notice thereof, of the
time when such registration statement has become effective or a
supplement to any prospectus forming a part of such registration
statement has been filed;
(vi) notify such holders promptly of any request by
the Commission for the amending or supplementing of such registration
statement or prospectus or for additional information;
(vii) prepare and file with the Commission, promptly
upon the request of any such holders, any amendments or supplements to
such registration statement or prospectus which, in the opinion of
counsel for such holders (and concurred in by counsel for the Issuer),
is required under the Securities Act or the rules and regulations
thereunder in connection with the distribution of the Note or shares by
such holder;
(viii) prepare and promptly file with the Commission
and promptly notify such holders of the filing of such amendment or
supplement to such registration statement or prospectus as may be
necessary to correct any statements or omissions if at the time when a
prospectus relating to such securities is required to be delivered
under the Securities Act, any event shall have occurred as the result
of which any such prospectus or any other prospectus as then in effect
would include an untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein, in the
light of the circumstances in which they were made, not misleading;
(ix) advise such holders, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance of any stop
order by the Commission suspending the effectiveness of such
registration statement or the initiation or threatening of any
proceeding for that purpose
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<PAGE>
and promptly use its best efforts to prevent the issuance of any stop
order or to obtain its withdrawal if such stop order should be issued;
(x) not file any amendment or supplement to such
registration statement or prospectus to which a majority in interest of
such holders shall have reasonably objected on the grounds that such
amendment or supplement does not comply in all material respects with
the requirements of the Securities Act or the rules and regulations
thereunder, after having been furnished with a copy thereof at least
five business days prior to the filing thereof, unless in the opinion
of counsel for the Issuer the filing of such amendment or supplement is
reasonably necessary to protect the Issuer from any liabilities under
any applicable federal or state law and such filing will not violate
applicable law; and
(xi) at the request of any such holder, furnish on
the effective date of the registration statement and, if such
registration includes an underwritten public offering, at the closing
provided for in the underwriting agreement: (i) opinions, dated such
respective dates, of the counsel representing the Issuer for the
purposes of such registration, addressed to the underwriters, if any,
and to the holder or holders making such request, covering such matters
as such underwriters and holder or holders may reasonably request; and
(ii) letters, dated such respective dates, from the independent
certified public accountants of the Issuer, addressed to the
underwriters, if any, and to the holder or holders making such request,
covering such matters as such underwriters and holder or holders may
reasonably request, in which letter such accountants shall state
(without limiting the generality of the foregoing) that they are
independent certified public accountants within the meaning of the
Securities Act and that in the opinion of such accountants the
financial statements and other financial data of the Issuer included in
the registration statement or the prospectus or any amendment or
supplement thereto comply in all material respects with the applicable
accounting requirements of the Securities Act.
(d) The Issuer hereby indemnifies the holder of this Note and
of any common or other stock issued or issuable hereunder, its officers,
directors, employees and agents, and any person who controls such Note holder or
such holder of common or other stock within the meaning of Section 15 of the
Securities Act of 1933, against all losses, claims, damages and liabilities
caused by any untrue statement of a material fact contained in any registration
statement, prospectus, notification or offering circular (and as amended or
supplemented if the Issuer shall have furnished any amendments or supplements
thereto) or any preliminary prospectus or caused by any omission to state
therein a material fact required to be stated therein or necessary to
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make the statements therein not misleading except insofar as such losses,
claims, damages or liabilities are caused by any untrue statement or omission
contained in information furnished in writing to the Issuer by such Note holder
or such holder of common or other stock expressly for use therein, and each such
holder by its acceptance hereof severally agrees that it will indemnify and hold
harmless the Issuer and each of its officers who signs such registration
statement and each of its directors and each person, if any, who controls the
Issuer within the meaning of Section 15 of the Securities Act of 1933 with
respect to losses, claims, damages or liabilities which are caused by any untrue
statement or omission contained in information furnished in writing to the
Issuer by such holder expressly for use therein.
(e) If the indemnification provided for in Article 5 is
unavailable to an indemnified party as provided herein in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then the Issuer,
in lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses in such proportion as is appropriate to reflect
the relative fault of the Issuer on the one hand and the holder of this Note on
the other in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of the Issuer on the one hand and
of the holder of this Note on the other shall be determined by reference to,
among other things, whether the untrue or alleged untrue statements of a
material fact of the omission or alleged omission to state a material fact
relates to information supplied by the Issuer or by the holder of this Note is
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent, such statement or omission. The amount paid
or payable by a party as a result of the losses, claims, damages, liabilities
and expenses referred to above shall be deemed to include, without limitation,
any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim.
The Issuer and the holder of this Note agree that it would not
be just and equitable if contribution pursuant to this Section 5.1(e) were
determined by a pro rata allocation or by any other method of allocation that
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of this Section
5.1(c), the holder of this Note shall not be required to contribute any amount
in excess of the amount by which the total price which such holder's
registerable securities were sold to the public. No person guilty of fraudulent
misrepresentations (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
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ARTICLE 6.
REGISTRY
6.1. Books for the registry hereof are kept at the office of
the Issuer. No transfer hereof shall be valid unless made on the Issuer's books
at the office of the Issuer, by the Holder, in person, or by an attorney duly
authorized in writing, similarly noted hereon.
ARTICLE 7.
PAYMENT
7.1. Payment to the Holder of principal and interest shall be
a complete discharge of the Issuer's liability with respect to such payment, but
the Issuer may, at any time, require the presentation hereof as a condition
precedent to such payment.
7.2. No recourse shall be had for the payment of the
principal, or interest, or for any claim based thereof, or otherwise, against
any incorporator, shareholder, officer, director, or agent, past, present, or
future, of the Issuer, whether by virtue of any constitution, statute, rule of
law, enforcement of any assessment, or penalty, or by reason of any matter prior
to delivery of this Note, or otherwise. All such liability, by the acceptance
hereof, is a part of the consideration to the Issuer hereof, and is expressly
waived.
ARTICLE 8.
DIVIDENDS
8.1. Until payment in full or conversion of this Note, the
Issuer may not declare any dividend payable in cash or property on its Common
Stock, with the sole exception of any stock split in the form of a dividend
payable in shares of common stock to which the provisions of Article IV hereof
apply.
ARTICLE 9.
OWNERSHIP
9.1. The Issuer may treat the person(s) in whose name this
Note is issued as the absolute owner(s) hereof for all purposes, whether or not
this Note is overdue and the Issuer shall not be affected by any notice to the
contrary.
ARTICLE 10.
NOTICE
10.1. All notices, requests, demands and other communications
under this Note shall be in writing and shall be
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deemed to have been given on the date of service if served personally on the
party to whom notice is to be given, or on the third day after mailing if mailed
to the party to whom notice is to be given by first class mail, registered or
certified, postage prepaid to the Issuer at its address stated on the front page
of this Note and to the Holder at its address as listed in the register of the
Issuer. Either party may change its address for purposes of this Article 10.1 by
giving the other party written notice of the new address in the manner set forth
above.
ARTICLE 11.
MISCELLANEOUS
11.1. All parties liable for the payment of this Note agree
to pay on demand, all costs of collection and to cure any default under this
Note including, but not limited to, reasonable attorneys' fees actually
incurred.
11.2. The undersigned and all endorsers, sureties and
guarantors of this Note jointly and severally waive notice of and consent to any
and all extensions of this Note or any part hereof without notice, and each
hereby waives presentment, demand for payment, protest and notice of dishonor,
demand, protest and nonpayment.
11.3. The remedies of Holder as provided herein shall be
cumulative and concurrent, and may be pursued singularly, successively or
together against Issuer at the sole discretion of Holder, and the failure to
exercise any such right or remedy shall in no event be construed as a waiver or
release of the same.
11.4. Issuer's obligations hereunder shall extend to and bind
Issuer's successors and assigns. This Note may be amended only by an instrument
in writing signed by both Issuer and Holder.
IN WITNESS WHEREOF, the Issuer has caused this Note to be
signed by its Chief Financial Officer.
Dated: January ____, 1999 WAM!NET, Inc.
By: /s/Brad Sparks
-------------------------
Brad Sparks
Its: Chief Financial Officer
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<PAGE>
CONVERSION NOTICE
To WAM!NET, Inc.
The undersigned holder of this Note hereby irrevocably
exercises the option to convert this Note as indicated below:
__________ The undersigned elects to convert $_________ in
principal of this Note and accrued interest thereon into Common Stock of
WAM!NET, Inc. in accordance with the terms of Section 4 of this Note.
The undersigned holder of this Note directs that the shares
issuable and deliverable upon the conversion be issued and delivered to the
undersigned unless a different name has been indicated below. Additionally, as a
condition to such conversion privilege, the undersigned holder of this Note
agrees to execute a letter stating its investment intent is to hold the shares
issuable upon conversion for investment and not for resale, except in accordance
with the requirements is of Rule 144 of the General Rules and Regulations under
the Securities Act of 1933, or any successor Rule together with applicable state
securities law, and agrees that the certificates representing the shares
issuable and deliverable upon conversion may be imprinted with a legend in
customary form reciting the restrictions on transfer mandated by such laws.
Dated:___________ NOTE HOLDER:
-------------------------------
Name (Please Print)
-------------------------------
Address
-------------------------------
City, State and Zip
-------------------------------
Signature
If shares are to be issued otherwise than to owner please provide name and
address of person or persons to whom shares are to be issued:
-------------------------------
Name (Please Print)
-------------------------------
Address
-------------------------------
City, State and Zip
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EXHIBIT 4.17
SUBORDINATED UNSECURED CONVERTIBLE NOTE
AND WARRANT PURCHASE AGREEMENT
Agreement made this 13th day of January 1999, by and between WAM!NET, Inc.,
a Minnesota corporation, having its principal place of business at 6100 West
110/th/ Street, Minneapolis, Minnesota 55438 ("WAM!NET") and MCI WORLDCOM, INC.,
a Georgia corporation, having its principal place of business at 515 East Amite
Street, Jackson, Mississippi 39201 ("MCI WCOM").
WITNESSETH:
Whereas, WAM!NET's objective is to become the leading provider of enhanced,
managed digital data delivery and archiving services to industries comprised of
interdependent participants requiring industry specific, high speed digital
connectivity;
Whereas, in order to pursue this objective, WAM!NET intends to designate a
senior level operations manager to serve as a Chief Operating Officer and
perform the functions and duties typically performed by a Chief Operating
Officer;
Whereas, WAM!NET currently requires financing to continue its development
and deployment activities, to maintain existing and recruit additional key
employees, and to engage a Chief Operating Officer pending the receipt of
additional permanent financing; and
Whereas, MCI WCOM is agreeable to lending WAM!NET the sum of up to Twenty
Five Million Dollars ($25,000,000.00) in consideration of WAM!NET's issuance to
MCI WCOM of WAM!NET's Subordinated Unsecured Convertible Note upon the terms and
conditions, and for the additional consideration, provided herein;
Whereas, MCI WCOM and WAM!NET each desire to provide for the issuance of
the Warrants (as hereinafter defined) and the conversion of the Subordinated
Unsecured Convertible Note of WAM!NET held by MCI WCOM as set forth in this
Agreement.
NOW THEREFORE, in consideration of the foregoing premises, and of the
consideration provided herein, the parties agree as follows:
I. LOAN AGREEMENT
1.1. The Loan. Subject to the terms and conditions set forth in this
--------
Agreement, MCI WCOM will loan to WAM!NET an amount not exceeding Twenty-Five
Million Dollars ($25,000,000) (the "Loan"). The Loan will be made in an initial
disbursement ("Initial Disbursement") of Ten Million Dollars ($10,000,000.00) at
Closing (as defined herein) and, upon request of WAM!NET, in subsequent
disbursements ("Future Disbursements") not exceeding Fifteen Million Dollars
($15,000,000.00). WAM!NET hereby agrees that it will promptly designate a senior
level operations manager to serve as a Chief Operating Officer and perform the
<PAGE>
functions and duties typically performed by a Chief Operating Officer, whose
selection, qualifications and authority are satisfactory to MCI WCOM.
Future Disbursements of the Loan shall be made in one or more disbursements
on or after January 31, 1999, conditioned upon the Initial Disbursement being
funded and of WAM!NET's obtaining a commitment for an equity investment
resulting in gross proceeds of cash and non-cash consideration having an
aggregate value of a minimum of $75,000,000.00, from an investor or investors
and on such terms as are acceptable to MCI WCOM in its sole discretion.
All requests for Future Disbursements must be signed by an officer of
WAM!NET authorized by its board, requesting the Future Disbursement. The amount
of each such Future Disbursement shall be delivered by MCI WCOM to WAM!NET in
immediately available funds by wire transfer to an account designated by WAM!NET
in the Funding Notice. Each Funding Notice shall be in form of the Funding
Notice attached to this Agreement as Exhibit 1.
1.2. 13.25% Subordinated Note. The Loan shall be evidenced by a 13.25%
------------------------
Subordinated Convertible Unsecured Note ("Subordinated Note") in the form
attached to this Agreement as Exhibit 2. The Loan shall be governed by the terms
of the Subordinated Note, and shall bear interest and be repayable in accordance
therewith in the principal amount of the sum of the Initial Disbursement and all
Future Disbursements (if any) made by MCI WCOM to WAM!NET. The Loan shall
constitute "Deeply Subordinated Indebtedness" for purposes of the Indenture (the
"Indenture") relating to WAM!NET's 13.25% Senior Discount Notes due 2005.
II. WARRANTS
2.1. Consideration. In consideration of the Loan, WAM!NET agrees to issue
-------------
to MCI WCOM warrants to purchase shares of the Common Stock of WAM!NET in the
form and subject to the terms and conditions set forth herein.
2.2. Terms.
-----
(a) Upon the Initial Disbursement, WAM!NET shall issue to MCI WCOM
Common Stock Purchase Warrants (the "Initial Warrants") entitling MCI WCOM to
purchase in whole or in part One Hundred Fifty Thousand (150,000) shares of
WAM!NET's authorized and unissued Common Stock, par value $.01 per share
("Common Stock") for an exercise price of One Cent ($.01) after April 30, 1999
and until April 30, 2004 subject to the additional terms and conditions as set
forth in the Warrants.
(b) WAM!NET shall issue to MCI WCOM Common Stock Purchase Warrants (the
"Future Warrants" and, together with the Initial Warrants, the "Warrants")
entitling MCI WCOM to purchase Common Stock in addition to that referenced in
Section 2.02 (a) and not to exceed an additional Two Hundred Thousand (200,000)
shares of Common Stock according to the formula set forth below for an exercise
price of One Cent ($.01), after April 30, 1999 and until April 30, 2004 subject
to the additional terms and conditions as set forth in the Warrants. Prior to
requesting any Future Disbursement, WAM!NET shall use its reasonable efforts to
obtain a written opinion from an Independent Financial Advisor (as such term is
defined in the Indenture
2
<PAGE>
pursuant to Section 10.14 thereof) stating that the terms of the issuance of the
Warrants (as defined herein) including the Section 2.02 and 2.03 transactions,
together with the other transactions contemplated under this Agreement, are fair
to WAM!NET from a financial point of view ("Fairness Opinion"). If,
notwithstanding its reasonable efforts to do so, WAM!NET is unable to obtain a
response to its request for a Fairness Opinion within the time set forth for the
Future Disbursement, MCI WCOM shall fund the Future Disbursement based upon
WAM!NET's covenant that it will diligently pursue in good faith the issuance of
the Fairness Opinion. Upon receipt of a Fairness Opinion and if supported by the
Fairness Opinion, WAM!NET will issue Warrants to MCI WCOM for an aggregate
number of shares of Common Stock equal to the product of (x) 200,000 and (y) a
fraction, the numerator of which is the amount of such Future Disbursement and
the denominator of which is $15,000,000.
(c) In the event the Independent Financial Advisor cannot issue a
Fairness Opinion on the transaction set forth in Section 2.02 (a), then the
Warrants shall be promptly returned by MCI WCOM to WAM!NET and replaced with
Warrants in such number as are supported by the Fairness Opinion rendered by the
Independent Financial Advisor. In the event the Independent Financial Advisor
cannot issue a Fairness Opinion on the proposed transaction set forth in Section
2.02(b), then the Warrants contemplated thereby shall not be issued but WAM!NET
shall instead issue Warrants in such number as are supported by the Fairness
Opinion rendered by the Independent Financial Advisor.
2.3. Form of the Warrants. The Initial Warrants for the Initial
--------------------
Disbursement will be issued in the form attached to this Agreement as Exhibit 3.
The Future Warrants for the Future Disbursements will be issued in a form
substantially similar to the form attached to this Agreement as Exhibit 3,
modified to reflect the correct number of warrants according to the formula set
forth in Section 2.02 (b).
III. REPRESENTATIONS, WARRANTIES AND COVENANTS OF WAM!NET
3.1. WAM!NET hereby represents, warrants and covenants to MCI WCOM that,
as of the date hereof and as of the Closing as provided herein:
(a) Corporate Organization and Power; Qualification. WAM!NET is duly
organized, validly existing and in good standing as a corporation under the laws
of its state of incorporation, has all corporate power and authority to own its
properties and to carry on its businesses as now being and hereafter proposed to
be conducted and is duly qualified and in good standing as a foreign
corporation, and is authorized to do business, in all jurisdictions in which the
character of its properties or the nature of its businesses requires such
qualification or authorization, except for qualifications and authorizations the
lack of which, singly or in the aggregate, has not had and will not have a
materially adverse effect on WAM!NET.
(b) Subsidiaries. Except as set forth on Schedule 1 hereto, WAM!NET does
not own, directly or indirectly, any capital stock or other equity securities of
any corporation nor does WAM!NET have any direct or indirect ownership interest,
including interests in partnerships and joint ventures, in any other entity or
business.
3
<PAGE>
(c) Authorization; Enforceability. WAM!NET has the power, and has taken,
or will take prior to closing, all necessary action (including any necessary
stockholder action) to authorize it, to execute, deliver and perform in
accordance with their respective terms this Agreement, the Subordinated Note in
the form appended to this Agreement as Exhibit 2, and the Warrants in the form
appended to this Agreement as Exhibit 3. This Agreement has been, and the
Subordinated Note and Warrant contemplated hereby to which WAM!NET is a party,
when delivered to MCI WCOM will have been duly executed and delivered by
WAM!NET, and are, or when so delivered will be, legal, valid and binding
obligations of WAM!NET, enforceable against WAM!NET in accordance with their
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally.
(d) No Violations; Consent. The execution, delivery and performance in
accordance with their respective terms by WAM!NET of this Agreement and of the
Note and Warrants, do not and will not as of closing or thereafter (i) require
any governmental approval or any other consent or approval, including any
consent or approval of the stockholders of WAM!NET, other than governmental
approvals and other consents and approvals that have been obtained, are final
and not subject to review on appeal or to collateral attack, are in full force
and effect, or (ii) violate, conflict with, result in a breach of, constitute a
default under, or result in or require the creation of any lien upon any assets
of WAM!NET under, any material contract to which WAM!NET is a party or by which
WAM!NET or any of its properties may be bound.
(e) Litigation. There are not, in any court or before any arbitrator of
any kind or before or by any governmental or non-governmental body, any actions,
suits or proceedings pending or, to the knowledge of WAM!NET, threatened against
or in any other way relating to or affecting (i) WAM!NET, or (ii) any of its
businesses or properties, except for such actions, suits or proceedings which,
singularly or in the aggregate, have not had and will not have a material
adverse affect upon WAM!NET.
(f) Taxes. WAM!NET has filed (or obtained extensions of the time by
which it is required to file) all United States federal, state and local income
tax returns and all other material tax returns required to be filed by it and
has paid all taxes shown due on the returns so filed as well as the other taxes,
assessments and governmental charges which have become due, except such taxes,
if any, as are being contested in good faith and as to which adequate reserves
have been provided. WAM!NET will continue to make all such filings in a timely
manner and pay all such taxes, assessments and other governmental charges
required of it.
(g) Capitalization.
(i) As of the date hereof, the authorized capital stock of
WAM!NET consists of 500,000,000 shares, the designations and classes of which
are shown on Schedule 2 to this Agreement. WAM!NET does not hold any of its
shares in treasury.
(ii) As of the date hereof, 9,288,194 Common Shares are issued
and outstanding and have been validly issued and are fully paid and
nonassessable and are not subject to preemptive rights.
4
<PAGE>
(iii) Except as contemplated by this Agreement and as disclosed
on Schedule 2 to this Agreement, there are no outstanding subscriptions,
options, warrants or other rights of any kind to acquire any additional shares
of capital stock of WAM!NET, or other instruments or securities convertible into
or exchangeable for, or which otherwise confer on the holder thereof any right
to acquire, any such additional shares, nor is WAM!NET committed to issue any
such option, warrant, right, or security, or any other instrument convertible
into a security.
(iv) Except as expressly provided for in this Agreement or
depicted on Schedule 2 to this Agreement, there are no agreements relating to
voting, purchase or sale of capital stock between WAM!NET and any of its
stockholders or affiliates, and to the best of WAM!NET's knowledge, among any of
its stockholders.
(h) Financial Statements; Information.
(i) WAM!NET has delivered to MCI WCOM copies of its financial
statements (including balance sheets, income statements, changes in stockholders
equity and statements of cash flow) for the period from inception, September,
1994, through year end December, 1997, and for the ten month period ended
October 31, 1998. Such financial statements (x) fairly present the financial
condition, assets and liabilities of WAM!NET at their respective dates and the
results of its operations and changes in its cash flows for the periods covered
thereby, (y) were prepared in accordance with generally accepted accounting
principles except as may be noted therein, and (z) were prepared from the books
and records of WAM!NET, which books and records are complete and correct and
fairly reflect all material transactions of WAM!NET's business.
(ii) Within 30 days following the end of each of its first
three fiscal quarters and within 75 days following the end of its fourth fiscal
quarter during the term of the Subordinated Note, WAM!NET will furnish MCI WCOM
with a copy of its financial statements, (including balance sheets, income
statements, changes in stockholders equity and statements of cash flow) for each
of such quarters and fiscal year, respectively. In addition, WAM!NET will
furnish MCI WCOM with such additional financial and business information,
including monthly or other periodic financial statements as WAM!NET may prepare
from time to time, upon the reasonable request of MCI WCOM.
(i) Access. WAM!NET has provided MCI WCOM access to full and complete
information regarding WAM!NET and shall continue to provide such information as
MCI WCOM may reasonably request throughout the term of the Subordinated Note.
IV. REPRESENTATIONS, WARRANTIES AND COVENANTS OF MCI WCOM
4.1. MCI WCOM hereby represents, warrants and covenants to WAM!NET that:
(a) MCI WCOM has been given access to full and complete information
regarding WAM!NET and has utilized such access to its satisfaction for the
purpose of obtaining information MCI WCOM desires or deems relevant to the
decision to purchase the Subordinated Note and obtain the Warrants; and
particularly, MCI WCOM has had the opportunity to ask questions of, and receive
answers from, representatives of the Company concerning the terms and
5
<PAGE>
conditions of the Note and to obtain any additional information MCI WCOM desires
or deems relevant; and
(b) MCI WCOM is aware that the Company is a development stage company;
that the success of the Company is dependent upon the Company's ability to
secure appropriate employees, switching equipment, telephone carriage,
integrating software; also upon the Company's ability to provide adequate
installation and maintenance services; and upon the Company's ability to
successfully market its data transportation technology and services to
appropriate customers; and upon the Company's ability to obtain adequate
financing, to finance its development and operations; and that the Company can
give no assurances that it will be able to successfully obtain, provide or
accomplish any such matters.
(c) MCI WCOM has obtained, to the extent it has deemed necessary,
professional advice with respect to the risks inherent in the investment in the
Subordinated Note and the Warrant.
(d) MCI WCOM, being a corporation with total assets in excess of
$5,000,000 that was not formed for the purpose of acquiring the Subordinated
Note and the Warrants, is an "accredited investor" within the meaning of Rule
501(a) of the General Rules and Regulations under the Securities Act of 1933.
(e) MCI WCOM will not use its representation on WAM!NET's board of
directors to cause WAM!NET to amend, waive or fail to enforce any provision of
this Agreement; provided however, that this covenant shall not be deemed to
----------------
require any current or future director of WAM!NET to take or refrain from taking
any action which such director reasonably believes, in the exercise of
reasonable business judgment, to be in the best interests of WAM!NET or its
shareholders in light of the circumstances then prevailing; and provided further
--------------------
that this covenant is intended to be for the express benefit of the members,
from time to time, of WAM!NET's board of directors who are not affiliated with
MCI WCOM or its affiliates.
V. LICENSES AND ACCESS TO TECHNOLOGY
5.1 Access to Technology. WAM!NET desires MCI WCOM to use certain of its
--------------------
technology, products and services, both for MCI WCOM's own use and as part of
suites of solutions MCI WCOM sells to its customers. As such, MCI WCOM would
have to integrate certain of WAM!NET's technologies, products and services into
MCI WCOM's infrastructure and product/service suites. During the term of the
Subordinated Note and thereafter until such time as an initial public offering
("IPO") of the WAM!NET stock is prepared at the request of WAM!NET, WAM!NET
hereby agrees that it will make available for such purposes to MCI WCOM
technology developed by WAM!NET on terms mutually acceptable to MCI WCOM and
WAM!NET subject to the provisions of Section 5.02. WAM!NET can condition such
access upon the execution of an appropriate license or other agreement so long
as the terms and conditions of the agreement are at least as favorable as any
WAM!NET provides or may provide to any other customer or partner as set forth
below. Upon the payment of the Subordinated Note or its conversion to Stock as
provided herein, WAM!NET shall continue to make available to MCI WCOM technology
previously made available to MCI WCOM in accordance with the terms
6
<PAGE>
of any then existing applicable license or other agreement, but shall have no
obligation to make available new technology developed after an IPO.
5.2. Most Favored Customer and/or Partner Terms. WAM!NET agrees that
------------------------------------------
during the term set forth in Section 5.01, any technology it provides or makes
available to MCI WCOM pursuant to Section 5.01 shall be furnished on the terms
and conditions (including, without limitation, pricing, access, and all other
material terms and conditions) that are at least as favorable, when viewed in
their entirety with respect to any particular agreement, as WAM!NET provides or
may in the future have provided to any other person or entity not affiliated
with WAM!NET or MCI WCOM.
5.3. Participation in Investor Partnering Discussions. During the term of
------------------------------------------------
the Subordinated Note and thereafter until paid or converted to Stock as
provided herein, WAM!NET hereby agrees that MCI WCOM shall be given the
opportunity to participate in any negotiation with any person or entity
concerning an equity investment in WAM!NET by such person or entity.
5.4. No Violations. Notwithstanding anything to the contrary contained
-------------
herein, (a) in no event shall WAM!NET be obligated to enter into any agreement,
arrangement or understanding contemplated by this Section 5 on terms that would
violate or cause a default under the Indenture and (b) in the event that this
Section 5 would require WAM!NET to enter into any agreement, arrangement or
understanding on terms that would violate or cause a default under any of its
other material obligations existing as of the date hereof, MCI WCOM and WAM!NET
agree to each use their respective good faith efforts in order to provide MCI
WCOM with the benefits of this Section 5 without violating or causing a default
under any such other material obligation. WAM!NET represents that as of the
date hereof it has not identified any such material obligation that will be
violated or as to which a default would occur by virtue of the rights granted to
MCI WCOM in Section 5 of this agreement.
VI. CLOSING
6.1. Closing. Closing of the transactions contemplated by this Agreement
-------
("the Closing") shall occur at the offices of WAM!NET, at 9:00 A.M., local
Minneapolis time, on or before January 12, 1999, or at such other time and place
as may be agreed by WAM!NET and MCI WCOM.
6.2. Conditions to Closing. The Closing shall be conditioned upon
---------------------
satisfaction of all of the following requirements;
(a) The approval of this Agreement by WAM!NET's Board of Directors and
by MCI WCOM;
(b) The due authorization and approval by WAM!NET's Board of Directors
of the Subordinated Note and the Warrants;
(c) Any necessary corporate filings by WAM!NET to validly authorize the
Subordinated Note and the Warrants;
7
<PAGE>
(d) Such certificates, dated as of the Closing, from officers of
WAM!NET as MCI WCOM may reasonably request relating to the representations,
warranties and covenants given by WAM!NET herein or to the satisfaction of these
conditions of closing;
(e) The opinion of WAM!NET counsel addressed to MCI WCOM in form and
substance attached as Exhibit 4 to this Agreement.
6.3. Payment and Delivery. At Closing, WAM!NET shall deliver the
--------------------
Subordinated Note and the Initial Warrants to purchase 150,000 shares of Common
Stock to MCI WCOM against MCI WCOM's payment of the Initial Disbursement by wire
transfer of immediately available funds to a depositary account specified by
WAM!NET.
VII. TERMINATION
7.1. Termination. Either party may terminate this Agreement prior to
-----------
Closing upon any failure, including its own failure, to satisfy any of the
Conditions to Closing set forth in Section 6.02 hereof.
7.2. Consequences of Termination. Neither party shall be liable to the
---------------------------
other upon any termination in accordance with Section 7.01 hereof.
VIII. MISCELLANEOUS
-------------
8.1. Amendments, Waivers and Consents. No provision in this Agreement
--------------------------------
may be altered or amended, and compliance with any covenant or provision set
forth herein may not be omitted or waived, except by an instrument in writing
duly executed by MCI WCOM and WAM!NET. Any waiver or consent may be given
subject to satisfaction of conditions stated therein and any waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.
8.2. Notices. All notices required or permitted by this Agreement shall
-------
be in writing, and shall be hand delivered, sent by facsimile or sent by
nationally recognized overnight delivery service or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
(a) If to MCI WCOM:
MCI WORLDCOM, Inc.
515 E. Amite
Jackson, Mississippi 39201
Attention: Susan Mayer
Senior Vice President
Telephone: (202) 887-2202
Telecopy: (202) 887-3226
8
<PAGE>
with a copy to:
MCI WORLDCOM, Inc.
515 E. Amite
Jackson, Mississippi 39201
Attention: Michael Salsbury
General Counsel
Telephone: (601) 360-8977
Telecopy: (601) 360-8282
(b) If to the WAM!NET:
WAM!NET, Inc.
6100 West 110/th/ Street
Minneapolis, Minnesota 55438
Attention: Edward J. Driscoll, III
President and CEO
Telephone: (612) 886-5146
Telecopy: (612) 887-2165
with a copy to:
Lisa A. Gray
General Counsel
WAM!NET, Inc.
6100 West 110/th/ Street
Minneapolis, Minnesota 55438
Telephone: (612) 886-5091
Telecopy: (612) 886-5176
or to such other person or address as any party hereto shall specify by notice
in writing to the other parties. All such notices and other communications shall
be effective when received.
8.3. Binding Effect; Assignment. This Agreement shall be binding upon
--------------------------
and inure to the benefit of the WAM!NET and MCI WCOM. No assignment of rights or
delegation of duties arising under this Agreement may be made by any party
hereto without the prior written consent of the other parties.
8.4. Third-Party Beneficiaries. Except as set forth in Section 4.01(e),
-------------------------
this Agreement is for the sole benefit of the parties hereto and their permitted
assigns and, except as expressly set forth in Section 3.02(b) herein relating to
the right to petition for a valuation, nothing herein expressed or implied shall
give or be construed to give to any person, other than the parties hereto and
such assigns, any legal or equitable rights hereunder.
9
<PAGE>
8.5. Entire Agreement; Sayings. This Agreement, the Subordinated Note
-------------------------
and the Warrants constitute the entire agreement between the parties hereto with
respect to the subject matter contained herein and therein and supersedes all
other prior understandings or agreements, both written and oral, between the
parties with respect to the matters contained herein and therein.
8.6. Severability. The provisions of this Agreement are severable and,
------------
in the event that any court of competent jurisdiction shall determine that any
one or more of the provisions or part of a provision contained in this Agreement
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement; but this Agreement
shall be reformed and construed as if such invalid or illegal or unenforceable
provision, or part of a provision, had never been contained herein, and such
provisions or part reformed so that it would be valid, legal and enforceable to
the maximum extent possible.
8.7. Governing Law. This Agreement shall be governed by, and construed
-------------
in accordance with, the law of the State of Minnesota without regard to its
principles of conflicts of laws.
8.8. Headings. Article, section and subsection headings in this
--------
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
8.9. Counterparts. This Agreement may be executed in two or more
------------
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart by original or facsimile signature.
8.10. Expenses. Each of the parties hereto shall pay the fees and
--------
expenses of its respective counsel, accountants and other experts (including any
broker, finder, advisor or intermediary) and shall pay all other expenses
incurred by it in connection with the negotiation, preparation and execution of
this Agreement and the consummation of the transactions contemplated hereby.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the
day and year first above written.
"WAM!NET"
WAM!NET, Inc.
By: /s/ Bradley E. Sparks
----------------------------------
Bradley E. Sparks
Its: Chief Financial Officer
"MCI WCOM"
MCI W0RLDCOM, Inc.
By: /s/ Susan Mayer
----------------------------------
Susan Mayer
Its: Senior Vice President
11
<PAGE>
EXHIBIT 4.18
================================================================================
PREFERRED STOCK PURCHASE AGREEMENT
BY AND BETWEEN
WAM!NET INC.
AND
SILICON GRAPHICS, INC.
______________________________
Dated as of March 3, 1999
______________________________
================================================================================
<PAGE>
PREFERRED STOCK PURCHASE AGREEMENT
Preferred Stock Purchase Agreement, dated as of March 3, 1999 (this
"Agreement"), by and between WAM!NET INC., a Minnesota corporation (the
"Company"), and SILICON GRAPHICS, INC., a Delaware corporation ("Buyer").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company has designated two additional series of its preferred
stock, consisting of 5,710,425 shares, par value $0.01 per share, designated as
its "Class B Convertible Preferred Stock" (the "Class B Preferred Shares"), and
878,527 shares, par value $0.01 per share, designated as its "Class C
Convertible Preferred Stock" (the "Class C Preferred Shares" and together with
the Class B Preferred Shares, the "Preferred Shares");
WHEREAS, the Preferred Shares are convertible into shares (the "Conversion
Shares") of the Company's common stock, par value $0.01 per share (the "Common
Stock") in accordance with the terms of the Class B Certificate of Designation
and the Class C Certificate of Designation (each as defined herein);
WHEREAS, the terms, limitations and relative rights and preferences of the
Class B Preferred Shares are set forth in the "Statement of Rights and
Preferences of Class B Convertible Preferred Shares" (the "Class B Certificate
of Designation"), a copy of which is attached hereto as Exhibit I, and the
terms, limitations and relative rights and preferences of the Class C Preferred
Shares are set forth in the "Statement of Rights and
<PAGE>
Preferences of Class C Convertible Preferred Shares" (the "Class C Certificate
of Designation"), a copy of which is attached hereto as Exhibit II; and
WHEREAS, Buyer desires to subscribe for and purchase from the Company, and
the Company desires to issue and sell to Buyer, the Class B Preferred Shares and
the Class C Preferred Shares, all in accordance with the terms and subject to
conditions of this Agreement.
NOW THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements contained herein, the
parties hereby agree as follows:
I. PURCHASE AND SALE OF PREFERRED STOCK
1.01 Purchase and Sale of the Preferred Stock. On the terms and subject to
----------------------------------------
the conditions set forth in this Agreement, on the Closing Date (as defined
herein), Buyer shall subscribe for and purchase from the Company, and the
Company shall issue and sell to Buyer:
(a) The Class B Preferred Shares for an aggregate purchase price of
$65,000,000, of which (i) $25,000,000 shall be payable in cash and (ii)
$40,000,000 shall be payable by transfer and conveyance of title to Buyer's
campus facility located at 655 Lone Oak Parkway, Eagan, Minnesota, as described
in greater detail in the Real Property Documents (as defined herein) (the "Real
Property" and, together with the amount set forth in (i), the "Class B Purchase
Price"); and
2
<PAGE>
(b) The Class C Preferred Shares for an aggregate purchase price of
$10,000,000 payable in cash (the "Class C Purchase Price").
1.02 Duration, Rights and Preferences of the Preferred Stock. The Class B
-------------------------------------------------------
Preferred Shares shall have and enjoy the rights and preferences as are set
forth in the Class B Certificate of Designation and the Class C Preferred Shares
shall have and enjoy the rights and preferences as are set forth in the Class C
Certificate of Designation.
1.03 Closing. (a) Unless this Agreement shall have been terminated and the
-------
transactions herein contemplated shall have been abandoned pursuant to Section 5
hereof, the closing of the purchase and sale of the Preferred Shares and the
other transactions contemplated hereby (the "Closing") shall be held at 10:00
a.m. (Central Standard Time) on the third business day following the
satisfaction or waiver of the conditions set forth herein, at the offices of the
Company, 6100 West 110th Street, Minneapolis, Minnesota (or at such other time,
date and place as the parties may mutually agree). The date on which the
Closing actually occurs is hereinafter referred to as the "Closing Date."
(b) At the Closing, the Company shall deliver to Buyer stock certificates
registered in the name of Buyer representing the Preferred Shares being
purchased by Buyer, against payment and delivery by Buyer to the Company of the
Class B Purchase Price and the Class C Purchase Price. Buyer shall effect such
payment and delivery of the Class B Purchase Price and the Class
3
<PAGE>
C Purchase Price as follows: (i) with respect to cash, by wire transfer of
immediately available funds to such bank account or bank accounts designated by
the Company and (ii) with respect to the Real Property, by execution and
delivery of the agreements, instruments and documents set forth on Schedule
1.03(b) hereto necessary to convey good and marketable title to the Real
Property to the Company (the "Real Property Documents").
II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
2.01 The Company hereby represents, warrants and covenants to Buyer that,
as of the date hereof and as of the Closing Date:
(a) Corporate Organization and Power; Qualification. The Company (i) is
-----------------------------------------------
duly organized, validly existing and in good standing as a corporation under the
laws of the state of Minnesota, (ii) has all corporate power and authority to
own its properties and to carry on its businesses as now being conducted and
(iii) is duly qualified and in good standing as a foreign corporation, and is
authorized to do business, in all jurisdictions in which the character of its
properties or the nature of its businesses requires such qualification or
authorization, except for qualifications and authorizations the lack of which,
individually or in the aggregate, would not reasonably be expected to result in
a material adverse effect on the business, financial condition, results of
operations, assets or liabilities of the Company and its subsidiaries taken as a
whole (a "Material Adverse Effect").
4
<PAGE>
(b) Subsidiaries. Set forth on Schedule 2.01(b) hereto is a complete list
------------
of all of the subsidiaries of the Company. Except as set forth on Schedule
2.01(b) hereto, the Company does not own, directly or indirectly, any capital
stock or other equity securities of any corporation, nor does the Company have
any direct or indirect ownership interest, including interests in partnerships
and joint ventures, in any other entity or business. Each of the subsidiaries
has been duly incorporated, is validly existing and in good standing under the
laws of its respective jurisdiction of incorporation and is duly qualified and
in good standing as a foreign corporation, and is authorized to do business, in
all jurisdictions in which the character of its properties or the nature of its
businesses requires such qualification or authorization, except for
qualifications and authorizations the lack of which, individually or in the
aggregate, would not reasonably be expected to result in a Material Adverse
Effect. Each of the subsidiaries has the requisite power and authority to own
and hold its properties and to carry on its business as now being conducted.
Except as disclosed in the registration statements, reports and proxy statements
filed by the Company with the Securities and Exchange Commission (the "SEC
Reports"), disclosed in the Financial Statements (as defined herein) or set
forth on Schedule 2.01(b) hereto: (i) all of the outstanding shares (other than
director's qualifying shares, if any) of capital stock of each of the
subsidiaries are owned beneficially and of record by the Company, one of its
subsidiaries or any combination thereof, in each case
5
<PAGE>
free and clear of any liens, charges, restrictions, claims or encumbrances
created or suffered by the Company or any of its subsidiaries, other than
restrictions on transfer imposed by the Securities Act of 1933, as amended (the
"Securities Act"), or any other provision of applicable law; and (ii) there are
no outstanding subscriptions, warrants, options, convertible securities or other
rights (contingent or other) pursuant to which any of the subsidiaries is or may
become obligated to issue any shares of its capital stock to any person other
than the Company or a subsidiary.
(c) Power and Authority; Authorization; Enforceability. The Company has
--------------------------------------------------
all requisite corporate power and authority necessary to execute and deliver (i)
this Agreement, (ii) the Real Property Documents to which it is a party, (iii)
the Stockholders' Agreement, by and among the Company, Buyer and MCI WORLDCOM,
Inc., the form of which is attached hereto as Exhibit III (the "Stockholders'
Agreement"), (iv) the Preferred Provider Agreement, by and between the Company
and Buyer, the form of which is attached hereto as Exhibit IV (the "Preferred
Provider Agreement" and, collectively with the Real Property Documents to which
the Company or Buyer, as the case may be, is a party and the Stockholders'
Agreement, the "Other Transaction Documents") and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Other Transaction Documents and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary corporate action on the part
6
<PAGE>
of the Company and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement and the Other Transaction Documents and to
consummate the transactions contemplated hereby and thereby. This Agreement has
been (and the Other Transaction Documents, when executed and delivered in
accordance with their respective terms, will be) duly executed and delivered by
the Company and constitutes (and, in the case of the Other Transaction
Documents, will constitute) the valid and binding obligation of the Company,
enforceable against it in accordance with its terms, except as enforceability
against the Company may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws now or hereafter in effect relating
to the rights of creditors generally and other general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or at
law) and except as any rights to indemnity and contribution contemplated by
Section 6.02 may be limited by applicable federal and state securities laws and
public policy considerations.
(d) No Violations; Consents and Approvals. The execution and delivery by
-------------------------------------
the Company of this Agreement and the Other Transaction Documents, the
performance by the Company of its obligations hereunder and thereunder and the
consummation by the Company of the transactions contemplated hereby and thereby
will not (i) violate, conflict with, result in a breach of, constitute a default
under, or result in or require the creation of any lien upon any assets of the
Company under its Articles of Incorporation, as amended (the "Charter"), By-laws
or any
7
<PAGE>
material contract to which the Company is a party or by which the Company or any
of its properties may be bound or (ii) require any consent or approval other
than such consents and approvals to be obtained before the Closing and those
that have been obtained which are final and not subject to review on appeal or
to collateral attack and are in full force and effect, except for such
violations, conflicts, breaches, defaults or liens which, or consents or
approvals which, if not obtained, would not reasonably be expected to,
individually or in the aggregate, result in a Material Adverse Effect.
(e) Litigation; Compliance with Laws. Except as disclosed in the SEC
--------------------------------
Reports, disclosed in the Financial Statements or set forth on Schedule 2.01(e),
there are no (i) actions, suits, claims, proceedings or investigations
instituted and pending or, to the knowledge of the Company, threatened, against
or affecting the Company or any of its subsidiaries, at law or in equity, or
before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, (ii)
arbitration proceedings relating to the Company instituted and pending under
collective bargaining agreements or otherwise or (iii) governmental inquiries
instituted and pending or, to the knowledge of the Company, threatened, against
or affecting the Company, any of which would reasonably be expected to result in
a Material Adverse Effect. Except for any defaults which would not reasonably
be expected to result in a Material Adverse Effect, neither the Company nor any
of its subsidiaries is in default with respect to any order,
8
<PAGE>
writ, injunction or decree known to or served upon the Company of any court or
of any federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign. Except where the
failure to do so would not reasonably be expected to result in a Material
Adverse Effect, neither the Company nor any of its subsidiaries has failed to
comply with any laws, rules, regulations and orders applicable to its respective
business, operations, properties, assets, products and services, the Company and
each of its subsidiaries has all necessary permits, licenses and other
authorizations required to conduct its business as presently conducted and the
Company and each of its subsidiaries has operated its respective business
pursuant to and in compliance with the terms of all such permits, licenses and
other authorizations.
(f) Taxes. The Company has filed (or obtained extensions of the time by
-----
which it is required to file) all United States federal, state and local income
tax returns and all other material tax returns required to be filed by it, and
has paid all taxes shown due on the returns so filed as well as the other taxes,
assessments and governmental charges which have become due, except such taxes,
if any, as are being contested in good faith and as to which adequate reserves
have been provided. The Company will continue to make all such filings in a
timely manner and pay all such taxes, assessments and other governmental charges
required of it.
9
<PAGE>
(g) Capitalization. (i) As of the date hereof, the authorized capital
--------------
stock of the Company consists of 500,000,000 shares, the designations and
classes of which are set forth on Schedule 2.01(g) hereto. The Company does not
hold any of its shares in treasury.
(ii) As of the date hereof, 9,291,027 shares of Common Stock and 100,000
shares of the Company's Class A Preferred Stock, par value $10.00 per share (the
"Class A Preferred Stock"), are issued and outstanding and have been validly
issued and are fully paid and nonassessable and are not subject to preemptive
rights.
(iii) Except as contemplated by this Agreement, disclosed in the SEC
Reports, disclosed in the Financial Statements or set forth on Schedule 2.01(g)
hereto, as of the date hereof there are no outstanding subscriptions, options,
warrants or other rights of any kind to acquire any additional shares of capital
stock of the Company or other instruments or securities convertible into or
exchangeable for, or which otherwise confer on the holder thereof any right to
acquire, any such additional shares of capital stock, nor is the Company
committed to issue any such option, warrant, right or security. Except as
provided for in the Charter, disclosed in the SEC Reports or set forth on
Schedule 2.01(g) hereto, the Company has no obligation (contingent or other) to
purchase, redeem or otherwise acquire any of its equity securities or any
interest therein or to pay any dividend or make any other distribution in
respect thereof.
10
<PAGE>
All of the outstanding securities of the Company were issued in compliance with
the registration requirements under applicable federal and state securities laws
(or pursuant to applicable exemptions therefrom).
(iv) Except as contemplated by this Agreement, disclosed in the SEC Reports
or disclosed in the Financial Statements, as of the date hereof, there are no
agreements relating to voting, purchase or sale of capital stock between the
Company and any of its stockholders or affiliates, and to the best of the
Company's knowledge, there are no such agreements among any of its stockholders.
(v) The Preferred Shares are duly authorized and, when issued and paid for
pursuant to the terms of this Agreement, will be validly issued, fully paid and
nonassessable, will have the rights, preferences and privileges specified in the
Class B Certificate of Designation and the Class C Certificate of Designation,
as the case may be. The Conversion Shares are duly authorized and have been
reserved for issuance and, when issued upon conversion in accordance with the
terms of the Class B Certificate of Designation and the Class C Certificate of
Designation, as the case may be, will be validly issued, fully paid and
nonassessable, and will be free and clear of all liens, encumbrances and
restrictions (other than those contemplated hereby and by the Other Transaction
Documents, created or suffered by Buyer (or the current holder thereof) and
restrictions on transfer imposed by the Securities Act or any
11
<PAGE>
other applicable federal or state securities laws, and the rules and regulations
promulgated thereunder). Neither the issuance, sale or delivery of the Preferred
Shares nor the contemplated issuance or delivery of the Conversion Shares is
subject to any currently existing preemptive right of stockholders of the
Company, any right of first refusal or other right in favor of any person, in
each case except for rights that have been waived.
(h) Financial Statements. The Company has delivered to Buyer copies of its
--------------------
financial statements (including balance sheets, income statements, changes in
stockholders equity, statements of cash flow and any related notes) for the year
ended December 31, 1998 (the "Financial Statements") and will deliver to Buyer
(as soon as practicable but in no event later than March 31, 1999) audited
copies of the Financial Statements. The Financial Statements (i) fairly
present, in all material respects, the financial condition, assets and
liabilities of the Company as of the date thereof and the results of its
operations and changes in its cash flows for the periods covered thereby, (ii)
were prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved, except as may be
noted therein, and (iii) were prepared from the books and records of the
Company, which books and records are complete and correct and fairly reflect all
material transactions of the Company's business.
(i) Absence of Certain Changes. Except as contemplated by this Agreement,
--------------------------
disclosed in the SEC Reports or set forth on
12
<PAGE>
Schedule 2.01(i) hereto, since December 31, 1998, (i) there has been no change
in the assets, liabilities or financial condition of the Company and its
subsidiaries (on a consolidated basis) from that reflected in the balance sheet
of the Company and its subsidiaries as of December 31, 1998, except for changes
(A) in the ordinary course of business or (B) which in the aggregate have not
resulted in and would not reasonably be expected to result in a Material Adverse
Effect and (ii) there has not been any event or change that would reasonably be
expected to result in a Material Adverse Effect, individually or in the
aggregate, whether or not insured against (excluding general economic or
industry changes).
(j) No Brokers. No broker, finder or investment banker is entitled to any
----------
brokerage, finder's or other fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on behalf of
the Company.
(k) Proprietary Information of Third Parties. Except for such claims that
----------------------------------------
would not reasonably be expected to result in a Material Adverse Effect, to the
knowledge of the Company, no third party has claimed or has reason to claim that
the Company or any of its subsidiaries has (a) violated or may be violating any
of the terms or conditions of any non-competition or non-disclosure agreement
with such third party, (b) disclosed or may be disclosing or utilized or may be
utilizing any trade secret or proprietary information or documentation of such
third party or (c) interfered or may be interfering in the employment
13
<PAGE>
relationship between such third party and any of its present or former
employees. Neither the Company nor any of its subsidiaries has utilized and
does not propose to utilize any trade secret or any information or documentation
proprietary to any other person in violation of existing arrangements with such
person, and to the knowledge of the Company, neither the Company nor any of its
subsidiaries has violated any confidential relationship which any such person
may have had with any third party, in connection with the development,
manufacture or sale of any product or the development or sale of any service of
the Company.
(l) Patents, Trademarks, Etc. Set forth on Schedule 2.01(l) hereto is a
-------------------------
list of all domestic and foreign trademarks, trademark applications, patents,
registered copyrights (except copyrighted software licensed to the Company in
its ordinary course of business) and patent applications owned by, registered in
the name of or licensed to or from the Company and its subsidiaries as of the
date hereof. Except where the failure to do so would not reasonably be expected
to result in a Material Adverse Effect, the Company and its subsidiaries own or
possess, or can acquire on reasonable terms, adequate patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), trademarks, service marks and trade names (including those
necessary for the use and protection of the names and/or marks "WAM!NET",
"WAM!BASE" and "WAM!PROOF") or other intellectual
14
<PAGE>
property (collectively, "Intellectual Property") necessary to carry on its
business as presently conducted. Except as set forth on Schedule 2.01(l) hereto,
neither the Company nor any subsidiary has received any notice of any
infringement of or conflict with asserted rights of others with respect to any
Intellectual Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of its subsidiaries, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity or
inadequacy, individually or in the aggregate, would reasonably be expected to
result in a Material Adverse Effect.
(m) The Year 2000. Except where the failure to do so would not reasonably
--------------
be expected to result in a Material Adverse Effect, the Company has used (or is
in the process of using) reasonable procedures to verify that any of its
software licensed or otherwise provided to its customers and any software used
in its business will recognize and process date fields after the turn of the
century, and perform date-dependent calculations and operations (including
sorting, comparing and reporting) after the turn of the century correctly, and
has used (or is in the process of using) reasonable efforts to ensure that any
such software will not produce invalid and incorrect results as a result of the
change of century (all without human intervention, other than original data
entry of valid dates), provided that such software receives correct and properly
formatted date inputs from all
15
<PAGE>
software and hardware that exchanges data with or provides data to the software.
(n) Title to Properties. Except as disclosed in the SEC Reports, the
-------------------
Company and its subsidiaries have good and valid title to all real and personal
property which they own and which are reflected on the Financial Statements
(except for assets and properties sold, consumed or otherwise disposed of by
them in the ordinary course of business since December 31, 1998), and such
assets and properties are owned free and clear of all mortgages, pledges, liens,
security interests, claims, restrictions or encumbrances of any kind, except (i)
those securing indebtedness reflected on the Financial Statements or
indebtedness incurred in the ordinary course of business and consistent with
past practice after the date thereof, (ii) mechanics', materialmens' and other
liens which have arisen in the ordinary course of business or (iii) mortgages,
pledges, liens, security interests, claims, restrictions or encumbrances which,
individually or in the aggregate, would not be reasonably likely to impair, in
any material respect, the continued use of such asset or property.
(o) Agreements. Except as set forth in Schedule 2.01(o) hereto or
----------
disclosed in the Financial Statements, all material agreements, contracts or
instruments required to be filed as exhibits to the SEC Reports have been so
filed. Neither the Company nor any of its subsidiaries is in breach or default
of any agreement, contract, instrument or other commitment, except for such
breaches and defaults which would not reasonably be expected to result in a
Material Adverse Effect. To the
16
<PAGE>
knowledge of Company, no other party to any of such agreements, contracts,
instruments or other commitments is, as of the date of this Agreement, in breach
or default (and no event has occurred which with notice or the lapse of time or
both would constitute a default or violation) thereunder, except for such
breaches and defaults which would not reasonably be expected to result in a
Material Adverse Effect. The Company is in full compliance with all of the terms
and provisions of its Charter and By-laws, except where the failure to so comply
would not reasonably be expected to result in a Material Adverse Effect.
(p) Offering of the Preferred Shares. The Company has not, directly or
--------------------------------
indirectly, solicited any other offer to buy or offered to sell, and will not,
directly or indirectly, solicit any other offer to buy or offer to sell, any
security which is or would be integrated with the sale of the Preferred Shares
in a manner that would require the Preferred Shares to be registered under the
Securities Act.
(q) Transactions With Affiliates. Except as disclosed in the SEC Reports
----------------------------
or disclosed in the Financial Statements, neither the Company nor any subsidiary
is a party to any transaction of the type required to be disclosed pursuant to
Item 404 of Regulation S-K under the Securities Act.
(r) Disclosure. Neither this Agreement (including the Schedules hereto)
----------
nor the SEC Reports (as of the date filed with the Securities and Exchange
Commission) contains an untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein or
17
<PAGE>
therein, in light of the circumstances under which they were made, not
misleading. None of the statements, documents, certificates or other items
prepared by the Company and supplied to Buyer or its counsel in connection with
the transactions contemplated hereby (other than those relating to (i) projected
financial information, (ii) plans and objectives regarding the Company's future
operations, (iii) future economic performance and (iv) assumptions underlying
any of the matters described in (i) through (iii), each as to which no
representation or warranty is given) contains an untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading.
III. REPRESENTATIONS AND WARRANTIES OF BUYER
3.01 Buyer hereby represents, warrants and covenants to the Company that:
(a) Corporate Organization and Power; Qualification. Buyer (i) is duly
-----------------------------------------------
organized, validly existing and in good standing as a corporation under the laws
of the state of Delaware and (ii) has all corporate power and authority to own
its properties and to carry on its businesses as now being conducted.
(b) Power and Authority; Authorization; Enforceability. Buyer has all
--------------------------------------------------
requisite corporate power and authority necessary to execute and deliver this
Agreement and the Other Transaction Documents and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and
18
<PAGE>
the Other Transaction Documents and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary corporate action on the part of Buyer and no other corporate
proceedings on the part of Buyer are necessary to authorize this Agreement and
the Other Transaction Documents and to consummate the transactions contemplated
hereby and thereby. This Agreement has been (and the Other Transaction
Documents, when executed and delivered in accordance with their respective
terms, will be) duly executed and delivered by Buyer and constitutes (and, in
the case of the Other Transaction Documents, will constitute) the valid and
binding obligation of Buyer, enforceable against it in accordance with its
terms, except as enforceability against Buyer may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws now or
hereafter in effect relating to the rights of creditors generally and other
general principles of equity (regardless of whether enforcement is considered in
a proceeding in equity or at law) and except as any rights to indemnity and
contribution contemplated by Section 6.02 may be limited by applicable federal
and state securities laws and public policy considerations.
(c) No Violations; Consents and Approvals. The execution and delivery by
-------------------------------------
Buyer of this Agreement and the Other Transaction Documents, the performance by
Buyer of its obligations hereunder and thereunder and the consummation by Buyer
of the transactions contemplated hereby and thereby will not (i) violate,
conflict with, result in a breach of, constitute a default under, or
19
<PAGE>
result in or require the creation of any lien upon any assets of Buyer under its
certificate of incorporation, by-laws (or other comparable charter documents) or
any material contract to which Buyer is a party or by which Buyer or any of its
properties may be bound or (ii) require any consent or approval other than such
consents and approvals to be made and obtained before the Closing and those that
have been obtained which are final and not subject to review on appeal or to
collateral attack and are in full force and effect, except for such violations,
conflicts, breaches, defaults or liens which, or consents or approvals which, if
not obtained would not reasonably be expected to, individually or in the
aggregate, result in a material adverse effect on the business, financial
condition, results of operations, assets or liabilities of Buyer.
(d) Due Diligence. Buyer has sufficient knowledge and experience in
-------------
investing in companies similar to the Company in terms of the Company's stage of
development and is capable of evaluating the merits and risks of its investment
in the Company as contemplated by this Agreement and is able to bear the
economic risk of such investment for an indefinite period of time. Buyer has
been given access to full and complete information regarding the Company and has
utilized such access to its satisfaction for the purpose of obtaining
information Buyer desires or deems relevant to its decision to purchase the
Preferred Shares. Buyer has had the opportunity to ask questions of and receive
answers from representatives of the Company concerning the terms and conditions
of this Agreement, to discuss
20
<PAGE>
the Company's business, management and financial affairs with the Company's
management and to obtain any additional information Buyer desires or deems
relevant. Buyer has obtained, to the extent it has deemed necessary,
professional advice with respect to the risks inherent in the investment in the
Preferred Shares and the Company, including, without limitation, the matters
relating to the Company's business and financial condition set forth in the SEC
Reports.
(e) Investment Intent. Buyer is acquiring the Preferred Shares for its own
-----------------
account for investment and not with a view towards the resale, transfer or
distribution thereof, nor with any present intention of distributing the
Preferred Shares in violation of the Securities Act or any other applicable
federal or state securities laws, and the rules and regulations promulgated
thereunder. Buyer understands that no public market currently exists for the
Preferred Shares or the Common Stock, and that no such public market may ever
exist. Buyer further understands and agrees that the Preferred Shares have not
been (and the Conversion Shares, upon issuance, will not be) registered under
the Securities Act by reason of their issuance in a transaction exempt from the
registration requirements of the Securities Act, that the Preferred Shares and
the Conversion Shares will bear a legend (and the Company will make a notation
on its transfer books) to such effect and the Preferred Shares (and, upon
issuance, the Conversion Shares) must be held indefinitely unless subsequently
disposed of pursuant to an effective registration statement under the Securities
Act or in a
21
<PAGE>
transaction exempt from, or not subject to, the registration requirements
thereof. Buyer agrees that if it sells any Conversion Shares pursuant to Rule
144A under the Securities Act, it will take all necessary steps in order to
perfect the exemption from registration provided thereby, including, without
limitation, obtaining on behalf of the Company information to enable the Company
to establish a reasonable belief that the purchaser is a "qualified
institutional buyer" (within the meaning of Rule 144A) and advising such
purchaser that Rule 144A is being relied upon with respect to such resale. Buyer
was not organized for the specific purpose of acquiring the Preferred Shares and
is an "accredited investor" within the meaning of Rule 501(a) of the Securities
Act.
(f) No Brokers. No broker, finder or investment banker is entitled to
----------
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on behalf of
Buyer.
IV. CONDITIONS
4.01 Conditions of Each Party. The respective obligations of each of the
------------------------
Company and Buyer to consummate the transactions contemplated hereby are subject
to the fulfillment, at or prior to the Closing, of each of the following
conditions, any or all of which may be waived in whole or in part to the extent
permitted by applicable law:
22
<PAGE>
(a) All filings required to be made, and all consents, approvals, permits
and authorizations required to be obtained, prior to the Closing from any
governmental or regulatory authorities in connection with the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby shall have been made or obtained;
(b) No court or governmental or regulatory authority of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent) or taken any action that prohibits the
consummation of the transactions contemplated by this Agreement; provided,
---------
however, that any party invoking this condition shall use its reasonable best
- - -------
efforts to have any such judgment, decree, injunction or order vacated;
(c) Any waiting period applicable to the consummation of the transactions
contemplated hereby under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, shall have expired or been terminated; and
(d) All proceedings to be taken by a party in connection with this
Agreement and the transactions contemplated hereby and all documents incident
hereto and thereto shall be reasonably satisfactory in form and substance to
such party and its counsel, and each party and its counsel shall have received
all such counterpart originals or certified or other copies of such documents as
they may reasonably request.
23
<PAGE>
4.02 Conditions of the Company. The obligations of the Company to
-------------------------
consummate the transactions contemplated hereby are subject to the fulfillment,
at or prior to the Closing, of each of the following conditions, any or all of
which may be waived in whole or in part by the Company to the extent permitted
by applicable law:
(a) Buyer shall have performed and complied with, in all material respects,
all of its respective obligations hereunder required to be performed by it at or
prior to the Closing;
(b) Each of the representations and warranties of the Buyer contained in
this Agreement and in any certificate or other writing delivered by Buyer
pursuant hereto qualified as to materiality shall be true and correct, and those
not so qualified shall be true and correct, in all material respects in each
case at and as of the Closing Date as if made at and as of such time (except to
the extent it relates to a particular date);
(c) The Company shall have received a certificate from Buyer, signed by an
executive officer of Buyer, to the effect set forth in clauses (a) and (b) of
this Section 4.02;
(d) Buyer shall have executed and delivered the Stockholders' Agreement;
(e) Buyer shall have executed and delivered the Preferred Provider
Agreement; and
24
<PAGE>
(f) Buyer shall have executed and delivered each of the Real Property
Documents to which it is a party and has caused the delivery of all other Real
Property Documents to be delivered by any party other than the Company.
4.03 Conditions of Buyer. The obligation of Buyer to consummate the
-------------------
transactions contemplated by this Agreement is subject to the fulfillment, at or
prior to the Closing, of each of the following conditions, any or all of which
may be waived in whole or in part by Buyer to the extent permitted by applicable
law:
(a) The Company shall have performed and complied with, in all material
respects, all of its obligations hereunder required to be performed by it at or
prior to the Closing;
(b) Each of the representations and warranties of the Company contained in
this Agreement and in any certificate or other writing delivered by the Company
pursuant hereto qualified as to materiality shall be true and correct, and those
not so qualified shall be true and correct, in all material respects at and as
of the Closing Date as if made at and as of such time (except to the extent it
relates to a particular date);
(c) Buyer shall have received a certificate from the Company, signed by an
executive officer of the Company, to the effect set forth in clauses (a) and (b)
of this Section 4.03;
(d) The Company shall have executed and delivered the Shareholders'
Agreement;
25
<PAGE>
(e) The Company shall have executed and delivered the Preferred Provider
Agreement; and
(f) The Company shall have delivered copies of the following documents:
(i) (A) The Charter, certified as of a recent date by the Secretary of State of
the State of Minnesota and (B) a certificate of said Secretary dated as of a
recent date as to the due incorporation and good standing of the Company; and
(ii) a certificate of the Secretary or an Assistant Secretary of the Company
dated the Closing Date and certifying: (A) that attached thereto is a true and
complete copy of the By-laws of the Company as in effect on the date of such
certification; (B) that attached thereto is a true and complete copy of all
resolutions adopted by the Board of Directors or the stockholders of the Company
authorizing the execution, delivery and performance of this Agreement and the
Other Transaction Documents, the issuance, sale and delivery of the Preferred
Shares and the reservation, issuance and delivery of the Conversion Shares, and
that all such resolutions are in full force and effect and are all the
resolutions adopted in connection with the transactions contemplated by this
Agreement and the Other Transaction Documents; and (C) that the Charter has not
been amended since the date of the last amendment referred to in the certificate
delivered pursuant to Section 4.03(g)(i)(B).
(g) Buyer shall have received from Willkie Farr & Gallagher, an opinion,
dated the Closing Date, covering the matters set forth in Exhibit V hereto,
subject to customary
26
<PAGE>
qualifications, limitations and assumptions for opinions given in transactions
of the kind contemplated hereby.
4.04 Materiality of Conditions. Notwithstanding anything contained
-------------------------
herein, no condition involving the performance of obligations by the Company or
the truth and accuracy of representations and warranties made by the Company as
of the Closing Date shall be deemed not fulfilled, and Buyer shall not be
entitled to fail to consummate the transactions contemplated hereby or terminate
this Agreement on such basis, if the respects in which such conditions have not
been performed or such representations and warranties are untrue (assuming for
this purpose that the representations and warranties are not qualified by
materiality), in the aggregate, would not reasonably be expected to result in a
Material Adverse Effect.
V. TERMINATION
5.01 Termination. This Agreement may be terminated and the transactions
-----------
contemplated hereby may be abandoned at any time prior to the Closing:
(a) by joint written agreement of the Company and Buyer;
(b) by the Company, if Buyer has breached any representation, warranty,
covenant or agreement contained in this Agreement and has not cured such breach
within ten (10) business days after written notice to Buyer (provided that the
-------------
Company is not then in material breach of the terms of this Agreement; and
---
provided further that no cure period shall be required for a
- - ---------------------
27
<PAGE>
breach which by its nature cannot be cured) such that the conditions set forth
in Section 4.01 or 4.02 hereof, as the case may be, will not be satisfied;
(c) by Buyer, if the Company has breached any representation, warranty,
covenant or agreement contained in this Agreement and has not cured such breach
within ten (10) business days after written notice to the Company (provided that
-------------
Buyer is not then in material breach of the terms of this Agreement; and
---
provided further that no cure period shall be required for a breach which by its
- - ---------------------
nature cannot be cured) such that the conditions set forth in Section 4.01 or
4.03 hereof, as the case may be, will not be satisfied; or
(d) by any party if the Closing has not occurred on or before April 30,
1999; provided, however, that a party may not terminate this Agreement pursuant
-----------------
to this Section 5.01(d) if the failure of such party to fulfill any of its
obligations hereunder shall have been the reason that the Closing shall not have
occurred on or before said date.
5.02 Effect of Termination. In the event of termination of this Agreement
---------------------
pursuant to this Article V, this Agreement shall forthwith terminate and (except
in the event of the willful breach of this Agreement by any party) there shall
be no liability on the part of any party; provided, however, that Sections
-----------------
2.01(j), 3.01(f), 5.02, 6.03, 7.01, 7.02, 7.04, 7.07 and 7.10 shall survive the
termination of this Agreement.
VI. OTHER AGREEMENTS
28
<PAGE>
6.01 Consents And Approvals. Each of the parties agrees to use all
----------------------
commercially reasonable efforts to take, or cause to be taken, all actions and
to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated hereby, including, without limitation, using all
commercially reasonable efforts to obtain all necessary waivers, consents and
approvals, to effect all necessary registrations and filings (including, but not
limited to, filings with all applicable governmental agencies) and to lift any
injunction or other legal bar to the transactions contemplated hereby (and, in
such case, to proceed with such transactions as expeditiously as possible).
6.02 Registration Rights.
-------------------
(a) Piggy-back Registration. If, commencing one (1) year after the date
-----------------------
hereof, the Company proposes to claim an exemption under Section 3(b) of the
Securities Act for a public offering of any of its securities or to register
under the Securities Act (except pursuant to a registration statement on Form S-
4 or S-8 (or any substitute form adopted by the Commission) or any other form
that does not permit the inclusion of shares by its security holders) its Common
Stock, it will give written notice to Buyer of its intention to do so and, upon
the written request of Buyer given within twenty (20) days after receipt of any
such notice (which request shall specify the number of Conversion Shares
intended to be sold or disposed of by Buyer and the nature of any
29
<PAGE>
proposed sale or other disposition thereof), the Company will use its best
efforts to cause all Conversion Shares that Buyer shall have requested the
registration of to be included in such notification or the registration
statement proposed to be filed by the Company; provided, however, that nothing
-----------------
herein shall prevent the Company from, at any time, abandoning or delaying any
such registration initiated by it. If any such registration shall be
underwritten in whole or in part, the Company may require that the Conversion
Shares requested for inclusion pursuant to this Section 6.02 be included in the
underwriting on the same terms and conditions as the securities otherwise being
sold through the underwriters. If in the good faith judgment of the managing
underwriter, as expressed in writing delivered to Buyer, the inclusion of all of
the Conversion Shares of Common Stock originally covered by a request for
registration would reduce the number of Common Stock to be offered by the
Company or interfere with the successful marketing of the Common Stock offered
by the Company, the number of Conversion Shares otherwise to be included
pursuant to this Section 6.02 in the underwritten public offering may be
reduced; provided, however, that any such required reduction shall be pro
-----------------
rata among all persons (other than the Company and any other persons demanding
registration pursuant to existing rights who are entitled to be protected
against any such reduction) who are participating in such offering. Conversion
Shares which are thus excluded from the underwritten public offering shall be
withheld from the market for a period, not to exceed 90 days, which the managing
30
<PAGE>
underwriter reasonably determines is necessary in order to effect the
underwritten public offering. All expenses of such offering, except the fees of
special counsel to Buyer and brokers' commissions or underwriting discounts
payable by Buyer, shall be borne by the Company.
(b) Demand Registration. In addition, on one occasion only, commencing
-------------------
upon the later of one (1) year after the date hereof and the date that is six
months after an IPO, upon request by Buyer to register the Conversion Shares,
the Company will promptly use its reasonable best efforts to register such
shares under the Securities Act; provided that (i) such request must be made
-------------
within five (5) years from the date hereof and (ii) the Company may delay the
filing of any registration statement requested pursuant to this Section 6.02(b)
to a date not more than ninety (90) days following the date of such request if
in the opinion of the Company's principal investment banker at the time of such
request such a delay is necessary in order not to adversely affect the Company's
financing efforts then underway or if in the opinion of the Company such a delay
is necessary or advisable to avoid disclosure of material nonpublic information.
The costs and expenses directly related to any registration requested pursuant
to this Section 6.02(b), including, but not limited to, legal fees of the
Company's counsel, audit fees, printing expenses, filing fees of the Commission
and the National Association of Securities Dealers, Inc. and fees and expenses
relating to qualifications under state securities or blue sky laws incurred by
the Company shall be borne entirely by the
31
<PAGE>
Company; provided, however, that the persons for whose account the securities
-------- -------
covered by such registration are sold shall bear the expenses of brokers'
commissions or underwriting discounts applicable to their shares and fees of
their legal counsel. If Buyer is the only person whose shares are included in
the registration pursuant to this Section 6.02(b), Buyer shall bear the expense
of inclusion of any audited financial statements contained in the registration
statement which are not dated as of the Company's fiscal year-end or are not
otherwise prepared by the Company for its own business purposes. The Company
shall keep effective and maintain any registration statement specified in this
Section 6.02(b) for such period as may be necessary for Buyer to dispose of the
Conversion Shares so registered, and from time to time shall amend or
supplement, at Buyer's expense, the prospectus used in connection therewith to
the extent necessary in order to comply with applicable law; provided that the
-------------
Company shall not be obligated to maintain any registration statement for a
period of more than nine (9) months. If, at the time any written request for
registration is received by the Company pursuant to this Section 6.02(b), the
Company had previously determined to proceed with the preparation and filing of
a registration statement under the Securities Act in connection with the
proposed offer and sale of Common Stock, such written request shall be deemed to
have been given pursuant to Section 6.02(a) rather than this Section 6.02(b),
and the rights of Buyer shall be governed by Section 6.02(a) hereof.
32
<PAGE>
(c) Registration Procedures. If and whenever the Company is required by
-----------------------
the provisions of Sections 6.02(a) or 6.02(b) hereof to effect the registration
of Conversion Shares under the Securities Act, the Company will:
(i) prepare and file with the Commission a registration statement with
respect to such securities, and use its reasonable best efforts to cause such
registration statement to become and remain effective for such period as may be
reasonably necessary to effect the sale of such securities, not to exceed nine
(9) months;
(ii) prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus contained therein as
may be necessary to keep such registration statement effective for such period
as may be reasonably necessary to effect the sale of such securities, not to
exceed nine (9) months;
(iii) furnish to the security holders participating in such registration
and to the underwriters of the securities being registered, such reasonable
number of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such participating security holders and
underwriters may reasonably request in order to facilitate the public offering
of such securities;
(iv) use its reasonable best efforts to register or qualify the
securities covered by such registration statement under such state securities or
blue sky laws of such jurisdictions as such participating security holders and
33
<PAGE>
underwriters may reasonably request in writing within 30 days following the
original filing of such registration statement, except that the Company shall
not for any purpose be required to execute a general consent to service of
process or to qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified;
(v) notify the participating security holders, promptly after it shall
receive notice thereof, of the time when such registration statement has become
effective or a supplement to any prospectus forming a part of such registration
statement has been filed;
(vi) notify such participating security holders promptly of any request
by the Commission for the amending or supplementing of such registration
statement or prospectus or for additional information;
(vii) prepare and file with the Commission, promptly upon the request of
any such participating security holders, any amendments or supplements to such
registration statement or prospectus which, in the opinion of counsel for such
holders (and concurred with by counsel for the Company), is required under the
Securities Act or the rules and regulations promulgated thereunder in connection
with the distribution of such Conversion Shares by such holder;
(viii) prepare and promptly file with the Commission and promptly notify
such participating security holders of the filing of such amendment or
supplement to such registration statement or prospectus as may be necessary to
correct any statements or
34
<PAGE>
omissions if, at the time when a prospectus relating to such securities is
required to be delivered under the Securities Act, any event shall have occurred
as the result of which any such prospectus or any other prospectus as then in
effect would include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading;
(ix) advise such participating security holders, promptly after it shall
receive notice of the issuance of any stop order by the Commission suspending
the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose, and promptly use its reasonable
best efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued; and
(x) furnish on the effective date of the registration statement and, if
such registration includes an underwritten public offering, at the closing
provided for in the underwriting agreement: (A) opinions, dated such respective
dates, of counsel representing the Company for the purposes of such
registration, addressed to the underwriters, covering such matters as such
persons may reasonably request in customary form as would be given to
underwriters in connection with underwritten offerings and (B) letters, dated
such respective dates, from the independent certified public accountants of the
Company addressed to the underwriters, in customary form and concerning matters
of the type customarily covered in "comfort" letters in connection
35
<PAGE>
with underwritten offerings, and such other matters as permitted by the
Statement on Accounting Standards No. 72.
(d) Indemnification. In connection with such registration, the Company
---------------
shall indemnify Buyer, its officers, directors, employees and agents, and any
person who controls Buyer within the meaning of Section 15 of the Securities
Act, against all losses, claims, damages and liabilities caused by any untrue
statement of a material fact contained in any registration statement or
prospectus, (and as amended or supplemented, if the Company shall have furnished
any amendments or supplements thereto) or any preliminary prospectus, or caused
by any omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages or liabilities are caused by any untrue statement
or omission contained in information furnished in writing to the Company by
Buyer expressly for use therein, and Buyer agrees that it will indemnify and
hold harmless the Company and each of its officers who signs such registration
statement and each of its directors and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act with respect to
losses, claims, damages or liabilities which are caused by any untrue statement
or omission contained in information furnished in writing to the Company by
Buyer expressly for use therein.
(e) Contribution. In addition, in connection with any such registration,
------------
the Company and Buyer agree that if the indemnification to be provided for
pursuant to Section 6.02(d) is
36
<PAGE>
unavailable to an indemnified party as provided herein in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then the Company
or Buyer (as the case may be), in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the Company, on
the one hand, and Buyer, on the other hand, in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
fault of the Company on the one hand, and of Buyer, on the other hand, shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statements of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company or by
Buyer, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The amount paid or
payable by a party as a result of the losses, claims, damages, liabilities and
expenses referred to above shall be deemed to include, without limitation, any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim. The Company and Buyer agree
that it would not be just and equitable if contribution pursuant to this Section
6.02(e) were determined by a pro rata allocation or by any other method of
allocation that does not take account of the equitable considerations referred
to
37
<PAGE>
in this Section 6.02(e). Notwithstanding the provisions of this Section 6.02(e),
Buyer shall not be required to contribute any amount in excess of the amount by
which the total price which Buyer's securities were sold to the public. The
parties agree that in connection with any such registration, no person guilty of
fraudulent misrepresentations (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
(f) Termination. The registration rights provided in this Section 6.02
-----------
shall terminate on the earliest to occur of: (i) the date that is five (5) years
from the date hereof and (ii) the date on which all of the Conversion Shares
then held by Buyer could be sold pursuant to Rule 144(k) under the Securities
Act (or any comparable or successor provision).
6.03 Confidentiality. (a) Without the consent of the other party,
---------------
neither Buyer nor the Company shall make any public comment, statement or
communication with respect to, or otherwise disclose or permit the disclosure of
the terms of this Agreement and the transactions contemplated hereby, and each
party shall cause its authorized officers, directors, partners, employees,
counsel, accountants, agents and other representatives (collectively,
"Representatives") to strictly comply with the foregoing.
(b) Each of the parties hereby covenants and agrees to use due care to
prevent the disclosure of the information and other material furnished under or
in connection with this Agreement to
38
<PAGE>
persons other than its Representatives who have a need to know such information
or to have access to such material in connection with Buyer's investment in the
Company and who have agreed to keep such information and material confidential.
For purposes of this Section 6.03(b), "due care" means at least the same level
of care that a person would use to protect the confidentiality of its own
sensitive or proprietary information, and this obligation shall survive
termination of this Agreement.
(c) Notwithstanding Sections 6.03(a) and (b), either party may disclose or
deliver any information or other material disclosed to or received by it (i)
should such party be advised by its counsel that such disclosure or delivery is
required by law, regulation, legal process or administrative order, if the
disclosing party has first provided the other party with prompt notice of the
request to disclose or deliver such information or other material a reasonable
period of time in advance of making such disclosure or delivery so as to enable
such other party to seek a protective order or other appropriate remedy or (ii)
in connection with a public or private financing effected by the Company, to the
extent required in any Registration Statement, prospectus or other offering
document, or to the extent necessary to make any statements contained in any of
the foregoing not misleading.
(d) In the event of any termination of this Agreement prior to the Closing
Date, Buyer shall return to the Company all
39
<PAGE>
material previously furnished to it or its Representatives in connection with
this transaction.
6.04 Information Rights. From and after the Closing Date until the
------------------
earlier to occur of (i) the issuance of shares of Common Stock to the public in
an underwritten offering pursuant to a registration statement filed under the
Securities Act covering the offer and sale of Common Stock (an "IPO") and (ii)
the date on which Buyer no longer owns any Preferred Shares, within 45 days
following the end of each of its first three fiscal quarters and within 90 days
following the end of its fourth fiscal quarter, the Company shall furnish Buyer
with a copy of its financial statements, (including balance sheets, income
statements, changes in stockholders equity and statements of cash flow) for each
of such quarters and fiscal year, respectively. In addition, during such
period, the Company will furnish Buyer with such additional financial and
business information, including monthly or other periodic financial statements
as the Company may prepare from time to time, upon the reasonable request of
Buyer.
6.05 Subscription Right. (a) From and after the Closing Date until the
------------------
earlier of (i) an IPO and (ii) the date on which Buyer no longer owns any
Preferred Shares, if the Company proposes to issue equity securities of any kind
(the term "equity securities" shall include for the purposes of this Section
6.05, any equity securities and all warrants, options or other rights to acquire
equity securities, and debt securities convertible
40
<PAGE>
into or exchangeable for equity securities) of the Company (other than the
issuance of securities (i) upon conversion of or exercise securities of the
Company outstanding as of the date hereof, (ii) in an IPO, (iii) pursuant to the
acquisition of another entity by the Company by merger, purchase of
substantially all of the assets or other form of reorganization, (iv) pursuant
to an employee stock option plan, stock bonus plan, stock purchase plan or other
management equity program, (v) to vendors, customers and consultants of the
Company for purposes primarily other than the raising of capital or (vi) in
connection with a public or private debt financing effected by the Company
(other than with an affiliate of the Company) or upon the conversion or exercise
of any securities so issued), then the Company shall: (A) give written notice to
Buyer setting forth in reasonable detail: (1) the designation and all of the
terms and provisions of the securities proposed to be issued (the "Proposed
Securities"), including, where applicable, the voting powers, preferences and
relative participating, optional or other special rights and the qualifications,
limitations or restrictions thereof; (2) the price and other terms of the
proposed sale of Proposed Securities; (3) the amount of Proposed Securities
proposed to be issued; and (4) such other information as Buyer may reasonably
request in order to evaluate the proposed issuance; and (B) offer to issue to
Buyer a portion of the Proposed Securities equal to a percentage determined by
dividing (1) the number of shares of Common Stock held by Buyer and issuable to
Buyer (including for purposes of this calculation,
41
<PAGE>
conversion and exercise in full of all securities then held by Buyer that are
then convertible into or exchangeable for Common Stock) by (2) the total number
of shares of Common Stock then outstanding (including for purposes of this
calculation, conversion and exercise in full of all securities then outstanding
that are then convertible into or exchangeable for Common Stock).
(b) Buyer must exercise its purchase right hereunder within fifteen (15)
days after receipt of such notice from the Company. To the extent that the
Company offers two or more securities in units, Buyer must purchase such units
as a whole and will not be given the opportunity to purchase only one of the
securities making up such unit. Upon the expiration of such fifteen-day period,
the Company will be free to sell Proposed Securities that Buyer has not elected
to purchase during the ninety (90) days following such expiration on terms and
conditions no more favorable to the purchasers thereof than those offered to
Buyer. Any Proposed Securities offered or sold by the Company after such 90-day
period must be reoffered to Buyer pursuant to this Section 6.05.
(c) The election by Buyer not to exercise its subscription rights under
this Section 6.05 in any one instance shall not affect its right (other than in
respect of a reduction in its percentage holdings) as to any subsequent proposed
issuance of equity securities by the Company. Any sale of equity securities by
the Company without first giving Buyer the rights described in this Section 6.05
shall be void and of no force and effect.
42
<PAGE>
6.06 By-laws. The Company shall at all times cause its By-laws to provide
-------
that the number of directors fixed in accordance therewith shall in no event
conflict with any of the terms or provisions of the Preferred Shares as set
forth in the Charter. The Company shall at all times maintain provisions in its
By-laws or Charter indemnifying all directors to the maximum extent permitted
under the Minnesota Business Corporation Act.
VII. MISCELLANEOUS
7.01 Amendments, Waivers and Consents. No provision in this Agreement may
--------------------------------
be altered or amended, and compliance with any covenant or provision set forth
herein may not be omitted or waived, except by an instrument in writing duly
executed by Buyer and the Company. Any waiver or consent may be given subject to
satisfaction of conditions stated therein and any waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
7.02 Notices. All notices required or permitted by this Agreement shall be
-------
in writing, and shall be hand delivered, sent by facsimile or nationally
recognized overnight delivery service, addressed as follows:
(a) If to Buyer:
Silicon Graphics, Inc.
2011 N. Shoreline Blvd.
Mountain View, CA 94043-1389
Attention: William M. Kelly,
Senior Vice President, Corporate Operations
Telephone: 650-933-1440
Facsimile: 650-932-0908
43
<PAGE>
with a copy to:
Testa, Hurwitz & Thibeault, LLP
High Street Tower, 125 High Street
Boston, MA 02110
Attention: William B. Asher, Jr.
Telephone: 617-248-7518
Facsimile: 617-248-7100
(b) If to the Company:
WAM!NET INC.
6100 West 110th Street
Minneapolis, MN 55438
Attention: Edward J. Driscoll, III, President
Telephone: 612-886-5100
Facsimile: 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
or to such other person or address as a party shall specify by notice in writing
to the other party. All such notices and other communications shall be
effective when received.
7.03 Binding Effect; Assignment. This Agreement shall be binding upon and
--------------------------
inure to the benefit of the Company and Buyer. No assignment of rights or
delegation of duties arising under this Agreement may be made by any party
hereto without the prior written consent of the other party.
7.04 Third-Party Beneficiaries. This Agreement is for the sole benefit of
-------------------------
the parties hereto and their permitted assigns and nothing herein expressed or
implied shall give or be
44
<PAGE>
construed to give to any person, other than the parties hereto and such
permitted assigns, any legal or equitable rights hereunder.
7.05 Entire Agreement. This Agreement (including all Schedules and
----------------
Exhibits hereto) constitutes the entire agreement between the parties hereto
with respect to the subject matter contained herein and supersedes all other
prior understandings or agreements, both written and oral, between the parties
with respect to the matters contained herein.
7.06 Severability. The provisions of this Agreement are severable and, in
------------
the event that any court of competent jurisdiction shall determine that any one
or more of the provisions or part of a provision contained in this Agreement
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement; but this Agreement
shall be reformed and construed as if such invalid or illegal or unenforceable
provision, or part of a provision, had never been contained herein, and such
provisions or part reformed so that it would be valid, legal and enforceable to
the maximum extent possible.
7.07 Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the law of the State of Minnesota without regard to its
principles of conflicts of laws.
45
<PAGE>
7.08 Headings. Article, Section and sub-Section headings in this Agreement
--------
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
7.09 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one and the same instrument, and any of the parties
hereto may execute this Agreement by signing any such counterpart by original or
facsimile signature.
7.10 Expenses. Each party shall pay the fees and expenses of its
--------
respective counsel, accountants and other experts (including any broker, finder,
advisor or intermediary), and shall pay all other expenses incurred by it in
connection with the negotiation, preparation and execution of this Agreement and
the consummation of the transactions contemplated hereby.
46
<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the
day and year first above written.
WAM!NET INC.
/s/ Allen L. Witters
____________________________________
By: Allen L. Witters
Its: Chief Technology Officer
SILICON GRAPHICS, INC.
/s/ William M. Kelly
____________________________________
By: William M. Kelly
Its: Senior Vice President
47
<PAGE>
EXHIBIT 4.19
EXERCISABLE ON OR BEFORE, AND VOID AFTER
5:00 P.M. MINNEAPOLIS TIME APRIL 30, 2004
Certificate for 150,000 Warrants
WARRANTS TO PURCHASE COMMON STOCK OF
WAM!NET, Inc.
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
THIS CERTIFIES that MCI WORLDCOM, Inc., ("Holder") or assigns, is the owner
of the number of Warrants set forth above, each of which represents the right to
purchase from WAM!NET, Inc., Minnesota corporation (the "Company"), at any time
after April 30, 1999 and on or before 5:00 Minneapolis time, April 30, 2004,
upon compliance with and subject to the conditions set forth herein, one share
(subject to adjustments referred to below) of the Common Stock of the Company,
par value $.01 per share (such shares or other securities or property
purchasable upon exercise of the Warrants being herein called the "Shares").
Upon any exercise of less than all the Warrants evidenced by this Warrant
Certificate, there shall be issued to the Holder a new Warrant Certificate in
respect of the Warrants as to which this Warrant Certificate was not exercised.
This Warrant is subject to the following provisions, terms and conditions:
1. Exercise; Transferability. The rights represented by this Warrant may be
-------------------------
exercised by the Holder hereof, in whole or in part (but not as to a fractional
share of Common Stock), by written notice of exercise delivered to the Company
ten (10) days prior to the intended date of exercise and by the surrender of
this Warrant (properly endorsed if required) at the principal office of the
Company and by paying in full, as provided herein, the purchase price of $.01
per share (the "Exercise Price").
Payment upon exercise of the rights represented by this Warrant may be made
at the option of the Holder (a) in cash or by certified or official bank check
payable to the order of the Company, (b) by surrendering to the Company for
cancellation and retirement any number shares of Class A Preferred Shares, par
<PAGE>
value $10.00 per share, which shares shall each be valued for purposes hereof at
their par value of $10.00 plus the sum of any then accumulated and unpaid
dividends thereon, (c) by cancellation and discharge of the Company from all or
any portion of any debt in the amount then owed by the Company to the Holder on
a dollar for dollar basis, including principal whether or not then due and
payable together with any interest accrued and unpaid thereon, or (d) by any
combination of any or all of the foregoing.
This Warrant may not be transferred or divided into two or more Warrants of
smaller denominations, nor may any Common Stock issued pursuant to exercise of
this Warrant be transferred unless this Warrant or shares have been registered
under the Securities Act of 1933, as amended ("Securities Act") and applicable
state laws, or unless the Holder of the certificate obtains an opinion of
counsel satisfactory to the Company and its counsel that the proposed transfer
may be effected without registration pursuant to exemptions under the Securities
Act and applicable state laws.
2. Issuance of Shares. The Company agrees that the shares purchased hereby
------------------
shall be deemed to be issued to the record Holder hereof as of the close of
business on the date on which this Warrant shall have been surrendered and the
payment made for such shares as aforesaid. Subject to the provisions of the next
succeeding paragraph, certificates for the shares of stock so purchased shall be
delivered to the Holder hereof within a reasonable time, not exceeding ten (10)
days after the rights represented by this Warrant shall have been so exercised,
and, unless this Warrant has expired, a new Warrant representing the number of
shares, if any, with respect to which this Warrant shall not then have been
exercised shall also be delivered to the Holder hereof within such time.
Notwithstanding the foregoing, however, the Company shall not be required
to deliver any certificate for shares of stock upon exercise of this Warrant,
except in accordance with the provisions, and subject to the limitations, of
paragraph 7 hereof.
3. Covenants of Company. The Company covenants and agrees that all shares
--------------------
which may be issued upon the exercise of the rights represented by this Warrant
will, upon issuance, be duly authorized and issued, fully paid, nonassessable
and free from all taxes, liens and charges with respect to the issue thereof,
and without limiting the generality of the foregoing, the Company covenants and
agrees that it will from time to time take all such action as may be required to
assure that the par value per share of the Common Stock is at all times equal to
or less than the then effective purchase price per share of the Common Stock
issuable pursuant to this Warrant. The Company further covenants and agrees that
during the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized, and reserved for the
purpose of issue
-2-
<PAGE>
or transfer upon exercise of the subscription rights evidenced by this Warrant,
a sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant.
4. Adjustments. The above provisions are, however, subject to the following
-----------
provisions:
(a) No fractional shares of Common Stock are to be issued upon the exercise
of the Warrant, but the Company shall pay a cash adjustment in respect of any
fraction of a share which would otherwise be issuable in an amount equal to the
same fraction of the market price per share of Common Stock on the date of
exercise as determined in good faith by the Company.
(b) If any capital reorganization or reclassification of the capital stock
of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the Holder hereof shall hereafter have the right to
purchase and receive upon the basis and upon the terms and conditions specified
in this Warrant and in lieu of the shares of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby, such shares of stock, securities or assets as may be
issued and payable with respect to or in exchange for a number of outstanding
shares of such Common Stock equal to the number of shares of such stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provisions shall be made with respect to the rights and interests of the Holder
of this Warrant to the end that the provisions hereof (including without
limitation provisions for adjustments of the Warrant purchase price and of the
number of shares purchasable upon the exercise of this Warrant) shall thereafter
be applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger or sale, unless prior to
the consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation, merger, or the corporation purchasing such
assets shall assume by written instrument executed and mailed to the registered
Holder hereof at the last address of such holder appearing on the books of the
Company, the obligation to deliver to such holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to purchase.
-3-
<PAGE>
(c) If the Company shall at any time or from time to time (i) distribute
(otherwise than as a dividend in cash or in Common Stock or securities
convertible into or exchangeable for Common Stock) to the holders of Common
Stock any property or other securities, or (ii) declare a dividend upon the
Common Stock (to the extent payable otherwise than out of earnings or earned
surplus, as indicated by the accounting treatment of such dividend in the books
of the Company, and otherwise than in Common Stock or securities convertible
into or exchangeable for Common Stock), the Company shall reserve and the Holder
of this Warrant shall thereafter upon exercise hereof be entitled to receive,
with respect to each share of Common Stock purchased hereunder, without any
change in, or payment in addition to, the exercise price, the amount of any
property or other securities which would have been distributable to such holder
had such holder been a holder of one share of Common Stock on the record date of
such distribution or dividend (or if no record date was established by the
Company, the date such distribution or dividend was paid).
5. Common Stock. As used herein, the term "Common Stock" means the
------------
Company's presently authorized shares of Common Stock and shall also include any
capital stock of any class of the Company hereafter authorized which shall not
be limited to fixed sum or percentage in respect of the rights of the holders
thereof to participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the Company.
6. No Voting Rights. This Warrant shall not entitle the Holder hereof to
----------------
any voting rights or other rights as a stockholder of the Company.
7. Notice of Transfer of Warrant or Resale of Shares. The Holder of this
-------------------------------------------------
Warrant, by acceptance hereof, agrees to give written notice to the Company
before transferring this Warrant, or transferring any Common Stock issued upon
the exercise hereof, of such holder's intention to do so, describing briefly the
manner of any proposed transfer. Promptly upon receiving such written notice
the Company shall present copies thereof to the Company counsel and if in the
opinion of such counsel the proposed transfer complies with federal and state
securities laws and may be effected without registration or qualification (under
any Federal or State law), the Company, as promptly as practicable, shall notify
such holder of such opinion, whereupon such holder shall be entitled to transfer
this Warrant or to dispose of shares of Common Stock received upon the previous
exercise of this Warrant, provided that an appropriate legend may be endorsed on
this Warrant or the certificates for such shares respecting restrictions upon
transfer thereof necessary or advisable in the opinion of counsel to the Company
to prevent further transfers which would be in violation of Section 5 of the
Securities Act of 1933.
-4-
<PAGE>
If in the opinion of Company's counsel referred to in this paragraph 7
hereof, the proposed transfer or disposition of shares described in the written
notice given pursuant to this paragraph 7 may not be effected without
registration or qualification of this Warrant or the shares of Common Stock
issued on the exercise hereof, the Company shall promptly give written notice
thereof to the Holder hereof, and the Holder will limit its activities in
respect to such as, in the opinion of such counsel, are permitted by law.
8. Registration Rights. If the Company, at any time after the later of
-------------------
three (3) years from the date hereof until two (2) years after the complete
exercise of this Warrant, but in no event later than April 30, 2004, proposes to
claim an exemption under Section 3(b) for a public offering of any of its
securities or to register under the Securities Act of 1933 (except by a Form S-8
or other inappropriate Form for registration) any of its securities, it will
give written notice to all registered holders of Warrants, and all registered
holders of shares of Common Stock acquired upon the exercise of Warrants, of its
intention to do so and, on the written request of any registered holders given
within twenty (20) days after receipt of any such notice (which request shall
specify the Warrants or shares of Common Stock intended to be sold or disposed
of by such registered holder and describe the nature of any proposed sale or
other disposition thereof), the Company will use its best efforts to cause all
such Warrants and/or shares, the registered holders of which shall have
requested the registration or qualification thereof, to be included in such
notification or registration statement proposed to be filed by the Company;
provided, however, that no such inclusion shall be required (i) if the Shares
may then be sold by the holder thereof without limitation under Rule 144(k), or
comparable successor rule of the Securities and Exchange Commission, or (ii) if
the managing underwriter of such offering reasonably determines that including
such Shares would unreasonably interfere with such offering. The Company will
pay all expenses of registration. The Warrant holders shall pay all commissions
or discounts applicable to the sale of the included Shares, together with any
expenses of counsel retained by them in connection with their sale of the
Shares.
-5-
<PAGE>
IN WITNESS WHEREOF, WAM!NET, Inc. has caused this Warrant to be signed by
its duly authorized officer and this Warrant to be dated January 13, 1999.
WAM!NET, Inc.
By: /s/ Bradley E. Sparks
------------------------
Bradley E. Sparks
Chief Financial Officer
-6-
<PAGE>
EXHIBIT 4.20
CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES
OF
CLASS A CONVERTIBLE PREFERRED STOCK
OF
WAM!NET INC.
The undersigned, Edward J. Driscoll, Jr., hereby certifies that:
A. He is the duly elected and acting Secretary of WAM!NET Inc. (the
"Company"), a Minnesota corporation.
B. The Articles of Incorporation of this Company provide for a class of
up to 49,500,000 shares known as Undesignated Stock, which shares may be issued
from time to time in one or more classes or series.
C. The Board of Directors of the Company is authorized, pursuant to
Article 6 of the Company's Articles of Incorporation and Minnesota Statutes,
Section 302A.401, to fix or alter the rights, preferences, privileges, and
restrictions granted to or imposed upon any wholly unissued series of
Undesignated Stock, to fix the number of shares constituting the series, and to
determine the designation thereof.
D. It is the desire of the Board of Directors of the Company, pursuant
to its authority, to fix the rights, preferences, restrictions and other matters
relating to the Undesignated Stock and the number of shares of Undesignated
Stock.
E. Pursuant to authority given by Article 6 of the Company's Articles
of Incorporation, the Company's Board of Directors has adopted the following
resolutions as of the 4th day of March, 1999;
RESOLVED, that, pursuant to Article 6 of the Articles of Incorporation of
WAM!NET Inc. (the "Company"), the Board of Directors of the Company hereby
creates and designates a series of Preferred Stock, Ten Dollars ($10.00) par
value per share, and authorizes the issuance of up to One Hundred Fourteen
Thousand Two Hundred and Six (115,206) of such shares, and hereby fixes the
designation and the preferences and relative, participating, optional and other
special rights of such shares, and the qualifications, limitations or
restrictions as follows:
Section 1. Designation and Amount. The shares of the Preferred Stock shall be
----------------------
designated as "1999 Class A Preferred Stock." The number of shares constituting
the 1999 Class A Preferred Stock shall be One Hundred Fifteen Thousand Two
Hundred and Six (115,206). Each share of 1999 Class A Preferred Stock shall have
a par value of Ten Dollars ($10.00) per share. The number of shares of 1999
Class A Preferred Stock may be increased or decreased by resolution of the Board
of Directors; provided, that, no decrease shall reduce the number of shares of
1999 Class A Preferred Stock to a number less than the number of shares then
outstanding, plus the
<PAGE>
number of shares of 1999 Class A Preferred Stock, if any, reserved for issuance
upon the exercise of outstanding options, rights or warrants or upon the
conversion of any outstanding securities issued by the Company convertible into
1999 Class A Preferred Stock.
Section 2. Dividends and Distributions.
---------------------------
(A) The holders of shares of 1999 Class A Preferred Stock, in preference
to the holders of Common Stock of the Company, shall be entitled to receive,
when, as and if declared by the Board of Directors of the Company (the
"Directors"), a dividend (the "Quarterly Dividend") in the amount of Seventeen
and One-half Cents ($.175) per share payable out of the net earnings of the
Company constituting funds legally available for the purpose. The Quarterly
Dividend shall begin to accrue on January 1, 1999, and shall be payable in cash
on the first day of March, June, September and December in each year (each such
date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of 1999 Class A Preferred Stock. If the net
earnings in any year are not sufficient to pay the Quarterly Dividend, either in
whole or in part, then any unpaid portion of such dividend will become a charge
against the net earnings of the Company, and will be paid in full out of the net
earnings of the Company in subsequent years before any dividends are paid on the
Common Stock of the Company in those years. No dividends will be paid or set
apart for payment on the Common Stock, no distribution will be made on the
Common Stock, and no shares of Common Stock will be redeemed, retired or
otherwise acquired for valuable consideration unless all theretofore unpaid
Quarterly Dividends have been declared, and the Company has paid those dividends
or has set aside a sum sufficient to pay them.
(B) Dividends shall begin to accrue and accumulate on outstanding shares
of 1999 Class A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, in which case dividends on such
shares shall begin to accrue from the date of issue of such shares, or (i) from
such Quarterly Dividend Date if additional consideration, prorated for the
number of elapsed days since such Quarterly Dividend Date, is paid upon
issuance, (ii) unless the date of issue is a Quarterly Dividend Payment Date or
is a date after the record date for the determination of holders of shares of
1999 Class A Preferred Stock entitled to receive Quarterly Dividends and before
such Quarterly Dividend Payment Date, in either of which events such Quarterly
Dividends shall begin to accrue and accumulate from such Quarterly Dividend
Payment Date. Accrued but unpaid Quarterly Dividends shall not bear interest.
Dividends paid on the shares of 1999 Class A Preferred Stock in an amount less
than the total amount of Quarterly Dividends then accrued and payable shall be
allocated pro rata on a share-by-share basis among all such shares of 1999 Class
A Preferred Stock then outstanding. The Directors may fix a record date for the
determination of holders of shares of 1999 Class A Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be no more than sixty (60) days prior to the date fixed for the
payment thereof.
Section 3. Voting Rights. The holders of shares of 1999 Class A Preferred
-------------
Stock shall have the following voting rights:
2
<PAGE>
(A) Each share of 1999 Class A Preferred Stock shall entitle the holder
thereof to one (1) vote for each share of 1999 Class A Preferred Stock standing
in the name of the holder on the books of the Company. The holders of 1999 Class
A Preferred Stock, voting separately as a class, shall be entitled to elect that
number of Directors as is equal to the largest whole number less than a majority
of all Directors. The right to elect Directors may be exercised at any annual
meeting of the stockholders of the Company, at any special meeting held in place
of an annual meeting, or at a special meeting called to elect directors. The
right to elect directors shall continue until December 31, 2000, and then
expire. The directors elected by the 1999 Class A Preferred Stock shall serve
until the next annual or special meeting of the stockholders of the Company and
until their respective successors have been elected by the holders of 1999 Class
A Preferred Stock and have been qualified. The term of office of any person
elected as a director by the holders of 1999 Class A Preferred Stock shall
terminate on December 31, 2000. The vacancies created thereby may be filled by
resolution of the remaining Directors who shall have been elected by a vote of
the holders of the Common Stock of the Company. If the office of a director
elected by the holders of 1999 Class A Preferred Stock is vacant prior to
December 31, 2000, due to resignation, removal or death, the vacancy shall be
filled by the majority vote of the directors then in office, even if less than a
quorum, upon the recommendation of the remaining director or directors who were
elected by the holders of the 1999 Class A Preferred Stock. If the office of a
director who was elected by the holders of Common Stock is vacant prior to
December 31, 2000, due to resignation, removal or death, the vacancy shall be
filled by the majority vote of the directors then in office, even if less than a
quorum, upon the recommendation of the remaining director or directors who were
elected by the holders of the Common Stock. If the vacancy is not so filled
within forty (40) days after the creation of the vacancy, a special meeting of
the holders of Preferred Stock and/or Common Stock shall be called and the
vacancy or vacancies shall be filled at that meeting.
(B) In addition to the right to elect Directors as provided in Section
3(A), the holder of each share of 1999 Class A Preferred Stock shall be entitled
to one (1) vote, voting together with the holders of Common Stock as a single
class, on all matters, excluding the election of Directors, submitted to the
vote of shareholders of the Company.
(C) Except as otherwise provided in Section 3(A) or in Section 10, or in
any Certificate of Designation creating another class or series of preferred
stock, or in any similar stock of the Company hereafter created, or by law, the
holders of shares of 1999 Class A Preferred Stock and the holders of shares of
Common Stock and any other capital stock of the Company having general voting
rights shall vote together as one class on all matters submitted to a vote of
stockholders of the Company.
(D) Except as expressly set forth herein, or as otherwise provided by
law, holders of 1999 Class A Preferred Stock shall have no special voting rights
and their consent, as a separate class, shall not be required (except to the
extent they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
Section 4. Certain Restrictions.
--------------------
3
<PAGE>
A. Whenever Quarterly Dividends or distributions payable on 1999 Class
A Preferred Stock as provided in Section 2 are in arrears, thereafter and until
all accrued and unpaid Quarterly Dividends and distributions, whether or not
declared, on shares of 1999 Class A Preferred Stock outstanding shall have been
paid in full, the Company shall not, without the express affirmative unanimous
approval of the Directors elected by holders of the 1999 Class A Preferred
Stock:
(1) declare or pay dividends, or make any other distributions, on any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the 1999 Class A
Preferred Stock;
(2) declare or pay dividends, or make any other distributions, on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the 1999 Class A
Preferred Stock, except dividends paid ratably on the 1999 Class A
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which
the holders of all such shares are then entitled;
(3) redeem or purchase or otherwise acquire for consideration shares of
any stock of the Company ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the 1999 Class A
Preferred Stock, provided that the Company may at any time redeem,
purchase or otherwise acquire shares of any such junior stock in
exchange for shares of any stock of the Company ranking junior (as
to dividends and upon dissolution, liquidation and winding up) to
the 1999 Class A Preferred Stock; or
(4) redeem or purchase or otherwise acquire for consideration any shares
of 1999 Class A Preferred Stock, or any shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or
winding up) with the 1999 Class A Preferred Stock, except in
accordance with a purchase offer made in writing or by publication
(as determined by the Board of Directors) to all holders of such
shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and
classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
B. The Company shall not permit any subsidiary of the Company to
purchase or otherwise acquire for consideration any shares of stock of the
Company unless the Company could, under Paragraph A of this Section 4, purchase
or otherwise acquire such shares at such time and in such manner.
Section 5. Liquidation, Dissolution or Winding Up. Upon any voluntary
--------------------------------------
or involuntary liquidation, dissolution or winding up of the affairs of the
Company, no distribution shall be made (a) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the 1999 Class A Preferred Stock, or (b) to the holders of shares
of stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the 1999 Class A Preferred Stock unless each
holder of 1999 Class A Preferred
4
<PAGE>
Stock has received in cash out of the assets of the Company, whether from
capital or earnings, available for distribution to the shareholders of the
Company, before any amount is paid to the holders of Common Stock, the sum of
Ten Dollars ($10.00) per share for each share of 1999 Class A Preferred Stock
held by the holder, plus an amount equal to the sum of all accumulated and
unpaid dividends to the date affixed for the payment of the distribution on the
shares of 1999 Class A Preferred Stock held by the holder. The sale or transfer
by the Company of all or substantially all of its assets shall not, for the
purposes of determining preferences and liquidation, be deemed to be a
liquidation, dissolution or winding up of the Company.
Section 6. Preemptive Rights. No holder of any shares of 1999 Class A
-----------------
Preferred Stock shall be entitled as such, as a matter of right, to subscribe
for, purchase or receive any part of any class whatsoever, or of securities
convertible into or exchangeable for any stock or any class whatsoever, whether
now or hereafter authorized or whether issued for cash or other consideration or
by way of a dividend.
Section 7. Mandatory Redemption. Unless earlier redeemed or acquired in
--------------------
whole or in part by the Company with the consent of the holder, the shares of
1999 Class A Preferred Stock that remain issued and outstanding shall expire and
shall be automatically redeemed on December 31, 2000, at par value, plus an
amount equal to all accumulated and unpaid dividends, if any, due with respect
to the 1999 Class A Preferred Stock (collectively, the "Redemption Price").
Redemption shall be in cash out of any funds legally available for the
redemption of the 1999 Class A Preferred Stock.
Section 8. Rank. The 1999 Class A Preferred Stock shall rank, with
----
respect to payment of dividends and distribution of assets (except with respect
to events that do not give rise to a right of the holders of the 1999 Class A
Preferred Stock to receive distributions) (a) junior to any other class or
series of the Company's preferred stock which shall specifically provide that
such class or series shall rank senior to the 1999 Class A Preferred Stock
("Senior Stock"); (b) on parity with (i) the Company's Class B Convertible
Preferred Stock, par value $0.01 per share, (ii) the Company's Class C
Convertible Preferred Stock, par value $0.01 per share, (iii) the Company's
Class D Convertible Preferred Stock, par value $0.01 per share, and (iv) any
other class or series of the Company's preferred stock which shall specifically
provide that such class or series shall rank on parity with the Class B
Preferred Stock ((i) through (iv) collectively, the "Parity Stock"); and (c)
prior to (i) the Company's Common Stock and (ii) any other class or series of
the Company's preferred stock except for any class or series which are Senior
Stock or Parity Stock ((i) and (ii) together, the "Junior Stock").
Section 9. Reacquired Shares. Any shares of 1999 Class A Preferred
-----------------
Stock purchased or otherwise acquired by the Company in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
undesignated stock and may be reissued subject to the conditions and
restrictions on issuance in the Articles of Incorporation, or in any other
Certificate of Designations creating another class or series of stock or as
otherwise required by law.
Section 10. Amendment. If any proposed amendment to these Articles of
---------
Incorporation would alter or change the preferences, special rights or powers
given to the 1999
5
<PAGE>
Class A Preferred Stock so as to affect the 1999 Class A Preferred Stock
adversely, or would authorize the issuance of a class or classes of stock having
preferences or rights with respect to dividends or dissolution or the
distribution of assets that would be superior to the preferences or rights of
the 1999 Class A Preferred Stock, then the holders of the 1999 Class A Preferred
Stock shall be entitled to vote as a series upon such amendment, and the
affirmative vote of two-thirds of the outstanding shares of 1999 Class A
Preferred Stock shall be necessary to the adoption thereof, in addition to such
other vote as may be required by law.
RESOLVED FURTHER, that the officers of this Company be, and each of them
acting alone is, hereby authorized and instructed to take all steps necessary to
execute, deliver and file, for and on behalf of this Company and in its name,
any and all documents required in connection with the establishment and
authorization of the Company's Class A Preferred Stock, including but not
limited to filing the Statement of Rights and Preferences with the Minnesota
Secretary of State in accordance with Minnesota Statutes, Section 302A.401.
F. The undersigned further declares under penalty of perjury that the
matters set out in the foregoing Certificate are true and correct of his own
knowledge.
IN WITNESS WHEREOF, the undersigned has executed this certificate as of
the 4th day of March 1999.
/s/ Edward J. Driscoll, Jr.
----------------------------------------
Edward J. Driscoll, Jr.
Secretary
6
<PAGE>
ARTICLES OF CORRECTION
OF
CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES
OF
CLASS A CONVERTIBLE PREFERRED STOCK
OF
WAM!NET INC.
The undersigned, Edward J. Driscoll, Jr., Secretary of WAM!NET INC., a
Minnesota Corporation (the "Corporation"), acting pursuant to the provisions of
Minnesota Statutes, Section 5.16, does hereby correct and amend the Certificate
of Designation of Rights and Preferences of Class A Convertible Preferred Stock
as follows effective as of the 4th day of March, 1999:
1.) The undersigned, Edward J. Driscoll, Jr., executed and filed a
Certificate of Designation of Rights and Preferences of Class A
Convertible Preferred Stock which was filed with the Minnesota
Secretary of State on March 4, 1999.
2.) The Certificate of Designation of Rights and Preferences of Class A
Convertible Preferred Stock inadvertently referenced "Convertible"
-----------
Stock in its title, the Certificate of Designation of Rights and
Preferences of Class A Convertible Preferred Stock title should read
"Certificate of Designation of Rights and Preferences of Class A
Preferred Stock."
3.) In Section 1, the number of shares constituting the 1999 Class A
Preferred Stock incorrectly states "One Hundred Fourteen Thousand Two
--------
Hundred and Six (115,206)." The number of shares constituting the 1999
-------
Class A Preferred Stock should read "One Hundred Fifteen Thousand Two
Hundred and Six (115,206).
IN WITNESS WHEREOF, I have hereunder subscribed my name effective the 4th
day of March, 1999.
/s/ Edward J. Driscoll, Jr.
-------------------------------------
Edward J. Driscoll, Jr., Secretary
<PAGE>
CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES
OF
CLASS A PREFERRED STOCK
OF
WAM!NET INC.
The undersigned, Edward J. Driscoll, Jr., hereby certifies that:
A. He is the duly elected and acting Secretary of WAM!NET Inc. (the
"Company"), a Minnesota corporation.
B. The Articles of Incorporation of this Company provide for a class of
up to 49,500,000 shares known as Undesignated Stock, which shares may be issued
from time to time in one or more classes or series.
C. The Board of Directors of the Company is authorized, pursuant to
Article 6 of the Company's Articles of Incorporation and Minnesota Statutes,
Section 302A.401, to fix or alter the rights, preferences, privileges, and
restrictions granted to or imposed upon any wholly unissued series of
Undesignated Stock, to fix the number of shares constituting the series, and to
determine the designation thereof.
D. It is the desire of the Board of Directors of the Company, pursuant to
its authority, to fix the rights, preferences, restrictions and other matters
relating to the Undesignated Stock and the number of shares of Undesignated
Stock.
E. Pursuant to authority given by Article 6 of the Company's Articles of
Incorporation, the Company's Board of Directors has adopted the following
resolutions as of the 4th day of March, 1999;
RESOLVED, that, pursuant to Article 6 of the Articles of Incorporation of
WAM!NET Inc. (the "Company"), the Board of Directors of the Company hereby
creates and designates a series of Preferred Stock, Ten Dollars ($10.00) par
value per share, and authorizes the issuance of up to One Hundred Fifteen
Thousand Two Hundred and Six (115,206) of such shares, and hereby fixes the
designation and the preferences and relative, participating, optional and other
special rights of such shares, and the qualifications, limitations or
restrictions as follows:
Section 1. Designation and Amount. The shares of the Preferred Stock shall be
----------------------
designated as "1999 Class A Preferred Stock." The number of shares constituting
the 1999 Class A Preferred Stock shall be One Hundred Fifteen Thousand Two
Hundred and Six (115,206). Each share of 1999 Class A Preferred Stock shall have
a par value of Ten Dollars ($10.00) per share. The number of shares of 1999
Class A Preferred Stock may be increased or decreased by resolution of the Board
of Directors; provided, that, no decrease shall reduce the number of shares of
1999 Class A Preferred Stock to a number less than the number of shares then
outstanding, plus the
<PAGE>
number of shares of 1999 Class A Preferred Stock, if any, reserved for issuance
upon the exercise of outstanding options, rights or warrants or upon the
conversion of any outstanding securities issued by the Company convertible into
1999 Class A Preferred Stock.
Section 2. Dividends and Distributions.
---------------------------
(A) The holders of shares of 1999 Class A Preferred Stock, in preference
to the holders of Common Stock of the Company, shall be entitled to receive,
when, as and if declared by the Board of Directors of the Company (the
"Directors"), a dividend (the "Quarterly Dividend") in the amount of Seventeen
and One-half Cents ($.175) per share payable out of the net earnings of the
Company constituting funds legally available for the purpose. The Quarterly
Dividend shall begin to accrue on January 1, 1999, and shall be payable in cash
on the first day of March, June, September and December in each year (each such
date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of 1999 Class A Preferred Stock. If the net
earnings in any year are not sufficient to pay the Quarterly Dividend, either in
whole or in part, then any unpaid portion of such dividend will become a charge
against the net earnings of the Company, and will be paid in full out of the net
earnings of the Company in subsequent years before any dividends are paid on the
Common Stock of the Company in those years. No dividends will be paid or set
apart for payment on the Common Stock, no distribution will be made on the
Common Stock, and no shares of Common Stock will be redeemed, retired or
otherwise acquired for valuable consideration unless all theretofore unpaid
Quarterly Dividends have been declared, and the Company has paid those dividends
or has set aside a sum sufficient to pay them.
(B) Dividends shall begin to accrue and accumulate on outstanding shares
of 1999 Class A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, in which case dividends on such
shares shall begin to accrue from the date of issue of such shares, or (i) from
such Quarterly Dividend Date if additional consideration, prorated for the
number of elapsed days since such Quarterly Dividend Date, is paid upon
issuance, (ii) unless the date of issue is a Quarterly Dividend Payment Date or
is a date after the record date for the determination of holders of shares of
1999 Class A Preferred Stock entitled to receive Quarterly Dividends and before
such Quarterly Dividend Payment Date, in either of which events such Quarterly
Dividends shall begin to accrue and accumulate from such Quarterly Dividend
Payment Date. Accrued but unpaid Quarterly Dividends shall not bear interest.
Dividends paid on the shares of 1999 Class A Preferred Stock in an amount less
than the total amount of Quarterly Dividends then accrued and payable shall be
allocated pro rata on a share-by-share basis among all such shares of 1999 Class
A Preferred Stock then outstanding. The Directors may fix a record date for the
determination of holders of shares of 1999 Class A Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be no more than sixty (60) days prior to the date fixed for the
payment thereof.
Section 3. Voting Rights. The holders of shares of 1999 Class A Preferred
-------------
Stock shall have the following voting rights:
2
<PAGE>
(A) Each share of 1999 Class A Preferred Stock shall entitle the holder
thereof to one (1) vote for each share of 1999 Class A Preferred Stock standing
in the name of the holder on the books of the Company. The holders of 1999 Class
A Preferred Stock, voting separately as a class, shall be entitled to elect that
number of Directors as is equal to the largest whole number less than a majority
of all Directors. The right to elect Directors may be exercised at any annual
meeting of the stockholders of the Company, at any special meeting held in place
of an annual meeting, or at a special meeting called to elect directors. The
right to elect directors shall continue until December 31, 2000, and then
expire. The directors elected by the 1999 Class A Preferred Stock shall serve
until the next annual or special meeting of the stockholders of the Company and
until their respective successors have been elected by the holders of 1999 Class
A Preferred Stock and have been qualified. The term of office of any person
elected as a director by the holders of 1999 Class A Preferred Stock shall
terminate on December 31, 2000. The vacancies created thereby may be filled by
resolution of the remaining Directors who shall have been elected by a vote of
the holders of the Common Stock of the Company. If the office of a director
elected by the holders of 1999 Class A Preferred Stock is vacant prior to
December 31, 2000, due to resignation, removal or death, the vacancy shall be
filled by the majority vote of the directors then in office, even if less than a
quorum, upon the recommendation of the remaining director or directors who were
elected by the holders of the 1999 Class A Preferred Stock. If the office of a
director who was elected by the holders of Common Stock is vacant prior to
December 31, 2000, due to resignation, removal or death, the vacancy shall be
filled by the majority vote of the directors then in office, even if less than a
quorum, upon the recommendation of the remaining director or directors who were
elected by the holders of the Common Stock. If the vacancy is not so filled
within forty (40) days after the creation of the vacancy, a special meeting of
the holders of Preferred Stock and/or Common Stock shall be called and the
vacancy or vacancies shall be filled at that meeting.
(B) In addition to the right to elect Directors as provided in Section
3(A), the holder of each share of 1999 Class A Preferred Stock shall be entitled
to one (1) vote, voting together with the holders of Common Stock as a single
class, on all matters, excluding the election of Directors, submitted to the
vote of shareholders of the Company.
(C) Except as otherwise provided in Section 3(A) or in Section 10, or in
any Certificate of Designation creating another class or series of preferred
stock, or in any similar stock of the Company hereafter created, or by law, the
holders of shares of 1999 Class A Preferred Stock and the holders of shares of
Common Stock and any other capital stock of the Company having general voting
rights shall vote together as one class on all matters submitted to a vote of
stockholders of the Company.
(D) Except as expressly set forth herein, or as otherwise provided by
law, holders of 1999 Class A Preferred Stock shall have no special voting rights
and their consent, as a separate class, shall not be required (except to the
extent they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
Section 4. Certain Restrictions.
--------------------
3
<PAGE>
A. Whenever Quarterly Dividends or distributions payable on 1999 Class
A Preferred Stock as provided in Section 2 are in arrears, thereafter and until
all accrued and unpaid Quarterly Dividends and distributions, whether or not
declared, on shares of 1999 Class A Preferred Stock outstanding shall have been
paid in full, the Company shall not, without the express affirmative unanimous
approval of the Directors elected by holders of the 1999 Class A Preferred
Stock:
(1) declare or pay dividends, or make any other distributions, on any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the 1999 Class A
Preferred Stock;
(2) declare or pay dividends, or make any other distributions, on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the 1999 Class A
Preferred Stock, except dividends paid ratably on the 1999 Class A
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which
the holders of all such shares are then entitled;
(3) redeem or purchase or otherwise acquire for consideration shares of
any stock of the Company ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the 1999 Class A
Preferred Stock, provided that the Company may at any time redeem,
purchase or otherwise acquire shares of any such junior stock in
exchange for shares of any stock of the Company ranking junior (as
to dividends and upon dissolution, liquidation and winding up) to
the 1999 Class A Preferred Stock; or
(4) redeem or purchase or otherwise acquire for consideration any shares
of 1999 Class A Preferred Stock, or any shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or
winding up) with the 1999 Class A Preferred Stock, except in
accordance with a purchase offer made in writing or by publication
(as determined by the Board of Directors) to all holders of such
shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and
classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
B. The Company shall not permit any subsidiary of the Company to
purchase or otherwise acquire for consideration any shares of stock of the
Company unless the Company could, under Paragraph A of this Section 4, purchase
or otherwise acquire such shares at such time and in such manner.
Section 5. Liquidation, Dissolution or Winding Up. Upon any voluntary or
--------------------------------------
involuntary liquidation, dissolution or winding up of the affairs of the
Company, no distribution shall be made (a) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the 1999 Class A Preferred Stock, or (b) to the holders of shares
of stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the 1999 Class A Preferred Stock unless each
holder of 1999 Class A Preferred
4
<PAGE>
Stock has received in cash out of the assets of the Company, whether from
capital or earnings, available for distribution to the shareholders of the
Company, before any amount is paid to the holders of Common Stock, the sum of
Ten Dollars ($10.00) per share for each share of 1999 Class A Preferred Stock
held by the holder, plus an amount equal to the sum of all accumulated and
unpaid dividends to the date affixed for the payment of the distribution on the
shares of 1999 Class A Preferred Stock held by the holder. The sale or transfer
by the Company of all or substantially all of its assets shall not, for the
purposes of determining preferences and liquidation, be deemed to be a
liquidation, dissolution or winding up of the Company.
Section 6. Preemptive Rights. No holder of any shares of 1999 Class A
------------------
Preferred Stock shall be entitled as such, as a matter of right, to subscribe
for, purchase or receive any part of any class whatsoever, or of securities
convertible into or exchangeable for any stock or any class whatsoever, whether
now or hereafter authorized or whether issued for cash or other consideration or
by way of a dividend.
Section 7. Mandatory Redemption. Unless earlier redeemed or acquired in
--------------------
whole or in part by the Company with the consent of the holder, the shares of
1999 Class A Preferred Stock that remain issued and outstanding shall expire and
shall be automatically redeemed on December 31, 2000, at par value, plus an
amount equal to all accumulated and unpaid dividends, if any, due with respect
to the 1999 Class A Preferred Stock (collectively, the "Redemption Price").
Redemption shall be in cash out of any funds legally available for the
redemption of the 1999 Class A Preferred Stock.
Section 8. Rank. The 1999 Class A Preferred Stock shall rank, with
----
respect to payment of dividends and distribution of assets (except with respect
to events that do not give rise to a right of the holders of the 1999 Class A
Preferred Stock to receive distributions) (a) junior to any other class or
series of the Company's preferred stock which shall specifically provide that
such class or series shall rank senior to the 1999 Class A Preferred Stock
("Senior Stock"); (b) on parity with (i) the Company's Class B Convertible
Preferred Stock, par value $0.01 per share, (ii) the Company's Class C
Convertible Preferred Stock, par value $0.01 per share, (iii) the Company's
Class D Convertible Preferred Stock, par value $0.01 per share, and (iv) any
other class or series of the Company's preferred stock which shall specifically
provide that such class or series shall rank on parity with the Class B
Preferred Stock ((i) through (iv) collectively, the "Parity Stock"); and (c)
prior to (i) the Company's Common Stock and (ii) any other class or series of
the Company's preferred stock except for any class or series which are Senior
Stock or Parity Stock ((i) and (ii) together, the "Junior Stock").
Section 9. Reacquired Shares. Any shares of 1999 Class A Preferred
-----------------
Stock purchased or otherwise acquired by the Company in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
undesignated stock and may be reissued subject to the conditions and
restrictions on issuance in the Articles of Incorporation, or in any other
Certificate of Designations creating another class or series of stock or as
otherwise required by law.
Section 10. Amendment. If any proposed amendment to these Articles of
---------
Incorporation would alter or change the preferences, special rights or powers
given to the 1999
5
<PAGE>
Class A Preferred Stock so as to affect the 1999 Class A Preferred Stock
adversely, or would authorize the issuance of a class or classes of stock having
preferences or rights with respect to dividends or dissolution or the
distribution of assets that would be superior to the preferences or rights of
the 1999 Class A Preferred Stock, then the holders of the 1999 Class A Preferred
Stock shall be entitled to vote as a series upon such amendment, and the
affirmative vote of two-thirds of the outstanding shares of 1999 Class A
Preferred Stock shall be necessary to the adoption thereof, in addition to such
other vote as may be required by law.
RESOLVED FURTHER, that the officers of this Company be, and each of them
acting alone is, hereby authorized and instructed to take all steps necessary to
execute, deliver and file, for and on behalf of this Company and in its name,
any and all documents required in connection with the establishment and
authorization of the Company's Class A Preferred Stock, including but not
limited to filing the Statement of Rights and Preferences with the Minnesota
Secretary of State in accordance with Minnesota Statutes, Section 302A.401.
F. The undersigned further declares under penalty of perjury that the
matters set out in the foregoing Certificate are true and correct of his own
knowledge.
IN WITNESS WHEREOF, the undersigned has executed this certificate as of
the 4th day of March 1999.
/s/ Edward J. Driscoll, Jr.
---------------------------------------------
Edward J. Driscoll, Jr.
Secretary
6
<PAGE>
EXHIBIT 4.21
CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES
OF
CLASS B CONVERTIBLE PREFERRED STOCK
OF
WAM!NET INC.
The undersigned, Edward J. Driscoll, Jr., hereby certifies that:
A. He is the duly elected and acting Secretary of WAM!NET Inc. (the "Company"),
a Minnesota corporation.
B. The Articles of Incorporation of this Company provide for a class of up to
49,500,000 shares known as Undesignated Stock, which shares may be issued from
time to time in one or more classes or series.
C. The Board of Directors of the Company is authorized, pursuant to Article 6
of the Company's Articles of Incorporation and Minnesota Statutes, Section
302A.401, to fix or alter the rights, preferences, privileges, and restrictions
granted to or imposed upon any wholly unissued series of Undesignated Stock, to
fix the number of shares constituting the series, and to determine the
designation thereof.
D. It is the desire of the Board of Directors of the Company, pursuant to its
authority, to fix the rights, preferences, restrictions and other matters
relating to the Undesignated Stock and the number of shares of Undesignated
Stock.
E. Pursuant to authority given by Article 6 of the Company's Articles of
Incorporation, the Company's Board of Directors has adopted the following
resolutions as of the 4th day of March, 1999:
<PAGE>
RESOLVED, that, pursuant to Article 6 of the Articles of Incorporation of
WAM!NET Inc. (the "Company"), the Board of Directors of the Company (the
"Board") hereby creates and designates a series of Convertible Preferred Stock,
par value $0.01 per share, and authorizes the issuance of up to 5,710,425 of
such shares, and hereby fixes the designations, powers, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations or restrictions, of such shares, as follows:
1. DESIGNATION AND AMOUNT. The shares of such series shall be designated
----------------------
"Class B Convertible Preferred Stock" (the "Class B Preferred Stock") and the
number of shares constituting such series shall be 5,710,425.
2. RANK. The Class B Preferred Stock shall rank, with respect to dividend
----
rights and distribution of assets on any Liquidation of the Company (as defined
herein) (a) junior to any other class or series of the Company's preferred stock
which shall specifically provide that such class or series shall rank senior to
the Class B Preferred Stock (the "Senior Stock"); (b) on parity with (i) the
Company's Class A Preferred Stock, par value $10.00 per share (the "Class A
Preferred Stock") (except with respect to a Liquidation of the Company resulting
from the merger or consolidation of the Company into or with another
corporation, the merger or consolidation of any other corporation into or with
the Company or the sale of all or substantially all the assets of
-2-
<PAGE>
the Company, which events do not give rise to a right of the holders of the
Class A Preferred Stock to receive distributions), (ii) the Company's Class C
Convertible Preferred Stock, par value $0.01 per share (the "Class C Preferred
Stock"), (iii) the Company's Class D Convertible Preferred Stock, par value
$0.01 per share (the "Class D Preferred Stock"), and (iv) any other class or
series of the Company's preferred stock which shall specifically provide that
such class or series shall rank on parity with the Class B Preferred Stock ((i)
through (iv) collectively, the "Parity Stock"); and (c) prior to (i) the
Company's common stock, par value $0.01 per share (the "Common Stock") and (ii)
any other class or series of the Company's preferred stock except for any class
or series which are Senior Stock or Parity Stock ((i) and (ii) together, the
"Junior Stock").
3. DIVIDENDS. (a) Payment. The holders of Class B Preferred Stock shall be
--------- -------
entitled to receive dividends as set forth herein, payable only (i) if, as and
when declared by the Board, out of any funds legally available therefor or (ii)
to the extent declared by the Board, upon the Liquidation of the Company,
subject to and as set forth in Section 4 hereof. All such dividends (X) shall
be cumulative and shall accrue on each share of Class B Preferred Stock from the
date of issuance thereof at the rate of SEVEN PERCENT (7%) per annum of the
Original Purchase Price Per Share (as defined herein) thereof solely in the form
of additional shares of Class B Preferred Stock (Y) shall be payable before any
dividends shall be set apart for or paid upon Junior
-3-
<PAGE>
Stock in any year and (Z) shall be payable in accordance with Section 2 when any
dividends shall be set apart for or paid upon Parity Stock in any year. All such
dividends declared upon Class B Preferred Stock shall be declared pro rata per
share.
(b) Limit on Junior Dividends and Redemption. For so long as the Class B
----------------------------------------
Preferred Stock remains outstanding, the Company shall not pay any dividend upon
the Junior Stock, whether in cash or other property (other than shares of Junior
Stock), or purchase, redeem or otherwise acquire any such Junior Stock;
provided, however, that nothing in this Section 3(b) shall prohibit or otherwise
- - -----------------
limit the ability of the Company to (i) purchase unvested shares of Common Stock
from former employees of the Company at their original purchase price or (ii)
make any purchase, redemption or other acquisition pursuant to arrangements
existing as of the date of the initial issuance of the Class B Preferred Stock
(the "Initial Issuance Date").
4. LIQUIDATION, DISSOLUTION OR WINDING-UP.
--------------------------------------
(a) Liquidation Preference. In the event of any Liquidation of the
----------------------
Company, the holders of shares of Class B Preferred Stock then outstanding shall
be entitled to be paid out of the assets of the Company available for
distribution to its stockholders, after and subject to the payment in full of
all amounts required to be distributed to the holders of Senior Stock upon such
Liquidation of the Company and before any payment shall be made to the holders
of Junior Stock, the Liquidation Amount (as defined herein) per share of Class B
Preferred Stock. If upon any such Liquidation of the Company, the remaining
assets of
-4-
<PAGE>
the Company available for the distribution to its stockholders after payment in
full of amounts required to be paid or distributed to holders of Senior Stock
shall be insufficient to pay the holders of shares of Parity Stock the full
amount to which they shall be entitled, the holders of the Class B Preferred
Stock shall share ratably with the holders of Parity Stock in any distribution
of the remaining assets and funds of the Company in proportion to the respective
amounts which would otherwise be payable in respect of the shares held by them
upon such distribution if all amounts payable on or with respect to said shares
were paid in full. After the payment of all preferential amounts required to be
paid to the holders of Senior Stock and Parity Stock and any other series of the
Company's preferred stock upon any Liquidation of the Company, the holders of
shares of Junior Stock then outstanding shall be entitled to receive the
remaining assets and funds of the Company available for distribution to its
stockholders in accordance with the terms thereof.
(b) Certain Definitions. (i) The term "Liquidation of the Company" shall
-------------------
mean any voluntary or involuntary liquidation, dissolution or winding-up of the
affairs of the Company, and the merger or consolidation of the Company into or
with another corporation, the merger or consolidation of any other corporation
into or with the Company or the sale of all or substantially all the assets of
the Company.
(ii) The term "Liquidation Amount" shall mean an amount per share of Class
B Preferred Stock equal to the greater of: (A) (1)
-5-
<PAGE>
if the Company has effected a Real Property Financing (as defined herein) within
18 months of the Initial Issuance Date, (Y) the sum of the Financed Value (as
defined herein), plus $25,000,000, plus any dividends accrued on the Class B
Preferred Stock but not paid (provided that, under no circumstances shall the
-------------
amount calculated under this Section 4(b)(ii)(A)(1)(Y) exceed $65,000,000 (the
"Original Purchase Price") plus any dividends accrued on the Class B Preferred
Stock but not paid) divided by (Z) 5,710,425 or (2) if the Company has not
effected a Real Property Financing within such 18 months, the Original Purchase
Price Per Share plus any dividends per share accrued on the Class B Preferred
Stock but not paid; and (B) the per share amount that holders of the Class B
Preferred Stock would have received had they exercised their right to convert
the Class B Preferred Stock to Common Stock immediately prior to a Liquidation
of the Company; and provided further, that for purposes of the antidilution
----------------
provisions of Section 7 hereof and the mandatory conversion provisions of
Section 8 hereof, the term "Liquidation Amount" shall exclude any dividends
accrued on the Class B Preferred Stock but not paid.
(iii) The term "Real Property Financing" shall mean a sale-leaseback or
similar financing arrangement with an independent third party for the purposes
of financing not less than 100% of the financeable value of the Real Property.
(iv) The term "Real Property" shall have the meaning ascribed thereto in
the Preferred Stock Purchase Agreement, dated as of March 3, 1999, by and
between the Company and Silicon
-6-
<PAGE>
Graphics, Inc., relating to the sale of the Class B Preferred Stock and the
Class C Preferred Stock (the "Purchase Agreement").
(v) The term "Financed Value" shall mean (A) in connection with a sale-
leaseback arrangement, the sum of the total amount that a third-party is willing
to fund (without deduction for loan fees and costs), providing for rent payable
to the Company under the lease in an amount not less than fair market rental for
the Real Property or (B) in connection with a mortgage or other financing
arrangement involving a loan to value ratio of less than 100%, the total
appraised value of the Real Property being relied upon by such lender; provided,
---------
however, that the Financed Value shall under no circumstances be greater than
- - -------
$40,000,000 or less than $30,000,000.
(vi) The values ascribed to the terms "financeable value," "fair market
rental" and "total appraised value" as used in this Section 4(b) shall be
determined in good faith by the Company after consultation with a majority-in-
interest of the holders of the Class B Preferred Stock; provided that, if a
-------------
majority-in-interest of the holders of the Class B Preferred Stock reasonably
object to the values ascribed to such terms, such holders may proceed to
arbitration as set forth in herein: (A) In such event, the dispute shall be
solely and finally settled in accordance with the Commercial Arbitration Rules
of the American Arbitration Association ("AAA") as in force and effect at such
time. The AAA shall administer the arbitration. The arbitration shall be
conducted by a panel of three arbitrators selected in the following manner: The
Company and a majority-in-interest of
-7-
<PAGE>
the holders of the Class B Preferred Stock shall each select one arbitrator
within five (5) days from the date on which the notice of arbitration has been
received by the Company. Within five (5) days after such appointment, the
selected arbitrators shall choose a third arbitrator, who must be experienced in
the area of real estate valuation in the Minneapolis, Minnesota metropolitan
area, to serve as the chairman of the panel. The arbitration shall take place in
Minneapolis, Minnesota. The determination of the arbitrators shall set forth
findings of fact, conclusions and the reasons therefor and shall be the final
disposition on the merits. The Company and the holders of the Class B Preferred
Stock waive any right they may enjoy under the law of any state to apply to the
courts of such state for relief from the provisions hereof or from any decision
of the arbitrators. All costs of arbitration hereunder shall be borne equally by
the Company, on the one hand, and the holders of the Class B Preferred Stock, on
the other hand.
5. VOTING. (a) Number of Votes. Each issued and outstanding share of Class B
------ ---------------
Preferred Stock shall be entitled to the number of votes equal to (i) the number
of shares of Common Stock into which each such share of Class B Preferred Stock
is then convertible (as adjusted from time to time) divided by the Number of
Common Shares Deemed Outstanding (as defined herein) at such time, multiplied by
(ii) the aggregate number of shares of Common Stock then outstanding and
entitled to vote (giving effect to the voting power of all of the securities of
the Company convertible into or exchangeable for Common Stock that are entitled
to vote
-8-
<PAGE>
with the Common Stock, but without giving effect to the voting power of the
Class B Preferred Stock), at each meeting of stockholders of the Company (or any
written consent without a meeting in accordance with the Minnesota Business
Corporation Act) with respect to any and all matters presented to the
stockholders of the Company for their action or consideration other than the
election of directors (as to which the Class B Preferred Stock shall have rights
voting separately as a class as set out in Section 5(b)). Except as provided by
law, by the provisions of this Section 5 or by the provisions establishing any
other series of the Company's preferred stock, holders of Class B Preferred
Stock and of any other outstanding preferred stock shall vote together with the
holders of Common Stock as a single class.
(b) The Class B Director. The holders of Class B Preferred Stock shall have
--------------------
the exclusive right, voting separately as a class, to elect one director (the
"Class B Director"). The Class B Director shall be elected by the affirmative
vote of the holders of record of a majority of the outstanding shares of Class B
Preferred Stock either at meetings of stockholders at which directors are
elected, a special meeting of the holders of record of the Class B Preferred
Stock or by written consent of a majority of such holders of record without a
meeting in accordance with the Minnesota Business Corporation Act. Each Class B
Director so elected shall serve for a term of one year and until his or her
successor is elected and qualified. Any vacancy in the position of a Class B
Director may be filled only
-9-
<PAGE>
by the holders of the Class B Preferred Stock. Each Class B Director may, during
his or her term of office, be removed at any time, with or without cause, by and
only by the affirmative vote, at a special meeting of holders of Class B
Preferred Stock called for such purpose, or the written consent, of the holders
of record of a majority of the outstanding shares of Class B Preferred Stock.
Any vacancy created by such removal may also be filled at such meeting or by
such consent.
(c) Protective Provisions. In addition to any other rights provided by
---------------------
law, the Company shall not (i) without first obtaining the affirmative vote or
written consent of a majority of the holders of the Class B Preferred Stock,
voting separately as a class, amend, alter or repeal any provision of the
Company's Articles of Incorporation or By-Laws in a manner that is adverse to
the holders of the Class B Preferred Stock and (ii) without first obtaining the
affirmative vote or written consent of a majority of the holders the Company's
voting stock other than MCI WORLDCOM, Inc. (together with its majority-owned
subsidiaries and other controlled affiliates, "MCI WCOM"), enter into any merger
or consolidation into or with MCI WCOM or enter into any other contract or
arrangement involving the sale or license of the Company's material assets with
MCI WCOM (excluding contractual arrangements with MCI WCOM existing as of the
Initial Issuance Date).
6. OPTIONAL CONVERSION. Each share of Class B Preferred Stock may be converted
-------------------
at any time, at the option of the holder thereof, into the number of fully paid
and nonassessable shares
-10-
<PAGE>
of Common Stock obtained by dividing the Original Purchase Price Per Share by
the Conversion Price then in effect (the "Conversion Rate"); provided, however,
-----------------
that upon any Liquidation of the Company, the right of conversion shall
terminate at the close of business on the full business day next preceding the
date fixed for the payment of any amounts distributable on liquidation to the
holders of Class B Preferred Stock.
(a) Initial. The initial Conversion Rate for the Class B Preferred Stock
-------
shall be one share of Common Stock for each one share of Class B Preferred Stock
surrendered for conversion representing an initial Conversion Price of
$11.3826902 per share of Common Stock (the "Original Purchase Price Per Share").
The applicable Conversion Rate and Conversion Price from time to time in effect
is subject to adjustment as hereinafter provided.
(b) No Fractional Shares. The Company shall not issue fractions of shares
--------------------
of Common Stock upon conversion of Class B Preferred Stock or scrip in lieu
thereof. If any fraction of a share of Common Stock would, except for the
provisions of this Section 6(b), be issuable upon conversion of any Class B
Preferred Stock, the Company shall in lieu thereof pay to the person entitled
thereto an amount in cash equal to the current value of such fraction,
calculated to the nearest one hundredth (1/100) of a share, to be computed (i)
if the Common Stock is listed on any national securities exchange on the basis
of the last sales price of the Common Stock on such exchange (or the quoted
closing bid price if there shall have been no sales) on the date of conversion
or (ii) if the Common Stock shall not be
-11-
<PAGE>
listed, on the basis of the mean between the closing bid and asked prices for
the Common Stock on the date of conversion as reported by Nasdaq, or its
successor, and if there are not such closing bid and asked prices, on the basis
of the fair market value per share as determined by the Board of Directors of
the Company.
(c) Adjustment. Whenever the Conversion Rate and Conversion Price shall
----------
be adjusted as provided herein, the Company shall forthwith file at each office
designated for the conversion of Class B Preferred Stock, a statement, signed by
the President, any Vice President or Treasurer of the Company, showing in
reasonable detail the facts requiring such adjustment and the Conversion Rate
that will be effective after such adjustment. The Company shall also cause a
notice setting forth any such adjustments to be sent by mail, first class,
postage prepaid, to each record holder of Class B Preferred Stock at his or its
address appearing on the stock register. If such notice relates to an
adjustment resulting from an event referred to in Section 7(g), such notice
shall be included as part of the notice required to be mailed and published
under the provisions of such Section 7(g).
(d) Exercise. In order to exercise the conversion privilege, the holder
--------
of any Class B Preferred Stock to be converted shall surrender his or its
certificate or certificates therefore to the principal office of the transfer
agent for the Class B Preferred Stock (or if no transfer agent be at the time
appointed, then the Company at its principal office), and shall
-12-
<PAGE>
give written notice to the Company at such office that the holder elects to
convert the Class B Preferred Stock represented by such certificates, or any
number thereof. Such notice shall also state the name or names (with address) in
which the certificate or certificates for shares of Common Stock which shall be
issuable on such conversion shall be issued, subject to any restrictions on
transfer relating to shares of the Class B Preferred Stock or shares of Common
Stock upon conversion thereof. If so required by the Company, certificates
surrendered for conversion shall be endorsed or accompanied by written
instrument or instruments of transfer, in form satisfactory to the Company, duly
authorized in writing. The date of receipt by the transfer agent (or by the
Company if the Company serves as its own transfer agent) of the certificates and
notice shall be the conversion date. As soon as practicable after receipt of
such notice and the surrender of the certificate or certificates for Class B
Preferred Stock as set forth herein, the Company shall cause to be issued and
delivered at such office to such holder, or on his or its written order, a
certificate or certificates for the number of full shares of Common Stock
issuable on such conversion in accordance with the provisions hereof and cash as
provided in Section 6(b) in respect of any fraction of a share of Common Stock
otherwise issuable upon such conversion.
(e) Reservation of Shares of Common Stock. The Company shall at all times
-------------------------------------
while any shares of Class B Preferred Stock shall be outstanding, reserve and
keep available out of its
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<PAGE>
authorized but unissued stock, for the purposes of effecting the conversion of
the Class B Preferred Stock, such number of its duly authorized shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding Class B Preferred Stock. Before taking any action which would cause
an adjustment reducing the Conversion Price below the then par value of the
shares of Common Stock issuable upon conversion of the Class B Preferred Stock,
the Company will take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable shares of such Common Stock at such adjusted
Conversion Price.
(f) No Adjustment for Dividends. Upon any such conversion, no adjustment
---------------------------
to the Conversion Rate shall be made for accrued and unpaid dividends on the
Class B Preferred Stock surrendered for conversion or on the Common Stock
delivered.
(g) Surrender. All shares of Class B Preferred Stock which shall have
---------
been surrendered for conversion as herein provided shall no longer be deemed to
be outstanding and all rights with respect to such shares, including the rights,
if any, to receive notices and to vote, shall forthwith cease and terminate
except only the right of the holder thereof to receive shares of Common Stock in
exchange therefor and payment of any accrued and unpaid dividends on such shares
of Common Stock. Any shares of Class B Preferred Stock so converted shall be
retired and canceled and shall not be reissued, and the Company may from time to
time take
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<PAGE>
such appropriate action as may be necessary to reduce the authorized Class B
Preferred Stock accordingly.
7. ANTI-DILUTION PROVISIONS. (a) General. In order to prevent dilution of
------------------------ -------
the rights granted hereunder, the Conversion Price shall be subject to
adjustment from time to time in accordance with this Section 7. Upon each
adjustment of the Conversion Price pursuant to this Section 7, the registered
holder of shares of Class B Preferred Stock shall thereafter be entitled to
acquire upon conversion, at the Conversion Price resulting from such adjustment,
the number of shares of Common Stock obtainable by multiplying the Conversion
Price in effect immediately prior to such adjustment by the number of shares of
Common Stock acquirable immediately prior to such adjustment and dividing the
product thereof by the Conversion Price resulting from such adjustment.
(b) Adjustment of Conversion Price. Except as provided in Sections 7(c)
------------------------------
or 7(f) below, if and whenever on or after the Initial Issuance Date, the
Company shall issue or sell, or shall pursuant to Section 7(b)(1) through (10)
inclusive, be deemed to have issued or sold any shares of its Common Stock for a
consideration per share less than the Liquidation Amount (excluding, for all
purposes of this Section 7, any dividends accrued on the Class B Preferred
Stock) in effect immediately prior to the time of such issue or sale, then
forthwith upon such issue or sale (the "Triggering Transaction"), the Conversion
Price shall, subject to Section 7(b)(1) through (10) inclusive, be reduced to:
(i) if a Triggering Transaction shall occur within
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<PAGE>
nine months following the Initial Issuance Date, the consideration per share
that such Common Stock shall have been issued or sold (or deemed issued or sold)
for in such Triggering Transaction or (ii) if a Triggering Transaction shall
occur at any time thereafter, the Conversion Price (calculated to the nearest
one-hundredth of a cent) determined by dividing: (A) an amount equal to the sum
of the product derived by multiplying the Number of Common Shares Deemed
Outstanding immediately prior to such Triggering Transaction by the Conversion
Price then in effect, plus the consideration, if any, received by the Company
upon consummation of such Triggering Transaction by (B) an amount equal to the
sum of the Number of Common Shares Deemed Outstanding immediately prior to such
Triggering Transaction plus the number of shares of Common Stock issued (or
deemed to be issued in accordance with Section 7(b)(1) through (10) inclusive)
in connection with the Triggering Transaction. The term "Number of Common Shares
Deemed Outstanding" at any given time shall mean the sum of (i) the number of
shares of Common Stock outstanding at such time, (ii) the number of shares of
Common Stock issuable upon conversion or exchange at such time of all of the
Company's outstanding securities that are then convertible into, or exchangeable
for, Common Stock and (iii) the number of shares of the Company's Common Stock
deemed to be outstanding under Section 7(b)(1) through (10) inclusive, at such
time. For purposes of determining the adjusted Conversion Price under this
Section 7(b), the following provisions shall be applicable:
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<PAGE>
(1) In case the Company at any time shall in any manner grant (whether
directly or by assumption in a merger or otherwise) any rights to subscribe for
or to purchase, or any options for the purchase of, Common Stock or any stock or
other securities convertible into or exchangeable for Common Stock (such rights
or options being herein called "Options" and such convertible or exchangeable
stock or securities being herein called "Convertible Securities"), whether or
not such Options or the right to convert or exchange any such Convertible
Securities are immediately exercisable and the price per share for which the
Common Stock is issuable upon exercise, conversion or exchange (determined by
dividing (Y) the total amount, if any, received or receivable by the Company as
consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Company upon the exercise of
all such Options, plus, in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable upon the issue or sale of such Convertible Securities and upon the
conversion or exchange thereof, by (Z) the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or the conversion or
exchange of such Convertible Securities) shall be less than the Liquidation
Amount in effect immediately prior to the time of the granting of such Option,
then the total maximum amount of Common Stock issuable upon the exercise of such
Options or in the case of Options for Convertible Securities, upon the
conversion or exchange of such Convertible Securities shall (as
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<PAGE>
of the date of granting of such Options) be deemed to be outstanding and to have
been issued and sold by the Company for such price per share. No further
adjustment of the Conversion Price shall be made upon the actual issue of such
shares of Common Stock or such Convertible Securities upon the exercise of such
Options, except as otherwise provided in Section 7(b)(3).
(2) In case the Company at any time shall in any manner issue (whether
directly or by assumption in a merger or otherwise) or sell any Convertible
Securities, whether or not the rights to exchange or convert thereunder are
immediately exercisable, and the price per share for which Common Stock is
issuable upon such conversion or exchange (determined by dividing (Y) the total
amount received or receivable by the Company as consideration for the issue or
sale of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the conversion or
exchange thereof, by (Z) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities)
shall be less than the Liquidation Amount in effect immediately prior to the
time of such issue or sale, then the total maximum number of shares of Common
Stock issuable upon conversion or exchange of all such Convertible Securities
shall (as of the date of the issue or sale of such Convertible Securities) be
deemed to be outstanding and to have been issued and sold by the Company for
such price per share. No further adjustment of the Conversion Price shall be
made upon the actual issue of such Common Stock upon exercise of the rights to
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<PAGE>
exchange or convert under such Convertible Securities, except as otherwise
provided in Section (7)(b)(3).
(3) If the purchase price provided for in any Options referred to in
Section 7(b)(1), the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in Sections
7(b)(1) or (2), or the rate at which any Convertible Securities referred to in
Sections 7(b)(1) or (2) are convertible into or exchangeable for Common Stock
shall change at any time (other than under or by reason of provisions designed
to protect against dilution of the type set forth in Sections 7(b) or 7(d)), the
Conversion Price in effect at the time of such change shall forthwith be
readjusted to the Conversion Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or conversion rate, as the case
may be, at the time initially granted, issued or sold. If the purchase price
provided for in any Option referred to in Section 7(b)(1) or the rate at which
any Convertible Securities referred to in Sections 7(b)(1) or (2) are
convertible into or exchangeable for Common Stock, shall be reduced at any time
under or by reason of provisions with respect thereto designed to protect
against dilution, then in case of the delivery of Common Stock upon the exercise
of any such Option or upon conversion or exchange of any such Convertible
Security, the Conversion Price then in effect hereunder shall forthwith be
adjusted to such respective amount as would have been obtained had such Option
or Convertible Security never been issued as to
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<PAGE>
such Common Stock and had adjustments been made upon the issuance of the shares
of Common Stock delivered as set forth herein, but only if as a result of such
adjustment the Conversion Price then in effect hereunder is hereby reduced.
(4) On the expiration of any Option or the termination of any right to
convert or exchange any Convertible Securities, the Conversion Price then in
effect hereunder shall forthwith be increased to the Conversion Price which
would have been in effect at the time of such expiration or termination had such
Option or Convertible Securities, to the extent outstanding immediately prior to
such expiration or termination, never been issued.
(5) In case any Options shall be issued in connection with the issue or
sale of other securities of the Company, together comprising one integral
transaction in which no specific consideration is allocated to such Options by
the parties thereto, such Options shall be deemed to have been issued without
consideration.
(6) In case any shares of Common Stock, Options or Convertible Securities
shall be issued or sold or deemed to have been issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Company therefor. In case any shares of Common Stock, Options or Convertible
Securities shall be issued or sold for a consideration other than cash, the
amount of the consideration other than cash received by the Company shall be the
fair value of such consideration as determined in good faith by the Board. In
case any shares of Common Stock, Options or Convertible
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<PAGE>
Securities shall be issued in connection with any merger in which the Company is
the surviving corporation, the amount of consideration therefor shall be deemed
to be the fair value of such portion of the net assets and business of the non-
surviving corporation as shall be attributable to such Common Stock, Options or
Convertible Securities, as the case may be.
(7) The number of shares of Common Stock outstanding at any given time
shall not include shares owned or held by or for the account of the Company, and
the disposition of any shares so owned or held shall be considered an issue or
sale of Common Stock for the purpose of this Section 7(b).
(8) In case the Company shall declare a dividend or make any other
distribution upon the stock of the Company payable in Options or Convertible
Securities, then in such case any Options or Convertible Securities, as the case
may be, issuable in payment of such dividend or distribution shall be deemed to
have been issued or sold without consideration.
(9) For purposes of this Section 7(b), in case the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them to
receive a dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of
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<PAGE>
the granting of such right or subscription or purchase, as the case may be.
(10) For purposes of this Section 7(b), notwithstanding Section 7(f), in
the event that the "Class B Warrants" issued to MCI WCOM on September 26, 1997
vest and become exercisable for shares of Common Stock, whether or not MCI WCOM
shall exercise such Class B Warrants, the following shall apply: the
consideration per share that the Common Stock shall be deemed to have been
issued or sold at shall be equal to the Original Purchase Price Per Share that
would have been payable by the holder of the Class B Preferred Stock on the
Initial Issuance Date if the vested Class B Warrants had vested and been
exercised (and the exercise price thereon had been paid to the Company) prior to
the Initial Issuance Date.
(c) Liquidating Dividends. In the event the Company shall declare a
---------------------
dividend upon the Common Stock (other than a dividend payable in Common Stock)
payable otherwise than out of earnings or earned surplus, determined in
accordance with generally accepted accounting principles, including the making
of appropriate deductions for minority interests, if any, in subsidiaries
(herein referred to as "Liquidating Dividends"), then, as soon as possible after
the conversion of any Class B Preferred Stock, the Company shall pay to the
person converting such Class B Preferred Stock an amount equal to the aggregate
value at the time of such exercise of all Liquidating Dividends (including but
not limited to the Common Stock which would have been issued at the time of such
earlier exercise and all other
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<PAGE>
securities which would have been issued with respect to such Common Stock by
reason of stock splits, stock dividends, mergers or reorganizations, or for any
other reason). For the purposes of this Section 7(c), a dividend other than in
cash shall be considered payable out of earnings or earned surplus only to the
extent that such earnings or earned surplus are charged an amount equal to the
fair value of such dividend as determined in good faith by the Board.
(d) Subdivisions and Dividends; Combinations. In case the Company shall
----------------------------------------
at any time (i) subdivide the outstanding Common Stock or (ii) issue a stock
dividend on its outstanding Common Stock, the number of shares of Common Stock
issuable upon conversion of the Class B Preferred Stock shall be proportionately
increased by the same ratio as the subdivision or dividend (with appropriate
adjustments to the Conversion Price in effect immediately prior to such
subdivision or dividend). In case the Company shall at any time combine its
outstanding Common Stock, the number of shares issuable upon conversion of the
Class B Preferred Stock immediately prior to such combination shall be
proportionately decreased by the same ratio as the combination (with appropriate
adjustments to the Conversion Price in effect immediately prior to such
combination).
(e) Reorganizations, etc. If any capital reorganization or
--------------------
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with another corporation, or the sale of all or substantially all
of its assets to another corporation shall be effected in such a way that
holders of
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<PAGE>
Common Stock shall be entitled to receive stock, securities, cash or other
property with respect to or in exchange for Common Stock, then, as a condition
of such reorganization, reclassification, consolidation, merger or sale, lawful
and adequate provision shall be made whereby the holders of the Class B
Preferred Stock shall have the right to acquire and receive upon conversion of
the Class B Preferred Stock, which right shall be prior to the rights of the
holders of Junior Stock, equal to the rights of the holders of Parity Stock and
after and subject to the rights of holders of Senior Stock, such shares of
stock, securities, cash or other property issuable or payable (as part of the
reorganization, reclassification, consolidation, merger or sale) with respect to
or in exchange for such number of outstanding shares of Common Stock as would
have been received upon conversion of the Class B Preferred Stock at the
Conversion Price then in effect.
(f) Exceptions to Antidilution. The provisions of this Section 7 shall
--------------------------
not apply to any Common Stock issued, issuable or deemed outstanding under
Section 7(b)(1) through (10) inclusive (and no such transaction shall constitute
a Triggering Transaction): (i) in connection with a public or private debt
financing effected by the Company (other than with an affiliate of the Company,
including MCI WCOM) within nine months after the Initial Issuance Date, (ii)
after the issuance of shares of Common Stock to the public in an underwritten
offering pursuant to a registration statement filed under the Securities Act of
1933, as amended (the "Securities Act") covering the offer and
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<PAGE>
sale of Common Stock in which the proceeds to the Company are not less than $20
million, (iii) to any person pursuant to any stock option, stock purchase or
similar plan or arrangement for the benefit of employees, consultants or other
representatives of the Company or its subsidiaries in effect on the Initial
Issuance Date or thereafter adopted by the Board, (iv) pursuant to options,
warrants and conversion rights in existence on the Initial Issuance Date (other
than as provided for in Section 7(b)(10)) or (v) on conversion of the Class B
Preferred Stock, the Class C Preferred Stock or the Class D Preferred Stock or
the sale of any additional shares of any of the foregoing at a price not less
than the applicable conversion price thereof.
(g) Procedures. In the event that (i) the Company shall declare any cash
----------
dividend upon its Common Stock, (ii) the Company shall declare any dividend upon
its Common Stock payable in stock or make any special dividend or other
distribution to the holders of its Common Stock, (iii) the Company shall offer
for subscription pro rata to the holders of its Common Stock any additional
shares of stock of any class or other rights, (iv) there shall be any capital
reorganization or reclassification of the capital stock of the Company,
including any subdivision or combination of its outstanding shares of Common
Stock, or consolidation or merger of the Company with, or sale of all or
substantially all of its assets to, another corporation, (v) there shall be a
voluntary or involuntary dissolution, liquidation or winding-up of the Company,
then, in connection with any such event, the Company shall give to the holders
of the
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<PAGE>
Class B Preferred Stock (A) at least twenty (20) days prior written notice of
the date on which the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights or for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up; and (B) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, at least twenty (20) days prior
written notice of the date when the same shall take place. Such notice in
accordance with the foregoing clause (A) shall also specify, in the case of any
such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto, and such notice in accordance
with the foregoing clause (B) shall also specify the date on which the holders
of Common Stock shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reorganization, reclassification
consolidation, merger, sale, dissolution, liquidation or winding-up, as the case
may be. Each such written notice shall be given by first class mail, postage
prepaid, addressed to the holders of the Class B Preferred Stock at the address
of each such holder as shown on the books of the Company.
(h) Intended Effect. If any event occurs as to which, in the opinion of
---------------
the Board, the provisions of this Section 7 are not strictly applicable or if
strictly applicable would not fairly protect the rights of the holders of the
Class B Preferred
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<PAGE>
Stock in accordance with the essential intent and principles of such provisions,
then the Board shall make an adjustment in the application of such provisions,
in accordance with such essential intent and principles, so as to protect such
rights as set forth herein, but in no event shall any adjustment have the effect
of increasing the Conversion Price as otherwise determined pursuant to any of
the provisions of this Section 7 except in the case of a combination of shares
of a type contemplated in Section 7(d) and then in no event to an amount greater
than the Conversion Price as adjusted pursuant to Section 7(d).
8. MANDATORY CONVERSION.
--------------------
(a) Mandatory Conversion. Each share of Class B Preferred Stock shall
--------------------
automatically be converted into shares of Common Stock at the then effective
Conversion Price at any time upon the closing of an underwritten offering
pursuant to an effective registration statement under the Securities Act,
covering the offer and sale of Common Stock to the public at a price per share
of Common Stock that is not less than (i) 110% of the Liquidation Amount
(excluding, for all purposes of this Section 8, any dividends accrued on the
Class B Preferred Stock), if such offering is consummated within two years
following the Initial Issuance Date or (ii) 200% of the Liquidation Amount, if
such offering is consummated at any time thereafter. In addition, each share of
Class B Preferred Stock shall automatically be converted into shares of Common
Stock at the then effective Conversion Price for such shares (A) upon the vote
to so convert of the holders of at least a majority of the shares of Class B
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<PAGE>
Preferred Stock then outstanding or (B) at any time after the conversion into
Common Stock of at least a majority of the shares of Class B Preferred Stock
issued on the Initial Issuance Date.
(b) Procedures. All holders of record of shares of Class B Preferred
----------
Stock will be given at least twenty (20) days' prior written notice of the date
fixed and the place designated for mandatory conversion of all of such shares of
Class B Preferred Stock pursuant to this Section 8. Such notice will be sent by
mail, first class, postage prepaid, to each record holder of shares of Class B
Preferred Stock at such holder's address appearing on the stock register. On or
before the date fixed for conversion each holder of shares of Class B Preferred
Stock shall surrender his or its certificates or certificates for all such
shares to the Company at the place designated in such notice, and shall
thereafter receive certificates for the number of shares of Common Stock to
which such holder is entitled pursuant to this Section 8. On the date fixed for
conversion, all rights with respect to the Class B Preferred Stock so converted
will terminate, except only the rights of the holders thereof, upon surrender of
their certificate or certificates therefore, to receive certificates for the
number of shares of Common Stock into which such Class B Preferred Stock has
been converted and payment of any accrued and unpaid dividends thereon. If so
required by the Company, certificates surrendered for conversion shall be
endorsed or accompanied by written instrument or instruments of transfer, in
form satisfactory to the Company, duly executed by the registered holder or by
his attorneys duly
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<PAGE>
authorized in writing. All certificates evidencing shares of Class B Preferred
Stock which are required to be surrendered for conversion in accordance with the
provisions hereof shall, from and after the date such certificates are so
required to be surrendered, be deemed to have been retired and canceled and the
shares of Class B Preferred Stock represented thereby converted into Common
Stock for all purposes, notwithstanding the failure of the holder or holders
thereof to surrender such certificates on or prior to such date. As soon as
practicable after the date of such mandatory conversion and the surrender of the
certificate or certificates for Class B Preferred Stock as set forth herein, the
Company shall cause to be issued and delivered to such holder, or on his or its
written order, a certificate or certificates for the number of full shares of
Common Stock issuable on such conversion in accordance with the provisions
hereof and cash as provided in Section 6(b) in respect of any fraction of a
share of Common Stock otherwise issuable upon such conversion.
9. CONVERTED AND REACQUIRED SHARES. Any shares of Series B referred Stock
-------------------------------
converted into Common Stock, purchased or otherwise acquired by the Company in
any manner whatsoever shall be retired and canceled promptly after the
acquisition thereof. All such shares shall upon their cancellation become
authorized but unissued shares of undesignated stock of the Company and may be
reissued subject to the conditions and restrictions on issuance in the Articles
of Incorporation, in any other
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<PAGE>
Certificate of Designation creating a series of preferred stock or any similar
stock or as otherwise required by law.
10. SUSPENSION OF VOTING RIGHTS PENDING HSR APPROVAL. Notwithstanding anything
------------------------------------------------
to the contrary contained herein, unless and until all filings required under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations of the Federal Trade Commission promulgated thereunder, in
connection with the acquisition of the Class B Preferred Stock shall have been
made and the applicable waiting period thereunder shall have expired or been
terminated, no holder of Class B Preferred Stock shall have any voting rights as
a stockholder of the Company or any other right to elect, nominate, designate or
vote for any member of the Company's Board of Directors.
RESOLVED FURTHER, that the officers of this Company be, and each of them acting
alone is, hereby authorized and instructed to take all steps necessary to
execute, deliver and file, for and on behalf of this Company and in its name,
any and all documents required in connection with the establishment and
authorization of the Company's Class B Preferred Stock, including but not
limited to filing the Statement of Rights and Preferences with the Minnesota
Secretary of State in accordance with Minnesota Statutes, Section 302A.401.
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<PAGE>
F. The undersigned further declares under penalty of perjury that the matters
set out in the foregoing Certificate are true and correct of his own knowledge.
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<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this certificate as of the 4th
day of March, 1999.
/s/ Edward J. Driscoll, Jr.
_________________________________
Edward J. Driscoll, Jr.
Secretary
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<PAGE>
EXHIBIT 4.22
CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES
OF
CLASS C CONVERTIBLE PREFERRED STOCK
OF
WAM!NET INC.
The undersigned, Edward J. Driscoll, Jr., hereby certifies that:
A. He is the duly elected and acting Secretary of WAM!NET Inc. (the "Company"),
a Minnesota corporation.
B. The Articles of Incorporation of this Company provide for a class of up to
49,500,000 shares known as Undesignated Stock, which shares may be issued from
time to time in one or more classes or series.
C. The Board of Directors of the Company is authorized, pursuant to Article 6
of the Company's Articles of Incorporation and Minnesota Statutes, Section
302A.401, to fix or alter the rights, preferences, privileges, and restrictions
granted to or imposed upon any wholly unissued series of Undesignated Stock, to
fix the number of shares constituting the series, and to determine the
designation thereof.
D. It is the desire of the Board of Directors of the Company, pursuant to its
authority, to fix the rights, preferences, restrictions and other matters
relating to the Undesignated Stock and the number of shares of Undesignated
Stock.
E. Pursuant to authority given by Article 6 of the Company's Articles of
Incorporation, the Company's Board of Directors has adopted the following
resolutions as of the 4th day of March, 1999;
<PAGE>
RESOLVED, that, pursuant to Article 6 of the Articles of Incorporation of
WAM!NET Inc. (the "Company"), the Board of Directors of the Company (the
"Board") hereby creates and designates a series of Convertible Preferred Stock,
par value $0.01 per share, and authorizes the issuance of up to 878,527 of such
shares, and hereby fixes the designations, powers, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations or restrictions, of such shares, as follows:
1. DESIGNATION AND AMOUNT. The shares of such series shall be designated
----------------------
"Class C Convertible Preferred Stock" (the "Class C Preferred Stock") and the
number of shares constituting such series shall be 878,527.
2. RANK. The Class C Preferred Stock shall rank, with respect to dividend
----
rights and distribution of assets on any Liquidation of the Company (as defined
herein) (a) junior to any other class or series of the Company's preferred stock
which shall specifically provide that such class or series shall rank senior to
the Class C Preferred Stock (the "Senior Stock"); (b) on parity with (i) the
Company's Class A Preferred Stock, par value $10.00 per share (the "Class A
Preferred Stock") (except with respect to a Liquidation of the Company resulting
from the merger or consolidation of the Company into or with another
corporation, the merger or consolidation of any other corporation into or with
the Company or the sale of all or substantially all the assets of the Company,
which events do not give rise to a right of the holders of the Class A Preferred
Stock to receive distributions),
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<PAGE>
(ii) the Company's Class B Convertible Preferred Stock, par value $0.01 per
share (the "Class B Preferred Stock"), (iii) the Company's Class D Convertible
Preferred Stock, par value $0.01 per share (the "Class D Preferred Stock"), and
(iv) any other class or series of the Company's preferred stock which shall
specifically provide that such class or series shall rank on parity with the
Class C Preferred Stock ((i) through (iv) collectively, the "Parity Stock"); and
(c) prior to (i) the Company's common stock, par value $0.01 per share (the
"Common Stock") and (ii) any other class or series of the Company's preferred
stock except for any class or series which are Senior Stock or Parity Stock ((i)
and (ii) together, the "Junior Stock").
3. DIVIDENDS. (a) Payment. The holders of Class C Preferred Stock shall be
--------- -------
entitled to receive dividends as set forth herein, payable only (i) if, as and
when declared by the Board, out of any funds legally available therefor or (ii)
to the extent declared by the Board, upon the Liquidation of the Company,
subject to and as set forth in Section 4 hereof. All such dividends (X) shall
be cumulative and shall accrue on each share of Class C Preferred Stock from the
date of issuance thereof at the rate of SEVEN PERCENT (7%) per annum of the
Original Purchase Price Per Share (as defined herein) thereof solely in the form
of additional shares of Class C Preferred Stock (Y) shall be payable before any
dividends shall be set apart for or paid upon Junior Stock in any year and (Z)
shall be payable in accordance with Section 2 when any dividends shall be set
apart for or paid upon
-3-
<PAGE>
Parity Stock in any year. All such dividends declared upon Class C Preferred
Stock shall be declared pro rata per share.
(b) Limit on Junior Dividends and Redemption. For so long as the Class C
----------------------------------------
Preferred Stock remains outstanding, the Company shall not pay any dividend upon
the Junior Stock, whether in cash or other property (other than shares of Junior
Stock), or purchase, redeem or otherwise acquire any such Junior Stock;
provided, however, that nothing in this Section 3(b) shall prohibit or otherwise
- - -----------------
limit the ability of the Company to (i) purchase unvested shares of Common Stock
from former employees of the Company at their original purchase price or (ii)
make any purchase, redemption or other acquisition pursuant to arrangements
existing as of the date of the initial issuance of the Class C Preferred Stock
(the "Initial Issuance Date").
4. LIQUIDATION, DISSOLUTION OR WINDING-UP.
--------------------------------------
(a) Liquidation Preference. In the event of any Liquidation of the
----------------------
Company, the holders of shares of Class C Preferred Stock then outstanding shall
be entitled to be paid out of the assets of the Company available for
distribution to its stockholders, after and subject to the payment in full of
all amounts required to be distributed to the holders of Senior Stock upon such
Liquidation of the Company and before any payment shall be made to the holders
of Junior Stock, the Liquidation Amount (as defined herein) per share of Class C
Preferred Stock. If upon any such Liquidation of the Company, the remaining
assets of the Company available for the distribution to its stockholders after
payment in full of amounts required to be paid or
-4-
<PAGE>
distributed to holders of Senior Stock shall be insufficient to pay the holders
of shares of Parity Stock the full amount to which they shall be entitled, the
holders of the Class C Preferred Stock shall share ratably with the holders of
Parity Stock in any distribution of the remaining assets and funds of the
Company in proportion to the respective amounts which would otherwise be payable
in respect of the shares held by them upon such distribution if all amounts
payable on or with respect to said shares were paid in full. After the payment
of all preferential amounts required to be paid to the holders of Senior Stock
and Parity Stock and any other series of the Company's preferred stock upon any
Liquidation of the Company, the holders of shares of Junior Stock then
outstanding shall be entitled to receive the remaining assets and funds of the
Company available for distribution to its stockholders in accordance with the
terms thereof.
(b) Certain Definitions. (i) The term "Liquidation of the Company" shall
-------------------
mean any voluntary or involuntary liquidation, dissolution or winding-up of the
affairs of the Company, and the merger or consolidation of the Company into or
with another corporation, the merger or consolidation of any other corporation
into or with the Company or the sale of all or substantially all the assets of
the Company.
(ii) The term "Liquidation Amount" shall mean an amount per share of Class
C Preferred Stock equal to the greater of: (A) the Original Purchase Price Per
Share plus any per share dividends accrued on the Class C Preferred Stock but
not paid and (B) the
-5-
<PAGE>
per share amount that holders of the Class C Preferred Stock would have received
had they exercised their right to convert the Class C Preferred Stock to Common
Stock immediately prior to a Liquidation of the Company; provided that for
-------------
purposes of the antidilution provisions of Section 7 hereof and the mandatory
conversion provisions of Section 8 hereof, the term "Liquidation Amount" shall
exclude any dividends accrued on the Class C Preferred Stock but not paid.
5. VOTING. (a) Number of Votes. Each issued and outstanding share of Class C
------ ---------------
Preferred Stock shall be entitled to the number of votes equal to (i) the number
of shares of Common Stock into which each such share of Class C Preferred Stock
is then convertible (as adjusted from time to time) divided by the Number of
Common Shares Deemed Outstanding (as defined herein) at such time, multiplied by
(ii) the aggregate number of shares of Common Stock then outstanding and
entitled to vote (giving effect to the voting power of all of the securities of
the Company convertible into or exchangeable for Common Stock that are entitled
to vote with the Common Stock, but without giving effect to the voting power of
the Class C Preferred Stock), at each meeting of stockholders of the Company (or
any written consent without a meeting in accordance with the Minnesota Business
Corporation Act) with respect to any and all matters presented to the
stockholders of the Company for their action or consideration. Except as
provided by law, by the provisions of this Section 5 or by the provisions
establishing any other series of the Company's preferred stock, holders of Class
C Preferred Stock and of any
-6-
<PAGE>
other outstanding preferred stock shall vote together with the holders of Common
Stock as a single class.
(b) Protective Provisions. In addition to any other rights provided by
---------------------
law, the Company shall not (i) without first obtaining the affirmative vote or
written consent of a majority of the holders of the Class C Preferred Stock,
voting separately as a class, amend, alter or repeal any provision of the
Company's Articles of Incorporation or By-Laws in a manner that is adverse to
the holders of the Class C Preferred Stock and (ii) without first obtaining the
affirmative vote or written consent of a majority of the holders the Company's
voting stock other than MCI WORLDCOM, Inc. (together with its majority-owned
subsidiaries and other controlled affiliates, "MCI WCOM"), enter into any merger
or consolidation into or with MCI WCOM or enter into any other contract or
arrangement involving the sale or license of the Company's material assets with
MCI WCOM (excluding contractual arrangements with MCI WCOM existing as of the
Initial Issuance Date).
6. OPTIONAL CONVERSION. Each share of Class C Preferred Stock may be converted
-------------------
at any time after 18 months following the Initial Issuance Date, at the option
of the holder thereof, into the number of fully paid and nonassessable shares of
Common Stock obtained by dividing the Original Purchase Price Per Share by the
Conversion Price then in effect (the "Conversion Rate"); provided, however, that
-----------------
upon any redemption of the Class C Preferred Stock contemplated by Section 9
hereof or any Liquidation of the Company, the right of conversion shall
-7-
<PAGE>
terminate at the close of business on the full business day next preceding the
date fixed for such redemption or for the payment of any amounts distributable
on liquidation to the holders of Class C Preferred Stock.
(a) Initial. The initial Conversion Rate for the Class C Preferred Stock
-------
shall be one share of Common Stock for each one share of Class C Preferred Stock
surrendered for conversion representing an initial Conversion Price of
$11.3826902 per share of Common Stock (the "Original Purchase Price Per Share").
The applicable Conversion Rate and Conversion Price from time to time in effect
is subject to adjustment as hereinafter provided.
(b) No Fractional Shares. The Company shall not issue fractions of shares
--------------------
of Common Stock upon conversion of Class C Preferred Stock or scrip in lieu
thereof. If any fraction of a share of Common Stock would, except for the
provisions of this Section 6(b), be issuable upon conversion of any Class C
Preferred Stock, the Company shall in lieu thereof pay to the person entitled
thereto an amount in cash equal to the current value of such fraction,
calculated to the nearest one hundredth (1/100) of a share, to be computed (i)
if the Common Stock is listed on any national securities exchange on the basis
of the last sales price of the Common Stock on such exchange (or the quoted
closing bid price if there shall have been no sales) on the date of conversion
or (ii) if the Common Stock shall not be listed, on the basis of the mean
between the closing bid and asked prices for the Common Stock on the date of
conversion as reported by Nasdaq, or its successor, and if there are not such
-8-
<PAGE>
closing bid and asked prices, on the basis of the fair market value per share as
determined by the Board of Directors of the Company.
(c) Adjustment. Whenever the Conversion Rate and Conversion Price shall
----------
be adjusted as provided herein, the Company shall forthwith file at each office
designated for the conversion of Class C Preferred Stock, a statement, signed by
the President, any Vice President or Treasurer of the Company, showing in
reasonable detail the facts requiring such adjustment and the Conversion Rate
that will be effective after such adjustment. The Company shall also cause a
notice setting forth any such adjustments to be sent by mail, first class,
postage prepaid, to each record holder of Class C Preferred Stock at his or its
address appearing on the stock register. If such notice relates to an
adjustment resulting from an event referred to in Section 7(g), such notice
shall be included as part of the notice required to be mailed and published
under the provisions of such Section 7(g).
(d) Exercise. In order to exercise the conversion privilege, the holder
--------
of any Class C Preferred Stock to be converted shall surrender his or its
certificate or certificates therefore to the principal office of the transfer
agent for the Class C Preferred Stock (or if no transfer agent be at the time
appointed, then the Company at its principal office), and shall give written
notice to the Company at such office that the holder elects to convert the Class
C Preferred Stock represented by such certificates, or any number thereof. Such
notice shall also
-9-
<PAGE>
state the name or names (with address) in which the certificate or certificates
for shares of Common Stock which shall be issuable on such conversion shall be
issued, subject to any restrictions on transfer relating to shares of the Class
C Preferred Stock or shares of Common Stock upon conversion thereof. If so
required by the Company, certificates surrendered for conversion shall be
endorsed or accompanied by written instrument or instruments of transfer, in
form satisfactory to the Company, duly authorized in writing. The date of
receipt by the transfer agent (or by the Company if the Company serves as its
own transfer agent) of the certificates and notice shall be the conversion date.
As soon as practicable after receipt of such notice and the surrender of the
certificate or certificates for Class C Preferred Stock as set forth herein, the
Company shall cause to be issued and delivered at such office to such holder, or
on his or its written order, a certificate or certificates for the number of
full shares of Common Stock issuable on such conversion in accordance with the
provisions hereof and cash as provided in Section 6(b) in respect of any
fraction of a share of Common Stock otherwise issuable upon such conversion.
(e) Reservation of Shares of Common Stock. The Company shall at all times
-------------------------------------
while any shares of Class C Preferred Stock shall be outstanding, reserve and
keep available out of its authorized but unissued stock, for the purposes of
effecting the conversion of the Class C Preferred Stock, such number of its duly
authorized shares of Common Stock as shall from time to time
-10-
<PAGE>
be sufficient to effect the conversion of all outstanding Class C Preferred
Stock. Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value of the shares of Common Stock issuable
upon conversion of the Class C Preferred Stock, the Company will take any
corporate action which may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue fully paid and nonassessable
shares of such Common Stock at such adjusted Conversion Price.
(f) No Adjustment for Dividends. Upon any such conversion, no adjustment
---------------------------
to the Conversion Rate shall be made for accrued and unpaid dividends on the
Class C Preferred Stock surrendered for conversion or on the Common Stock
delivered.
(g) Surrender. All shares of Class C Preferred Stock which shall have
---------
been surrendered for conversion as herein provided shall no longer be deemed to
be outstanding and all rights with respect to such shares, including the rights,
if any, to receive notices and to vote, shall forthwith cease and terminate
except only the right of the holder thereof to receive shares of Common Stock in
exchange therefor and payment of any accrued and unpaid dividends on such shares
of Common Stock. Any shares of Class C Preferred Stock so converted shall be
retired and canceled and shall not be reissued, and the Company may from time to
time take such appropriate action as may be necessary to reduce the authorized
Class C Preferred Stock accordingly.
7. ANTI-DILUTION PROVISIONS. (a) General. In order to prevent dilution of the
------------------------ -------
rights granted hereunder, the Conversion Price
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<PAGE>
shall be subject to adjustment from time to time in accordance with this Section
7. Upon each adjustment of the Conversion Price pursuant to this Section 7, the
registered holder of shares of Class C Preferred Stock shall thereafter be
entitled to acquire upon conversion, at the Conversion Price resulting from such
adjustment, the number of shares of Common Stock obtainable by multiplying the
Conversion Price in effect immediately prior to such adjustment by the number of
shares of Common Stock acquirable immediately prior to such adjustment and
dividing the product thereof by the Conversion Price resulting from such
adjustment.
(b) Adjustment of Conversion Price. Except as provided in Sections 7(c)
------------------------------
or 7(f) below, if and whenever on or after the Initial Issuance Date, the
Company shall issue or sell, or shall pursuant to Section 7(b)(1) through (10)
inclusive, be deemed to have issued or sold any shares of its Common Stock for a
consideration per share less than the per share Conversion Price in effect
immediately prior to the time of such issue or sale, then forthwith upon such
issue or sale (the "Triggering Transaction"), the Conversion Price shall,
subject to Section 7(b)(1) through (10) inclusive, be reduced to: (i) if a
Triggering Transaction shall occur within nine months following the Initial
Issuance Date, the lower of (A) the consideration per share that such Common
Stock shall have been issued or sold (or deemed issued or sold) for in such
Triggering Transaction or (B) the "Liquidation Amount of the Class B Preferred
Stock" (as calculated in accordance with the Statement of Rights and
-12-
<PAGE>
Preferences of Class B Convertible Preferred Stock of the Company) or (ii) if a
Triggering Transaction shall occur at any time thereafter, the Conversion Price
(calculated to the nearest one-hundredth of a cent) determined by dividing: (A)
an amount equal to the sum of the product derived by multiplying the Number of
Common Shares Deemed Outstanding immediately prior to such Triggering
Transaction by the Conversion Price then in effect, plus the consideration, if
any, received by the Company upon consummation of such Triggering Transaction by
(B) an amount equal to the sum of the Number of Common Shares Deemed Outstanding
immediately prior to such Triggering Transaction plus the number of shares of
Common Stock issued (or deemed to be issued in accordance with Section 7(b)(1)
through (10) inclusive) in connection with the Triggering Transaction. The term
"Number of Common Shares Deemed Outstanding" at any given time shall mean the
sum of (i) the number of shares of Common Stock outstanding at such time, (ii)
the number of shares of Common Stock issuable upon conversion or exchange at
such time of all of the Company's outstanding securities that are then
convertible into, or exchangeable for, Common Stock and (iii) the number of
shares of the Company's Common Stock deemed to be outstanding under Section
7(b)(1) through (10) inclusive, at such time. For purposes of determining the
adjusted Conversion Price under this Section 7(b), the following provisions
shall be applicable:
(1) In case the Company at any time shall in any manner grant (whether
directly or by assumption in a merger or otherwise) any rights to subscribe for
or to purchase, or any
-13-
<PAGE>
options for the purchase of, Common Stock or any stock or other securities
convertible into or exchangeable for Common Stock (such rights or options being
herein called "Options" and such convertible or exchangeable stock or securities
being herein called "Convertible Securities"), whether or not such Options or
the right to convert or exchange any such Convertible Securities are immediately
exercisable and the price per share for which the Common Stock is issuable upon
exercise, conversion or exchange (determined by dividing (Y) the total amount,
if any, received or receivable by the Company as consideration for the granting
of such Options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of all such Options, plus, in the case
of such Options which relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable upon the issue or sale of
such Convertible Securities and upon the conversion or exchange thereof, by (Z)
the total maximum number of shares of Common Stock issuable upon the exercise of
such Options or the conversion or exchange of such Convertible Securities) shall
be less than the Conversion Price in effect immediately prior to the time of the
granting of such Option, then the total maximum amount of Common Stock issuable
upon the exercise of such Options or in the case of Options for Convertible
Securities, upon the conversion or exchange of such Convertible Securities shall
(as of the date of granting of such Options) be deemed to be outstanding and to
have been issued and sold by the Company for such price per share. No further
adjustment of the Conversion
-14-
<PAGE>
Price shall be made upon the actual issue of such shares of Common Stock or such
Convertible Securities upon the exercise of such Options, except as otherwise
provided in Section 7(b)(3).
(2) In case the Company at any time shall in any manner issue (whether
directly or by assumption in a merger or otherwise) or sell any Convertible
Securities, whether or not the rights to exchange or convert thereunder are
immediately exercisable, and the price per share for which Common Stock is
issuable upon such conversion or exchange (determined by dividing (Y) the total
amount received or receivable by the Company as consideration for the issue or
sale of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the conversion or
exchange thereof, by (Z) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities)
shall be less than the Conversion Price in effect immediately prior to the time
of such issue or sale, then the total maximum number of shares of Common Stock
issuable upon conversion or exchange of all such Convertible Securities shall
(as of the date of the issue or sale of such Convertible Securities) be deemed
to be outstanding and to have been issued and sold by the Company for such price
per share. No further adjustment of the Conversion Price shall be made upon the
actual issue of such Common Stock upon exercise of the rights to exchange or
convert under such Convertible Securities, except as otherwise provided in
Section (7)(b)(3).
-15-
<PAGE>
(3) If the purchase price provided for in any Options referred to in
Section 7(b)(1), the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in Sections
7(b)(1) or (2), or the rate at which any Convertible Securities referred to in
Sections 7(b)(1) or (2) are convertible into or exchangeable for Common Stock
shall change at any time (other than under or by reason of provisions designed
to protect against dilution of the type set forth in Sections 7(b) or 7(d)), the
Conversion Price in effect at the time of such change shall forthwith be
readjusted to the Conversion Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or conversion rate, as the case
may be, at the time initially granted, issued or sold. If the purchase price
provided for in any Option referred to in Section 7(b)(1) or the rate at which
any Convertible Securities referred to in Sections 7(b)(1) or (2) are
convertible into or exchangeable for Common Stock, shall be reduced at any time
under or by reason of provisions with respect thereto designed to protect
against dilution, then in case of the delivery of Common Stock upon the exercise
of any such Option or upon conversion or exchange of any such Convertible
Security, the Conversion Price then in effect hereunder shall forthwith be
adjusted to such respective amount as would have been obtained had such Option
or Convertible Security never been issued as to such Common Stock and had
adjustments been made upon the issuance of the shares of Common Stock delivered
as set forth herein, but
-16-
<PAGE>
only if as a result of such adjustment the Conversion Price then in effect
hereunder is hereby reduced.
(4) On the expiration of any Option or the termination of any right to
convert or exchange any Convertible Securities, the Conversion Price then in
effect hereunder shall forthwith be increased to the Conversion Price which
would have been in effect at the time of such expiration or termination had such
Option or Convertible Securities, to the extent outstanding immediately prior to
such expiration or termination, never been issued.
(5) In case any Options shall be issued in connection with the issue or
sale of other securities of the Company, together comprising one integral
transaction in which no specific consideration is allocated to such Options by
the parties thereto, such Options shall be deemed to have been issued without
consideration.
(6) In case any shares of Common Stock, Options or Convertible Securities
shall be issued or sold or deemed to have been issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Company therefor. In case any shares of Common Stock, Options or Convertible
Securities shall be issued or sold for a consideration other than cash, the
amount of the consideration other than cash received by the Company shall be the
fair value of such consideration as determined in good faith by the Board. In
case any shares of Common Stock, Options or Convertible Securities shall be
issued in connection with any merger in which the Company is the surviving
corporation, the amount of
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<PAGE>
consideration therefor shall be deemed to be the fair value of such portion of
the net assets and business of the non-surviving corporation as shall be
attributable to such Common Stock, Options or Convertible Securities, as the
case may be.
(7) The number of shares of Common Stock outstanding at any given time
shall not include shares owned or held by or for the account of the Company, and
the disposition of any shares so owned or held shall be considered an issue or
sale of Common Stock for the purpose of this Section 7(b).
(8) In case the Company shall declare a dividend or make any other
distribution upon the stock of the Company payable in Options or Convertible
Securities, then in such case any Options or Convertible Securities, as the case
may be, issuable in payment of such dividend or distribution shall be deemed to
have been issued or sold without consideration.
(9) For purposes of this Section 7(b), in case the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them to
receive a dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right or subscription or
purchase, as the case may be.
-18-
<PAGE>
(10) For purposes of this Section 7(b), notwithstanding Section 7(f), in
the event that the "Class B Warrants" issued to MCI WCOM on September 26, 1997
vest and become exercisable for shares of Common Stock, whether or not MCI WCOM
shall exercise such Class B Warrants, the following shall apply: the
consideration per share that the Common Stock shall be deemed to have been
issued or sold at shall be equal to the Original Purchase Price Per Share that
would have been payable by the holder of the Class C Preferred Stock on the
Initial Issuance Date if the vested Class B Warrants had vested and been
exercised (and the exercise price thereon had been paid to the Company) prior to
the Initial Issuance Date.
(c) Liquidating Dividends. In the event the Company shall declare a
---------------------
dividend upon the Common Stock (other than a dividend payable in Common Stock)
payable otherwise than out of earnings or earned surplus, determined in
accordance with generally accepted accounting principles, including the making
of appropriate deductions for minority interests, if any, in subsidiaries
(herein referred to as "Liquidating Dividends"), then, as soon as possible after
the conversion of any Class C Preferred Stock, the Company shall pay to the
person converting such Class C Preferred Stock an amount equal to the aggregate
value at the time of such exercise of all Liquidating Dividends (including but
not limited to the Common Stock which would have been issued at the time of such
earlier exercise and all other securities which would have been issued with
respect to such Common Stock by reason of stock splits, stock dividends, mergers
-19-
<PAGE>
or reorganizations, or for any other reason). For the purposes of this Section
7(c), a dividend other than in cash shall be considered payable out of earnings
or earned surplus only to the extent that such earnings or earned surplus are
charged an amount equal to the fair value of such dividend as determined in good
faith by the Board.
(d) Subdivisions and Dividends; Combinations. In case the Company shall
----------------------------------------
at any time (i) subdivide the outstanding Common Stock or (ii) issue a stock
dividend on its outstanding Common Stock, the number of shares of Common Stock
issuable upon conversion of the Class C Preferred Stock shall be proportionately
increased by the same ratio as the subdivision or dividend (with appropriate
adjustments to the Conversion Price in effect immediately prior to such
subdivision or dividend). In case the Company shall at any time combine its
outstanding Common Stock, the number of shares issuable upon conversion of the
Class C Preferred Stock immediately prior to such combination shall be
proportionately decreased by the same ratio as the combination (with appropriate
adjustments to the Conversion Price in effect immediately prior to such
combination).
(e) Reorganizations, etc. If any capital reorganization or
--------------------
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with another corporation, or the sale of all or substantially all
of its assets to another corporation shall be effected in such a way that
holders of Common Stock shall be entitled to receive stock, securities, cash or
other property with respect to or in exchange for Common
-20-
<PAGE>
Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provision shall be made
whereby the holders of the Class C Preferred Stock shall have the right to
acquire and receive upon conversion of the Class C Preferred Stock, which right
shall be prior to the rights of the holders of Junior Stock, equal to the rights
of the holders of Parity Stock and after and subject to the rights of holders of
Senior Stock, such shares of stock, securities, cash or other property issuable
or payable (as part of the reorganization, reclassification, consolidation,
merger or sale) with respect to or in exchange for such number of outstanding
shares of Common Stock as would have been received upon conversion of the Class
C Preferred Stock at the Conversion Price then in effect.
(f) Exceptions to Antidilution. The provisions of this Section 7 shall
--------------------------
not apply to any Common Stock issued, issuable or deemed outstanding under
Section 7(b)(1) through (10) inclusive (and no such transaction shall constitute
a Triggering Transaction): (i) in connection with a public or private debt
financing effected by the Company (other than with an affiliate of the Company,
including MCI WCOM) within nine months after the Initial Issuance Date, (ii)
after the issuance of shares of Common Stock to the public in an underwritten
offering pursuant to a registration statement filed under the Securities Act of
1933, as amended (the "Securities Act") covering the offer and sale of Common
Stock in which the proceeds to the Company are not less than $20 million, (iii)
to any person pursuant to any stock
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<PAGE>
option, stock purchase or similar plan or arrangement for the benefit of
employees, consultants or other representatives of the Company or its
subsidiaries in effect on the Initial Issuance Date or thereafter adopted by the
Board, (iv) pursuant to options, warrants and conversion rights in existence on
the Initial Issuance Date (other than as provided for in Section 7(b)(10)) or
(v) on conversion of the Class B Preferred Stock, the Class C Preferred Stock or
the Class D Preferred Stock or the sale of any additional shares of any of the
foregoing at a price not less than the applicable conversion price thereof.
(g) Procedures. In the event that (i) the Company shall declare any cash
----------
dividend upon its Common Stock, (ii) the Company shall declare any dividend upon
its Common Stock payable in stock or make any special dividend or other
distribution to the holders of its Common Stock, (iii) the Company shall offer
for subscription pro rata to the holders of its Common Stock any additional
shares of stock of any class or other rights, (iv) there shall be any capital
reorganization or reclassification of the capital stock of the Company,
including any subdivision or combination of its outstanding shares of Common
Stock, or consolidation or merger of the Company with, or sale of all or
substantially all of its assets to, another corporation, (v) there shall be a
voluntary or involuntary dissolution, liquidation or winding-up of the Company,
then, in connection with any such event, the Company shall give to the holders
of the Class C Preferred Stock (A) at least twenty (20) days prior written
notice of the date on which the books of the Company
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<PAGE>
shall close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up; and (B) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, at least twenty (20) days prior written notice of the date when the
same shall take place. Such notice in accordance with the foregoing clause (A)
shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in accordance with the foregoing clause (B)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification consolidation, merger,
sale, dissolution, liquidation or winding-up, as the case may be. Each such
written notice shall be given by first class mail, postage prepaid, addressed to
the holders of the Class C Preferred Stock at the address of each such holder as
shown on the books of the Company.
(h) Intended Effect. If any event occurs as to which, in the opinion of
---------------
the Board, the provisions of this Section 7 are not strictly applicable or if
strictly applicable would not fairly protect the rights of the holders of the
Class C Preferred Stock in accordance with the essential intent and principles
of such provisions, then the Board shall make an adjustment in the
-23-
<PAGE>
application of such provisions, in accordance with such essential intent and
principles, so as to protect such rights as set forth herein, but in no event
shall any adjustment have the effect of increasing the Conversion Price as
otherwise determined pursuant to any of the provisions of this Section 7 except
in the case of a combination of shares of a type contemplated in Section 7(d)
and then in no event to an amount greater than the Conversion Price as adjusted
pursuant to Section 7(d).
8. MANDATORY CONVERSION.
--------------------
(a) Mandatory Conversion. Each share of Class C Preferred Stock shall
--------------------
automatically be converted into shares of Common Stock at the then effective
Conversion Price at any time upon the closing of an underwritten offering
pursuant to an effective registration statement under the Securities Act,
covering the offer and sale of Common Stock to the public at a price per share
of Common Stock that is not less than (i) 110% of the Original Purchase Price
Per Share, if such offering is consummated within two years following the
Initial Issuance Date or (ii) 200% of the Original Purchase Price Per Share, if
such offering is consummated at any time thereafter. In addition, each share of
Class C Preferred Stock shall automatically be converted into shares of Common
Stock at the then effective Conversion Price for such shares (A) upon the vote
to so convert of the holders of at least a majority of the shares of Class C
Preferred Stock then outstanding or (B) at any time after the conversion into
Common Stock of at least a majority of the shares of Class C Preferred Stock
issued on the Initial Issuance Date.
-24-
<PAGE>
(b) Procedures. All holders of record of shares of Class C Preferred
----------
Stock will be given at least twenty (20) days' prior written notice of the date
fixed and the place designated for mandatory conversion of all of such shares of
Class C Preferred Stock pursuant to this Section 8. Such notice will be sent by
mail, first class, postage prepaid, to each record holder of shares of Class C
Preferred Stock at such holder's address appearing on the stock register. On or
before the date fixed for conversion each holder of shares of Class C Preferred
Stock shall surrender his or its certificates or certificates for all such
shares to the Company at the place designated in such notice, and shall
thereafter receive certificates for the number of shares of Common Stock to
which such holder is entitled pursuant to this Section 8. On the date fixed for
conversion, all rights with respect to the Class C Preferred Stock so converted
will terminate, except only the rights of the holders thereof, upon surrender of
their certificate or certificates therefore, to receive certificates for the
number of shares of Common Stock into which such Class C Preferred Stock has
been converted and payment of any accrued and unpaid dividends thereon. If so
required by the Company, certificates surrendered for conversion shall be
endorsed or accompanied by written instrument or instruments of transfer, in
form satisfactory to the Company, duly executed by the registered holder or by
his attorneys duly authorized in writing. All certificates evidencing shares of
Class C Preferred Stock which are required to be surrendered for conversion in
accordance with the provisions hereof shall, from
-25-
<PAGE>
and after the date such certificates are so required to be surrendered, be
deemed to have been retired and canceled and the shares of Class C Preferred
Stock represented thereby converted into Common Stock for all purposes,
notwithstanding the failure of the holder or holders thereof to surrender such
certificates on or prior to such date. As soon as practicable after the date of
such mandatory conversion and the surrender of the certificate or certificates
for Class C Preferred Stock as set forth herein, the Company shall cause to be
issued and delivered to such holder, or on his or its written order, a
certificate or certificates for the number of full shares of Common Stock
issuable on such conversion in accordance with the provisions hereof and cash as
provided in Section 6(b) in respect of any fraction of a share of Common Stock
otherwise issuable upon such conversion.
9. REDEMPTION.
----------
(a) Redemption Price. At any time within 18 months from the Initial
----------------
Issuance Date, the Company may redeem all (but not less than all) of the shares
of the Class C Preferred Stock at a per share redemption price of 110% of the
Original Purchase Price Per Share, plus an amount equal to the per share
dividends accrued on the Class C Preferred Stock but not paid (such amount, the
"Redemption Price").
(b) Redemption Notice; Surrender. At least thirty (30) days prior to the
----------------------------
date that the Company elects to redeem the Class C Preferred Stock (the
"Redemption Date"), written notice shall be mailed, postage prepaid, to each
holder of record of
-26-
<PAGE>
Class C Preferred Stock to be redeemed, at his or its post office address last
shown on the records of the Company, notifying such holder of the number of
shares so to be redeemed, specifying the Redemption Date and calling upon such
holder to surrender to the Company, in the manner and at the place designated,
his or its certificate or certificates representing the shares to be redeemed
(such notice, the "Redemption Notice"). On or prior to each Redemption Date,
each holder of Class C Preferred Stock to be redeemed shall surrender his or its
certificate or certificates representing such shares to the Company, in the
manner and at the place designated in the Redemption Notice, and thereupon the
Redemption Price of such shares shall be payable to the order of the person
whose name appears on such certificate or certificates as the owner thereof and
each surrendered certificate shall be canceled. From and after the Redemption
Date, unless there shall have been a default in payment of the Redemption Price,
all rights of the holders of the Class C Preferred Stock designated for
redemption in the Redemption Notice as holders of Class C Preferred Stock of the
Company (except the right to receive the Redemption Price without interest upon
surrender of their certificate or certificates) shall cease with respect to such
shares, and such shares shall not thereafter be transferred on the books of the
Company or be deemed to be outstanding for any purpose whatsoever.
(c) Miscellaneous. Any shares of Class C Preferred Stock so redeemed
-------------
shall be permanently retired, shall no longer be deemed outstanding and shall
not under any circumstances be
-27-
<PAGE>
reissued, and the Company may from time to time take such appropriate corporate
action as may be necessary to reduce the authorized Class C Preferred Stock
accordingly. Nothing herein contained shall prevent or restrict the purchase by
the Company, from time to time either at public or private sale, of the whole or
any part of the Class C Preferred Stock at such price or prices as the Company
may determine, subject to the provisions of applicable law.
10. CONVERTED AND REACQUIRED SHARES. Any shares of Series C Preferred Stock
-------------------------------
converted into Common Stock, redeemed, purchased or otherwise acquired by the
Company in any manner whatsoever shall be retired and canceled promptly after
the acquisition thereof. All such shares shall upon their cancellation become
authorized but unissued shares of undesignated stock of the Company and may be
reissued subject to the conditions and restrictions on issuance in the Articles
of Incorporation, in any other Certificate of Designation creating a series of
preferred stock or any similar stock or as otherwise required by law.
11. SUSPENSION OF VOTING RIGHTS PENDING HSR APPROVAL. Notwithstanding anything
------------------------------------------------
to the contrary contained herein, unless and until all filings required under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations of the Federal Trade Commission promulgated thereunder, in
connection with the acquisition of the Class C Preferred Stock shall have been
made and the applicable waiting period thereunder shall have expired or been
terminated, no holder of Class C Preferred Stock shall have any voting rights as
-28-
<PAGE>
a stockholder of the Company or any other right to elect, nominate, designate or
vote for any member of the Company's Board of Directors.
RESOLVED FURTHER, that the officers of this company be, and each of them acting
alone is, hereby authorized and instructed to take all steps necessary to
execute, deliver and file, with the establishment and authorization of the
Company's Class D Preferred Stock, including but not limited to filing the
Statement of Rights and Preferences with the Minnesota Secretary of State inn
accordance with Minnesota Statutes, Section 302A.401.
F. The undersigned further declares under penalty of perjury that the matters
set out in the foregoing Certificate are true and correct of his own knowledge.
-29-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this certificate as of the 4th
day of March, 1999.
/s/ Edward J. Driscoll, Jr.
---------------------------------
Edward J. Driscoll, Jr.
Secretary
30
<PAGE>
EXHIBIT 4.23
CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES
OF
CLASS D CONVERTIBLE PREFERRED STOCK
OF
WAM!NET INC.
The undersigned, Edward J. Driscoll, Jr., hereby certifies that:
A. He is the duly elected and acting Secretary of WAM!NET Inc. (the "Company"),
a Minnesota corporation.
B. The Articles of Incorporation of this Company provide for a class of up to
49,500,000 shares known as Undesignated Stock, which shares may be issued from
time to time in one or more classes or series.
C. The Board of Directors of the Company is authorized, pursuant to Article 6
of the Company's Articles of Incorporation and Minnesota Statutes, Section
302A.401, to fix or alter the rights, preferences, privileges, and restrictions
granted to or imposed upon any wholly unissued series of Undesignated Stock, to
fix the number of shares constituting the series, and to determine the
designation thereof.
D. It is the desire of the Board of Directors of the Company, pursuant to its
authority, to fix the rights, preferences, restrictions and other matters
relating to the Undesignated Stock and the number of shares of Undesignated
Stock.
E. Pursuant to authority given by Article 6 of the Company's Articles of
Incorporation, the Company's Board of Directors has adopted the following
resolutions as of the 4th day of March, 1999;
<PAGE>
RESOLVED, that, pursuant to Article 6 of the Articles of Incorporation of
WAM!NET Inc. (the "Company"), the Board of Directors of the Company (the
"Board") hereby creates and designates a series of Convertible Preferred Stock,
par value $0.01 per share, and authorizes the issuance of up to 2,196,317 of
such shares, and hereby fixes the designations, powers, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations or restrictions, of such shares, as follows:
1. DESIGNATION AND AMOUNT. The shares of such series shall be designated
----------------------
"Class D Convertible Preferred Stock" (the "Class D Preferred Stock") and the
number of shares constituting such series shall be 2,196,317.
2. RANK. The Class D Preferred Stock shall rank, with respect to dividend
----
rights and distribution of assets on any Liquidation of the Company (as defined
herein) (a) junior to any other class or series of the Company's preferred stock
which shall specifically provide that such class or series shall rank senior to
the Class D Preferred Stock (the "Senior Stock"); (b) on parity with (i) the
Company's Class A Preferred Stock, par value $10.00 per share (the "Class A
Preferred Stock") (except with respect to a Liquidation of the Company resulting
from the merger or consolidation of the Company into or with another
corporation, the merger or consolidation of any other corporation into or with
the Company or the sale of all or substantially all the assets of the Company,
which events do not give rise to a right of the holders of the Class A Preferred
Stock to receive distributions),
-2-
<PAGE>
(ii) the Company's Class B Convertible Preferred Stock, par value $0.01 per
share (the "Class B Preferred Stock"), (iii) the Company's Class C Convertible
Preferred Stock, par value $0.01 per share (the "Class C Preferred Stock"), and
(iv) any other class or series of the Company's preferred stock which shall
specifically provide that such class or series shall rank on parity with the
Class D Preferred Stock ((i) through (iv) collectively, the "Parity Stock"); and
(c) prior to (i) the Company's common stock, par value $0.01 per share (the
"Common Stock") and (ii) any other class or series of the Company's preferred
stock except for any class or series which are Senior Stock or Parity Stock ((i)
and (ii) together, the "Junior Stock").
3. DIVIDENDS. (a) Payment. The holders of Class D Preferred Stock shall be
--------- -------
entitled to receive dividends as set forth herein, payable only (i) if, as and
when declared by the Board, out of any funds legally available therefor or (ii)
to the extent declared by the Board, upon the Liquidation of the Company,
subject to and as set forth in Section 4 hereof. All such dividends (X) shall
be cumulative and shall accrue on each share of Class D Preferred Stock from the
date of issuance thereof at the rate of SEVEN PERCENT (7%) per annum of the
Original Purchase Price Per Share (as defined herein) thereof solely in the form
of additional shares of Class D Preferred Stock (Y) shall be payable before any
dividends shall be set apart for or paid upon Junior Stock in any year and (Z)
shall be payable in accordance with Section 2 when any dividends shall be set
apart for or paid upon
-3-
<PAGE>
Parity Stock in any year. All such dividends declared upon Class D Preferred
Stock shall be declared pro rata per share.
(b) Limit on Junior Dividends and Redemption. For so long as the Class D
----------------------------------------
Preferred Stock remains outstanding, the Company shall not pay any dividend upon
the Junior Stock, whether in cash or other property (other than shares of Junior
Stock), or purchase, redeem or otherwise acquire any such Junior Stock;
provided, however, that nothing in this Section 3(b) shall prohibit or otherwise
- - -----------------
limit the ability of the Company to (i) purchase unvested shares of Common Stock
from former employees of the Company at their original purchase price or (ii)
make any purchase, redemption or other acquisition pursuant to arrangements
existing as of the date of the initial issuance of the Class D Preferred Stock
(the "Initial Issuance Date").
4. LIQUIDATION, DISSOLUTION OR WINDING-UP.
--------------------------------------
(a) Liquidation Preference. In the event of any Liquidation of the
----------------------
Company, the holders of shares of Class D Preferred Stock then outstanding shall
be entitled to be paid out of the assets of the Company available for
distribution to its stockholders, after and subject to the payment in full of
all amounts required to be distributed to the holders of Senior Stock upon such
Liquidation of the Company and before any payment shall be made to the holders
of Junior Stock, the Liquidation Amount (as defined herein) per share of Class D
Preferred Stock. If upon any such Liquidation of the Company, the remaining
assets of the Company available for the distribution to its stockholders after
payment in full of amounts required to be paid or
-4-
<PAGE>
distributed to holders of Senior Stock shall be insufficient to pay the holders
of shares of Parity Stock the full amount to which they shall be entitled, the
holders of the Class D Preferred Stock shall share ratably with the holders of
Parity Stock in any distribution of the remaining assets and funds of the
Company in proportion to the respective amounts which would otherwise be payable
in respect of the shares held by them upon such distribution if all amounts
payable on or with respect to said shares were paid in full. After the payment
of all preferential amounts required to be paid to the holders of Senior Stock
and Parity Stock and any other series of the Company's preferred stock upon any
Liquidation of the Company, the holders of shares of Junior Stock then
outstanding shall be entitled to receive the remaining assets and funds of the
Company available for distribution to its stockholders in accordance with the
terms thereof.
(b) Certain Definitions. (i) The term "Liquidation of the Company" shall
-------------------
mean any voluntary or involuntary liquidation, dissolution or winding-up of the
affairs of the Company, and the merger or consolidation of the Company into or
with another corporation, the merger or consolidation of any other corporation
into or with the Company or the sale of all or substantially all the assets of
the Company.
(ii) The term "Liquidation Amount" shall mean an amount per share of Class
D Preferred Stock equal to the greater of: (A) the Original Purchase Price Per
Share plus any per share dividends accrued on the Class D Preferred Stock but
not paid and (B) the
-5-
<PAGE>
per share amount that holders of the Class D Preferred Stock would have received
had they exercised their right to convert the Class D Preferred Stock to Common
Stock immediately prior to a Liquidation of the Company; provided that for
-------------
purposes of the antidilution provisions of Section 7 hereof and the mandatory
conversion provisions of Section 8 hereof, the term "Liquidation Amount" shall
exclude any dividends accrued on the Class D Preferred Stock but not paid.
5. VOTING. (a) Number of Votes. Each issued and outstanding share of Class D
------ ---------------
Preferred Stock shall be entitled to the number of votes equal to (i) the number
of shares of Common Stock into which each such share of Class D Preferred Stock
is then convertible (as adjusted from time to time) divided by the Number of
Common Shares Deemed Outstanding (as defined herein) at such time, multiplied by
(ii) the aggregate number of shares of Common Stock then outstanding and
entitled to vote (giving effect to the voting power of all of the securities of
the Company convertible into or exchangeable for Common Stock that are entitled
to vote with the Common Stock, but without giving effect to the voting power of
the Class D Preferred Stock), at each meeting of stockholders of the Company (or
any written consent without a meeting in accordance with the Minnesota Business
Corporation Act) with respect to any and all matters presented to the
stockholders of the Company for their action or consideration. Except as
provided by law, by the provisions of this Section 5 or by the provisions
establishing any other series of the Company's preferred stock, holders of Class
D Preferred Stock and of any
-6-
<PAGE>
other outstanding preferred stock shall vote together with the holders of Common
Stock as a single class.
(b) Protective Provisions. In addition to any other rights provided by
---------------------
law, the Company shall not without first obtaining the affirmative vote or
written consent of a majority of the holders of the Class D Preferred Stock,
voting separately as a class, amend, alter or repeal any provision of the
Company's Articles of Incorporation or By-Laws in a manner that is adverse to
the holders of the Class D Preferred Stock.
6. OPTIONAL CONVERSION. Each share of Class D Preferred Stock may be converted
-------------------
at any time, at the option of the holder thereof, into the number of fully paid
and nonassessable shares of Common Stock obtained by dividing the Original
Purchase Price Per Share by the Conversion Price then in effect (the "Conversion
Rate"); provided, however, that upon any Liquidation of the Company, the right
-----------------
of conversion shall terminate at the close of business on the full business day
next preceding the date fixed for such redemption or for the payment of any
amounts distributable on liquidation to the holders of Class D Preferred Stock.
(a) Initial. The initial Conversion Rate for the Class D Preferred Stock
-------
shall be one share of Common Stock for each one share of Class D Preferred Stock
surrendered for conversion representing an initial Conversion Price of
$11.3826902 per share of Common Stock (the "Original Purchase Price Per Share").
The applicable Conversion Rate and Conversion Price from time to time in effect
is subject to adjustment as hereinafter provided.
-7-
<PAGE>
(b) No Fractional Shares. The Company shall not issue fractions of shares
--------------------
of Common Stock upon conversion of Class D Preferred Stock or scrip in lieu
thereof. If any fraction of a share of Common Stock would, except for the
provisions of this Section 6(b), be issuable upon conversion of any Class D
Preferred Stock, the Company shall in lieu thereof pay to the person entitled
thereto an amount in cash equal to the current value of such fraction,
calculated to the nearest one hundredth (1/100) of a share, to be computed (i)
if the Common Stock is listed on any national securities exchange on the basis
of the last sales price of the Common Stock on such exchange (or the quoted
closing bid price if there shall have been no sales) on the date of conversion
or (ii) if the Common Stock shall not be listed, on the basis of the mean
between the closing bid and asked prices for the Common Stock on the date of
conversion as reported by Nasdaq, or its successor, and if there are not such
closing bid and asked prices, on the basis of the fair market value per share as
determined by the Board of Directors of the Company.
(c) Adjustment. Whenever the Conversion Rate and Conversion Price shall
----------
be adjusted as provided herein, the Company shall forthwith file at each office
designated for the conversion of Class D Preferred Stock, a statement, signed by
the President, any Vice President or Treasurer of the Company, showing in
reasonable detail the facts requiring such adjustment and the Conversion Rate
that will be effective after such adjustment. The Company shall also cause a
notice setting forth
-8-
<PAGE>
any such adjustments to be sent by mail, first class, postage prepaid, to each
record holder of Class D Preferred Stock at his or its address appearing on the
stock register. If such notice relates to an adjustment resulting from an event
referred to in Section 7(g), such notice shall be included as part of the notice
required to be mailed and published under the provisions of such Section 7(g).
(d) Exercise. In order to exercise the conversion privilege, the holder
--------
of any Class D Preferred Stock to be converted shall surrender his or its
certificate or certificates therefore to the principal office of the transfer
agent for the Class D Preferred Stock (or if no transfer agent be at the time
appointed, then the Company at its principal office), and shall give written
notice to the Company at such office that the holder elects to convert the Class
D Preferred Stock represented by such certificates, or any number thereof. Such
notice shall also state the name or names (with address) in which the
certificate or certificates for shares of Common Stock which shall be issuable
on such conversion shall be issued, subject to any restrictions on transfer
relating to shares of the Class D Preferred Stock or shares of Common Stock upon
conversion thereof. If so required by the Company, certificates surrendered for
conversion shall be endorsed or accompanied by written instrument or instruments
of transfer, in form satisfactory to the Company, duly authorized in writing.
The date of receipt by the transfer agent (or by the Company if the Company
serves as its own transfer agent) of the certificates and notice shall be
-9-
<PAGE>
the conversion date. As soon as practicable after receipt of such notice and the
surrender of the certificate or certificates for Class D Preferred Stock as set
forth herein, the Company shall cause to be issued and delivered at such office
to such holder, or on his or its written order, a certificate or certificates
for the number of full shares of Common Stock issuable on such conversion in
accordance with the provisions hereof and cash as provided in Section 6(b) in
respect of any fraction of a share of Common Stock otherwise issuable upon such
conversion.
(e) Reservation of Shares of Common Stock. The Company shall at all times
-------------------------------------
while any shares of Class D Preferred Stock shall be outstanding, reserve and
keep available out of its authorized but unissued stock, for the purposes of
effecting the conversion of the Class D Preferred Stock, such number of its duly
authorized shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding Class D Preferred Stock. Before taking
any action which would cause an adjustment reducing the Conversion Price below
the then par value of the shares of Common Stock issuable upon conversion of the
Class D Preferred Stock, the Company will take any corporate action which may,
in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable shares of such Common
Stock at such adjusted Conversion Price.
(f) No Adjustment for Dividends. Upon any such conversion, no adjustment
---------------------------
to the Conversion Rate shall be made for accrued
-10-
<PAGE>
and unpaid dividends on the Class D Preferred Stock surrendered for conversion
or on the Common Stock delivered.
(g) Surrender. All shares of Class D Preferred Stock which shall have
---------
been surrendered for conversion as herein provided shall no longer be deemed to
be outstanding and all rights with respect to such shares, including the rights,
if any, to receive notices and to vote, shall forthwith cease and terminate
except only the right of the holder thereof to receive shares of Common Stock in
exchange therefor and payment of any accrued and unpaid dividends on such shares
of Common Stock. Any shares of Class D Preferred Stock so converted shall be
retired and canceled and shall not be reissued, and the Company may from time to
time take such appropriate action as may be necessary to reduce the authorized
Class D Preferred Stock accordingly.
7. ANTI-DILUTION PROVISIONS. (a) General. In order to prevent dilution of the
------------------------ -------
rights granted hereunder, the Conversion Price shall be subject to adjustment
from time to time in accordance with this Section 7. Upon each adjustment of
the Conversion Price pursuant to this Section 7, the registered holder of shares
of Class D Preferred Stock shall thereafter be entitled to acquire upon
conversion, at the Conversion Price resulting from such adjustment, the number
of shares of Common Stock obtainable by multiplying the Conversion Price in
effect immediately prior to such adjustment by the number of shares of Common
Stock acquirable immediately prior to such adjustment and dividing the product
thereof by the Conversion Price resulting from such adjustment.
-11-
<PAGE>
(b) Adjustment of Conversion Price. Except as provided in Sections 7(c)
------------------------------
or 7(f) below, if and whenever on or after the Initial Issuance Date, the
Company shall issue or sell, or shall pursuant to Section 7(b)(1) through (10)
inclusive, be deemed to have issued or sold any shares of its Common Stock for a
consideration per share less than the per share Conversion Price in effect
immediately prior to the time of such issue or sale, then forthwith upon such
issue or sale (the "Triggering Transaction"), the Conversion Price shall,
subject to Section 7(b)(1) through (10) inclusive, be reduced to: (i) if a
Triggering Transaction shall occur within nine months following the Initial
Issuance Date, the lower of (A) the consideration per share that such Common
Stock shall have been issued or sold (or deemed issued or sold) for in such
Triggering Transaction or (B) the "Liquidation Amount of the Class B Preferred
Stock" (as calculated in accordance with the Statement of Rights and Preferences
of Class B Convertible Preferred Stock of the Company) or (ii) if a Triggering
Transaction shall occur at any time thereafter, the Conversion Price (calculated
to the nearest one-hundredth of a cent) determined by dividing: (A) an amount
equal to the sum of the product derived by multiplying the Number of Common
Shares Deemed Outstanding immediately prior to such Triggering Transaction by
the Conversion Price then in effect, plus the consideration, if any, received by
the Company upon consummation of such Triggering Transaction by (B) an amount
equal to the sum of the Number of Common Shares Deemed Outstanding immediately
prior to such Triggering Transaction plus
-12-
<PAGE>
the number of shares of Common Stock issued (or deemed to be issued in
accordance with Section 7(b)(1) through (10) inclusive) in connection with the
Triggering Transaction. The term "Number of Common Shares Deemed Outstanding" at
any given time shall mean the sum of (i) the number of shares of Common Stock
outstanding at such time, (ii) the number of shares of Common Stock issuable
upon conversion or exchange at such time of all of the Company's outstanding
securities that are then convertible into, or exchangeable for, Common Stock and
(iii) the number of shares of the Company's Common Stock deemed to be
outstanding under Section 7(b)(1) through (10) inclusive, at such time. For
purposes of determining the adjusted Conversion Price under this Section 7(b),
the following provisions shall be applicable:
(1) In case the Company at any time shall in any manner grant (whether
directly or by assumption in a merger or otherwise) any rights to subscribe for
or to purchase, or any options for the purchase of, Common Stock or any stock or
other securities convertible into or exchangeable for Common Stock (such rights
or options being herein called "Options" and such convertible or exchangeable
stock or securities being herein called "Convertible Securities"), whether or
not such Options or the right to convert or exchange any such Convertible
Securities are immediately exercisable and the price per share for which the
Common Stock is issuable upon exercise, conversion or exchange (determined by
dividing (Y) the total amount, if any, received or receivable by the Company as
consideration for the granting of such Options, plus the minimum aggregate
amount of additional
-13-
<PAGE>
consideration payable to the Company upon the exercise of all such Options,
plus, in the case of such Options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable upon the
issue or sale of such Convertible Securities and upon the conversion or exchange
thereof, by (Z) the total maximum number of shares of Common Stock issuable upon
the exercise of such Options or the conversion or exchange of such Convertible
Securities) shall be less than the Conversion Price in effect immediately prior
to the time of the granting of such Option, then the total maximum amount of
Common Stock issuable upon the exercise of such Options or in the case of
Options for Convertible Securities, upon the conversion or exchange of such
Convertible Securities shall (as of the date of granting of such Options) be
deemed to be outstanding and to have been issued and sold by the Company for
such price per share. No further adjustment of the Conversion Price shall be
made upon the actual issue of such shares of Common Stock or such Convertible
Securities upon the exercise of such Options, except as otherwise provided in
Section 7(b)(3).
(2) In case the Company at any time shall in any manner issue (whether
directly or by assumption in a merger or otherwise) or sell any Convertible
Securities, whether or not the rights to exchange or convert thereunder are
immediately exercisable, and the price per share for which Common Stock is
issuable upon such conversion or exchange (determined by dividing (Y) the total
amount received or receivable by the Company as consideration for the issue or
sale of such Convertible
-14-
<PAGE>
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the conversion or exchange thereof, by (Z) the
total maximum number of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities) shall be less than the Conversion
Price in effect immediately prior to the time of such issue or sale, then the
total maximum number of shares of Common Stock issuable upon conversion or
exchange of all such Convertible Securities shall (as of the date of the issue
or sale of such Convertible Securities) be deemed to be outstanding and to have
been issued and sold by the Company for such price per share. No further
adjustment of the Conversion Price shall be made upon the actual issue of such
Common Stock upon exercise of the rights to exchange or convert under such
Convertible Securities, except as otherwise provided in Section (7)(b)(3).
(3) If the purchase price provided for in any Options referred to in
Section 7(b)(1), the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in Sections
7(b)(1) or (2), or the rate at which any Convertible Securities referred to in
Sections 7(b)(1) or (2) are convertible into or exchangeable for Common Stock
shall change at any time (other than under or by reason of provisions designed
to protect against dilution of the type set forth in Sections 7(b) or 7(d)), the
Conversion Price in effect at the time of such change shall forthwith be
readjusted to the Conversion Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided
-15-
<PAGE>
for such changed purchase price, additional consideration or conversion rate, as
the case may be, at the time initially granted, issued or sold. If the purchase
price provided for in any Option referred to in Section 7(b)(1) or the rate at
which any Convertible Securities referred to in Sections 7(b)(1) or (2) are
convertible into or exchangeable for Common Stock, shall be reduced at any time
under or by reason of provisions with respect thereto designed to protect
against dilution, then in case of the delivery of Common Stock upon the exercise
of any such Option or upon conversion or exchange of any such Convertible
Security, the Conversion Price then in effect hereunder shall forthwith be
adjusted to such respective amount as would have been obtained had such Option
or Convertible Security never been issued as to such Common Stock and had
adjustments been made upon the issuance of the shares of Common Stock delivered
as set forth herein, but only if as a result of such adjustment the Conversion
Price then in effect hereunder is hereby reduced.
(4) On the expiration of any Option or the termination of any right to
convert or exchange any Convertible Securities, the Conversion Price then in
effect hereunder shall forthwith be increased to the Conversion Price which
would have been in effect at the time of such expiration or termination had such
Option or Convertible Securities, to the extent outstanding immediately prior to
such expiration or termination, never been issued.
(5) In case any Options shall be issued in connection with the issue or
sale of other securities of the Company, together comprising one integral
transaction in which no specific
-16-
<PAGE>
consideration is allocated to such Options by the parties thereto, such Options
shall be deemed to have been issued without consideration.
(6) In case any shares of Common Stock, Options or Convertible Securities
shall be issued or sold or deemed to have been issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Company therefor. In case any shares of Common Stock, Options or Convertible
Securities shall be issued or sold for a consideration other than cash, the
amount of the consideration other than cash received by the Company shall be the
fair value of such consideration as determined in good faith by the Board. In
case any shares of Common Stock, Options or Convertible Securities shall be
issued in connection with any merger in which the Company is the surviving
corporation, the amount of consideration therefor shall be deemed to be the fair
value of such portion of the net assets and business of the non-surviving
corporation as shall be attributable to such Common Stock, Options or
Convertible Securities, as the case may be.
(7) The number of shares of Common Stock outstanding at any given time
shall not include shares owned or held by or for the account of the Company, and
the disposition of any shares so owned or held shall be considered an issue or
sale of Common Stock for the purpose of this Section 7(b).
(8) In case the Company shall declare a dividend or make any other
distribution upon the stock of the Company payable in Options or Convertible
Securities, then in such case any Options
-17-
<PAGE>
or Convertible Securities, as the case may be, issuable in payment of such
dividend or distribution shall be deemed to have been issued or sold without
consideration.
(9) For purposes of this Section 7(b), in case the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them to
receive a dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right or subscription or
purchase, as the case may be.
(10) For purposes of this Section 7(b), notwithstanding Section 7(f), in
the event that the "Class B Warrants" issued to MCI WCOM on September 26, 1997
vest and become exercisable for shares of Common Stock, whether or not MCI WCOM
shall exercise such Class B Warrants, the following shall apply: the
consideration per share that the Common Stock shall be deemed to have been
issued or sold at shall be equal to the Original Purchase Price Per Share that
would have been payable by the holder of the Class D Preferred Stock on the
Initial Issuance Date if the vested Class B Warrants had vested and been
exercised (and the exercise price thereon had been paid to the Company) prior to
the Initial Issuance Date.
-18-
<PAGE>
(c) Liquidating Dividends. In the event the Company shall declare a
---------------------
dividend upon the Common Stock (other than a dividend payable in Common Stock)
payable otherwise than out of earnings or earned surplus, determined in
accordance with generally accepted accounting principles, including the making
of appropriate deductions for minority interests, if any, in subsidiaries
(herein referred to as "Liquidating Dividends"), then, as soon as possible after
the conversion of any Class D Preferred Stock, the Company shall pay to the
person converting such Class D Preferred Stock an amount equal to the aggregate
value at the time of such exercise of all Liquidating Dividends (including but
not limited to the Common Stock which would have been issued at the time of such
earlier exercise and all other securities which would have been issued with
respect to such Common Stock by reason of stock splits, stock dividends, mergers
or reorganizations, or for any other reason). For the purposes of this Section
7(c), a dividend other than in cash shall be considered payable out of earnings
or earned surplus only to the extent that such earnings or earned surplus are
charged an amount equal to the fair value of such dividend as determined in good
faith by the Board.
(d) Subdivisions and Dividends; Combinations. In case the Company shall
----------------------------------------
at any time (i) subdivide the outstanding Common Stock or (ii) issue a stock
dividend on its outstanding Common Stock, the number of shares of Common Stock
issuable upon conversion of the Class D Preferred Stock shall be proportionately
increased by the same ratio as the subdivision or
-19-
<PAGE>
dividend (with appropriate adjustments to the Conversion Price in effect
immediately prior to such subdivision or dividend). In case the Company shall at
any time combine its outstanding Common Stock, the number of shares issuable
upon conversion of the Class D Preferred Stock immediately prior to such
combination shall be proportionately decreased by the same ratio as the
combination (with appropriate adjustments to the Conversion Price in effect
immediately prior to such combination).
(e) Reorganizations, etc. If any capital reorganization or
--------------------
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with another corporation, or the sale of all or substantially all
of its assets to another corporation shall be effected in such a way that
holders of Common Stock shall be entitled to receive stock, securities, cash or
other property with respect to or in exchange for Common Stock, then, as a
condition of such reorganization, reclassification, consolidation, merger or
sale, lawful and adequate provision shall be made whereby the holders of the
Class D Preferred Stock shall have the right to acquire and receive upon
conversion of the Class D Preferred Stock, which right shall be prior to the
rights of the holders of Junior Stock, equal to the rights of the holders of
Parity Stock and after and subject to the rights of holders of Senior Stock,
such shares of stock, securities, cash or other property issuable or payable (as
part of the reorganization, reclassification, consolidation, merger or sale)
with respect to or in exchange for such number of outstanding shares of Common
Stock as would have been received
-20-
<PAGE>
upon conversion of the Class D Preferred Stock at the Conversion Price then in
effect.
(f) Exceptions to Antidilution. The provisions of this Section 7 shall
--------------------------
not apply to any Common Stock issued, issuable or deemed outstanding under
Section 7(b)(1) through (10) inclusive (and no such transaction shall constitute
a Triggering Transaction): (i) in connection with a public or private debt
financing effected by the Company (other than with an affiliate of the Company,
including MCI WCOM) within nine months after the Initial Issuance Date, (ii)
after the issuance of shares of Common Stock to the public in an underwritten
offering pursuant to a registration statement filed under the Securities Act of
1933, as amended (the "Securities Act") covering the offer and sale of Common
Stock in which the proceeds to the Company are not less than $20 million, (iii)
to any person pursuant to any stock option, stock purchase or similar plan or
arrangement for the benefit of employees, consultants or other representatives
of the Company or its subsidiaries in effect on the Initial Issuance Date or
thereafter adopted by the Board, (iv) pursuant to options, warrants and
conversion rights in existence on the Initial Issuance Date (other than as
provided for in Section 7(b)(10)) or (v) on conversion of the Class B Preferred
Stock, the Class C Preferred Stock or the Class D Preferred Stock or the sale of
any additional shares of any of the foregoing at a price not less than the
applicable conversion price thereof.
(g) Procedures. In the event that (i) the Company shall declare any cash
----------
dividend upon its Common Stock, (ii) the Company
-21-
<PAGE>
shall declare any dividend upon its Common Stock payable in stock or make any
special dividend or other distribution to the holders of its Common Stock, (iii)
the Company shall offer for subscription pro rata to the holders of its Common
Stock any additional shares of stock of any class or other rights, (iv) there
shall be any capital reorganization or reclassification of the capital stock of
the Company, including any subdivision or combination of its outstanding shares
of Common Stock, or consolidation or merger of the Company with, or sale of all
or substantially all of its assets to, another corporation, (v) there shall be a
voluntary or involuntary dissolution, liquidation or winding-up of the Company,
then, in connection with any such event, the Company shall give to the holders
of the Class D Preferred Stock (A) at least twenty (20) days prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for such dividend, distribution or subscription rights or for
determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up; and (B) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, at least
twenty (20) days prior written notice of the date when the same shall take
place. Such notice in accordance with the foregoing clause (A) shall also
specify, in the case of any such dividend, distribution or subscription rights,
the date on which the holders of Common Stock shall be entitled thereto, and
such notice in accordance
-22-
<PAGE>
with the foregoing clause (B) shall also specify the date on which the holders
of Common Stock shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reorganization, reclassification
consolidation, merger, sale, dissolution, liquidation or winding-up, as the case
may be. Each such written notice shall be given by first class mail, postage
prepaid, addressed to the holders of the Class D Preferred Stock at the address
of each such holder as shown on the books of the Company.
(h) Intended Effect. If any event occurs as to which, in the opinion of
---------------
the Board, the provisions of this Section 7 are not strictly applicable or if
strictly applicable would not fairly protect the rights of the holders of the
Class D Preferred Stock in accordance with the essential intent and principles
of such provisions, then the Board shall make an adjustment in the application
of such provisions, in accordance with such essential intent and principles, so
as to protect such rights as set forth herein, but in no event shall any
adjustment have the effect of increasing the Conversion Price as otherwise
determined pursuant to any of the provisions of this Section 7 except in the
case of a combination of shares of a type contemplated in Section 7(d) and then
in no event to an amount greater than the Conversion Price as adjusted pursuant
to Section 7(d).
8. MANDATORY CONVERSION.
--------------------
(a) Mandatory Conversion. Each share of Class D Preferred Stock shall
--------------------
automatically be converted into shares of Common Stock at the then effective
Conversion Price at any time upon the
-23-
<PAGE>
closing of an underwritten offering pursuant to an effective registration
statement under the Securities Act, covering the offer and sale of Common Stock
to the public at a price per share of Common Stock that is not less than (i)
110% of the Original Purchase Price Per Share, if such offering is consummated
within two years following the Initial Issuance Date or (ii) 200% of the
Original Purchase Price Per Share, if such offering is consummated at any time
thereafter. In addition, each share of Class D Preferred Stock shall
automatically be converted into shares of Common Stock at the then effective
Conversion Price for such shares (A) upon the vote to so convert of the holders
of at least a majority of the shares of Class D Preferred Stock then outstanding
or (B) at any time after the conversion into Common Stock of at least a majority
of the shares of Class D Preferred Stock issued on the Initial Issuance Date.
(b) Procedures. All holders of record of shares of Class D Preferred
----------
Stock will be given at least twenty (20) days' prior written notice of the date
fixed and the place designated for mandatory conversion of all of such shares of
Class D Preferred Stock pursuant to this Section 8. Such notice will be sent by
mail, first class, postage prepaid, to each record holder of shares of Class D
Preferred Stock at such holder's address appearing on the stock register. On or
before the date fixed for conversion each holder of shares of Class D Preferred
Stock shall surrender his or its certificates or certificates for all such
shares to the Company at the place designated in such notice, and shall
thereafter receive certificates for the number of shares of Common Stock to
which such holder is entitled pursuant to this Section 8. On the date fixed for
conversion, all rights with respect to the Class D Preferred Stock so converted
will terminate, except only the rights of the holders thereof, upon surrender of
their certificate or certificates therefore, to receive certificates for the
number of shares of
-24-
<PAGE>
Common Stock into which such Class D Preferred Stock has been converted and
payment of any accrued and unpaid dividends thereon. If so required by the
Company, certificates surrendered for conversion shall be endorsed or
accompanied by written instrument or instruments of transfer, in form
satisfactory to the Company, duly executed by the registered holder or by his
attorneys duly authorized in writing. All certificates evidencing shares of
Class D Preferred Stock which are required to be surrendered for conversion in
accordance with the provisions hereof shall, from and after the date such
certificates are so required to be surrendered, be deemed to have been retired
and canceled and the shares of Class D Preferred Stock represented thereby
converted into Common Stock for all purposes, notwithstanding the failure of the
holder or holders thereof to surrender such certificates on or prior to such
date. As soon as practicable after the date of such mandatory conversion and the
surrender of the certificate or certificates for Class D Preferred Stock as set
forth herein, the Company shall cause to be issued and delivered to such holder,
or on his or its written order, a certificate or certificates for the number of
full shares of Common Stock issuable on such conversion in accordance with the
provisions
-25-
<PAGE>
hereof and cash as provided in Section 6(b) in respect of any fraction of a
share of Common Stock otherwise issuable upon such conversion.
9. CONVERTED AND REACQUIRED SHARES. Any shares of Series D Preferred Stock
-------------------------------
converted into Common Stock, redeemed, purchased or otherwise acquired by the
Company in any manner whatsoever shall be retired and canceled promptly after
the acquisition thereof. All such shares shall upon their cancellation become
authorized but unissued shares of undesignated stock of the Company and may be
reissued subject to the conditions and restrictions on issuance in the Articles
of Incorporation, in any other Certificate of Designation creating a series of
preferred stock or any similar stock or as otherwise required by law.
RESOLVED FURTHER, that the officers of this Company be, and each of them acting
alone is, hereby authorized and instructed to take all steps necessary to
execute, deliver and file, for and on behalf of this Company and in its name,
any and all documents required in connection with the establishment and
authorization of the Company's Class D Preferred Stock, including but not
limited to filing the Statement of Rights and Preferences with the Minnesota
Secretary of State in accordance with Minnesota Statutes, Section 302A.401.
F. The undersigned further declares under penalty of perjury that the matters
set out in the foregoing Certificate are true and correct of his own knowledge.
-26-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this certificate as of the 4th
day of March 1999.
/s/ Edward J. Driscoll, Jr.
_____________________________________
Edward J. Driscoll, Jr.
Secretary
-27-
<PAGE>
EXHIBIT 4.24
WAM!NET INC.
A MINNESOTA CORPORATION
No. 1 115,206 Shares of 1999
Class A Preferred Stock
This certifies that MCI WORLDCOM, Inc. is the registered holder of One
------------------
Hundred Fifteen Thousand Two Hundred Six Shares of 1999 Class A Preferred Stock,
par value $10.00 per share (see reverse side), transferable only on the books of
the Corporation by the holder hereof in person or by Attorney upon surrender of
this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate
to be signed by its duly authorized officers this 4th day of March, 1999.
/s/ Edward J. Driscoll III
--------------------------
Edward J. Driscoll III, President
/s/ Edward J. Driscoll, Jr.
---------------------------
Edward J. Driscoll, Jr. Secretary
<PAGE>
The 1999 Class A Preferred Stock has the rights and preferences, and
is subject to mandatory redemption, as set forth in the Certificate of
Designation of 1999 Class A Preferred Stock as filed of record with the
Minnesota Secretary of State on March 4, 1999.
The securities evidenced hereby are subject to the terms of that
certain Stockholders Agreement, dated as of March 4, 1999, by and among the
Corporation, Silicon Graphics, Inc. and MCI WORLDCOM, Inc., including certain
restrictions on transfer. A copy of this Agreement has been filed with the
Secretary of the Corporation and is available upon request. The securities
evidenced hereby have not been registered under the Securities Act of 1933, as
amended (the "Act") and may not be resold, transferred or otherwise disposed of
other than in a transaction exempt from, or not subject to, the registration
requirements of the Act or pursuant to an effective registration statement
hereunder.
For value received, ______________________________ does hereby sell,
assign and transfer unto ____________________________
_____________________________________ Shares represented by the within
Certificate and does hereby irrevocably constitute and appoint
_____________________________ Attorney to transfer the said Shares on the books
of the within named Corporation with full power of substitution in the premises.
Dated:
Note: The signature on this assignment must correspond with the name as written
upon the face of the Certificate, in every particular, without alteration or
enlargement or any change whatever.
-2-
<PAGE>
EXHIBIT 4.25
WAM!NET INC.
A MINNESOTA CORPORATION
No. 1 5,710,425 Shares of Class B
Convertible Preferred Stock
This certifies that Silicon Graphics, Inc. is the registered holder of
----------------------
Five Million Seven Hundred Ten Thousand Four Hundred Twenty-five Shares of Class
B Convertible Preferred Stock, par value $0.01 per share (see reverse side),
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate
to be signed by its duly authorized officers this 4th day of March, 1999.
/s/ Edward J. Driscoll III
-------------------------------------------
Edward J. Driscoll III, President
/s/ Edward J. Driscoll, Jr.
-------------------------------------------
Edward J. Driscoll, Jr. Secretary
<PAGE>
The Class B Convertible Preferred Stock has the rights and preferences
as set forth in the Certificate of Designation of Class B Preferred Stock as
filed of record with the Minnesota Secretary of State on March 4, 1999.
The securities evidenced hereby are subject to the terms of that
certain Stockholders Agreement, dated as of March 4, 1999, by and among the
Corporation, Silicon Graphics, Inc. and MCI WORLDCOM, Inc., including certain
restrictions on transfer. A copy of this Agreement has been filed with the
Secretary of the Corporation and is available upon request. The securities
evidenced hereby have not been registered under the Securities Act of 1933, as
amended (the "Act") and may not be resold, transferred or otherwise disposed of
other than in a transaction exempt from, or not subject to, the registration
requirements of the Act or pursuant to an effective registration statement
thereunder.
For value received, __________ does hereby sell, assign and transfer
unto ____________ Shares represented by the within Certificate and does hereby
irrevocably constitute and appoint ________ Attorney to transfer the said Shares
on the books of the within named Corporation with full power of substitution in
the premises.
Dated:_____________________
_______________________________________
NOTE: The signature on this assignment must correspond with the name as written
upon the face of the Certificate, in every particular, without alteration or
enlargement or any change whatever.
-2-
<PAGE>
EXHIBIT 4.26
WAM!NET INC.
A Minnesota Corporation
No. 1 878,527 Shares of Class C
Convertible Preferred Stock
This certifies that Silicon Graphics, Inc. is the registered holder of
----------------------
Eight Hundred Seventy-eight Thousand Five Hundred Twenty-seven Shares of Class C
Convertible Preferred Stock, par value $0.01 per share (see reverse side),
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate
to be signed by its duly authorized officers this 4th day of March, 1999.
/s/ Edward J. Driscoll III
--------------------------
Edward J. Driscoll III, President
/s/ Edward J. Driscoll, Jr.
---------------------------
Edward J. Driscoll, Jr. Secretary
<PAGE>
The Class C Convertible Preferred Stock has the rights and
preferences, and is subject to mandatory redemption, as set forth in the
Certificate of Designation of Class C Preferred Stock as filed of record with
the Minnesota Secretary of State on March 4, 1999.
The securities evidenced hereby are subject to the terms of that
certain Stockholders Agreement, dated as of March 4, 1999, by and among the
Corporation, Silicon Graphics, Inc. and MCI WORLDCOM, Inc., including certain
restrictions on transfer. A copy of this Agreement has been filed with the
Secretary of the Corporation and is available upon request. The securities
evidenced hereby have not been registered under the Securities Act of 1933, as
amended (the "Act") and may not be resold, transferred or otherwise disposed of
other than in a transaction exempt from, or not subject to, the registration
requirements of the Act or pursuant to an effective registration statement
hereunder.
For value received, ______________________________ does hereby sell,
assign and transfer unto ____________________________
_____________________________________ Shares represented by the within
Certificate and does hereby irrevocably constitute and appoint
_____________________________ Attorney to transfer the said Shares on the books
of the within named Corporation with full power of substitution in the premises.
Dated:
Note: The signature on this assignment must correspond with the name as written
upon the face of the Certificate, in every particular, without alteration or
enlargement or any change whatever.
-2-
<PAGE>
EXHIBIT 4.27
WAM!NET INC.
A MINNESOTA CORPORATION
No. 1 2,196,317 Shares of Class D
Convertible Preferred Stock
This certifies that MCI WORLDCOM, Inc. is the registered holder of Two
-----------------
Million One Hundred Ninety-six Thousand Three Hundred Seventeen Shares of Class
D Convertible Preferred Stock, par value $0.01 per share (see reverse side),
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate
to be signed by its duly authorized officers this 4th day of March, 1999.
/s/ Edward J. Driscoll III
---------------------------------
Edward J. Driscoll III, President
/s/ Edward J. Driscoll, Jr.
----------------------------------
Edward J. Driscoll, Jr. Secretary
<PAGE>
The Class D Convertible Preferred Stock has the rights and preferences
as set forth in the Certificate of Designation of Class D Preferred Stock as
filed of record with the Minnesota Secretary of State on March 4, 1999.
The securities evidenced hereby are subject to the terms of that
certain Stockholders Agreement, dated as of March 4, 1999, by and among the
Corporation, Silicon Graphics, Inc. and MCI WORLDCOM, Inc., including certain
restrictions on transfer. A copy of this Agreement has been filed with the
Secretary of the Corporation and is available upon request. The securities
evidenced hereby have not been registered under the Securities Act of 1933, as
amended (the "Act") and may not be resold, transferred or otherwise disposed of
other than in a transaction exempt from, or not subject to, the registration
requirements of the Act or pursuant to an effective registration statement
thereunder.
For value received, ____________ does hereby sell, assign and transfer
unto _____________ Shares represented by the within Certificate and does hereby
irrevocably constitute and appoint ____________ Attorney to transfer the said
Shares on the books of the within named Corporation with full power of
substitution in the premises.
Dated: ________________________
______________________________
NOTE: The signature on this assignment must correspond with the name as written
upon the face of the Certificate, in every particular, without alteration or
enlargement or any change whatever.
-2-
<PAGE>
EXHIBIT 4.28
================================================================================
STOCKHOLDERS' AGREEMENT
BY AND AMONG
WAM!NET INC.
SILICON GRAPHICS, INC.
AND
MCI WORLDCOM, INC.
______________________________
Dated as of March 4, 1999
______________________________
================================================================================
<PAGE>
STOCKHOLDERS' AGREEMENT
Stockholders' Agreement, dated as of March 4, 1999, by and among Silicon
Graphics, Inc., a Delaware corporation ("SGI"); MCI WORLDCOM, Inc., a Georgia
corporation ("MCI WCOM" and, together with SGI, the "Investors"); and WAM!NET
INC., a Minnesota corporation (the "Company").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, MCI WCOM is the owner of 115,206 shares of the Company's 1999
Class A Preferred Stock, par value $10.00 per share (the "Class A Preferred
Stock"), in addition to certain warrants to purchase, and other securities
convertible into and exchangeable for, the Company's common stock, par value
$0.01 per share (the "Common Stock");
WHEREAS, SGI has, pursuant to the terms of a Preferred Stock Purchase
Agreement, dated as of March 3, 1999, between the Company and SGI, agreed to
purchase (i) 5,710,425 shares of the Company's Class B Convertible Preferred
Stock, par value $0.01 per share (the "Class B Preferred Stock") and (ii)
878,527 shares of the Company's Class C Convertible Preferred Stock, par value
$0.01 per share (the "Class C Preferred Stock");
WHEREAS, MCI WCOM has, immediately prior to the issuance of the Class B
Preferred Stock and the Class C Preferred Stock, pursuant to the terms of a
Subordinated Unsecured Convertible Note, dated as of January 13, 1999, issued by
the Company to MCI
<PAGE>
WCOM in a principal amount of up to $25.0 million, due August 28, 1999 (the "MCI
WCOM Note"), converted all of the amounts outstanding thereunder into 2,196,317
shares of the Company's Class D Convertible Preferred Stock, par value $0.01 per
share (the "Class D Preferred Stock");
WHEREAS, the Class B Preferred Stock, the Class C Preferred Stock and the
Class D Preferred Stock are convertible into shares of Common Stock (the
"Conversion Shares" and, together with the Class A Preferred Stock, the Class B
Preferred Stock, the Class C Preferred Stock and the Class D Preferred Stock,
the "Subject Securities");
WHEREAS, the Investors and the Company desire to promote their mutual
interests by agreeing to certain matters relating to, among other things, the
operations of the Company and the disposition and voting of the Subject
Securities;
NOW THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements contained herein, the
parties hereby agree as follows:
1. LEGENDS. The certificates evidencing the Subject Securities will bear
-------
the following legend reflecting the restrictions on the sale, transfer, pledge
or other disposition or encumbrance (each a "Transfer") of such securities
contained herein and in the Securities Act of 1933, as amended (the "Securities
Act"):
3
<PAGE>
"The securities evidenced hereby are subject to the terms of that
certain Stockholders Agreement, dated as of March 4, 1999, by and
among the Company, Silicon Graphics, Inc. and MCI WORLDCOM, Inc.,
including certain restrictions on transfer. A copy of this
Agreement has been filed with the Secretary of the Company and is
available upon request. The securities evidenced hereby have not
been registered under the Securities Act of 1933, as amended (the
"Act") and may not be resold, transferred or otherwise disposed
of other than in a transaction exempt from, or not subject to,
the registration requirements of the Act or pursuant to an
effective registration statement thereunder."
2. TRANSFER OF SUBJECT SECURITIES.
------------------------------
(a) Resale of Subject Securities. No Investor shall Transfer any Subject
----------------------------
Securities other than in accordance with the provisions of this Section 2. Any
Transfer or purported Transfer made in violation of this Section 2 shall be null
and void and of no effect.
(b) Co-Sale Rights. (i) In the event any Investor intends to Transfer any
--------------
Subject Securities (other than (A) the Class A Preferred Stock and (B) to any of
its "affiliates" (as defined in the Securities Act) or to the Company), such
Investor (the "Selling Investor") shall notify the other Investor (the "Tag-
4
<PAGE>
Along Investor") in writing, of such proposed Transfer, its terms and conditions
and the proposed purchaser (the "Purchaser"). Within twenty (20) business days
of the date of such notice, the Tag-Along Investor shall notify the Selling
Investor if it elects to participate in such Transfer. If the Tag-Along
Investor fails to notify the Selling Investor within such twenty (20) business
day period, it shall be deemed to have waived its rights under this Section
2(b). Upon notification by the Tag-Along Investor to the Selling Investor, the
Tag-Along Investor shall have the right to sell, at the same price and on the
same terms and conditions as the Selling Investor, an amount of Subject
Securities equal to the amount of Subject Securities the Purchaser actually
proposes to purchase, multiplied by a fraction, the numerator of which shall be
the amount of Subject Securities issued and owned by such Tag-Along Investor,
and the denominator of which shall be the aggregate amount of Subject Securities
issued and owned by the Selling Investor and the Tag-Along Investor. As used
herein, the term "amount of Subject Securities" shall mean the sum of (Y) all
Common Stock proposed to be purchased by the Purchaser or owned by an Investor,
as the case may be, plus (Z) all Common Stock issuable upon the conversion and
exercise in full of the Subject Securities proposed to be purchased by the
Purchaser or owned by an Investor, as the case may be, that are convertible into
or exchangeable for Common Stock.
5
<PAGE>
(ii) Notwithstanding anything contained in this Section 2(b), in the event
that all or a portion of the purchase price consists of securities, and the sale
of such securities to the Tag-Along Investor would require either registration
under the Securities Act or the preparation of a disclosure document pursuant to
Regulation D under the Securities Act (or any successor regulation) or a similar
provision of any state securities law, and no such registration is otherwise
being effected and no such disclosure document is otherwise being prepared,
then, at the option of the Selling Investor, the Tag-Along Investor may receive,
in lieu of such securities, the fair market value of such securities in cash, as
determined in good faith by the Board.
(c) Securities Act. The Investors understand and acknowledge that the
--------------
Subject Securities have not been registered under the Securities Act and that
they may not be Transferred other than in a transaction exempt from, or not
subject to, the registration requirements of the Securities Act or pursuant to
an effective registration statement thereunder.
3. [INTENTIONALLY OMITTED].
4. BOARD OF DIRECTORS. Throughout the term of this Agreement, the
------------------
Investors and the Company shall take all action within their respective power
(including, without limitation, the voting of all shares of capital stock of the
Company owned by an Investor) to cause the Board of Directors of the Company to
be
6
<PAGE>
constituted in accordance with the Company's "Statement of Rights and
Preferences of Class A Preferred Shares" and "Statement of Rights and
Preferences of Class B Preferred Shares."
5. TERMINATION. The Agreement shall terminate on the earliest to occur of
-----------
(a) the issuance of shares of Common Stock to the public in an underwritten
offering pursuant to a registration statement filed under the Securities Act
covering the offer and sale of Common Stock in which the net proceeds to the
Company exceed $20,000,000 and the Class B, C and D Preferred Stock have been
converted into Conversion Shares pursuant to the mandatory conversion provisions
thereof or (b) the date on which the Investors and the Company shall have agreed
in writing to terminate this Agreement.
6. WAIVER. MCI WCOM hereby consents to and approves the issuance of the
------
Class B Preferred Stock and the Class C Preferred Stock to SGI and the
transactions and other agreements contemplated thereby and agrees to the waiver
of its rights pursuant to Section 5.03 of the Subordinated Unsecured Convertible
Note and Warrant Purchase Agreement, by and between the Company and MCI WCOM,
dated January 13, 1999 (the "Note Agreement").
7. AFFILIATE TRANSACTIONS. The terms of any material agreement,
----------------------
arrangement or understanding between the Company and MCI WCOM pursuant to
Sections 5.01 and 5.02 of the Note Agreement shall be approved by a majority of
the "Disinterested Directors"
7
<PAGE>
of the Company (as such term is defined in the Indenture, dated as of March 5,
1998, relating to the Company's 13.25% Senior Discount Notes due 2005), subject
to the provisions of Article V of the Note Agreement.
8. MISCELLANEOUS.
-------------
(a) Amendments, Waivers and Consents. No provision in this Agreement may be
--------------------------------
altered or amended, and compliance with any covenant or provision set forth
herein may not be omitted or waived, except by an instrument in writing duly
executed by the Investors and the Company. Any waiver or consent may be given
subject to satisfaction of conditions stated therein and any waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.
(b) Notices. All notices required or permitted by this Agreement shall be
-------
in writing, and shall be hand delivered, sent by facsimile or nationally
recognized overnight delivery service, addressed as follows:
(i) If to SGI:
Silicon Graphics, Inc.
2011 N. Shoreline Blvd.
Mountain View, CA 94043-1389
Attention: William M. Kelly,
Senior Vice President, Corporate Operations
Telephone: 650-932-0488
Facsimile: 650-932-0908
with a copy to:
Testa, Hurwitz & Thibeault, LLP
High Street Tower, 125 High Street
8
<PAGE>
Boston, MA 02110
Attention: William B. Asher, Jr.
Telephone: 617-248-7518
Facsimile: 617-248-7100
(ii) If to MCI WCOM:
MCI WORLDCOM, Inc.
1801 Pennsylvania Avenue, NW
Washington, D.C. 20006-3606
Attention: Susan Mayer, Senior Vice President
Telephone: 202-887-2202
Facsimile: 202-887-3226
with a copy to:
MCI WORLDCOM, Inc.
1801 Pennsylvania Avenue, NW
Washington, D.C. 20006-3606
Attention: Michael Salsbury, General Counsel
Telephone: 202-887-3373
Facsimile: 202-887-3353
(iii) If to the Company:
WAM!NET INC.
6100 West 110th Street
Minneapolis, MN 55438
Attention: Edward J. Driscoll, III, President
Telephone: 612-886-5100
Facsimile: 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
or to such other person or address as a party shall specify by notice in writing
to the other party. All such notices and other communications shall be effective
when received.
9
<PAGE>
(c) Binding Effect; Assignment. This Agreement shall be binding upon and
--------------------------
inure to the benefit of the Company and the Investors. No assignment of rights
or delegation of duties arising under this Agreement may be made by any party
hereto without the prior written consent of the other party.
(d) Third-Party Beneficiaries. This Agreement is for the sole benefit of
-------------------------
the parties hereto and their permitted assigns and nothing herein expressed or
implied shall give or be construed to give to any person, other than the parties
hereto and such permitted assigns, any legal or equitable rights hereunder.
(e) Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties hereto with respect to the subject matter contained herein
and supersedes all other prior understandings or agreements, both written and
oral, between the parties with respect to the matters contained herein.
(f) Severability. The provisions of this Agreement are severable and, in
------------
the event that any court of competent jurisdiction shall determine that any one
or more of the provisions or part of a provision contained in this Agreement
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement; but this Agreement
shall be
10
<PAGE>
reformed and construed as if such invalid or illegal or unenforceable provision,
or part of a provision, had never been contained herein, and such provisions or
part reformed so that it would be valid, legal and enforceable to the maximum
extent possible.
(g) Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the law of the State of Minnesota without regard to its
principles of conflicts of laws.
(h) Headings. Article, Section and sub-Section headings in this Agreement
--------
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
(i) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one and the same instrument, and any of the parties
hereto may execute this Agreement by signing any such counterpart by original or
facsimile signature.
(j) Expenses. Each party shall pay the fees and expenses of its respective
--------
counsel, accountants and other experts (including any broker, finder, advisor or
intermediary), and shall pay all other expenses incurred by it in connection
with the negotiation,
11
<PAGE>
preparation and execution of this Agreement and the consummation of the
transactions contemplated hereby.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the
day and year first above written.
WAM!NET INC.
/s/ Allen L. Witters
_________________________________
By: Allen L. Witters
Its: Chief Technology Officer
MCI WORLDCOM, INC.
/s/ Susan Mayer
_________________________________
By: Susan Mayer
Its: Senior Vice President
SILICON GRAPHICS, INC.
/s/ William M. Kelly
_________________________________
By: William M. Kelly
Its: Senior Vice President
13
<PAGE>
EXHIBIT 4.29
CLASS A PREFERRED STOCK EXCHANGE AGREEMENT
Class A Preferred Stock Exchange Agreement, dated as of March 4, 1999, by
and between MCI WORLDCOM, Inc., a Georgia corporation ("MCI WCOM") and WAM!NET
INC., a Minnesota corporation (the "Company").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, MCI WCOM is the owner of 100,000 shares of the Company's Class A
Preferred Stock, par value $10.00 per share (the "Old Class A Preferred Stock"),
in addition to certain warrants to purchase, and other securities convertible
into and exchangeable for, the Company's common stock, par value $0.01 per share
(the "Common Stock");
WHEREAS, the Old Class A Preferred Stock entitles the holders thereof,
voting separately as a class to elect a majority of the members of the Board of
Directors of the Company;
WHEREAS, the Company and Silicon Graphics, Inc., a Delaware corporation
("SGI"), have entered into a Letter of Intent, dated as of February 2, 1999 (the
"LOI"), which contemplates that SGI will acquire certain convertible preferred
stock of the Company and have the right to designate one member of the Board of
Directors of the Company;
WHEREAS, the LOI also contemplates that the terms of the Old Class A
Preferred Stock will be modified such that the holders thereof, voting
separately as a class, will be entitled to elect
<PAGE>
that number of the members of the Board equal to the largest whole number less
than a majority of the Board; and
WHEREAS, the Company and MCI WCOM desire, on the terms and subject to the
conditions set forth hereon, to exchange the Old Class A Preferred Stock for
115,206 shares of the Company's 1999 Class A Preferred Stock, par value $10.00
per share, with the terms and conditions set forth in the Statement of Rights
and Preferences of Class A Preferred Shares of WAM!NET Inc. a copy of which is
attached hereto as Exhibit I (the "New Class A Preferred Stock").
NOW THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements contained herein, the
parties hereby agree as follows:
1. Concurrent with the execution and delivery of this Agreement, MCI WCOM
shall surrender to the Company its certificate evidencing all of the Old Class A
Preferred Stock at the offices of the Company, 6100 West 110th Street,
Minneapolis, MN 55438.
2. In consideration of the surrender of the Old Class A Preferred Stock
as contemplated by Section 1, the Company shall issue to MCI WCOM a certificate
evidencing the New Class A Preferred Stock.
3. Upon surrender and delivery of the Old Class A Preferred Stock
contemplated by Section 1, (i) all of MCI WCOM's rights with respect thereto
shall terminate and (ii) such shares shall be retired and canceled by the
Company.
2
<PAGE>
4. This Agreement is for the sole benefit of the parties hereto and their
permitted assigns and, except as set forth in the final sentence of Section 5
hereof, nothing herein expressed or implied shall give or be construed to give
to any person, other than the parties hereto and such permitted assigns, any
legal or equitable rights hereunder. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter
contained herein and supersedes all other prior understandings or agreements,
both written and oral, between the parties with respect to the matters contained
herein. The provisions of this Agreement are severable and, in the event that
any court of competent jurisdiction shall determine that any one or more of the
provisions or part of a provision contained in this Agreement shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
or part of a provision of this Agreement; but this Agreement shall be reformed
and construed as if such invalid or illegal or unenforceable provision, or part
of a provision, had never been contained herein, and such provisions or part
reformed so that it would be valid, legal and enforceable to the maximum extent
possible. This Agreement shall be governed by, and construed in accordance with,
the law of the State of Minnesota without regard to its principles of conflicts
of laws. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original and all of which taken together
3
<PAGE>
shall constitute one and the same instrument, and any of the parties hereto may
execute this Agreement by signing any such counterpart by original or facsimile
signature.
5. The parties hereto are also parties to that certain Preferred Stock,
Subordinated Note and Warrant Purchase Agreement, dated November 14, 1996 (the
"A Agreement"). The parties hereby agree that (a) Section 4.02 of the A
Agreement is hereby amended by substituting the year "2001" for the year "2000"
therein and making all such other changes as is necessary to conform Section
4.02 accordingly and (b) all references to "owners of outstanding shares" of the
Company in Article IV of the A Agreement shall be deemed to include Silicon
Graphics, Inc. ("SGI"), and the amount of "outstanding shares" deemed to be
owned by SGI shall be equal to the amount of shares of the Company's Common
Stock, par value $0.01 per share ("Common Stock"), then held by SGI, together
with the number of shares of Common Stock that all securities then held by SGI
are convertible into or exchangeable for. SGI shall be deemed to be an express
third-party beneficiary of this Section 5.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the
day and year first above written.
WAM!NET INC.
/s/ Allen L. Witters
_____________________________
By: Allen L. Witters
Its: Chief Technology Officer
MCI WORLDCOM, INC.
/s/ Susan Mayer
_____________________________
By: Susan Mayer
Its: Senior Vice Pesident
CONSENTING TO THE PROVISIONS OF SECTION 5 HEREOF ONLY:
/s/ Edward J. Driscoll, III
_____________________________
Edward J. Driscoll, III
/s/ Allen L. Witters
_____________________________
Allen L. Witters
5
<PAGE>
EXHIBIT 4.30
================================================================================
CLASS D PREFERRED STOCK CONVERSION AGREEMENT
BY AND BETWEEN
WAM!NET INC.
AND
MCI WORLDCOM, INC.
______________________________
Dated as of March 4, 1999
______________________________
================================================================================
<PAGE>
PREFERRED STOCK CONVERSION AGREEMENT
Preferred Stock Conversion Agreement, dated as of March 4, 1999 (this
"Agreement"), by and between WAM!NET INC., a Minnesota corporation (the
"Company"), and MCI WORLDCOM,INC., a Georgia corporation ("Buyer").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, on January 13, 1999, the Company issued to Buyer that certain
13.25% Subordinated Unsecured Convertible Note due August 28, 2005, in an
aggregate principal amount of up to $25 million (the "Note");
WHEREAS, upon an Equity Offering (as defined in the Note), the aggregate
principal amount outstanding under the Note and any interest accrued thereon
shall be converted into the same class of shares sold in the Equity Offering and
at a Conversion Price (as defined in the Note) equal to the offering price per
share in the Equity Offering;
WHEREAS, the Company and Silicon Graphics, Inc., a Delaware corporation
("SGI"), have entered into that certain Preferred Stock Purchase Agreement,
dated as of March 3, 1999, providing for the sale to SGI of two series of the
Company's preferred stock (the "SGI Investment"), consisting of (i) 5,710,425
shares of the Company's Class B Convertible Preferred Stock, par value $0.01 per
share, and (ii) 878,527 shares of the Company's Class C Convertible Preferred
Stock, par value $0.01 per share;
<PAGE>
WHEREAS, the Company has designated an additional series of its preferred
stock, consisting of 2,196,317 shares, par value $0.01 per share, designated as
its "Class D Convertible Preferred Stock" (the "Class D Preferred Shares");
WHEREAS, the Class D Preferred Shares are convertible into shares (the
"Conversion Shares") of the Company's common stock, par value $0.01 per share
(the "Common Stock") in accordance with the terms of the Class D Certificate of
Designation (as defined herein); and
WHEREAS, the terms, limitations and relative rights and preferences of the
Class D Preferred Shares are set forth in the "Statement of Rights and
Preferences of Class D Convertible Preferred Shares" (the "Class D Certificate
of Designation"), a copy of which is attached hereto as Exhibit I.
NOW THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements contained herein, the
parties hereby agree as follows:
I. CONVERSION OF THE NOTE INTO CLASS D PREFERRED STOCK
1.01 Automatic Conversion. The Company and Buyer acknowledge and agree
--------------------
that the SGI Investment constitutes an Equity Offering for the purposes of the
Note and that, as of the date hereof and immediately prior to the consummation
of the SGI Investment, the Note and any accrued interest thereon shall
automatically convert into the Class D Preferred Shares.
2
<PAGE>
1.02 Duration, Rights and Preferences of the Class D Preferred Stock. The
---------------------------------------------------------------
Class D Preferred Shares shall have and enjoy the rights and preferences as are
set forth in the Class D Certificate of Designation.
II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
2.01 The Company hereby represents, warrants and covenants to Buyer that,
as of the date hereof:
(a) Corporate Organization and Power; Qualification. The Company (i) is
-----------------------------------------------
duly organized, validly existing and in good standing as a corporation under the
laws of the state of Minnesota, (ii) has all corporate power and authority to
own its properties and to carry on its businesses as now being conducted and
(iii) is duly qualified and in good standing as a foreign corporation, and is
authorized to do business, in all jurisdictions in which the character of its
properties or the nature of its businesses requires such qualification or
authorization, except for qualifications and authorizations the lack of which,
individually or in the aggregate, would not reasonably be expected to result in
a material adverse effect on the business, financial condition, results of
operations, assets or liabilities of the Company and its subsidiaries taken as a
whole (a "Material Adverse Effect").
(b) Subsidiaries. Set forth on Schedule 2.01(b) hereto is a complete list
------------
of all of the subsidiaries of the Company. Except as set forth on Schedule
2.01(b) hereto, the Company does
3
<PAGE>
not own, directly or indirectly, any capital stock or other equity securities of
any corporation, nor does the Company have any direct or indirect ownership
interest, including interests in partnerships and joint ventures, in any other
entity or business. Each of the subsidiaries has been duly incorporated, is
validly existing and in good standing under the laws of its respective
jurisdiction of incorporation and is duly qualified and in good standing as a
foreign corporation, and is authorized to do business, in all jurisdictions in
which the character of its properties or the nature of its businesses requires
such qualification or authorization, except for qualifications and
authorizations the lack of which, individually or in the aggregate, would not
reasonably be expected to result in a Material Adverse Effect. Each of the
subsidiaries has the requisite power and authority to own and hold its
properties and to carry on its business as now being conducted. Except as
disclosed in the registration statements, reports and proxy statements filed by
the Company with the Securities and Exchange Commission (the "SEC Reports"),
disclosed in the Financial Statements (as defined herein) or set forth on
Schedule 2.01(b) hereto: (i) all of the outstanding shares (other than
director's qualifying shares, if any) of capital stock of each of the
subsidiaries are owned beneficially and of record by the Company, one of its
subsidiaries or any combination thereof, in each case free and clear of any
liens, charges, restrictions, claims or encumbrances created or suffered by the
Company or any of its subsidiaries, other than restrictions on transfer imposed
by the
4
<PAGE>
Securities Act of 1933, as amended (the "Securities Act"), or any other
provision of applicable law; and (ii) there are no outstanding subscriptions,
warrants, options, convertible securities or other rights (contingent or other)
pursuant to which any of the subsidiaries is or may become obligated to issue
any shares of its capital stock to any person other than the Company or a
subsidiary.
(c) Power and Authority; Authorization; Enforceability. The Company has
--------------------------------------------------
all requisite corporate power and authority necessary to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action on the part of the Company and no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
and to consummate the transactions contemplated hereby and thereby. This
Agreement has been duly executed and delivered by the Company and constitutes
the valid and binding obligation of the Company, enforceable against it in
accordance with its terms, except as enforceability against the Company may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws now or hereafter in effect relating to the rights of creditors
generally and other general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law) and except as any
rights to indemnity and contribution
5
<PAGE>
contemplated by Section 6.02 may be limited by applicable federal and state
securities laws and public policy considerations.
(d) No Violations; Consents and Approvals. The execution and delivery by
-------------------------------------
the Company of this Agreement, the performance by the Company of its obligations
hereunder and the consummation by the Company of the transactions contemplated
hereby will not (i) violate, conflict with, result in a breach of, constitute a
default under, or result in or require the creation of any lien upon any assets
of the Company under its Articles of Incorporation, as amended (the "Charter"),
By-laws or any material contract to which the Company is a party or by which the
Company or any of its properties may be bound or (ii) require any consent or
approval other than such consents and approvals to be obtained before the
Closing and those that have been obtained which are final and not subject to
review on appeal or to collateral attack and are in full force and effect,
except for such violations, conflicts, breaches, defaults or liens which, or
consents or approvals which, if not obtained, would not reasonably be expected
to, individually or in the aggregate, result in a Material Adverse Effect.
(e) Litigation; Compliance with Laws. Except as disclosed in the SEC
--------------------------------
Reports, disclosed in the Financial Statements or set forth on Schedule 2.01(e),
there are no (i) actions, suits, claims, proceedings or investigations
instituted and pending or, to the knowledge of the Company, threatened, against
or affecting the Company or any of its subsidiaries, at law or in equity, or
6
<PAGE>
before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, (ii)
arbitration proceedings relating to the Company instituted and pending under
collective bargaining agreements or otherwise or (iii) governmental inquiries
instituted and pending or, to the knowledge of the Company, threatened, against
or affecting the Company, any of which would reasonably be expected to result in
a Material Adverse Effect. Except for any defaults which would not reasonably
be expected to result in a Material Adverse Effect, neither the Company nor any
of its subsidiaries is in default with respect to any order, writ, injunction or
decree known to or served upon the Company of any court or of any federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign. Except where the failure to do
so would not reasonably be expected to result in a Material Adverse Effect,
neither the Company nor any of its subsidiaries has failed to comply with any
laws, rules, regulations and orders applicable to its respective business,
operations, properties, assets, products and services, the Company and each of
its subsidiaries has all necessary permits, licenses and other authorizations
required to conduct its business as presently conducted and the Company and each
of its subsidiaries has operated its respective business pursuant to and in
compliance with the terms of all such permits, licenses and other
authorizations.
7
<PAGE>
(f) Taxes. The Company has filed (or obtained extensions of the time by
-----
which it is required to file) all United States federal, state and local income
tax returns and all other material tax returns required to be filed by it, and
has paid all taxes shown due on the returns so filed as well as the other taxes,
assessments and governmental charges which have become due, except such taxes,
if any, as are being contested in good faith and as to which adequate reserves
have been provided. The Company will continue to make all such filings in a
timely manner and pay all such taxes, assessments and other governmental charges
required of it.
(g) Capitalization. (i) As of the date hereof, the authorized capital
--------------
stock of the Company consists of 500,000,000 shares, the designations and
classes of which are set forth on Schedule 2.01(g) hereto. The Company does not
hold any of its shares in treasury.
(ii) As of the date hereof, 9,291,027 shares of Common Stock and 100,000
shares of the Company's Class A Preferred Stock, par value $10.00 per share (the
"Class A Preferred Stock"), are issued and outstanding and have been validly
issued and are fully paid and nonassessable and are not subject to preemptive
rights.
(iii) Except as contemplated by this Agreement, disclosed in the SEC
Reports, disclosed in the Financial Statements or set forth on Schedule 2.01(g)
hereto, as of the date hereof there are
8
<PAGE>
no outstanding subscriptions, options, warrants or other rights of any kind to
acquire any additional shares of capital stock of the Company or other
instruments or securities convertible into or exchangeable for, or which
otherwise confer on the holder thereof any right to acquire, any such additional
shares of capital stock, nor is the Company committed to issue any such option,
warrant, right or security. Except as provided for in the Charter, disclosed in
the SEC Reports or set forth on Schedule 2.01(g) hereto, the Company has no
obligation (contingent or other) to purchase, redeem or otherwise acquire any of
its equity securities or any interest therein or to pay any dividend or make any
other distribution in respect thereof. All of the outstanding securities of the
Company were issued in compliance with the registration requirements under
applicable federal and state securities laws (or pursuant to applicable
exemptions therefrom).
(iv) Except as contemplated by this Agreement, disclosed in the SEC Reports
or disclosed in the Financial Statements, as of the date hereof, there are no
agreements relating to voting, purchase or sale of capital stock between the
Company and any of its stockholders or affiliates, and to the best of the
Company's knowledge, there are no such agreements among any of its stockholders.
(v) The Class D Preferred Shares are duly authorized, validly issued,
fully paid and nonassessable, and have the rights, preferences and privileges
specified in the Class D
9
<PAGE>
Certificate of Designation. The Conversion Shares are duly authorized and have
been reserved for issuance and, when issued upon conversion in accordance with
the terms of the Class D Certificate of Designation will be validly issued,
fully paid and nonassessable, and will be free and clear of all liens,
encumbrances and restrictions (other than those contemplated hereby, created or
suffered by Buyer (or the current holder thereof) and restrictions on transfer
imposed by the Securities Act or any other applicable federal or state
securities laws, and the rules and regulations promulgated thereunder). Neither
the issuance, sale or delivery of the Class D Preferred Shares nor the
contemplated issuance or delivery of the Conversion Shares is subject to any
currently existing preemptive right of stockholders of the Company, any right of
first refusal or other right in favor of any person, in each case except for
rights that have been waived.
(h) Financial Statements. The Company has delivered to Buyer copies of its
--------------------
financial statements (including balance sheets, income statements, changes in
stockholders equity, statements of cash flow and any related notes) for the year
ended December 31, 1998 (the "Financial Statements") and will deliver to Buyer
(as soon as practicable but in no event later than March 31, 1999) audited
copies of the Financial Statements. The Financial Statements (i) fairly
present, in all material respects, the financial condition, assets and
liabilities of the Company as of the date thereof and the results of its
operations
10
<PAGE>
and changes in its cash flows for the periods covered thereby, (ii) were
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved, except as may be noted therein,
and (iii) were prepared from the books and records of the Company, which books
and records are complete and correct and fairly reflect all material
transactions of the Company's business.
(i) Absence of Certain Changes. Except as contemplated by this Agreement,
--------------------------
disclosed in the SEC Reports or set forth on Schedule 2.01(i) hereto, since
December 31, 1998, (i) there has been no change in the assets, liabilities or
financial condition of the Company and its subsidiaries (on a consolidated
basis) from that reflected in the balance sheet of the Company and its
subsidiaries as of December 31, 1998, except for changes (A) in the ordinary
course of business or (B) which in the aggregate have not resulted in and would
not reasonably be expected to result in a Material Adverse Effect and (ii) there
has not been any event or change that would reasonably be expected to result in
a Material Adverse Effect, individually or in the aggregate, whether or not
insured against (excluding general economic or industry changes).
(j) No Brokers. No broker, finder or investment banker is entitled to any
----------
brokerage, finder's or other fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on behalf of
the Company.
11
<PAGE>
(k) Proprietary Information of Third Parties. Except for such claims that
----------------------------------------
would not reasonably be expected to result in a Material Adverse Effect, to the
knowledge of the Company, no third party has claimed or has reason to claim that
the Company or any of its subsidiaries has (a) violated or may be violating any
of the terms or conditions of any non-competition or non-disclosure agreement
with such third party, (b) disclosed or may be disclosing or utilized or may be
utilizing any trade secret or proprietary information or documentation of such
third party or (c) interfered or may be interfering in the employment
relationship between such third party and any of its present or former
employees. Neither the Company nor any of its subsidiaries has utilized and
does not propose to utilize any trade secret or any information or documentation
proprietary to any other person in violation of existing arrangements with such
person, and to the knowledge of the Company, neither the Company nor any of its
subsidiaries has violated any confidential relationship which any such person
may have had with any third party, in connection with the development,
manufacture or sale of any product or the development or sale of any service of
the Company.
(l) Patents, Trademarks, Etc. Set forth on Schedule 2.01(l) hereto is a
-------------------------
list of all domestic and foreign trademarks, trademark applications, patents,
registered copyrights (except copyrighted software licensed to the Company in
its ordinary course of business) and patent applications owned by, registered in
the name of or licensed to or from the Company and its
12
<PAGE>
subsidiaries as of the date hereof. Except where the failure to do so would not
reasonably be expected to result in a Material Adverse Effect, the Company and
its subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how (including
trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks and
trade names (including those necessary for the use and protection of the names
and/or marks "WAM!NET", "WAM!BASE" and "WAM!PROOF") or other intellectual
property (collectively, "Intellectual Property") necessary to carry on its
business as presently conducted. Except as set forth on Schedule 2.01(l) hereto,
neither the Company nor any subsidiary has received any notice of any
infringement of or conflict with asserted rights of others with respect to any
Intellectual Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of its subsidiaries, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity or
inadequacy, individually or in the aggregate, would reasonably be expected to
result in a Material Adverse Effect.
(m) The Year 2000. Except where the failure to do so would not reasonably
--------------
be expected to result in a Material Adverse Effect, the Company has used (or is
in the process of using) reasonable procedures to verify that any of its
software licensed or otherwise provided to its customers and any software used
in
13
<PAGE>
its business will recognize and process date fields after the turn of the
century, and perform date-dependent calculations and operations (including
sorting, comparing and reporting) after the turn of the century correctly, and
has used (or is in the process of using) reasonable efforts to ensure that any
such software will not produce invalid and incorrect results as a result of the
change of century (all without human intervention, other than original data
entry of valid dates), provided that such software receives correct and properly
formatted date inputs from all software and hardware that exchanges data with or
provides data to the software.
(n) Title to Properties. Except as disclosed in the SEC Reports, the
-------------------
Company and its subsidiaries have good and valid title to all real and personal
property which they own and which are reflected on the Financial Statements
(except for assets and properties sold, consumed or otherwise disposed of by
them in the ordinary course of business since December 31, 1998), and such
assets and properties are owned free and clear of all mortgages, pledges, liens,
security interests, claims, restrictions or encumbrances of any kind, except (i)
those securing indebtedness reflected on the Financial Statements or
indebtedness incurred in the ordinary course of business and consistent with
past practice after the date thereof, (ii) mechanics', materialmens' and other
liens which have arisen in the ordinary course of business or (iii) mortgages,
pledges, liens, security interests, claims, restrictions or encumbrances which,
individually or in the
14
<PAGE>
aggregate, would not be reasonably likely to impair, in any material respect,
the continued use of such asset or property.
(o) Agreements. Except as set forth in Schedule 2.01(o) hereto or
----------
disclosed in the Financial Statements, all material agreements, contracts or
instruments required to be filed as exhibits to the SEC Reports have been so
filed. Neither the Company nor any of its subsidiaries is in breach or default
of any agreement, contract, instrument or other commitment, except for such
breaches and defaults which would not reasonably be expected to result in a
Material Adverse Effect. To the knowledge of Company, no other party to any of
such agreements, contracts, instruments or other commitments is, as of the date
of this Agreement, in breach or default (and no event has occurred which with
notice or the lapse of time or both would constitute a default or violation)
thereunder, except for such breaches and defaults which would not reasonably be
expected to result in a Material Adverse Effect. The Company is in full
compliance with all of the terms and provisions of its Charter and By-laws,
except where the failure to so comply would not reasonably be expected to result
in a Material Adverse Effect.
(p) Transactions With Affiliates. Except as disclosed in the SEC Reports
----------------------------
or disclosed in the Financial Statements, neither the Company nor any subsidiary
is a party to any transaction of the type required to be disclosed pursuant to
Item 404 of Regulation S-K under the Securities Act.
(q) Disclosure. Neither this Agreement (including the Schedules hereto)
----------
nor the SEC Reports (as of the date filed with
15
<PAGE>
the Securities and Exchange Commission) contains an untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances under
which they were made, not misleading. None of the statements, documents,
certificates or other items prepared by the Company and supplied to Buyer or its
counsel in connection with the transactions contemplated hereby (other than
those relating to (i) projected financial information, (ii) plans and objectives
regarding the Company's future operations, (iii) future economic performance and
(iv) assumptions underlying any of the matters described in (i) through (iii),
each as to which no representation or warranty is given) contains an untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained therein, in light of the circumstances
under which they were made, not misleading.
III. REPRESENTATIONS AND WARRANTIES OF BUYER
3.01 Buyer hereby represents, warrants and covenants to the Company that:
(a) Corporate Organization and Power; Qualification. Buyer (i) is duly
-----------------------------------------------
organized, validly existing and in good standing as a corporation under the laws
of the state of Georgia and (ii) has all corporate power and authority to own
its properties and to carry on its businesses as now being conducted.
16
<PAGE>
(b) Power and Authority; Authorization; Enforceability. Buyer has all
--------------------------------------------------
requisite corporate power and authority necessary to execute and deliver this
Agreement and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action on the part of Buyer and no other corporate
proceedings on the part of Buyer are necessary to authorize this Agreement and
to consummate the transactions contemplated hereby and thereby. This Agreement
has been duly executed and delivered by Buyer and constitutes the valid and
binding obligation of Buyer, enforceable against it in accordance with its
terms, except as enforceability against Buyer may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws now or
hereafter in effect relating to the rights of creditors generally and other
general principles of equity (regardless of whether enforcement is considered in
a proceeding in equity or at law) and except as any rights to indemnity and
contribution contemplated by Section 6.02 may be limited by applicable federal
and state securities laws and public policy considerations.
(c) No Violations; Consents and Approvals. The execution and delivery by
-------------------------------------
Buyer of this Agreement, the performance by Buyer of its obligations hereunder
and the consummation by Buyer of the transactions contemplated hereby will not
(i) violate, conflict with, result in a breach of, constitute a default under,
or result in or require the creation of any lien upon any assets of
17
<PAGE>
Buyer under its certificate of incorporation, by-laws (or other comparable
charter documents) or any material contract to which Buyer is a party or by
which Buyer or any of its properties may be bound or (ii) require any consent or
approval other than such consents and approvals to be made and obtained before
the Closing and those that have been obtained which are final and not subject to
review on appeal or to collateral attack and are in full force and effect,
except for such violations, conflicts, breaches, defaults or liens which, or
consents or approvals which, if not obtained would not reasonably be expected
to, individually or in the aggregate, result in a material adverse effect on the
business, financial condition, results of operations, assets or liabilities of
Buyer.
(d) Due Diligence. Buyer has sufficient knowledge and experience in
-------------
investing in companies similar to the Company in terms of the Company's stage of
development and is capable of evaluating the merits and risks of its investment
in the Company contemplated by the automatic conversion provisions of the Note
and is able to bear the economic risk of such investment for an indefinite
period of time. Buyer has been given access to full and complete information
regarding the Company and has utilized such access to its satisfaction for the
purpose of obtaining information Buyer desires or deems relevant to its
investment decision. Buyer has had the opportunity to ask questions of and
receive answers from representatives of the Company concerning the terms and
conditions of this Agreement, to discuss the Company's business, management and
financial affairs with the
18
<PAGE>
Company's management and to obtain any additional information Buyer desires or
deems relevant. Buyer has obtained, to the extent it has deemed necessary,
professional advice with respect to the risks inherent in the investment in the
Class D Preferred Shares and the Company, including, without limitation, the
matters relating to the Company's business and financial condition set forth in
the SEC Reports.
(e) Investment Intent. Buyer has acquired the Class D Preferred Shares for
-----------------
its own account for investment and not with a view towards the resale, transfer
or distribution thereof, nor with any present intention of distributing the
Class D Preferred Shares in violation of the Securities Act or any other
applicable federal or state securities laws, and the rules and regulations
promulgated thereunder. Buyer understands that no public market currently
exists for the Class D Preferred Shares or the Common Stock, and that no such
public market may ever exist. Buyer further understands and agrees that the
Class D Preferred Shares have not been (and the Conversion Shares, upon
issuance, will not be) registered under the Securities Act by reason of their
issuance in a transaction exempt from the registration requirements of the
Securities Act, that the Class D Preferred Shares and the Conversion Shares will
bear a legend (and the Company will make a notation on its transfer books) to
such effect and the Class D Preferred Shares (and, upon issuance, the Conversion
Shares) must be held indefinitely unless subsequently disposed of pursuant to an
effective registration statement under the Securities Act or in a transaction
exempt from, or not
19
<PAGE>
subject to, the registration requirements thereof. Buyer agrees that if it sells
any Conversion Shares pursuant to Rule 144A under the Securities Act, it will
take all necessary steps in order to perfect the exemption from registration
provided thereby, including, without limitation, obtaining on behalf of the
Company information to enable the Company to establish a reasonable belief that
the purchaser is a "qualified institutional buyer" (within the meaning of Rule
144A) and advising such purchaser that Rule 144A is being relied upon with
respect to such resale. Buyer was not organized for the specific purpose of
acquiring the Class D Preferred Shares and is an "accredited investor" within
the meaning of Rule 501(a) of the Securities Act.
(f) No Brokers. No broker, finder or investment banker is entitled to any
----------
brokerage, finder's or other fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on behalf of
Buyer.
IV. [INTENTIONALLY OMITTED]
V. [INTENTIONALLY OMITTED]
VI. OTHER AGREEMENTS
6.01 [INTENTIONALLY OMITTED]
6.02 Registration Rights.
-------------------
(a) Piggy-back Registration. If, commencing one (1) year after the date
-----------------------
hereof, the Company proposes to claim an exemption
20
<PAGE>
under Section 3(b) of the Securities Act for a public offering of any of its
securities or to register under the Securities Act (except pursuant to a
registration statement on Form S-4 or S-8 (or any substitute form adopted by the
Commission) or any other form that does not permit the inclusion of shares by
its security holders) its Common Stock, it will give written notice to Buyer of
its intention to do so and, upon the written request of Buyer given within
twenty (20) days after receipt of any such notice (which request shall specify
the number of Conversion Shares intended to be sold or disposed of by Buyer and
the nature of any proposed sale or other disposition thereof), the Company will
use its best efforts to cause all Conversion Shares that Buyer shall have
requested the registration of to be included in such notification or the
registration statement proposed to be filed by the Company; provided, however,
-------- -------
that nothing herein shall prevent the Company from, at any time, abandoning or
delaying any such registration initiated by it. If any such registration shall
be underwritten in whole or in part, the Company may require that the Conversion
Shares requested for inclusion pursuant to this Section 6.02 be included in the
underwriting on the same terms and conditions as the securities otherwise being
sold through the underwriters. If in the good faith judgment of the managing
underwriter, as expressed in writing delivered to Buyer, the inclusion of all of
the Conversion Shares of Common Stock originally covered by a request for
registration would reduce the number of Common Stock to be offered by the
Company or interfere with the successful marketing of the Common Stock
21
<PAGE>
offered by the Company, the number of Conversion Shares otherwise to be included
pursuant to this Section 6.02 in the underwritten public offering may be
reduced; provided, however, that any such required reduction shall be pro rata
-------- -------
among all persons (other than the Company and any other persons demanding
registration pursuant to existing rights who are entitled to be protected
against any such reduction) who are participating in such offering. Conversion
Shares which are thus excluded from the underwritten public offering shall be
withheld from the market for a period, not to exceed 90 days, which the managing
underwriter reasonably determines is necessary in order to effect the
underwritten public offering. All expenses of such offering, except the fees of
special counsel to Buyer and brokers' commissions or underwriting discounts
payable by Buyer, shall be borne by the Company.
(b) Demand Registration. In addition, on one occasion only, commencing
-------------------
upon the later of one (1) year after the date hereof and the date that is six
months after an IPO, upon request by Buyer to register the Conversion Shares,
the Company will promptly use its reasonable best efforts to register such
shares under the Securities Act; provided that (i) such request must be made
-------------
within five (5) years from the date hereof and (ii) the Company may delay the
filing of any registration statement requested pursuant to this Section 6.02(b)
to a date not more than ninety (90) days following the date of such request if
in the opinion of the Company's principal investment banker at the time of such
request such a delay is necessary in order not to
22
<PAGE>
adversely affect the Company's financing efforts then underway or if in the
opinion of the Company such a delay is necessary or advisable to avoid
disclosure of material nonpublic information. The costs and expenses directly
related to any registration requested pursuant to this Section 6.02(b),
including, but not limited to, legal fees of the Company's counsel, audit fees,
printing expenses, filing fees of the Commission and the National Association of
Securities Dealers, Inc. and fees and expenses relating to qualifications under
state securities or blue sky laws incurred by the Company shall be borne
entirely by the Company; provided, however, that the persons for whose account
-------- -------
the securities covered by such registration are sold shall bear the expenses of
brokers' commissions or underwriting discounts applicable to their shares and
fees of their legal counsel. If Buyer is the only person whose shares are
included in the registration pursuant to this Section 6.02(b), Buyer shall bear
the expense of inclusion of any audited financial statements contained in the
registration statement which are not dated as of the Company's fiscal year-end
or are not otherwise prepared by the Company for its own business purposes. The
Company shall keep effective and maintain any registration statement specified
in this Section 6.02(b) for such period as may be necessary for Buyer to dispose
of the Conversion Shares so registered, and from time to time shall amend or
supplement, at Buyer's expense, the prospectus used in connection therewith to
the extent necessary in order to comply with applicable law; provided that the
-------- ----
Company shall not be obligated to maintain any registration statement for
23
<PAGE>
a period of more than nine (9) months. If, at the time any written request for
registration is received by the Company pursuant to this Section 6.02(b), the
Company had previously determined to proceed with the preparation and filing of
a registration statement under the Securities Act in connection with the
proposed offer and sale of Common Stock, such written request shall be deemed to
have been given pursuant to Section 6.02(a) rather than this Section 6.02(b),
and the rights of Buyer shall be governed by Section 6.02(a) hereof.
(c) Registration Procedures. If and whenever the Company is required by
-----------------------
the provisions of Sections 6.02(a) or 6.02(b) hereof to effect the registration
of Conversion Shares under the Securities Act, the Company will:
(i) prepare and file with the Commission a registration statement with
respect to such securities, and use its reasonable best efforts to cause such
registration statement to become and remain effective for such period as may be
reasonably necessary to effect the sale of such securities, not to exceed nine
(9) months;
(ii) prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus contained therein as
may be necessary to keep such registration statement effective for such period
as may be reasonably necessary to effect the sale of such securities, not to
exceed nine (9) months;
(iii) furnish to the security holders participating in such registration
and to the underwriters of the securities being
24
<PAGE>
registered, such reasonable number of copies of the registration statement,
preliminary prospectus, final prospectus and such other documents as such
participating security holders and underwriters may reasonably request in order
to facilitate the public offering of such securities;
(iv) use its reasonable best efforts to register or qualify the
securities covered by such registration statement under such state securities or
blue sky laws of such jurisdictions as such participating security holders and
underwriters may reasonably request in writing within 30 days following the
original filing of such registration statement, except that the Company shall
not for any purpose be required to execute a general consent to service of
process or to qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified;
(v) notify the participating security holders, promptly after it shall
receive notice thereof, of the time when such registration statement has become
effective or a supplement to any prospectus forming a part of such registration
statement has been filed;
(vi) notify such participating security holders promptly of any request
by the Commission for the amending or supplementing of such registration
statement or prospectus or for additional information;
(vii) prepare and file with the Commission, promptly upon the request of
any such participating security holders, any amendments or supplements to such
registration statement or
25
<PAGE>
prospectus which, in the opinion of counsel for such holders (and concurred with
by counsel for the Company), is required under the Securities Act or the rules
and regulations promulgated thereunder in connection with the distribution of
such Conversion Shares by such holder;
(viii) prepare and promptly file with the Commission and promptly notify
such participating security holders of the filing of such amendment or
supplement to such registration statement or prospectus as may be necessary to
correct any statements or omissions if, at the time when a prospectus relating
to such securities is required to be delivered under the Securities Act, any
event shall have occurred as the result of which any such prospectus or any
other prospectus as then in effect would include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances in which they were made,
not misleading;
(ix) advise such participating security holders, promptly after it shall
receive notice of the issuance of any stop order by the Commission suspending
the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose, and promptly use its reasonable
best efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued; and
(x) furnish on the effective date of the registration statement and, if
such registration includes an underwritten public offering, at the closing
provided for in the underwriting
26
<PAGE>
agreement: (A) opinions, dated such respective dates, of counsel representing
the Company for the purposes of such registration, addressed to the
underwriters, covering such matters as such persons may reasonably request in
customary form as would be given to underwriters in connection with underwritten
offerings and (B) letters, dated such respective dates, from the independent
certified public accountants of the Company addressed to the underwriters, in
customary form and concerning matters of the type customarily covered in
"comfort" letters in connection with underwritten offerings, and such other
matters as permitted by the Statement on Accounting Standards No. 72.
(d) Indemnification. In connection with such registration, the Company
---------------
shall indemnify Buyer, its officers, directors, employees and agents, and any
person who controls Buyer within the meaning of Section 15 of the Securities
Act, against all losses, claims, damages and liabilities caused by any untrue
statement of a material fact contained in any registration statement or
prospectus, (and as amended or supplemented, if the Company shall have furnished
any amendments or supplements thereto) or any preliminary prospectus, or caused
by any omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages or liabilities are caused by any untrue statement
or omission contained in information furnished in writing to the Company by
Buyer expressly for use therein, and Buyer agrees that it will indemnify and
hold harmless the Company and each of its officers who signs such
27
<PAGE>
registration statement and each of its directors and each person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act with
respect to losses, claims, damages or liabilities which are caused by any untrue
statement or omission contained in information furnished in writing to the
Company by Buyer expressly for use therein.
(e) Contribution. In addition, in connection with any such registration,
------------
the Company and Buyer agree that if the indemnification to be provided for
pursuant to Section 6.02(d) is unavailable to an indemnified party as provided
herein in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then the Company or Buyer (as the case may be), in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of the Company, on the one hand, and Buyer, on the other hand, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of the Company on the one hand,
and of Buyer, on the other hand, shall be determined by reference to, among
other things, whether the untrue or alleged untrue statements of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by Buyer, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The amount paid
28
<PAGE>
or payable by a party as a result of the losses, claims, damages, liabilities
and expenses referred to above shall be deemed to include, without limitation,
any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim. The Company and
Buyer agree that it would not be just and equitable if contribution pursuant to
this Section 6.02(e) were determined by a pro rata allocation or by any other
method of allocation that does not take account of the equitable considerations
referred to in this Section 6.02(e). Notwithstanding the provisions of this
Section 6.02(e), Buyer shall not be required to contribute any amount in excess
of the amount by which the total price which Buyer's securities were sold to the
public. The parties agree that in connection with any such registration, no
person guilty of fraudulent misrepresentations (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(f) Termination. The registration rights provided in this Section 6.02
-----------
shall terminate on the earliest to occur of: (i) the date that is five (5) years
from the date hereof and (ii) the date on which all of the Conversion Shares
then held by Buyer could be sold pursuant to Rule 144(k) under the Securities
Act (or any comparable or successor provision).
6.03 Confidentiality. (a) Without the consent of the other party,
---------------
neither Buyer nor the Company shall make any public comment, statement or
communication with respect to, or otherwise
29
<PAGE>
disclose or permit the disclosure of the terms of this Agreement and the
transactions contemplated hereby, and each party shall cause its authorized
officers, directors, partners, employees, counsel, accountants, agents and other
representatives (collectively, "Representatives") to strictly comply with the
foregoing.
(b) Each of the parties hereby covenants and agrees to use due care to
prevent the disclosure of the information and other material furnished under or
in connection with this Agreement to persons other than its Representatives who
have a need to know such information or to have access to such material in
connection with Buyer's investment in the Company and who have agreed to keep
such information and material confidential. For purposes of this Section
6.03(b), "due care" means at least the same level of care that a person would
use to protect the confidentiality of its own sensitive or proprietary
information, and this obligation shall survive termination of this Agreement.
(c) Notwithstanding Sections 6.03(a) and (b), either party may disclose or
deliver any information or other material disclosed to or received by it (i)
should such party be advised by its counsel that such disclosure or delivery is
required by law, regulation, legal process or administrative order, if the
disclosing party has first provided the other party with prompt notice of the
request to disclose or deliver such information or other material a reasonable
period of time in advance of making such disclosure or delivery so as to enable
such other party to
30
<PAGE>
seek a protective order or other appropriate remedy or (ii) in connection with a
public or private financing effected by the Company, to the extent required in
any Registration Statement, prospectus or other offering document, or to the
extent necessary to make any statements contained in any of the foregoing not
misleading.
6.04 Information Rights. From and after the date hereof until the earlier
------------------
to occur of (i) the issuance of shares of Common Stock to the public in an
underwritten offering pursuant to a registration statement filed under the
Securities Act covering the offer and sale of Common Stock (an "IPO") and (ii)
the date on which Buyer no longer owns any Class D Preferred Shares, within 45
days following the end of each of its first three fiscal quarters and within 90
days following the end of its fourth fiscal quarter, the Company shall furnish
Buyer with a copy of its financial statements, (including balance sheets, income
statements, changes in stockholders equity and statements of cash flow) for each
of such quarters and fiscal year, respectively. In addition, during such
period, the Company will furnish Buyer with such additional financial and
business information, including monthly or other periodic financial statements
as the Company may prepare from time to time, upon the reasonable request of
Buyer.
6.05 Subscription Right. (a) From and after the date hereof until the
------------------
earlier of (i) an IPO and (ii) the date on which Buyer no longer owns any Class
D Preferred Shares, if the Company
31
<PAGE>
proposes to issue equity securities of any kind (the term "equity securities"
shall include for the purposes of this Section 6.05, any equity securities and
all warrants, options or other rights to acquire equity securities, and debt
securities convertible into or exchangeable for equity securities) of the
Company (other than the issuance of securities (i) upon conversion of or
exercise securities of the Company outstanding as of the date hereof, (ii) in an
IPO, (iii) pursuant to the acquisition of another entity by the Company by
merger, purchase of substantially all of the assets or other form of
reorganization, (iv) pursuant to an employee stock option plan, stock bonus
plan, stock purchase plan or other management equity program, (v) to vendors,
customers and consultants of the Company for purposes primarily other than the
raising of capital or (vi) in connection with a public or private debt financing
effected by the Company (other than with an affiliate of the Company) or upon
the conversion or exercise of any securities so issued), then the Company shall:
(A) give written notice to Buyer setting forth in reasonable detail: (1) the
designation and all of the terms and provisions of the securities proposed to be
issued (the "Proposed Securities"), including, where applicable, the voting
powers, preferences and relative participating, optional or other special rights
and the qualifications, limitations or restrictions thereof; (2) the price and
other terms of the proposed sale of Proposed Securities; (3) the amount of
Proposed Securities proposed to be issued; and (4) such other information as
Buyer may reasonably request in order to evaluate the proposed
32
<PAGE>
issuance; and (B) offer to issue to Buyer a portion of the Proposed Securities
equal to a percentage determined by dividing (1) the number of Conversion Shares
by (2) the total number of shares of Common Stock then outstanding (including
for purposes of this calculation, conversion and exercise in full of all
securities then outstanding that are then convertible into or exchangeable for
Common Stock).
(b) Buyer must exercise its purchase right hereunder within fifteen (15)
days after receipt of such notice from the Company. To the extent that the
Company offers two or more securities in units, Buyer must purchase such units
as a whole and will not be given the opportunity to purchase only one of the
securities making up such unit. Upon the expiration of such fifteen-day period,
the Company will be free to sell Proposed Securities that Buyer has not elected
to purchase during the ninety (90) days following such expiration on terms and
conditions no more favorable to the purchasers thereof than those offered to
Buyer. Any Proposed Securities offered or sold by the Company after such 90-day
period must be reoffered to Buyer pursuant to this Section 6.05.
(c) The election by Buyer not to exercise its subscription rights under
this Section 6.05 in any one instance shall not affect its right (other than in
respect of a reduction in its percentage holdings) as to any subsequent proposed
issuance of equity securities by the Company. Any sale of equity securities by
the Company without first giving Buyer the rights described in this Section 6.05
shall be void and of no force and effect.
33
<PAGE>
6.06 By-laws. The Company shall at all times cause its By-laws to provide
-------
that the number of directors fixed in accordance therewith shall in no event
conflict with any of the terms or provisions of the Preferred Shares as set
forth in the Charter. The Company shall at all times maintain provisions in its
By-laws or Charter indemnifying all directors to the maximum extent permitted
under the Minnesota Business Corporation Act.
VII. MISCELLANEOUS
7.01 Amendments, Waivers and Consents. No provision in this Agreement may
--------------------------------
be altered or amended, and compliance with any covenant or provision set forth
herein may not be omitted or waived, except by an instrument in writing duly
executed by Buyer and the Company. Any waiver or consent may be given subject to
satisfaction of conditions stated therein and any waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
7.02 Notices. All notices required or permitted by this Agreement shall be
-------
in writing, and shall be hand delivered, sent by facsimile or nationally
recognized overnight delivery service, addressed as follows:
(a) If to Buyer:
MCI WORLDCOM, Inc.
515 E. Amite.
Jackson, MS 39201
Attention: Susan Mayer
Senior Vice President
Telephone: (202) 887-2202
Facsimile: (202) 887-3226
34
<PAGE>
with a copy to:
MCI WORLDCOM, Inc.
515 E. Amite.
Jackson, MS 39201
Attention: Michael Salsbury
General Counsel
Telephone: (601) 360-8977
Facsimile: (601) 360-8282
(b) If to the Company:
WAM!NET INC.
6100 West 110th Street
Minneapolis, MN 55438
Attention: Edward J. Driscoll, III, President
Telephone: 612-886-5100
Facsimile: 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
or to such other person or address as a party shall specify by notice in writing
to the other party. All such notices and other communications shall be
effective when received.
7.03 Binding Effect; Assignment. This Agreement shall be binding upon and
--------------------------
inure to the benefit of the Company and Buyer. No assignment of rights or
delegation of duties arising under this Agreement may be made by any party
hereto without the prior written consent of the other party.
7.04 Third-Party Beneficiaries. This Agreement is for the sole benefit of
-------------------------
the parties hereto and their permitted assigns and nothing herein expressed or
implied shall give or be
35
<PAGE>
construed to give to any person, other than the parties hereto and such
permitted assigns, any legal or equitable rights hereunder.
7.05 Entire Agreement. This Agreement (including all Schedules and Exhibit
----------------
hereto) constitutes the entire agreement between the parties hereto with respect
to the subject matter contained herein and supersedes all other prior
understandings or agreements, both written and oral, between the parties with
respect to the matters contained herein.
7.06 Severability. The provisions of this Agreement are severable and, in
------------
the event that any court of competent jurisdiction shall determine that any one
or more of the provisions or part of a provision contained in this Agreement
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement; but this Agreement
shall be reformed and construed as if such invalid or illegal or unenforceable
provision, or part of a provision, had never been contained herein, and such
provisions or part reformed so that it would be valid, legal and enforceable to
the maximum extent possible.
7.07 Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the law of the State of Minnesota without regard to its
principles of conflicts of laws.
36
<PAGE>
7.08 Headings. Article, Section and sub-Section headings in this Agreement
--------
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
7.09 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one and the same instrument, and any of the parties
hereto may execute this Agreement by signing any such counterpart by original or
facsimile signature.
7.10 Expenses. Each party shall pay the fees and expenses of its
--------
respective counsel, accountants and other experts (including any broker, finder,
advisor or intermediary), and shall pay all other expenses incurred by it in
connection with the negotiation, preparation and execution of this Agreement and
the consummation of the transactions contemplated hereby.
37
<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the
day and year first above written.
WAM!NET INC.
/s/ Allen L. Witters
_________________________________
By: Allen L. Witters
Its: Chief Technology Officer
MCI WORLDCOM, INC.
/s/ Susan Mayer
_________________________________
By: Susan Mayer
Its: Senior Vice President
38
<PAGE>
EXHIBIT 10.23
SALE AND PURCHASE AGREEMENT
This Sale and Purchase Agreement (the "AGREEMENT"), is made as of
March 4, 1999 (the "EFFECTIVE DATE"), between SILICON GRAPHICS, INC., a
corporation organized under the laws of the State of Delaware ("SGI"), on behalf
of itself and its wholly-owned subsidiary, CRAY RESEARCH, L.L.C., a limited
liability company organized under the laws of the State of Delaware ("CRAY")
(SGI and Cray are hereinafter collectively referred to as "SELLER"), and WAM!NET
INC., a corporation organized under the laws of the State of Minnesota
("WAM!NET").
In consideration of the mutual covenants and agreements hereinafter
contained, the parties agree as follows:
1. SALE AND PURCHASE OF PROPERTY. Seller shall sell to WAM!NET, and
-----------------------------
WAM!NET shall purchase from Seller the following property (collectively, the
"PROPERTY"):
(a) Real Property. Certain land (the "REAL PROPERTY") situated
-------------
in the City of Eagan (the "CITY"), in the County of Dakota, State of
Minnesota, commonly known as 655 Lone Oak Parkway, Eagan, Minnesota,
consisting of Lots 1 and 2, Block 1, Cray Second Addition, together with
(a) all fences, buildings, fixtures and other improvements thereon (the
"IMPROVEMENTS") and (b) all easements, air rights, and other rights
benefiting or appurtenant to the Real Property and Improvements; provided,
however, that the Property shall only include such development and parking
rights as provided in the Development Rights Distribution Agreement and
Parking Allocation Agreement (both as defined below);
(b) Personal Property. All of Seller's right, title and interest
-----------------
in the furniture, fixtures, equipment, mechanical systems, wiring, cabling,
keys, machinery and such other personal property owned by Seller and
specifically described in Exhibit 1(b) attached hereto ("PERSONAL
------------
PROPERTY");
(c) Development and Parking Rights. All of Seller's right, title
------------------------------
and interest in and to a portion of the development rights and parking
entitlements granted and/or approved for or in connection with the Real
Property (the "DEVELOPMENT AND PARKING RIGHTS") as provided in a
Development Rights Distribution Agreement (the "DEVELOPMENT RIGHTS
DISTRIBUTION AGREEMENT") and Allocation of Parking Spaces Agreement (the
"PARKING ALLOCATION AGREEMENT") both in substantially the same forms as
Exhibit 1(c) attached hereto;
------------
(d) Permits. All of Seller's right, title and interest in and to
-------
each and every permit, approval, license, certificate, variance and other
governmental permissions
<PAGE>
which relate to or benefit the Real Property or Improvements, except as
otherwise provided in the Development Rights Distribution Agreement and
Parking Allocation Agreement (the "PERMITS").
2. PURCHASE PRICE AND MANNER OF PAYMENT. The total purchase price
------------------------------------
("PURCHASE PRICE") to be paid by WAM!NET to Seller for the Property shall be
Forty Million and No/100 Dollars ($40,000,000.00). The Purchase Price shall be
payable by the issuance of Class B Preferred Stock of WAM!NET pursuant to terms
and conditions of that certain Preferred Stock Purchase Agreement of even date
herewith by and between Seller, as buyer, and WAM!NET, as seller (the "STOCK
PURCHASE AGREEMENT"). For purposes of this Agreement, the parties hereto agree
that a portion of the Purchase Price in the amount of $1,000,000 shall be
allocable to the purchase price for the Personal Property.
3. CONDITIONS TO WAM!NET'S OBLIGATIONS. The obligations of WAM!NET
-----------------------------------
under this Agreement are conditioned upon satisfaction or waiver by WAM!NET of
each of the following by the Closing Date:
(a) Title Insurance. The Title Insurer (as defined below) is
---------------
prepared to issue the Title Policy (as defined below), showing fee title to
the Real Property and Improvements vested in WAM!NET, subject only to the
Permitted Exceptions (as defined below).
(b) Performance of Seller's Obligations. Seller shall have
-----------------------------------
performed all of the obligations required to be performed by Seller under
this Agreement, as and when required by this Agreement.
(c) Closing of Stock Purchase Agreement. The closing of the
-----------------------------------
transactions contemplated in the Stock Purchase Agreement shall occur
simultaneously with the Closing of the transactions contemplated in this
Agreement.
(d) Representations and Warranties. The representations and
------------------------------
warranties of Seller contained in this Agreement will be true now and on
the Closing Date as if made on the Closing Date.
4. CONDITIONS TO SELLER'S OBLIGATIONS. The obligations of Seller
----------------------------------
under this Agreement are conditioned upon satisfaction or waiver by Seller of
each of the following by the Closing Date:
(a) Performance of WAM!NET's Obligations. WAM!NET shall have
------------------------------------
performed all of the obligations required to be performed by WAM!NET under
this Agreement, as and when required by this Agreement.
-2-
<PAGE>
(b) Closing of Stock Purchase Agreement. The closing of the
-----------------------------------
transactions contemplated in the Stock Purchase Agreement shall occur
simultaneously with the Closing of the transactions contemplated in this
Agreement.
(c) Representations and Warranties. The representations and
------------------------------
warranties of WAM!NET contained in this Agreement will be true now and on
the Closing Date as if made on the Closing Date.
5. TITLE MATTERS.
-------------
(a) Title Evidence. WAM!NET hereby acknowledges receipt and an
--------------
approval of the following (collectively, the "TITLE EVIDENCE"):
(1) Title Insurance Commitment. A commitment for an ALTA
--------------------------
Form B 1992 Owner's Policy of Title Insurance dated as of December 17,
1998 (Re-issue No. 1), as amended by endorsements attached thereto
(the "TITLE COMMITMENT"), issued by Commonwealth Land Title Insurance
Company (the "TITLE INSURER"), a copy of which is attached hereto as
Exhibit 5(a)(1), together with copies of all underlying recorded title
---------------
exception documents referred to in Schedule B thereof.
(2) Survey. A survey of the Real Property dated March 2,
------
1999 (Re-issue No. 1) (the "SURVEY"), certified to Seller, WAM!NET and
the Title Insurer, and all survey matters and title exceptions shown
therein.
(b) Permitted Title Exceptions. Seller shall convey to WAM!NET
--------------------------
insurable fee title to the Real Property, subject only to the following
title exceptions (collectively, "PERMITTED EXCEPTIONS"):
(1) Liens to secure payment of non-delinquent real estate
taxes and assessments;
(2) Title Insurer's standard preprinted exceptions to
coverage under the Title Policy, excluding such exceptions related to
survey matters, parties in possession and liens for labor, materials
and services;
(3) All title exceptions disclosed by the Title Commitment;
(4) All title exceptions shown on the Survey;
(5) That certain unrecorded Amendment to Agreement (Land Use
Covenants and Restrictions) dated February 28, 1992 which amends
Agreement (Land Use
-3-
<PAGE>
Covenants and Restrictions) dated December 2, 1986, filed of record
December 3, 1986, as Document No. 754646;
(6) The Parking Allocation Agreement; and
(7) The Development Rights Distribution Agreement.
(c) Title Policy. At Closing, Title Insurer shall issue to
------------
WAM!NET an owner's title insurance policy ("TITLE POLICY") issued by the
Title Insurer pursuant to the Title Commitment, or a suitably marked up
Title Commitment initialed by the Title Insurer undertaking to issue such a
Title Policy within a reasonable time in the form required by the Title
Commitment.
6. CLOSING AND POSSESSION. The closing of the purchase and sale
----------------------
contemplated by this Agreement (the "CLOSING") shall occur on the same date as
the closing contemplated in the Stock Purchase Agreement, unless postponed or
extended in writing by the parties (the "CLOSING DATE"). The Closing shall take
place at 10:00 a.m. local time at the offices of Larkin, Hoffman, Daly &
Lindgren, Ltd., in Bloomington, Minnesota, or at such other place and time as
may be acceptable to Seller and WAM!NET.
(a) Seller's Closing Documents. On the Closing Date, Seller
--------------------------
shall execute and/or deliver to WAM!NET the following (collectively, the
"SELLER'S CLOSING DOCUMENTS"):
(1) A General Warranty Deed (the "GENERAL WARRANTY DEED") in
the form attached hereto as Exhibit 6(a)(1), conveying fee title to
---------------
the Real Property to WAM!NET, free and clear of all encumbrances,
other than the Permitted Exceptions;
(2) The Development Rights Distribution Agreement and
Parking Allocation Agreement;
(3) The Lease Agreement (as defined below);
(4) A warranty bill of sale for the Personal Property in the
form attached hereto as Exhibit 6(a)(4), conveying title to the
---------------
Personal Property to WAM!NET, free and clear of all liens and
encumbrances created by or through Seller;
(5) Such affidavits by Seller in substantially the same form
attached hereto as Exhibit 6(a)(5), or other documents as may be
---------------
reasonably required by the Title Insurer in order to record Seller's
Closing Documents and issue the Title Policy required by Section 5 of
this Agreement;
-4-
<PAGE>
(6) A nonforeign affidavit in substantially the same form
attached hereto as Exhibit 6(a)(6), containing such information as is
---------------
required by IRC Section 1445(b)(2) and its regulations;
(7) A well disclosure statement and individual sewage
treatment system disclosure form in substantially the same forms
attached hereto as Exhibit 6(a)(7), disclosing any wells and sewage
---------------
treatment systems existing on the Real Property. If no wells exist
thereon, a statement to that effect may be inserted on the General
Warranty Deed in lieu of delivering the well disclosure statement;
(8) A current corporate resolution of SGI and unanimous
written consent of the board of directors of Cray, authorizing the
transactions contemplated by this Agreement and the execution and
delivery of Seller's Closing Documents;
(9) The Management Agreement (as defined below);
(10) All original documents that may be necessary for
WAM!NET to continue to operate the Property. Notwithstanding the
foregoing delivery requirement, delivery of such originals shall be
delayed until such time as the Management Agreement expires or is
terminated. WAM!NET may at any time make copies of the original
documents. Where necessary to comply with statutory record retention
requirements, Seller may retain originals of records and provide
copies to WAM!NET.
(b) WAM!NET's Closing Documents. On the Closing Date, WAM!NET
---------------------------
will execute and/or deliver to Seller the following (collectively,
"WAM!NET'S CLOSING DOCUMENTS"):
(1) The Purchase Price to be paid as required by Section 2
hereof;
(2) The Development Rights Distribution Agreement and
Parking Allocation Agreement;
(3) The Lease Agreement;
(4) The Management Agreement;
(5) Such affidavits of WAM!NET or other documents as may be
reasonably required by the Title Insurer in order to record WAM!NET's
Closing Documents and issue the Title Policy required by SECTION 5 of
this Agreement.
-5-
<PAGE>
(6) A current corporate resolution of WAM!NET, authorizing
the transactions contemplated by this Agreement and the execution and
delivery of WAM!NET's Closing Documents;
7. PRORATIONS. Seller and WAM!NET shall make the following
----------
prorations and allocations at Closing:
(a) Title Insurance and Closing Fee. Seller shall pay the cost
-------------------------------
of the Title Evidence. WAM!NET shall pay the premium for the Title Policy.
Seller and WAM!NET will each pay one-half of any reasonable and customary
closing fee or charge imposed by the Title Insurer or its designated
closing agent.
(b) Deed Tax. Seller shall pay all state deed tax due on the
--------
General Warranty Deed to be delivered by Seller under this Agreement.
(c) Real Estate Taxes and Special Assessments. Seller and
-----------------------------------------
WAM!NET shall prorate non-delinquent general real estate taxes and the
current installment of assessments payable in the year of closing as of the
Closing Date based upon a calendar year basis. If the amount of such real
estate taxes cannot be finally determined on the Closing Date, the taxes
shall be prorated based upon the previous year's real estate taxes. When
the actual amount of such taxes, including any interest payable therewith,
is determined and announced by the appropriate public authorities, WAM!NET
shall pay the full amount of such taxes and offset or credit, as
applicable, the difference between Seller's estimated pro rata portion of
the taxes and the Seller's pro rata portion of the actual taxes against or
towards, as applicable, any amount owed by Seller to WAM!NET under the
Lease Agreement. WAM!NET shall assume any assessments levied, "pending,"
deferred or constituting a lien against the Real Property as of the Closing
Date.
(d) Recording Costs. Seller will pay the cost of recording all
---------------
documents necessary to place record title in Seller in the condition
warranted by Seller in this Agreement. WAM!NET will pay the cost of
recording all other documents.
(e) Sales Tax. Seller shall pay sales tax of the State of
---------
Minnesota, if any, due by reason of the transactions contemplated by this
Agreement.
(f) Utilities. Promptly following the Closing, Seller shall
---------
notify all utilities serving the Property of the pending change in
ownership and direct that all future billings be made to WAM!NET at its
notice address with no interruption of service. Seller shall cause all
meters for utilities to be read during the daylight hours on the
-6-
<PAGE>
Closing Date, and Seller shall pay all charges for all utilities through
that time. Seller and WAM!NET shall prorate as of the Closing Date any
charges for utilities that are paid each month pursuant to the Lease
Agreement. Seller shall transfer to WAM!NET any and all prepaid deposits or
rents on utilities or services if they are transferable or refundable, and
WAM!NET shall pay those amounts to Seller within thirty (30) days following
Seller's written demand therefor.
(g) Attorneys' Fees. Seller and WAM!NET shall each pay its own
---------------
attorneys' fees in connection with the preparation and negotiation of this
Agreement and the Closing, except that a party defaulting under this
Agreement or any of its respective closing documents shall pay the
reasonable attorneys' fees and court costs incurred by the nondefaulting
party to enforce its rights regarding such default.
8. REPRESENTATIONS, WARRANTIES AND INDEMNITY BY SELLER. Seller
---------------------------------------------------
represents and warrants to WAM!NET as follows:
(a) Organization; Authority. SGI and Cray are duly organized and
-----------------------
in good standing under the laws of the State of Delaware; and are duly
qualified to transact business in the State of Minnesota. SGI and Cray
have the requisite organizational power and authority to execute and
perform this Agreement and any Seller's Closing Documents to be signed by
them; such documents have been (or will be prior to Closing) duly
authorized by all necessary corporate action on the part of SGI and all
necessary company action on the part of Cray and at the Closing shall have
been duly executed and delivered; such execution, delivery, and performance
by Seller of such documents does not conflict with or result in a violation
of each Seller's governing documents, any judgment, order, or decree of any
court or arbiter to which Seller is a party, or any agreement by which
Seller is bound; and such documents are and shall be valid and binding
obligations of Seller, enforceable in accordance with their terms.
(b) Title to Real Property. Seller owns the Real Property, free
----------------------
and clear of all encumbrances, except the Permitted Exceptions. Seller
owns Outlot D, Cray Second Addition ("OUTLOT D") free and clear of all
encumbrances.
(c) Title to Personal Property. Seller owns the Personal
--------------------------
Property, free and clear of all encumbrances created by or through Seller.
(d) Utilities. Except as otherwise disclosed in Exhibit 8
--------- ---------
attached hereto, (i) gas, sanitary, and storm sewer and water lines are
connected to the Property; and (ii) Seller has received no written notice
of actual or
-7-
<PAGE>
threatened reduction or curtailment of any utility service now supplied to
the Property.
(e) Litigation and Other Matters. Except as otherwise disclosed
----------------------------
in Exhibit 8 attached hereto, to Seller's actual knowledge, there are no
---------
lawsuits, administrative or arbitration hearings, governmental
investigations or proceedings affecting the Real Property or Improvements
or the use thereof, and Seller has not received notice of any such
proceedings or threatened proceedings.
(f) Rights of Others to Purchase Property. Except as otherwise
-------------------------------------
disclosed in Exhibit 8 attached hereto, Seller has not entered into any
---------
other contracts or agreements for the sale of all or any portion of the
Property, and there are no existing rights of first refusal or options to
purchase all or any portion of the Property, or any other rights of others
that would prevent the consummation of this Agreement.
(g) Private Restrictions. Except as otherwise disclosed in
--------------------
Exhibit 8 attached hereto, to Seller's actual knowledge, there are no
---------
unrecorded contracts, leases, private restrictions or agreements with any
public authority that do not appear in the Title Commitment and that will
adversely affect the present or future uses that may be made of the Real
Property or Improvements.
(h) Condemnation. Except as otherwise disclosed in Exhibit 8
------------ ---------
attached hereto, to Seller's actual knowledge, there are no pending
condemnation, eminent domain or other similar action, suit or proceeding
that would affect the Property.
(i) Real Estate Tax Appeals. Except as otherwise disclosed in
-----------------------
Exhibit 8 attached hereto, to Seller's actual knowledge, there are no
---------
pending real estate tax appeals in connection with the Real Property, and
there are no assessment agreements which currently set a minimum market
value on the Real Property or the Improvements.
(j) Assessments. Except as otherwise disclosed in Exhibit 8
----------- ---------
attached hereto, to Seller's actual knowledge, there are no actual or
proposed special assessments or reassessments of the Real Property.
(k) FIRPTA. Seller is not a "foreign person," "foreign
------
partnership," "foreign trust" or "foreign estate," as those terms are
defined in Section 1445 of the Internal Revenue Code.
(l) Hazardous Substances. Except as otherwise disclosed in the
--------------------
documents listed in Exhibit 8(t) attached hereto, to the Seller's actual
------------
knowledge: (1) no toxic or
-8-
<PAGE>
hazardous substances or wastes, pollutants, or contaminants (including,
without limitation, asbestos, urea formaldehyde, the group of organic
compounds known as polychlorinated biphenyls, petroleum products including
gasoline, fuel oil, crude oil, and various constituents of such products,
and any hazardous substance (collectively "HAZARDOUS SUBSTANCES") as
defined in any federal, state or local law rule or ordinance (collectively,
the "ENVIRONMENTAL LAWS") dealing with environmental matters have been
generated, treated, stored, released, or disposed of, or otherwise placed,
deposited in, or located on the Real Property by Seller, or any party
controlling, under common control of, or controlled by, Seller in violation
of Environmental Laws; (2) no activity has been undertaken on the Real
Property by Seller, or any party controlling, under common control of, or
controlled by, Seller; that would cause or contribute to (a) the Real
Property becoming a treatment, storage, or disposal facility within the
meaning of the Environmental Laws, (b) a release or threatened release of
toxic or hazardous wastes or substances, pollutants, or contaminants, from
the Real Property within the Environmental Laws, or (c) the discharge of
pollutants or effluents into any water source or system, the dredging or
filling of any waters, or the discharge into the air of any emissions that
would require a permit under any Environmental Laws; (3) no substances or
conditions exist in or on the Real Property that may support a claim or
cause of action under any Environmental Laws; (4) no above-ground or
underground tanks are located in or about the Real Property or have been
located under, in, or about the Real Property and have subsequently been
removed or filled; and (5) to the extent storage tanks exist on or under
the Real Property, such storage tanks have been duly registered with all
appropriate regulatory and governmental bodies and otherwise are in
compliance with applicable Environmental Laws.
(m) Americans With Disabilities Act. Except as otherwise
-------------------------------
disclosed in that certain Accessibility Audit from RSP Architects, Ltd
dated April 1993 (the "ADA REPORT"), to the Seller's actual knowledge there
are no existing violations of Title III of the Americans With Disabilities
Act of 1990 (the "ADA") and the ADA Accessibility Guidelines for Buildings
and Facilities (the "GUIDELINES") at the Real Property.
(n) Operating Statement. Attached hereto as Exhibit 8(n) is a
------------------- ------------
copy of the unaudited operating statement for the Real Property for the
1997-1998 fiscal year, which is true, accurate and complete in all material
respects.
(o) Compliance with Laws. Except as otherwise disclosed in
--------------------
Exhibit 8, Seller has not received any notice of violations of any existing
---------
local, state, and federal regulations concerning the maintenance and
operation of the
-9-
<PAGE>
Real Property, including zoning, building, health and safety, fire safety
and environmental codes and laws, and to the Seller's actual knowledge no
facts or circumstances exist which would constitute a violation thereof.
(p) Occupants/Tenants. As of the Effective Date there are no
-----------------
tenants, licensees, or occupants of the Real Property other than Seller,
and there are no leases, licenses or occupancy agreements outstanding in
connection with the Real Property.
(q) Outlot D Transfers. Seller shall give written notice to any
------------------
prospective purchaser or mortgagee of Outlot D of the existence of
WAM!NET's access rights (as described in Section 13 hereof) over and across
Outlot D prior to Outlot D being sold, mortgaged, pledged, encumbered,
assigned, or otherwise transferred to another party.
(r) Service Agreements and Contracts. Except as listed in
--------------------------------
Exhibit 8 there are no service agreements or contracts in connection with
---------
the operation of the Property that bind the Real Property or may require
performance by WAM!NET by reason of acquisition of title to the Real
Property by WAM!NET.
(s) Development and Parking Rights. To the Seller's actual
------------------------------
knowledge: (i) the Real Property together with Outlots A, B, C and D, Cray
Second Addition and Outlot G, Lone Oak Addition possess certain development
and parking rights as summarized in the Development Rights Distribution
Agreement and the Parking Allocation Agreement; and (ii) there are no other
documents or information regarding such rights other than the documents and
information set forth in Exhibit 8(t) and the Permitted Exceptions.
------------
(t) All Documents. Exhibit 8(t) attached hereto contains a true,
------------- ------------
correct and complete list of all material documents, information and
records in Seller's possession or under Seller's control which pertain to
the ownership and use of the Property, except for service and maintenance
agreements executed in connection with operation of the Property.
For purposes of this Agreement, "Seller's actual knowledge" shall mean
the actual knowledge (without inquiry or investigation of Raymond Johnson, Vice
President, Corporate Real Estate, Facilities and Services, Merey Price, Manager,
Corporate Facilities, Mark Lichty, on-site building engineer, and Michael
Hirahara, Manager, Corporate Facilities. Except for the specific
representations and warranties contained in this Agreement, Seller makes no
express or implied representations and warranties to WAM!NET regarding the
Property, the condition of the Property
-10-
<PAGE>
or its fitness for any particular use, and Buyer acknowledges and agrees that it
is acquiring the Property on an "as-is, where-as" basis. The foregoing
representations and warranties shall survive the Closing until the first
anniversary thereof, except for the representations and warranties contained in
Sections 8(e), (l) and (o) which shall survive for one (1) full year following
the date on which each respective portion of the Property is turned over to
WAM!NET for WAM!NET's exclusive use, or shared use for common areas of the
Property. If written notice of a claim has been given prior the expiration of
the applicable representations and warranties, the relevant representations and
warranties shall survive as to such claim until the claim has been finally
resolved. Seller will indemnify WAM!NET, its successors and assigns against, and
will hold WAM!NET harmless from, any expenses or damages, including reasonable
attorneys' fees, that WAM!NET incurs because of the breach of any of the above
representations and warranties. In no event, however, shall Seller have any
liability to WAM!NET for incidental, consequential, special or punitive damages
arising from the breach of any such representations and warranties.
9. REPRESENTATIONS, WARRANTIES AND INDEMNITY BY WAM!NET. WAM!NET
----------------------------------------------------
represents and warrants to Seller as follows:
(a) WAM!NET is duly organized and in good standing under the laws
of the State of Minnesota; that WAM!NET is duly qualified to transact
business in the State of Minnesota; that WAM!NET has the power and
authority to execute this Agreement and any WAM!NET's Closing Documents
signed by it; that all such documents have been duly authorized by all
necessary corporate action on the part of WAM!NET and at the Closing shall
have been duly executed and delivered; that the execution, delivery, and
performance by WAM!NET of such documents does not conflict with or violate
WAM!NET's articles of incorporation, bylaws, or any judgment, order or
decree of any court or arbiter or any agreement by which WAM!NET is bound;
and that all such documents are valid and binding obligations of WAM!NET
and are enforceable in accordance with their terms.
(b) WAM!NET has conducted a review of the Title Commitment
(including all underlying documents) and Survey; a review of the documents
and information listed on Exhibit 8(t), and inspections of the Property as
------------
deemed necessary or desirable by WAM!NET, including, without limitation, an
engineering inspection of the structure of the Improvements. WAM!NET
further represents and warrants that Seller has provided sufficient access
to the Property for conducting such tests and inspections as WAM!NET has
deemed necessary or desirable; WAM!NET has satisfied itself as to the
condition of the Property, the operations of the Property and the
suitability of the Property for the purposes intended by WAM!NET; and
WAM!NET will be relying solely upon its own inspections, investigations and
due
-11-
<PAGE>
diligence review of the Property and not upon any representations,
warranties or statements made or information provided by Seller, except for
those representations and warranties expressly set forth in Section 9
above. WAM!NET further acknowledges and agrees that it is acquiring the
Property subject to all existing laws, ordinances, rules and regulations.
(c) The foregoing representations and warranties shall survive
the Closing until the first anniversary thereof. If written notice of a
claim has been given prior the expiration of the applicable representations
and warranties, the relevant representations and warranties shall survive
as to such claim until the claim has been finally resolved. WAM!NET will
indemnify Seller against, and will hold Seller harmless from, any expenses
or damages, including reasonable attorneys' fees, that Seller incurs
because of the breach of any of the above representations and warranties.
In no event, however, shall WAM!NET have any liability to Seller for
incidental, consequential, special or punitive damages arising from the
breach of any such representations and warranties.
10. LEASE-BACK TO SELLER. At Closing, WAM!NET and Seller shall
--------------------
execute the Lease Agreement (the "LEASE AGREEMENT") attached hereto as Exhibit
-------
10 pursuant to which WAM!NET shall lease-back certain portions of the Property
- - --
to Seller. The term of the Lease Agreement shall commence on the Closing Date
and shall terminate as provided therein.
11. NON-SOLICITATION. WAM!NET and Seller agree that, except upon
----------------
the prior written consent of the other party, each party shall be prohibited
from directly soliciting the employees of the other party during the term of the
Lease Agreement.
12. MANAGEMENT AGREEMENT. At Closing, WAM!NET and Seller shall
--------------------
execute the Management Agreement (the "MANAGEMENT AGREEMENT") attached hereto as
Exhibit 12 pursuant to which Seller shall continue to manage the operations of
- - ----------
the Real Property pursuant to the terms and conditions therein.
13. ACCESS RIGHTS; EASEMENTS.
------------------------
(a) The Survey discloses the existence of a gravel road running
from Lot 1, Block 1 of the Real Property across Outlot D (the "GRAVEL
ROAD") to Lone Oak Road. Seller hereby grants to WAM!NET (to be effective
on the Closing Date) a license to use the Gravel Road for emergency access
between the Real Property and Lone Oak Road (the "LICENSE"). If access
from the Real Property to Lone Oak Road is required either for emergency
use or as a condition to further development of the Real Property, WAM!NET
shall use reasonable efforts to obtain the approvals necessary to locate a
permanent access on the Real Property and not on
-12-
<PAGE>
Outlot D. If the City of Eagan, Dakota County or other governing
authorities limit access to a single location on Lone Oak Road, Seller and
WAM!NET agree to share an access road and establish the same by easement
agreement. The foregoing license shall automatically terminate upon the
parties establishing a permanent, joint access route on and over a limited
portion of Outlot D.
(b) The parties agree to negotiate in good faith with regard to
any easements that may need to be granted for access, utility and/or
drainage purposes with regard to existing utilities and/or drainage
benefiting or burdening the Real Property and such other real property
owned by Seller, including without limitation a permanent, joint access
route on and over Outlot D and Seller's access to Outlot A, Cray Second
Addition over the existing private road located on Lot 1, Block 1. The
parties will use reasonable efforts to identify any such easements within
sixty (60) days following the closing. In no event shall either party be
required to grant an easement which would unreasonably interfere with its
current or proposed use or development of such party's respective property.
The provisions of this Section 13 shall survive the closing of the
transactions contemplated in this Agreement, and shall not merge into the
deed delivered to WAM!NET pursuant to the terms of this Agreement.
(c) The Survey discloses the existence of a gravel road running
from Lot 1, Block 1 to Seller's adjoining property to the East of the Real
Property. Seller and WAM!NET hereby acknowledge that the existence of such
gravel road does not give rise to any easement rights to the Real Property
or Seller's adjoining property upon which such gravel road is located.
14. BROKER'S COMMISSION. Seller represents to WAM!NET that it has
-------------------
not engaged a broker in connection with the transactions contemplated by this
Agreement. WAM!NET represents to Seller that it has not engaged a broker in
connection with the sale and purchase of the Property pursuant to this
Agreement. Seller shall indemnify and hold WAM!NET harmless from and against
any and all liability to which WAM!NET may be subjected by any broker's,
finder's, or similar fee with respect to the transactions contemplated by this
Agreement to the extent such fee is attributable to any action undertaken by or
on behalf of Seller or any affiliate of Seller. WAM!NET shall indemnify and
hold Seller harmless from and against any and all liability to which Seller may
be subjected by reason of any broker's, finder's, or similar fee with respect to
the transactions contemplated by this Agreement to the extent such fee is
attributable to any action undertaken by or on behalf of WAM!NET.
15. ASSIGNMENT. Prior to Closing, neither Seller nor WAM!NET may
----------
transfer or assign its rights under this Agreement
-13-
<PAGE>
for any purpose, without the prior written consent of the other party. After
Closing, either party may assign any remaining rights and obligations under this
Agreement to a third party provided such assignee assumes in writing the
remaining obligations to be performed under this Agreement. In no event shall
the assignment or other transfer of this Agreement by either party relieve such
party of its obligations and liabilities under this Agreement.
16. SURVIVAL. Except as provided herein, all of the covenants,
--------
representations and warranties made in this Agreement, or in any schedule,
exhibit, certificate, or document delivered in connection with this Agreement
will survive and be enforceable after the Closing.
17. NOTICES. Any notice required or permitted to be given under any
-------
provision of this Agreement shall be in writing and shall be deemed to have been
given in accordance with this Agreement, if it is mailed, by United States
certified mail, return receipt requested, postage prepaid; or if deposited cost
paid with a nationally recognized, reputable overnight courier, properly
addressed as follows:
If to Seller: See Address(s) set forth in the Stock
Purchase Agreement
with a copy to: Zamansky Professional Association
3901 IDS Tower
80 South Eighth Street
Minneapolis MN 55402
Attn: Ronald A. Zamansky
If to WAM!NET: See Address(s) set forth in the Stock
Purchase Agreement
with a copy to: Larkin, Hoffman, Daly & Lindgren, Ltd.
1500 Norwest Financial Center
7900 Xerxes Avenue South
Minneapolis, MN 55431
Attention: Thomas P. Stoltman
Notice shall be effective, and the time for response to any notice by
the other party shall commence to run, three (3) business days after any such
mailing or deposit. Either Seller or WAM!NET may change its address for the
service of notice by giving notice of such change to the other party, in any
manner above specified, ten (10) days prior to the effective date of such
change.
18. CAPTIONS; EXHIBITS. The section and paragraph headings or
------------------
captions appearing in this Agreement are for
-14-
<PAGE>
convenience only, are not a part of this Agreement, and are not to be considered
in interpreting this Agreement. All schedules, exhibits, addenda or attachments
referred to herein are hereby incorporated in and constitute a part of this
Agreement.
19. ENTIRE AGREEMENT; MODIFICATION. This written Agreement (which is
------------------------------
an exhibit to the Stock Purchase Agreement) and the Stock Purchase Agreement
constitute the complete agreement between Seller and WAM!NET and supersedes any
prior oral or written agreements between them regarding the Property. There are
no oral agreements that change this Agreement, and no amendment of any of its
terms will be effective unless in writing and executed by both Seller and
WAM!NET.
20. BINDING EFFECT. This Agreement binds and benefits Seller and
--------------
WAM!NET and their respective successors and assigns.
21. CONTROLLING LAW. This Agreement has been made under, and will be
---------------
interpreted and controlled by, the laws of the State of Minnesota.
22. WAIVER. No waiver of the provisions of this Agreement shall be
------
effective unless in writing, executed by the party to be charged with such
waiver. No waiver shall be deemed a continuing waiver or waiver in respect of
any subsequent breach or default, either of similar or different nature, unless
expressly stated in writing.
23. COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
Agreement.
24. FACSIMILE SIGNATURES. This Agreement may be executed with
--------------------
signatures transmitted by facsimile and shall constitute a binding agreement
with such signatures. Nonetheless, any party providing facsimile signatures
shall provide the other party with the original signatures within five (5)
business days after providing the facsimile signature page(s).
25. SEVERABILITY. If any provision of this Agreement is invalid or
------------
unenforceable, such provision shall be deemed to be modified to be within the
limits of enforceability or validity, if feasible; however, if the offending
provision cannot be so modified, it shall be stricken and all other provisions
of this Agreement in all other respects shall remain valid and enforceable.
26. LIMITATION OF LIABILITY. Upon Closing, WAM!NET shall neither
-----------------------
assume nor undertake to pay, satisfy or discharge any liabilities, obligations
or commitments of any Seller in connection with any service, maintenance or
similar agreements executed in connection with the operation of the Property.
-15-
<PAGE>
27. REMEDIES. Time is of the essence of this Agreement. If either
--------
party fails to perform any of its obligations under this Agreement, the other
party may exercise any remedies that may be available to such party in law or in
equity. Except as otherwise specified elsewhere herein, all rights, powers or
remedies afforded the parties hereunder, under the Stock Purchase Agreement, or
at law or in equity shall be cumulative and the exercise of one shall not bar
exercise of another.
28. FURTHER ASSURANCES. At any time and from time to time after the
------------------
Closing Date, each party shall, upon request of another party, execute,
acknowledge and deliver all such further and other assurances and documents, and
will take such action consistent with the terms of this Agreement as may be
reasonably requested to carry out the transactions contemplated herein, and to
permit each party to enjoy its rights and benefits hereunder.
Seller and WAM!NET have executed this Agreement as of the date set
forth on page 1 hereof.
WAM!NET: SELLER:
WAM!NET INC. SILICON GRAPHICS, INC.
By:/s/ Allen L. Witters By:/s/ William M. Kelly
- - ---------------------------- ---------------------------
- - ---------------------------- ---------------------------
(Print Name) Allen L. Witters (Print Name) William M. Kelly
Its: Chief Technology Officer Its: Senior Vice President
-16-
<PAGE>
EXHIBIT 10.24
LEASE
-----
THIS LEASE is entered into and made as of March 4, 1999 by and between
WAM!NET INC., a Minnesota corporation ("Landlord"), and SILICON GRAPHICS, INC.,
a Delaware corporation ("SGI"), on behalf of itself and its wholly-owned
subsidiary, CRAY RESEARCH, L.L.C., a Delaware limited liability company ("Cray")
(SGI and Cray are collectively referred to hereinafter as "Tenant").
WITNESSETH:
Landlord, in consideration of the rents and covenants hereinafter set
forth, does hereby demise, let and lease to Tenant, and Tenant does hereby hire,
take and lease from Landlord, on the terms and conditions hereinafter set forth,
the following described rentable area, hereinafter called the "Premises", to
have and to hold the same, with all appurtenances specified herein, for the term
hereinafter specified.
1. DESCRIPTION OF THE PREMISES
---------------------------
(a) Premises. The "Premises" will initially include all buildings and
--------
common areas comprising the Cray Research campus located at 655 Lone Oak
Parkway, in the City of Eagan, County of Dakota, State of Minnesota (hereinafter
called the "Project"), consisting of approximately 480,724 square feet of
rentable area within Buildings A, D, E and F, as more particularly shown on
Exhibit A attached hereto and made a part hereof. Landlord and Tenant
- - ---------
acknowledge that said total rentable area of the Project includes approximately
93,756 square feet of interior common area. During the Term, Tenant shall also
have the right to use all personal property of Landlord currently located in the
Premises. At such times that the rentable area of the Premises is reduced, said
personal property currently located therein shall remain in the vacated portions
of the original Premises and Tenant shall no longer have the right to use the
same. All such personal property shall be surrendered to Landlord in the same
condition as on the Commencement Date (as hereinafter defined) subject to
ordinary and reasonable wear and tear.
(b) Reduction of Rentable Area.
--------------------------
(1) On or before March 15, 1999, Tenant shall vacate all of
Building A, which includes approximately 62,107 square feet of rentable area, as
shown on Exhibit B-1 attached hereto and made a part hereof, in which event the
-----------
Premises shall consist of approximately 418,617 square feet of rentable area.
(2) On or before May 15, 1999, Tenant shall vacate approximately
92,821 square feet of rentable area located within Building E as shown on
Exhibit B-2 attached hereto and made a part hereof, in which event the Premises
- - -----------
shall consist of
<PAGE>
approximately 325,796 square feet of rentable area (which calculation of
rentable area includes approximately 67.8% of the square footage of the interior
common area).
(3) As of June 1, 2001, Tenant shall vacate approximately 220,000
square feet of rentable area located within Buildings E and F as shown on
Exhibit B-3 attached hereto and made a part hereof, in which event the Premises
- - -----------
shall consist of approximately 105,796 square feet of rentable area (which
calculation of rentable area includes approximately 22.0% of the square footage
of the interior common area); provided, however, that if, on or before June 1,
2000, Tenant delivers to Landlord a revised plan to vacate all or any portion of
the Premises, Landlord and Tenant shall meet and confer and negotiate in good
faith to amend this Lease to allow Tenant to vacate additional rentable area
within the Premises, and the Premises shall be further reduced with regard to
the rentable area so vacated by Tenant, which additional reduction shall be
effective as of the later of the date vacated by Tenant or June 1, 2001.
(4) Landlord and Tenant shall equally share any and all costs
necessary to separate the remaining Premises from the rentable area vacated by
Tenant as provided in subsections (1), (2) and (3) above, including (a) the cost
of constructing such demising walls, corridors, heating, ventilation, and air
conditioning modifications, utility installations and security systems as agreed
upon by Landlord and Tenant (collectively, the "Demising Improvements"), and (b)
the cost to remove the Demising Improvements upon expiration or earlier
termination of this Lease. Tenant shall construct the Demising Improvements in
a good and workmanlike manner and in compliance with applicable laws and
building codes. Prior to constructing the Demising Improvements, Landlord and
Tenant shall meet and confer in good faith for purposes of agreeing upon the
Demising Improvements and the cost thereof. If at any time Landlord and Tenant
are unable to so agree after using reasonable efforts, then either party shall
have the right to deliver notice to the other party of such disagreement (the
"Notice of Disagreement"). The parties shall continue to use good faith efforts
to agree for five (5) business days after delivery of the Notice of
Disagreement, and within said period shall provide to each other their
respective Demising Improvements proposal. If the parties are unable to reach
agreement within said period, Landlord and Tenant shall each promptly identify
an architect or other qualified design professional. Said two (2) architects
(or other qualified design professionals) shall promptly mutually select a third
architect or other qualified design professional (the "Expert"). The Expert
shall review and analyze each parties' Demising Improvements proposal and shall
be required to select one of the two proposals, as the Expert deems appropriate.
Said decision of the Expert shall be final and binding on Landlord and Tenant,
unless Landlord and Tenant mutually agree otherwise in writing.
-2-
<PAGE>
(c) Common Areas. Tenant shall have the non-exclusive right to use
------------
all common areas of the Project, including, without limitation, sidewalks,
driveways, parking areas, corridors, cafeterias, lobbies, recreational
facilities and other amenities, in accordance with the terms of this Lease.
2. TERM
----
The term of this Lease (the "Term") shall commence on March 4, 1999
(the "Commencement Date") and end on May 31, 2004 (the "Expiration Date"),
unless sooner terminated as provided in this Lease. Effective as of June 1,
2001 and on each June 1 thereafter until June 1, 2003, Tenant shall have the
option to terminate this Lease by delivering to Landlord at least six (6)
months' prior written notice of termination (which notice shall be delivered not
sooner than June 1, 2001, providing a termination date of not sooner than six
(6) months thereafter).
3. RENT
----
(a) Base Rent. No Base Rent shall be payable with respect to the
---------
period from the Commencement Date through May 31, 1999. From June 1, 1999
through May 31, 2001, Tenant shall pay to Landlord, at the address listed below
in Paragraph 25, Base Rent for the Premises in the amount of Twelve Dollars
($12.00) per square foot of rentable area per year, which is equal to Three
Million Nine Hundred Nine Thousand Five Hundred Fifty-two and no/100 Dollars
($3,909,552.00), payable in equal monthly installments of Three Hundred Twenty
Five Thousand Seven Hundred Ninety-six and no/100 Dollars ($325,796.00) in
advance, on or before June 1, 1999 and continuing on or before the first day of
each and every month thereafter throughout said period of the Term. With
respect to the portion of the Premises which Tenant continues to occupy under
this Lease from and after June 1, 2001, the Base Rent shall be in the amount of
Twelve and 60/100 Dollars ($12.60) per square foot of rentable area per year,
payable in monthly installments at the rate of One and 05/100 Dollars($1.05) per
square foot of rentable area per month. If the Commencement Date shall be a day
other than the first day of a calendar month or the Expiration Date shall be a
day other than the last day of a calendar month, the Base Rent installment for
such first or last fractional month shall be prorated accordingly, based on a
thirty (30) day month. Tenant's obligation to pay Base Rent and any and all
other amounts due hereunder is a separate and independent covenant and
obligation. Tenant shall pay all Base Rent and all other amounts as shall
become due from and payable by Tenant to Landlord under this Lease at the times
and in the manner provided herein, without abatement and without notice, demand,
setoff or counterclaim.
(b) Taxes and Operating Expenses. Tenant shall pay as additional rent
----------------------------
Tenant's Proportionate Share (as defined below) of all Taxes (as defined below)
and Operating Expenses (as
-3-
<PAGE>
defined below), which shall accrue and be due and payable from and after the
Commencement Date as provided hereinbelow.
(1) Definitions.
-----------
a. "Tenant's Proportionate Share" of Operating Expenses
shall mean the percentage determined by dividing the then existing
rentable area of the Premises by the total rentable area within the
Project. From the Commencement Date through May 31, 1999, Tenant's
Proportionate Share shall be one hundred percent (100%) and,
commencing on June 1, 1999 through May 31, 2001, Tenant's
Proportionate Share shall be sixty-seven and eight tenths percent
(67.8%). If the rentable area of the Premises is reduced in
accordance with the terms of this Lease, then Tenant's Proportionate
Share shall be adjusted to be the percentage determined by a fraction,
the numerator of which is the reduced rentable area of the Premises,
and the denominator of which is 480,724. Notwithstanding any contrary
or inconsistent provision herein, for the period of the Term from the
Commencement Date until June 1, 1999, Tenant's Proportionate Share
shall be fixed at one hundred percent (100%), irrespective of Tenant's
use or occupancy of the Premises.
b. "Taxes" shall mean all real estate taxes, installments
of special assessments, sewer charges, transit taxes, taxes based upon
receipt of rent and any other federal, state or local governmental
charge, general, special, ordinary or extraordinary (excluding income,
franchise, or other taxes based upon Landlord's income or profit,
unless imposed in lieu of real estate taxes) which shall now or
hereafter be levied, assessed or imposed against the Project and shall
apply to said obligations at such time in which said obligations are
accrued or levied. Taxes shall not include any additional taxes
attributable to the improvement of any portion of the Project occupied
by Landlord or any other tenant (besides Tenant). Tenant shall be
obligated to pay one hundred percent (100%) of all Taxes attributable
to the improvement of any portion of the Premises by or on behalf of
Tenant.
c. "Operating Expenses" shall mean all of Landlord's costs
and expenses of operation and maintenance of the Project and the
surrounding walks, driveways, parking lots, recreational facilities
and other amenities and landscaped areas (within the area described or
shown in Exhibit "A") as determined by Landlord in accordance with
-----------
generally accepted accounting principles or other recognized
accounting practices, consistently applied, including by way of
illustration and not limitation: costs (including
-4-
<PAGE>
attorneys' fees) incurred in connection with any good faith contest of
Taxes (but only to the extent of savings resulting from such contest);
insurance premiums for the insurance required to be maintained by
Landlord as provided herein and such other insurance as is otherwise
typically maintained by owners of class-A office buildings in the
Minneapolis/St. Paul metropolitan area; personal property taxes on
personal property used in the Project by Landlord in operating or
maintaining the Project; water, electrical and other utility charges
other than the separately billed electrical and other charges
described in Paragraph 7 hereof; the charges of any property manager
or independent contractor who, under a contract with Landlord, or its
representatives, does any of the work of operating, maintaining or
repairing of the Project (which shall not exceed the approximate
amount, per square foot, of such charges paid for property management
of comparable properties in the Minneapolis-St. Paul metropolitan
area), service and other charges incurred in the operation and
maintenance of the elevators and the heating, ventilation and air
conditioning system; cleaning services; tools and supplies; landscape
maintenance costs; building security services; license and permit
fees; wages, bonuses and related employee benefits payable to the
onsite employees of Landlord (but only to the extent such employees
are engaged in the management or maintenance of the Project, and then
only if neither Cray nor SGI is responsible for serving as, or
engaging the services of, the property manager of the Project) or its
property management agent; such other costs and expenses which would,
under generally accepted accounting principles applicable to real
estate leasing transactions, be regarded as operating and maintenance
costs and expenses. If Landlord shall install a labor saving device,
equipment or such other improvement intended to improve the operating
efficiency of any system within the Project (such as an energy
management computer system) then Landlord may add to Operating
Expenses of the Project, in each year during the useful life of such
installed device or equipment, an amount equal to the lesser of (i)
annual depreciation or amortization allowance of the cost of such
installed device or equipment as determined in accordance with
applicable regulations of the Internal Revenue Service or generally
accepted accounting principles, or (ii) the savings in Operating
Expenses that results from such installation. Notwithstanding the
preceding to the contrary, Operating Expenses shall not include any of
the following-described expenses: any costs incurred by Landlord in
connection with the construction of any alterations, additions or
improvements for the sole benefit of Landlord or other occupants of
the Project;
-5-
<PAGE>
financing and refinancing costs, including interest on debts relating
to mortgage loans and rental fees under any ground or underlying
leases; business or income taxes; depreciation or amortization expense
(except as provided herein); costs in excess of the insurance
deductible (which deductible shall in no event exceed $50,000.00)
incurred by Landlord in connection with repairs and restorations
following the occurrence of a casualty loss; leasing commissions and
other costs of leasing incurred by Landlord; costs of restoring the
building or other improvements following a taking or transfer in lieu
thereof; costs incurred by Landlord as a result of Landlord making new
improvements to rentable area in the part of the Project that is
occupied by Landlord, which are made to cause the Project to comply
with applicable laws, ordinances, building codes, rules or
regulations, and which improvements are not required as a result of
improvements made by Tenant to the Premises; costs in excess of the
insurance deductible incurred as a result of the negligent or
intentional acts of Landlord or other occupants of the Project; and
costs which would be capitalized under generally accepted accounting
principles (except as otherwise provided herein). Operating Expenses
shall, in any event, include the cost of necessary or appropriate
capital repairs and replacements to the Project, which shall be
amortized on a monthly basis over the useful life of the capital item
on a straight-line basis.
(2) Payment of Taxes. Tenant shall pay to Landlord Tenant's
----------------
Proportionate Share of all Taxes on or before the later of (i) the twentieth
(20th) day prior to the date the applicable Taxes are due and payable or (ii)
the tenth (10th) day following Landlord's written demand therefor (which demand
shall be accompanied by a copy of the related tax bill or other accurate
statement of the amount of the Taxes). Subject to the foregoing and subject to
rights of Landlord to contest or dispute Taxes, Landlord shall pay the Taxes to
the applicable taxing authority(ies) on or before the date they are due and
payable.
(3) Payment of Operating Expenses. Landlord shall deliver to Tenant
-----------------------------
a written estimate of the Operating Expenses and the portion thereof payable by
Tenant for the ensuing year or portion thereof. On or before the first day of
each month during the Term, Tenant shall pay such estimated amount of Tenant's
annualized share of such Operating Expenses in twelve (12) equal monthly
installments, in advance. Following the expiration of each calendar year,
Landlord shall furnish Tenant a statement showing in reasonable detail the
actual Operating Expenses for the preceding calendar year. Within thirty (30)
days after service of the aforementioned statement, Tenant shall pay to
Landlord, or Landlord shall credit against the next rent payment or payments due
from Tenant, as the case may be, the
-6-
<PAGE>
difference between Tenant's actual Proportionate Share of Operating Expenses for
the preceding calendar year and the amount of Operating Expenses paid by Tenant
during such year. If this Lease shall commence, expire or be terminated on any
date other than the last day of a calendar year, then Tenant's Proportionate
Share of Operating Expenses and Taxes for such partial calendar year shall be
prorated on the basis of the number of days during the year this Lease was in
effect in relation to the total number of days in such year. Without limiting
other obligations of Tenant which shall survive the expiration of the Term, the
obligations of Tenant to pay Operating Expenses and Taxes shall survive the
expiration of the Term. Subject to the foregoing obligation of Tenant to pay its
Proportionate Share of Operating Expenses, and subject to the right of Landlord
to contest or dispute all or any part of the Operating Expenses, Landlord shall
pay the Operating Expenses on or before the date they are due and payable.
(4) Audit. Tenant or its accountants shall have the right to inspect,
-----
at reasonable times and locations and in a reasonable manner, during the ninety
(90) day period following the delivery of Landlord's statement of Operating
Expenses for a given calendar year, such of Landlord's books and records as
pertain to and contain information concerning such costs and expenses in order
to verify the amounts thereof; unless Tenant takes written exception to any item
within ninety (90) days after the furnishing of the statement, such statement
shall be considered as final and accepted by Tenant; if Tenant shall dispute any
item or items included in the determination of Landlord's Operating Expenses for
a given calendar year, and such dispute is not resolved by the parties hereto
within sixty (60) days after the date on which Tenant gives written notice to
Landlord of the disputed items, then either party may, within thirty (30) days
thereafter, request that a firm of certified public accountants mutually
selected by Landlord and Tenant render an opinion as to whether or not the
disputed item or items may properly be included in the determination of
Landlord's Operating Expenses of the Project for such year; and the opinion of
such firm on the matter shall be conclusive and binding upon the parties hereto;
the fees and expenses incurred in obtaining such an opinion shall be borne by
Tenant unless: (aa) Landlord's statement contains errors aggregating more than
four percent (4%) of the Operating Expenses for the Project; and (bb) neither
Cray nor SGI is responsible for serving as, or engaging the services of, the
property manager of the Project.
(c) Net Lease. Landlord and Tenant intend that this Lease shall be
---------
deemed and construed to be a "net lease," and Base Rent, Operating Expenses,
Taxes and all other charges, costs and sums to be paid by Tenant hereunder shall
be paid to Landlord absolutely net and without any charges, assessments,
impositions, expenses or deductions of any kind or nature whatsoever, except as
otherwise explicitly stated in this Lease.
-7-
<PAGE>
(d) Service Charge. Tenant's failure to pay any monetary payment
--------------
required of Tenant hereunder within ten (10) days of the due date therefor shall
result in the imposition of a service charge for such late payment in the amount
of two percent (2%) of the amount due. In addition, any sum not paid within
thirty (30) days of the due date therefor shall bear interest at a rate equal to
the greater of eighteen percent (18%) per annum or the then-current prime rate
(as listed in the "Money Rates" section of the Wall Street Journal) plus two
-------------------
percent (2%) per annum (or such lesser percentage as may be the maximum amount
permitted by law) from the date due until paid.
4. TENANT FINISH IMPROVEMENTS
--------------------------
Tenant accepts the Premises in "AS IS, with all faults" condition,
with no representations or warranties of any kind by or on behalf of Landlord
with regard to the Premises. Landlord shall have no obligation to construct any
tenant improvements or make any other changes to the Premises except as
expressly provided herein.
5. CABLE PLANT
-----------
Tenant shall have the right to maintain and to exclusively use all
existing cable plant and any related facilities and equipment located within the
Buildings to the extent serving solely the Premises. Tenant shall have the
right to use such cable plant and such related facilities and equipment in the
same manner in which Tenant has previously used the same prior to the sale and
transfer of the Project by Tenant to Landlord. Such maintenance shall be
performed with due care by qualified professionals, in a good workmanlike
manner, and shall be carried out in a manner which will not unreasonably
interfere with the use of the cable plant and related facilities and equipment
by Landlord.
Landlord shall have the right to maintain and to exclusively use all
existing cable plant and any related facilities and equipment located within the
Buildings to the extent not serving solely the Premises. Landlord and Tenant
shall split the existing cable plant as mutually agreed to serve the Premises
and the balance of the Project. Landlord and Tenant shall meet within thirty
(30) days after the date hereof to establish plans to so split the existing
cable plant.
6. USE OF THE PREMISES
-------------------
(a) Specific Use. The Premises shall be used exclusively for purposes
------------
of general, administrative and sales office, research and development, training
and for any other lawful purpose incidental thereto, and shall not be used for
any other purpose; provided, however, that Tenant shall have the right to use
the Premises in a manner consistent with the uses to
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which Tenant has put the Premises during the period prior to the sale and
transfer of the Project to the Landlord.
(b) Covenants Regarding Use. In connection with its use of the
-----------------------
Premises, Tenant agrees to do the following:
(1) Tenant shall use the Premises and conduct its business thereon in
a safe, careful, reputable and lawful manner; shall keep and maintain the
Premises in as good a condition as they were on the Commencement Date, subject
to ordinary and reasonable wear and tear, and shall make all necessary repairs
to the Premises other than those which Landlord is obligated to make as provided
elsewhere herein.
(2) Tenant shall not commit, nor allow to be committed, in, on or
about the Premises, the Buildings or the Project, any act of waste, including
any act which might deface, damage or destroy the Project, Buildings, or any
part thereof; use or permit to be used on the Premises any equipment or other
thing which might cause injury to person or property; permit any objectionable
or offensive noise or odors to be emitted from the Premises.
(3) Tenant shall not overload the floors of the Premises beyond their
designed weightbearing capacity. Notwithstanding the foregoing sentence to the
contrary, but subject to Paragraph 10(b) hereof, Tenant shall have the right to
continue to use the Premises in the same manner as Tenant has used the Premises
prior to the sale and transfer of the Premises to Landlord.
(4) Tenant shall not use the Premises, nor allow the Premises to be
used, for any purpose or in any manner which would invalidate any policy of
insurance now or hereafter carried on the Project or increase the rate of
premiums payable on any such insurance policy. Should Tenant fail to comply
with this covenant, Landlord may require Tenant to reimburse Landlord as
additional rent for any increase in premiums charged during the term of this
Lease on the insurance carried by Landlord on the Premises and attributable to
the use being made of the Premises by Tenant. Notwithstanding the foregoing
provisions of this subsection (4) to the contrary, Tenant shall have the right
to continue to use the Premises in the same manner as Tenant has used the
Premises prior to the sale and transfer of the Premises to Landlord.
(c) Compliance with Laws. Tenant shall not use or permit the use of
--------------------
any part of the Premises for any purpose prohibited by law. Tenant shall, at
Tenant's sole expense, comply with all laws, statutes, ordinances, rules,
regulations and orders of any federal, state, municipal or other governmental
agency thereof having jurisdiction over and relating to the use of the Premises,
except that Tenant shall not be responsible for or required to make structural
repairs to the Buildings or the
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Premises unless, they are required as a result of Tenant's use or improvement of
the Premises from and after the Commencement Date, or Tenant's negligence or
willful misconduct.
(d) Compliance with Project Rules and Regulations. Landlord and
---------------------------------------------
Tenant shall comply with and conform to the rules and regulations attached to
this Lease, made a part hereof and marked Exhibit "C".
-----------
(e) Compliance with Zoning. Tenant knows the character of its
----------------------
operation in the Premises and that applicable zoning ordinances and regulations
are of public record. Tenant shall have sole responsibility for its compliance
therewith, and Tenant's inability so to comply shall not be cause for Tenant to
terminate this Lease.
7. UTILITIES AND OTHER BUILDING SERVICES
-------------------------------------
(a) Services to be Provided. Landlord shall furnish Tenant with the
-----------------------
following utilities and building services to the extent reasonably necessary for
Tenant's use and occupancy of the Premises or as may be required by law or
directed by governmental authority:
(1) Heating, ventilation and air conditioning;
(2) Electricity for lighting and operating business machines and
equipment in the Premises and the common areas and facilities of the Buildings;
(3) Water for lavatory and drinking purposes;
(4) Automatic elevator service;
(5) Washing of interior and exterior windows;
(6) Replacement of all lamps, bulbs, starters and ballasts used
in the Project;
(7) Cleaning and maintenance of the common areas and facilities
of the Project and the walks, driveways, parking lots and landscaped areas
within the Project, including the removal of rubbish and snow; and
(8) Repair and maintenance of the Project and certain systems
within the Premises to the extent specified in Paragraph 10(a) hereof.
(b) Additional Services. If Tenant uses any other utilities or
-------------------
building services in addition to those identified above or uses any of the above
utilities or building services in frequency, scope, quality or quantities
greater than normally required by the other tenant(s) in the Project (including
Landlord), then the incremental cost thereof shall be borne by
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Tenant, who shall reimburse Landlord monthly for the same as provided in
Paragraph 7(d) hereof. If Landlord or any other tenant of the Project uses any
other utilities or building services in addition to those identified above or
uses any of the above utilities or building services in frequency, scope,
quality or quantities greater than normally required by Tenant, then the
incremental cost thereof shall be excluded from Operating Expenses for purposes
of this Lease, to be effective as of such time that Landlord is made aware of
such additional use.
If Landlord determines that Tenant has installed or connected any
machinery or equipment that exceeds the designed load capacity of the Project's
electrical system or is incompatible therewith, then Landlord shall have the
right, as a condition to granting its consent, to make such modifications to any
utility system or other parts of the Project or the Premises, or to require
Tenant to make such modifications to the equipment to be installed or connected,
as is reasonably necessary before such equipment may be so installed or
connected. The cost of any such modifications shall be borne by Tenant, who
shall reimburse Landlord for the same (or any portion thereof paid by Landlord)
as provided in Paragraph 7(d) hereof. This paragraph shall not apply to any
machinery or equipment that exists as of the Commencement Date.
(c) Interruption of Services. Tenant understands, acknowledges and
------------------------
agrees that any one or more of the utilities or building services identified
above may be interrupted by reason of accident, emergency or other causes beyond
Landlord's control, or may be discontinued or diminished temporarily by Landlord
or other persons until certain repairs, alterations or improvements can be made;
that Landlord does not represent or warrant the uninterrupted availability of
such utilities or building services; and that any such interruption, unless
caused by the intentionally wrongful act of Landlord shall not be deemed an
eviction or disturbance of Tenant's right to possession, occupancy and use of
the Premises or any part thereof, or render Landlord liable to Tenant in damages
by abatement of rent or otherwise, or relieve Tenant from the obligation to
perform its covenants under this Lease.
(d) Payment for Utilities and Buildings Services. The cost of
--------------------------------------------
additional utilities and other building services furnished by Landlord at the
request of Tenant or as a result of Tenant's activities as provided in Paragraph
7(b) hereof shall be borne by Tenant, who shall be separately billed therefor
and who shall reimburse and pay Landlord monthly for the same as additional
rent, at the same time the next monthly installment of Base Rent and other
additional rent is due. Tenant agrees to give reasonable advance notice, in
writing, to Landlord of its request for additional services.
(e) Computer Areas. Landlord and Tenant shall each be responsible for
--------------
their own utilities consumption costs associated
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with their respective computer areas within Building E. Tenant acknowledges that
its computer area is located on Level 2 of Building E. Within thirty (30) days
after the date hereof, representatives of Landlord and Tenant shall meet to
establish the method for determining respective responsibility for such
utilities costs. If the parties are unable to mutually agree within said thirty
(30) days then, at Landlord's option, (i) each party's large electrical
equipment, such as computers, shall be separately submetered, and/or (ii) each
party's computer areas shall be separately submetered, to determine electrical
consumption. In such event, each party shall be responsible for all costs and
expenses of the submetered electricity supplied to their respective computer
areas and, if necessary, Tenant's Proportionate Share of the balance of the
electricity costs shall be equitably adjusted. The costs of installing any such
submeters in Tenant's computer area shall be borne by Tenant. The costs of
installing any such submeters in Landlord's computer area shall be borne by
Landlord.
8. PARKING
-------
Tenant and its employees, agents, contractors, invitees and guests
shall have the non-exclusive right to park vehicles in the parking areas of the
Project on an undesignated basis at no additional charge to Tenant or its
employees, agents, contractors, invitees and guests.
9. SIGNS
-----
Subject to the terms and conditions of this Paragraph 9, Tenant shall
have the right to retain and maintain signs, advertisements, and notices on or
in the Project or on or about the Premises which have existed prior to the
Commencement Date; provided, however, that Landlord and Tenant shall mutually
agree on the signage to be installed by Tenant in the Project from and after the
Commencement Date. Tenant shall not inscribe, paint, affix or display any
additional signs, advertisements, or notices without the prior written consent
of Landlord, which consent shall not be unreasonably withheld or delayed. Upon
the expiration or early termination of this Lease, Tenant shall remove all of
its signs and shall repair and restore any damage or injury in connection
therewith, at Tenant's sole expense. Landlord shall have the right to erect
and/or otherwise install such signage as desired by Landlord, provided that it
complies with city ordinances and other applicable laws and regulations. If
city ordinances or other applicable laws or regulations impose restrictions or
limitations preventing Landlord from installing signage in size and quantity
equaling in area and visibility Tenant's existing signage, then Tenant agrees to
share and/or reduce the size and/or quantity of its signs to the extent
necessary to allow Landlord to install legal and conforming signage equaling in
area and visibility Tenant's existing signage. Landlord shall pay all costs and
expenses for Landlord's signage. Landlord shall also pay the cost, if any, of
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modifying Tenant's existing signage if necessary to allow Landlord to install
Landlord's signage as permitted by this paragraph. Any new directional signs on
the Project shall be subject to the mutual approval of Landlord and Tenant,
which shall not be unreasonably withheld or delayed.
10. REPAIRS, MAINTENANCE, ALTERATIONS, IMPROVEMENTS AND FIXTURES
------------------------------------------------------------
(a) Repair and Maintenance of Project. Landlord shall keep and
---------------------------------
maintain in good order, condition and repair the roof, exterior and interior
loadbearing walls (including any plate glass windows comprising a part thereof),
foundation, basement, the common areas and facilities of the Project and the
electrical, plumbing, heating, ventilation and air conditioning systems serving
the Premises and other parts of the Project. The cost of all noncapitalized
repairs required to be made by Landlord shall be an Operating Expense of the
Project (unless such non-capitalized repairs are required to be made by the
negligence, misuse, or default of Landlord, its employees or agents, or the
negligence, misuse or default of other occupants of the Project or their
employees or agents) unless made necessary by the negligence, misuse or default
of Tenant, its employees or agents, in which event they shall be borne by
Tenant, who shall be separately billed and shall reimburse Landlord for the same
as Additional Rent.
(b) Repair and Maintenance of Premises. Except as provided in
----------------------------------
Paragraph 10(a) hereof, Tenant shall, at its own expense, keep and maintain the
Premises in good order, condition and repair at all times during the Term,
subject to damage by casualty loss and Tenant shall promptly repair all damage
to the Premises and replace or repair all damaged or broken fixtures, equipment
and appurtenances with materials equal in quality and class to the original
materials, and within any reasonable period of time. If in any one event the
cost of such repair or replacement is estimated to exceed Ten Thousand and
no/100 Dollars ($10,000.00), then such repair or replacement shall be under the
supervision and subject to the approval of Landlord. If Tenant fails to do so,
Landlord may, but need not make such repairs and replacements, and Tenant shall
pay Landlord the cost thereof within thirty (30) days following Landlord's
written demand therefor, plus an amount equal to fifteen percent (15%) of any
costs or expenses paid by Landlord, in order to reimburse Landlord for overhead,
general conditions, fees and other costs and expenses arising from Landlord's
actions or involvement.
(c) Alterations or Improvements. During the Term, Tenant shall have
---------------------------
the right to make such alterations, additions or improvements to the Premises
("Improvements") as deemed necessary or desirable by Tenant, provided that such
Improvements are constructed in accordance with the terms and conditions of this
subsection (c). However, Tenant shall not make any Improvements of a structural
nature without obtaining Landlord's prior written consent. At the time Tenant
desires to make any
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Improvements with a cost in excess of Fifty Thousand and no/100 Dollars
($50,000.00), Tenant shall submit (i) a general plan or layout to Landlord for
Landlord's review and (ii) an express written notice that Landlord must notify
Tenant within fifteen (15) days if Landlord will require Tenant to remove such
Improvements prior to the Expiration Date, and, within fifteen (15) days
following receipt of such plan and notice, Landlord shall notify Tenant in
writing if Landlord will require Tenant to remove such Improvements prior to the
Expiration Date ("Removal Notice"). Tenant shall not have the right to make any
Improvements to or on the common areas of the Project. All Improvements shall be
made in compliance with all applicable laws and building codes, in a good and
workmanlike manner and in quality equal to or better than the original
construction of the Project. Tenant shall promptly pay all costs attributable to
such Improvements and shall indemnify, defend and hold harmless Landlord from
and against any mechanic's liens or other liens or claims filed or asserted as a
result thereof and against any costs or expenses which may be incurred as a
result of building code violations attributable to such work. Tenant shall
promptly repair any damage to the Premises or the Project caused during the
construction of such Improvements. Landlord shall give proper notice to Tenant
of any possible claim with respect to which Tenant's obligation to indemnify,
defend and hold harmless Landlord may apply and Tenant shall have the right to
defend any such claim with counsel of Tenant's choosing. All Improvements made
by Tenant to the Premises during the Term shall remain the property of Tenant
and Tenant shall be entitled to all depreciation and amortization of costs in
connection therewith. Prior to surrender of the Premises to Landlord, Tenant
shall remove any Improvements identified by Landlord for removal in the Removal
Notice and, at Landlord's request provided at least fifteen (15) days prior to
the Expiration Date or earlier termination of the Lease, such other Improvements
constructed by Tenant during the Term which were not submitted to Landlord for
its prior review. Any damage caused by such removal shall be repaired at
Tenant's cost and expense. Notwithstanding the preceding to the contrary, Tenant
shall have no obligation to remove any Improvements that existed on the
Commencement Date, or any Improvements that Tenant installed during the Term and
which Landlord did not identify for removal following Landlord's review of the
general plans. In the event Tenant so fails to remove any Improvements that
Tenant is obligated to remove, Landlord may have same removed and the Premises
so repaired at Tenant's expense. If any Improvements to the Premises cause the
need for additional alterations or improvements to any other part of the Project
or the Premises, including, but without limitation, any system(s) of the Project
and/or any other changes to comply with applicable codes, ordinances or other
laws (collectively, "Additional Improvements"), the installation of such
Additional Improvements shall be subject to the terms and conditions of this
subsection (c) and Tenant shall be required to pay the cost of installing such
Additional Improvements.
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(d) Trade Fixtures. Any trade fixtures installed on the Premises by
--------------
Tenant at its own expense during the Term, such as movable partitions, counters,
shelving, showcases, mirrors and the like may, and, at the request of Landlord,
shall be removed on the Expiration Date or earlier termination of this Lease,
provided that Tenant is not then in default, that Tenant bears the cost of such
removal, and further that Tenant repair at its own expense any and all damage to
the Premises resulting from the original installation of and subsequent removal
of such trade fixtures. If Tenant fails so to remove any and all such trade
fixtures from the Premises on the Expiration Date or earlier termination of this
Lease, all such trade fixtures shall become the property of Landlord unless
Landlord elects to require their removal, in which case Tenant shall promptly
remove same and restore the Premises to their prior condition. In the event
Tenant so fails to remove same, Landlord may have same removed and the Premises
so repaired to their prior condition at Tenant's expense.
(e) Cabling. During the Term, Tenant shall have the right to install
-------
such cabling in the Premises as deemed necessary or desirable by Tenant, subject
to the terms of this subsection (e). At the time Tenant desires to install any
such cabling, Tenant shall submit (i) a general plan or layout to Landlord for
Landlord's review and (ii) an express written notice that Landlord must notify
Tenant within fifteen (15) days if Landlord will require Tenant to remove such
cabling prior to the Expiration Date. If, within fifteen (15) days following
receipt of such plan and notice, Landlord notifies Tenant in writing that
Landlord will require Tenant to remove such cabling prior to the Expiration
Date, then Tenant shall remove such cabling identified by Landlord prior to the
Expiration Date or earlier termination of the Lease. If Tenant fails to provide
such plan and notice to Landlord prior to installation of the cabling, then
Tenant shall be required to remove such cabling prior to the Expiration Date or
earlier termination of the Lease, unless otherwise notified in writing by
Landlord. If Tenant provided said plan and notice, but Landlord does not notify
Tenant, then upon the Expiration Date or earlier termination of this Lease, such
items shall be deemed to be part of the realty and the property of Landlord (and
shall not be removed or disabled by Tenant). If Landlord so notifies Tenant to
remove any or all of such items, and Tenant fails to remove the same upon the
expiration or earlier termination of this Lease, then Landlord may have the same
removed at Tenant's expense.
(f) Reserved Rights. Landlord reserves the right to decorate and to
---------------
make, at any time or times, at its own expense, repairs, alterations, additions
and improvements, structural or otherwise, in or to the Buildings, the Project
or part thereof, and to perform any acts related to the safety, protection or
preservation thereof, and during such operations to take into and through the
Premises or any part of the Buildings all material and equipment required,
provided that Landlord shall use
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reasonable efforts to cause as little inconvenience or annoyance to Tenant as is
reasonably necessary in the circumstances. Included among Landlord's rights are
rights of Landlord to install security devices, walls, doorways and/or other
improvements as necessary or desirable in Landlord's discretion to adequately
secure space in the Project occupied or used by Landlord or other tenants from
the Premises. Tenant shall cause its employees, agents, customers and invitees
to comply with any security measures reasonably imposed by Landlord.
11. FIRE OR OTHER CASUALTY; CASUALTY INSURANCE
------------------------------------------
(a) Substantial Destruction of the Buildings. If the Buildings in
----------------------------------------
which the Premises is located are substantially destroyed (which, as used
herein, means destruction or damage to at least seventy-five percent (75%) of
said Buildings) by fire or other casualty, either party hereto may, at its
option, terminate this Lease by giving written notice thereof to the other party
within sixty (60) days of such casualty. In such event, Base Rent and
Additional Rent shall be apportioned to and shall cease as of the date of such
casualty. If neither party exercises this option, then the Premises shall be
reconstructed and restored, at Landlord's expense, to substantially the same
condition as they were prior to the casualty.
(b) Substantial Destruction of the Premises. If the Premises are
---------------------------------------
substantially destroyed (which, as used herein, means destruction or damage to
at least seventy-five percent (75%) of the Premises), or rendered wholly
untenantable for the purpose for which they were leased, by fire or other
casualty whether or not the Buildings are substantially destroyed as provided
above, then the parties hereto shall have the following options:
(1) Tenant may elect to terminate the Lease or to require that the
Premises be reconstructed and restored, at Landlord's expense, to substantially
the same condition as the Premises existed prior to the casualty, except for
repair or replacement of Tenant's personal property, equipment and trade
fixtures, which shall remain Tenant's responsibility. This option shall be
exercised by Tenant giving written notice to Landlord within sixty (60) days
after the date of the casualty, and this Lease shall continue in full force and
effect for the balance of the Term upon the same terms, conditions and covenants
as are contained herein. Base Rent and Additional Rent shall be equitably abated
following the occurrence of the casualty.
(2) If the casualty occurs during the last twelve (12) months of
the Term, either party shall have the right and option to terminate its Lease as
of the date of the casualty, which option shall be exercised by written notice
to be given by either party to the other party within thirty (30) days
therefrom. If this option is exercised, rent shall be apportioned to and shall
cease as of the date of the casualty.
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(c) Partial Destruction of the Premises.
-----------------------------------
(1) If the Premises are rendered partially untenantable for the
purpose for which they were leased (which, as used herein, means the Premises
are less than substantially destroyed, as defined in Paragraph 11(b) above) by
fire or other casualty, then such damaged part of the Premises shall be
reconstructed and restored, at Landlord's expense, to substantially the same
condition as it was prior to the casualty. Base Rent and Additional Rent shall
be equitably abated in proportion to the ratio between the number of square feet
which is untenantable compared to the aggregate number of square feet comprising
the Premises. Landlord shall use reasonable diligence in completing such
reconstruction repairs, but in the event Landlord fails to complete the same
within one hundred fifty (150) days from the date of the casualty, Tenant may,
at its option, terminate this Lease upon giving Landlord written notice to that
effect, whereupon both parties shall be released from all further obligations
and liability hereunder.
(2) If the casualty occurs during the last six (6) months of the
Term, either party shall have the right and option to terminate its Lease as of
the date of the casualty, which option shall be exercised by written notice to
be given by either party to the other party within thirty (30) days therefrom.
If this option is exercised, rent shall be apportioned to and shall cease as of
the date of the casualty.
(d) Casualty Insurance.
------------------
(1) Landlord shall at all times during the Term, carry, as an
Operating Expense of the Project, a "Special Forms and Extended Perils" property
insurance policy insuring the Project, including the Premises, against loss or
damage by fire or other casualty (namely, the perils against which insurance is
afforded by the standard fire insurance policy and extended coverage
endorsement) for the full replacement cost thereof; provided, however, that
Landlord shall not be obligated to insure against any loss or damage to personal
property (including, but not limited to, any furniture, machinery, equipment,
goods or supplies) of Tenant or which Tenant may have on the Premises or any
trade fixtures installed by or paid for by Tenant on the Premises or any
additional improvements which Tenant may construct on the Premises. Such policy
shall provide coverage against physical loss, damage and theft and the perils of
fire and extended coverage, including, without limitation, theft, vandalism,
malicious mischief, explosion, collapse and underground hazards, sprinkler
leakage, water damage, storms, subsidence, sinkhole collapse, landslide, and
debris removal. Such property insurance must be from insurance companies rated
at least A:X in the latest Best's Insurance Guide. Upon request, Landlord shall
furnish to Tenant a certificate evidencing the existence of such insurance
coverage and endorsements to such coverage. If changes to Tenant's use or
operation on the
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Premises, or any alterations or improvements made by Tenant pursuant to the
provisions of Paragraph 10(c) hereof result in an increase in the premiums
charged during the Term on the casualty insurance carried by Landlord on the
Project, then the cost of such increase in insurance premiums shall be borne by
Tenant, who shall reimburse Landlord for the same as additional rent after being
billed therefor. If changes to Landlord's use or operation within Project, or
any alterations or improvements made by Landlord (and not on Tenant's behalf)
result in an increase in the premiums charged during the Term on the casualty
insurance carried by Landlord on the Project, then the cost of such increase in
insurance premiums shall be borne by Landlord, and said increase shall be
excluded from Operating Expenses for purposes of this Lease.
(2) Tenant shall at all times during the Term, carry, at its own
expense, property insurance covering its personal property and trade fixtures
installed by or paid for by Tenant or any additional improvements which Tenant
may construct on the Premises, which coverage shall be no less than replacement
value. Tenant shall furnish Landlord with a certificate evidencing that such
coverages are in full force and effect. Such coverages shall not be canceled or
amended on less than thirty (30) days notice to Landlord.
(e) Waiver of Subrogation. This Paragraph 11(e) shall govern any
---------------------
contrary or inconsistent provisions of this Lease. Landlord and Tenant hereby
release each other and each other's employees, agents, customers and invitees
from any and all liability for any loss, damage or injury to property occurring
in, on or about or to the Premises, improvements to the Project or personal
property within the Project, by reason of fire or other casualty which are
covered by applicable standard fire and extended coverage insurance policies.
Because the provisions of this paragraph will preclude the assignment of any
claim mentioned herein by way of subrogation or otherwise to an insurance
company or any other person, each party to this Lease shall give to each
insurance company which has issued to it one or more policies of fire and
extended coverage insurance notice of the terms of the mutual releases contained
in this paragraph, and have such insurance policies properly endorsed, if
necessary, to prevent the invalidation of insurance coverages by reason of the
mutual releases contained in this paragraph.
(f) Calculating Percentages. For purposes of calculating percentages
-----------------------
under Paragraphs 11(a), 11(b) and 11(c), the rentable area of the common areas
allocated to the area of the Premises shall be excluded, and only the actual
rentable area of the Premises, excluding common areas, shall be taken into
account.
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12. GENERAL PUBLIC LIABILITY, INDEMNIFICATION AND INSURANCE
-------------------------------------------------------
(a) At all times during the Term, Landlord and Tenant shall each
carry, at its own expense, for the protection of the other party, one or more
policies of general liability insurance with one or more insurance companies
rated A:X or better in Best's Insurance Guide, providing minimum coverages of
$2,000,000 combined single limit for bodily injury and property damage per
occurrence and location with $5,000,000 aggregate coverage. Such general
liability insurance shall include a separation of insureds/cross liability
endorsement, broad form property damage coverage and afford coverage for
"personal injury" liability. At all times during the Term, Landlord and Tenant
shall each carry comprehensive automobile liability insurance covering all
owned, non-owned and hired automobiles, with limits of not less than $1,000,000
in primary coverage per accident for both bodily injury and property damage
liability. All such insurance policy or policies shall name the other party as
additional insureds and shall provide that they may not be canceled or
materially changed on less than thirty (30) days prior written notice to the
other party. Each party shall furnish the other with certificates of insurance
evidencing such coverages prior to the Commencement Date and prior to the date
of renewal. Should any party fail to carry such insurance and/or furnish to the
other party within ten (10) days following such other party's request a
certificate of insurance evidencing such coverage, such other party shall have
the right to obtain such insurance and collect the cost thereof from the non-
performing party, in which event the non-performing party shall reimburse such
other party for the cost of such coverage within thirty (30) days following such
other party's written demand therefor. Each party shall also provide the other
with certificates evidencing workers' compensation insurance coverage as
required by law and employer's liability coverage for injury, disease and death,
with coverage limits of not less than $1,000,000 per accident. The insurance
coverages required hereby shall be deemed to be additional obligations of each
party and shall not be a discharge or limitation of such party's indemnity
obligations contained hereinbelow.
(b) Except for any loss, damage, or injury to person or property
caused by the negligence or intentional misconduct of Landlord, Landlord's
agents, employees, contractors, invitees or guests, Tenant shall be responsible
for, shall insure against, and shall indemnify Landlord and hold it harmless
from, any and all liability for any loss, damage or injury to person or
property, arising out of use, occupancy or operations of Tenant and occurring
in, on or about the Premises and Tenant hereby releases Landlord from any and
all liability for the same. Tenant's obligation to indemnify Landlord hereunder
shall include the duty to defend against any claims asserted by reason of such
loss, damage or injury and to pay any judgments, settlements, costs, fees and
expenses, including attorneys' fees, incurred in connection therewith. Landlord
shall give prompt written notice to Tenant of the occurrence of any loss,
damage, or injury to
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which Tenant's duty to indemnify and hold harmless the Landlord may pertain and
Tenant shall have the right to defend any claim asserted by any party with
respect to such loss, damage, or injury through counsel of Tenant's selection.
(c) Except for any loss, damage, or injury to person or property
caused by the negligence or intentional misconduct of Tenant, or Tenant's
agents, employees, contractors, invitees or guests, Landlord shall be
responsible for, shall insure against, and shall indemnify Tenant and hold it
harmless from, any and all liability for any loss, damage or injury to person or
property occurring in, on or about the common areas and facilities for the
Project and the use, occupancy or operations of Landlord and occurring in, on or
about any portion of the Project occupied by Landlord, and Landlord hereby
releases Tenant from any and all liability for the same. Landlord's obligation
to indemnify Tenant shall include the duty to defend against any claims asserted
by reason of such loss, damage or injury and to pay any judgments, settlements,
costs, fees and expenses, including attorneys' fees, incurred in connection
therewith. Tenant shall give prompt written notice to Landlord of the
occurrence of any loss, damage, or injury to which Landlord's duty to indemnify
and hold harmless the Tenant may pertain and Landlord shall have the right to
defend any claim asserted by any party with respect to such loss, damage, or
injury through counsel of Landlord's selection.
(d) Landlord and its partners, shareholders, affiliates, officers,
agents, servants and employees shall not be liable for any damage to person,
property or business resulting from the loss of use thereof sustained by Tenant
or by any other persons due to the Buildings or any part thereof or any
appurtenances thereof becoming out of repair, or due to the happening of any
accident or event in or about the Buildings, including the Premises, or due to
any act or neglect of any tenant or occupant of the Buildings or of any other
person. This provision shall apply particularly, but not exclusively, to damage
caused by gas, electricity, snow, ice, frost, steam, sewage, sewer gas or odors,
fire, water or by the bursting or leaking of pipes, faucets, sprinklers,
plumbing fixtures and windows and shall apply without distinction as to the
person whose act or neglect was responsible for the damage and whether the
damage was due to any of the causes specifically enumerated above or to some
other cause. Tenant agrees that except as set forth below in this subsection
(d), all personal property located in the Premises or placed by Tenant or on
behalf of Tenant upon loading docks, receiving and holding areas, or freight
elevators of Buildings, shall be at the risk of Tenant only, and that Landlord
shall not be liable for any loss or damage thereto or theft thereof.
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13. EMINENT DOMAIN
--------------
If the whole or any part of the Premises or Project (including parking
areas) shall be taken for public or quasipublic use by a governmental authority
under the power of eminent domain or shall be conveyed to a governmental
authority in lieu of such taking, and if such taking or conveyance shall cause
the remaining part of the Premises to be untenantable and inadequate for use by
Tenant for the purpose for which they were leased, then Tenant may, at its
option, terminate this Lease as of the date Tenant is required to surrender
possession of the Premises as a result of such taking. If a part of the
Premises or Project shall be taken or conveyed but the remaining part is
tenantable and adequate for Tenant's use, then this Lease shall be terminated as
to the part taken or conveyed as of the date Tenant surrenders possession;
Landlord shall make such repairs, alterations and improvements as may be
necessary to render the part not taken or conveyed tenantable; and the rent
shall be reduced in proportion to the part of the Premises so taken or conveyed.
Tenant shall not have the right to assert a claim against the governmental
authority exercising its power of eminent domain based upon the value of
Tenant's leasehold interest. All compensation awarded for such taking or
conveyance shall be the property of Landlord without any deduction therefrom for
any present or future estate of Tenant and Tenant hereby assigns to Landlord all
its right, title and interest in and to any such award. However, Tenant shall
have the right to recover from the governmental authority, but not from
Landlord, such compensation as may be awarded to Tenant on account of the
interruption of Tenant's business, moving and relocation expenses and
depreciation to and removal of Tenant's trade fixtures and personal property.
14. LIENS
-----
If, because of any act or omission of Tenant or anyone claiming by,
through, or under Tenant (other than Landlord), any mechanic's lien or other
lien shall be filed against the Premises or the Project for work performed by or
on behalf of Tenant (whether or not such lien is valid or enforceable as such),
Tenant shall, at its own expense, cause the same to be discharged of record
within a reasonable time, not to exceed sixty (60) days after the date of filing
thereof, and shall also defend and indemnify Landlord and hold it harmless from
any and all claims, losses, damages, judgments, settlements, cost and expenses,
including attorneys' fees, resulting therefrom or by reason thereof. If such
lien is not discharged of record within sixty (60) days after the date of filing
thereof, Landlord, at its sole option, may take all action necessary to release
and remove such lien (without any duty to investigate the validity thereof) and
Tenant shall promptly upon notice reimburse Landlord for all sums, costs and
expenses (including reasonable attorneys' fees and Landlord's Costs) incurred by
Landlord in connection with such lien.
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15. RENTAL, PERSONAL PROPERTY AND OTHER TAXES
-----------------------------------------
(a) Tenant shall pay before delinquency any and all taxes,
assessments, fees or charges (hereinafter referred to as "taxes"), including any
sales, gross income, rental, business occupation or other taxes, levied or
imposed upon Tenant's business operation in the Premises and any personal
property or similar taxes levied or imposed upon Tenant's trade fixtures,
leasehold improvements or personal property located within the Premises. In the
event any such taxes are charged to the account of, or are levied or imposed
upon the property of Landlord, Tenant shall reimburse Landlord for the same as
additional rent. Notwithstanding the foregoing, Tenant shall have the right to
contest in good faith any such tax and to defer payment, if required, until
after Tenant's liability therefor is finally determined.
(b) If any tenant finish improvements, trade fixtures, alterations or
improvements or business machines and equipment located in, on or about the
Premises, regardless of whether they are installed or paid for by Landlord or
Tenant and whether or not they are affixed to and become a part of the realty
and the property of Landlord, are assessed for real property tax purposes at a
valuation higher than that at which other such property in other space in the
Project is assessed, then Tenant shall reimburse Landlord as additional rent for
the amount of real property taxes shown on the appropriate county official's
records as having been levied upon the Project or other property of Landlord by
reason of such excess assessed valuation.
16. ASSIGNMENT AND SUBLETTING
-------------------------
Tenant may not assign or otherwise transfer its interest in this Lease
or sublet the Premises or any part thereof without the prior written consent of
Landlord. Tenant shall notify Landlord thirty (30) days in advance of its
intent to transfer, assign or sublet all or any portion of the Premises and
shall, at the time Tenant requests Landlord's approval, provide Landlord with
financial information on the proposed assignee or subtenant. Landlord shall
have the right to grant or withhold its consent to a proposed assignment or
subletting in Landlord's sole discretion; however, Landlord shall not have the
right to unreasonably withhold its consent with respect to any assignment or
sublease requested by Tenant hereunder, provided that (i) the request is for an
assignment or sublease to one assignee or subtenant (as applicable), and (ii)
there is currently no other sublease in effect and (iii) the Tenant's interest
in this Lease has not previously been assigned more than once. Without
limitation, in determining whether to withhold its consent with respect to an
assignment or subleasing request to which said reasonableness standard applies,
Landlord shall have the right to give due regard to the proposed assignee's or
subtenant's financial situation, reputation, and specific proposed use, as well
as security issues and the impact on common areas. In any
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event, Tenant shall reimburse Landlord for fees and expenses incurred by
Landlord (including expert and attorneys' fees) in reviewing any proposed
assignment or subletting. In the event of any such assignment or subletting,
Tenant shall nevertheless at all times remain fully responsible and liable for
the payment of rent and the performance and observance of all of Tenant's other
obligations under the terms, conditions and covenants of this Lease. No
assignment or subletting of the Premises or any part thereof shall be binding
upon Landlord unless such assignee or subtenant delivers to Landlord an
instrument (in recordable form, if requested) containing an agreement of
assumption of all of Tenant's obligations under this Lease and Landlord executes
a consent form. Upon the occurrence of an event of default after the expiration
of any applicable notice and cure period herein, if all or any part of the
Premises are then assigned or sublet, Landlord, in addition to any other
remedies provided by this Lease or by law, may, at its option, collect directly
from the assignee or subtenant all rent becoming due to Landlord by reason of
the assignment or subletting, and Landlord shall have a security interest in all
property on the Premises to secure payment of such sums. Landlord, at its
option, may also recapture any sublet space in the event of default. Any
collection by Landlord from the assignee or subtenant shall not be construed to
constitute a novation or release of Tenant from the further performance of its
obligations under this Lease. Any rents received by Tenant from the assignment
or subletting of the Premises which exceed rents payable by Tenant hereunder
shall be immediately paid to Landlord as additional compensation. Landlord
shall, at its option, have the right to recapture all or any part of the
Premises Tenant proposes to assign or sublet upon notice from Tenant of its
intent to assign or such sublet part of the Premises. Landlord shall have the
right to transfer and assign, in whole or in part, all its rights and
obligations hereunder and in the Buildings, the Project and all other property
referred to herein, and upon such transfer, the transferor shall have no further
liability hereunder and Tenant shall attorn to any such transferee. Landlord
hereby consents to the sublease(s), if any, described in Exhibit "D" attached
-----------
hereto and made a part hereof. Landlord hereby consents to the merger of Cray
into SGI.
17. SUBORDINATION OF LEASE TO MORTGAGES
-----------------------------------
This Lease shall be subject and subordinate to any mortgage or similar
encumbrances, including ground or underlying leases, whether presently existing
or hereafter voluntarily placed upon the Project or the Premises, including any
renewals, extensions or modifications thereof, provided that, with respect to
any such encumbrances hereafter placed on the Project or Premises, the holder of
such encumbrance enters into a non-disturbance and attornment agreement with
Tenant in a customary form, including, among other provisions, an agreement that
Tenant's possession of the Premises will not be disturbed in the event of
mortgage foreclosure or other similar exercise of
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remedies, so long as Tenant is not in default hereunder after the expiration of
any applicable notice and cure periods. Tenant shall, at Landlord's request,
execute and deliver within ten (10) days to Landlord, without cost, a
subordination, non-disturbance and attornment agreement for purposes of
confirming the subordination of this Lease.
18. DEFAULTS AND REMEDIES
---------------------
(a) Default by Tenant. The occurrence of any one or more of the
-----------------
following events shall be a default and breach of this Lease by Tenant:
(1) Tenant shall fail to pay any installment of Base Rent, Taxes,
Operating Expenses or additional rent within ten (10) days after written notice
that the same is due and payable;
(2) Tenant shall fail to perform or observe any term, condition,
covenant or obligation required to be performed or observed by it under this
Lease for a period of thirty (30) days after written notice thereof from
Landlord; provided, however, that if the term, condition, covenant or obligation
to be performed by Tenant is of such nature that the same cannot reasonably be
performed within such thirty (30) day period, such default shall be deemed to
have been cured if Tenant commences such performance within said thirty day
period and thereafter diligently completes the same;
(3) Tenant shall abandon the Premises; or
(4) Tenant makes an assignment for the benefit of creditors; or
substantially all of Tenant's assets in, on or about the Premises or Tenant's
interest in this Lease are attached or levied upon under execution (and Tenant
does not discharge the same within sixty (60) days thereafter).
(b) Remedies of Landlord. Upon the occurrence of any event of default
--------------------
set forth in Paragraph 18(a) hereof, Landlord shall have the following rights
and remedies, in addition to those allowed by law, any one or more of which may
be exercised without further notice to or demand upon Tenant:
(1) Landlord may reenter the Premises and cure any default of
Tenant, in which event Tenant shall reimburse Landlord as additional rent for
any costs and expenses which Landlord may incur to cure such default.
(2) Landlord may terminate this Lease as of the date of such
default, in which event: (A) neither Tenant nor any person claiming under or
through Tenant shall thereafter be entitled to possession of the Premises, and
Tenant shall immediately thereafter surrender the Premises to Landlord; (B)
Landlord may reenter the Premises and dispossess Tenant or any
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other occupants of the Premises by summary proceedings, ejectment or otherwise,
and may remove their effects, without prejudice to any other remedy which
Landlord may have for possession or arrearages in rent; and (C) notwithstanding
the termination of this Lease, Landlord may either declare all rent which would
have been due under this Lease for the balance of the Term or exercised renewal
period to be immediately due and payable, whereupon Tenant shall be obligated to
pay the same to Landlord, together with all loss or damage which Landlord may
sustain by reason of such termination and reentry, or relet all or any part of
the Premises for a term different from that which would otherwise have
constituted the balance of the Term and for rent and on terms and conditions
different from those contained herein, whereupon Tenant shall be obligated to
pay to Landlord as liquidated damages the difference between the rent provided
for herein and that provided for in any lease covering a subsequent reletting of
the Premises, for the period which would otherwise have constituted the balance
of the Term, together with all of Landlord's costs and expenses for preparing
the Premises, for reletting, including all repairs, tenant finish improvements,
marketing costs, broker's and attorney's fees, and all loss or damage which
Landlord may sustain by reason of such termination, reentry and reletting, it
being expressly understood and agreed that the liabilities and remedies
specified above shall survive the termination of this Lease. Notwithstanding
anything to the contrary herein contained, Landlord shall not have a duty to
mitigate its damages following Tenant's default under this Lease.
(3) Landlord may terminate Tenant's right of possession of the
Premises and may repossess the Premises by unlawful detainer action, by taking
peaceful possession or otherwise, without terminating this Lease, in which event
Landlord may, but shall be under no obligation to, relet the same for the
account of Tenant, for such rent and upon such terms as shall be satisfactory to
Landlord. For the purpose of such reletting, Landlord is authorized to
decorate, repair, remodel or alter the Premises. If Landlord fails to so relet
the Premises, Tenant shall pay to Landlord as damages a sum equal to the rent
which would have been due under this Lease for the balance of the Term or
exercised renewal period as such rent shall become due and payable hereunder
from time to time during the Term. If the Premises are relet and a sufficient
sum shall not be realized from such reletting after paying all of the costs and
expenses of all decoration, repairs, remodeling, alterations and additions and
the expenses of such reletting and of the collection of the rent accruing
therefrom to satisfy the rent provided for in this Lease, Tenant shall satisfy
and pay the same upon demand therefor from time to time. Tenant shall not be
entitled to any rents received by Landlord in excess of the rent provided for in
this Lease.
(4) Landlord may sue for injunctive relief or to recover damages
for any loss resulting from the breach.
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Any agreement for an extension of the Term or any additional period
thereafter shall not thereby prevent Landlord from terminating this Lease for
any reason specified in this Lease. If any such right of termination is
exercised by Landlord during the Term or any extension thereof, Tenant's right
to any further extension shall thereby be automatically canceled. Any such
right of termination of Landlord contained herein shall continue during the Term
and any subsequent extension hereof.
(c) Default by Landlord and Remedies of Tenant. It shall be a default
------------------------------------------
and breach of this Lease by Landlord if it shall fail to perform or observe any
term, condition, covenant or obligation required to be performed or observed by
it under this Lease for a period of thirty (30) days after notice thereof from
Tenant; provided, however, that if the term, condition, covenant or obligation
to be performed by Landlord is of such nature that the same cannot reasonably be
performed within such thirty (30) day period, such default shall be deemed to
have been cured if Landlord commences such performance within said thirty-day
period and thereafter diligently completes the same. Upon the occurrence of any
such default, Tenant may sue for injunctive relief or to recover damages for any
loss resulting from the breach, but Tenant shall not be entitled to terminate
this Lease or withhold or abate any rent due hereunder.
(d) NonWaiver of Defaults. The failure or delay by either party
---------------------
hereto to enforce or exercise at any time any of the rights or remedies or other
provisions of this Lease shall not be construed to be a waiver thereof, nor
affect the validity of any part of this Lease or the right of either party
thereafter to enforce each and every such right or remedy or other provisions.
No waiver of any default and breach of this Lease shall be held to be a waiver
of any other default of breach. The receipt of rent by Landlord at a time after
rent is due under this Lease shall not be construed as a waiver of such default.
The receipt by Landlord of less than the full rent due shall not be construed to
be other than a payment on account of rent then due, nor shall any statement on
Tenant's check or any letter accompanying Tenant's check be deemed an accord and
satisfaction, and Landlord may accept such payment without prejudice to
Landlord's right to recover the balance of the rent due or to pursue any other
remedies provided in this Lease. No act or omission by Landlord or its
employees or agents during the term of this Lease shall be deemed an acceptance
of a surrender of the Premises, and no agreement to accept such a surrender
shall be valid unless in writing and signed by Landlord.
(e) Attorney's Fees. If Tenant defaults in the performance or
---------------
observance of any of the terms, conditions, covenants or obligations contained
in this Lease and Landlord places the enforcement of all or any part of this
Lease, the collection of any rent due or to become due or the recovery of
possession of the Premises in the hands of an attorney, or if Landlord incurs
any fees or out-of-pocket costs in any
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litigation, negotiation or transaction in which Tenant causes Landlord (without
Landlord's fault) to be involved or concerned, Tenant agrees to reimburse
Landlord for the attorney's fees and costs incurred thereby, whether or not suit
is actually filed.
19. BANKRUPTCY OR INSOLVENCY
------------------------
(a) If a petition is filed by, or an order for relief is entered
against Tenant under Chapter 7 of the Bankruptcy Code and the trustee of Tenant
elects to assume this Lease for the purpose of assigning it, such election or
assignment, or both, may be made only if all of the terms and conditions of
subparagraphs (b) and (d) below are satisfied. To be effective, an election to
assume this Lease must be in writing and addressed to Landlord, and in
Landlord's business judgment, all of the conditions hereinafter stated, which
Landlord and Tenant acknowledge to be commercially reasonable, must have been
satisfied. If the trustee fails so to elect to assume this Lease within sixty
(60) days after his appointment, this Lease will be deemed to have been
rejected, and Landlord shall then immediately be entitled to possession of the
Premises without further obligation to Tenant or the trustee and this Lease
shall be terminated. Landlord's right to be compensated for damages in the
bankruptcy proceeding, however, shall survive such termination.
(b) If Tenant files a petition for reorganization under Chapters 11 or
13 of the Bankruptcy Code, or if a proceeding filed by or against Tenant under
any other chapter of the Bankruptcy Code is converted to a Chapter 11 or 13
proceeding and Tenant's trustee or Tenant as debtor-in-possession fails to
assume this Lease within sixty (60) days from the date of the filing of such
petition or conversion, then the trustee or the debtor-in-possession shall be
deemed to have rejected this Lease. To be effective any election to assume this
Lease must be in writing addressed to Landlord and, in Landlord's business
judgment, all of the following conditions, which Landlord and Tenant acknowledge
to be commercially reasonable, must have been satisfied:
(1) The trustee or the debtor-in-possession has cured or has
provided to Landlord adequate assurance, as defined in this subparagraph (b),
that:
a. The trustee will cure all monetary defaults under this
Lease within ten (10) days from the date of assumption
b. The trustee will cure all nonmonetary defaults under
this Lease within thirty (30) days from the date of assumption.
(2) The trustee or the debtor-in-possession has compensated
Landlord, or has provided Landlord with adequate
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assurance, as hereinafter defined, that within ten (10) days from the date of
assumption Landlord will be compensated for any pecuniary loss it has incurred
arising from the default of Tenant, the trustee, or the debtor-in-possession, as
recited in Landlord's written statement of pecuniary loss sent to the trustee or
debtor-in-possession.
(3) The trustee or the debtor-in-possession has provided Landlord
with adequate assurance of the future performance of each of Tenant's
obligations under this Lease; provided, however, that:
a. From and after the date of assumption of this Lease, the
trustee or the debtor-in-possession shall pay the Base and Additional
Rents payable under this Lease in advance in equal monthly
installments on each date that such Rents are payable.
b. The trustee or debtor-in-possession shall also deposit
with Landlord, as security for the timely payment of Rent, an amount
equal to three (3) months' Base Rent and other monetary charges
accruing under this Lease;
c. If not otherwise required by the terms of this Lease,
the trustee or the debtor-in-possession shall also pay in advance, on
each day that any installment of Base Rent is payable, one-twelfth
(1/12) of Tenant's annual Taxes, Operating Expenses, and other
obligations under this Lease; and
d. The obligations imposed upon the trustee or the debtor-
in-possession will continue for Tenant after the completion of
bankruptcy proceedings.
(4) Landlord has determined that the assumption of this Lease
will not:
a. Breach any provision in any other lease, mortgage,
financing agreement, or other agreement by which Landlord is bound
relating to the Property, Buildings or Project in which the Premises
is located; or
b. Disrupt, in Landlord's judgment, the occupant mix or
occupant consistency of the Buildings or Project or any other attempt
by Landlord to provide or exclude a specific variety of occupants in
the Buildings or Project which, in Landlord's judgment, would be most
beneficial to all of the tenants thereof (including Landlord) and
would enhance the security, image, reputation, and profitability
thereof.
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(5) For purposes of this subparagraph (b), "adequate assurance"
means that:
a. Landlord determines that the trustee or the debtor-in-
possession has, and will continue to have, sufficient unencumbered
assets, after the payment of all secured obligations and
administrative expenses, to assure Landlord that the trustee or the
debtor-in-possession will have sufficient funds timely to fulfill
Tenant's obligations under this Lease and to keep the Premises
properly staffed with sufficient employees to conduct a fully
operational, actively promoted business in the Premises; and
b. An order shall have been entered segregating sufficient
cash payable to Landlord and/or a valid and perfected first lien and
security interest shall have been granted in property of Tenant,
trustee, or debtor-in-possession which is acceptable in value and kind
to Landlord, to secure to Landlord the obligation of the trustee or
debtor-in-possession to cure all monetary and nonmonetary defaults
under this Lease within the time periods set forth above.
(c) In the event this Lease is assumed by a trustee appointed for
Tenant or by Tenant as debtor-in-possession under the provisions of subparagraph
(b) above and, thereafter, Tenant is either adjudicated bankrupt or files a
subsequent petition for arrangement under Chapter 11 of the Bankruptcy Code,
then Landlord may, at its option, terminate this Lease and all the tenant's
rights under it, by giving written notice of Landlord's election so to
terminate.
(d) If the trustee or the debtor-in-possession has assumed this Lease,
pursuant to subparagraph (a) or (b) above, to assign or to elect to assign
Tenant's interest under this Lease or the estate created by that interest to any
other person, such interest or estate may be assigned only if the intended
assignee has provided adequate assurance of future performance, as defined in
this subparagraph (d), of all of the terms, covenants, and conditions of this
Lease.
(1) For purposes of this subparagraph (d), "adequate assurance of
future performance" means that Landlord has ascertained that each of the
following conditions has been satisfied:
a. The assignee has submitted a current financial statement,
audited by a certified public accountant, which shows a net worth and
working capital in amounts determined by Landlord to be sufficient to
assure the future performance by the assignee of the tenant's
obligations under this Lease;
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b. If requested by Landlord, the assignee will obtain
guarantees, in form and substance satisfactory to Landlord (i.e.
letter(s) of credit), from one or more persons who satisfy Landlord's
standards of creditworthiness; and
c. Landlord has obtained consents or waivers from any third
parties which may be required under any lease, mortgage, financing
arrangement, or other agreement by which Landlord is bound, to enable
Landlord to permit such assignment.
(e) When, pursuant to the Bankruptcy Code, the trustee or the debtor-
in-possession is obligated to pay reasonable use and occupancy charges for the
use of all or part of the Premises, it is agreed that such charges will not be
less than the Base Rent as defined in this Lease, plus additional rent and other
monetary obligations of Tenant included herein.
(f) Neither Tenant's interest in this Lease nor any estate of Tenant
created in this Lease shall pass to any trustee, receiver, assignee for the
benefit of creditors, or any other person or entity, nor otherwise by operation
of law under the laws of any state having jurisdiction of the person or property
of Tenant, unless Landlord consents in writing to such transfer. Landlord's
acceptance of Rent or any other payments from any trustee, receiver, assignee,
person, or other entity will not be deemed to have waived, or waive, either the
requirement of Landlord's consent or Landlord's right to terminate this Lease
for any transfer of Tenant's interest under this Lease without such consent.
20. ACCESS TO THE PREMISES
----------------------
Landlord, its employees and agents and any mortgagee of the Project
shall have the right to enter any part of the Premises following at least
twenty-four (24) hours' written notice (except in the event of an emergency, in
which case only such notice as is reasonably possible shall be required) for the
purposes of examining or inspecting the same, showing the same to prospective
purchasers, mortgagees or tenants and for making such repairs, alterations or
improvements to the Premises or the Project as Landlord may deem necessary or
desirable. Notwithstanding anything to the contrary herein contained, Landlord
agrees that it shall not unreasonably interfere with the use of the Premises by
Tenant and shall use diligent and good faith efforts to preserve all
confidentiality of Tenant. If (i) Landlord is unable to timely gain access to
the Premises due to Tenant's security or other reasons within Tenant's control,
and (ii) Landlord incurs loss or damage as a result, for example (but without
limitation) due to a ruptured pipe or other repair problem, then Tenant shall be
obligated to reimburse Landlord within ten (10) days after demand for any such
loss or damage to
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the extent insurance proceeds are not recovered by Landlord for the same.
21. SURRENDER OF PREMISES
---------------------
Upon the expiration or earlier termination of this Lease, Tenant shall
surrender the Premises to Landlord, together with all keys, access cards,
alterations, improvements, and other property as provided elsewhere herein, in
broom clean condition and in good order, condition and repair, except for
ordinary wear and tear, damage created by casualty loss and damage which Tenant
is not obligated to repair, failing which Landlord may restore the Premises to
such condition at Tenant's expense, which shall be payable upon demand. Subject
to the provisions of Paragraph 10(d) hereof, upon such expiration or termination
Tenant's trade fixtures, furniture and equipment shall remain Tenant's property,
and if Tenant shall not then be in default under this Lease, Tenant shall have
the right to remove the same prior to the expiration or earlier termination of
this Lease, Tenant shall promptly repair any damage caused by any such removal,
and shall restore the Premises to the condition existing prior to the
installation of the items so removed. Any of Tenant's trade fixtures, furniture
or equipment not so removed shall be considered abandoned and may be retained by
Landlord or be destroyed or disposed of at Tenant's expense. All reference to
trade fixtures shall be as described in Paragraph 10(d) hereof.
22. HOLDING OVER
------------
(a) If Tenant remains in possession of the Premises without the
written consent of Landlord after the expiration or earlier termination of this
Lease, Tenant shall be deemed to hold the Premises as a tenant at will subject
to all of the terms, conditions, covenants and provisions of this Lease (which
shall be applicable during the holdover period), except that the Base Rent shall
be increased to 125% of the last current Base Rent. In addition, Tenant shall be
liable to Landlord for all damages occasioned by such holding over. Tenant shall
vacate and surrender the Premises to Landlord upon Tenant's receipt of notice
from Landlord to vacate. No holding over by Tenant, whether with or without the
written consent of Landlord, shall operate to extend this Lease except as
otherwise expressly provided herein.
(b) Notwithstanding the preceding subsection (a) to the contrary, but
applicable only with respect to space that Tenant was to have vacated before
June 1, 2001, Tenant may extend the term of this Lease for a period of up to six
(6) months by providing Landlord with written notice of exercise at least ninety
(90) days prior to the expiration or earlier termination of the Lease (that is,
such notice must be delivered by not later than March 1, 2001), in which event
Tenant shall remain a tenant subject to the same terms and conditions of this
Lease, including
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the payment of Base Rent equal to 105% of the last current Base Rent.
(c) Notwithstanding the preceding subsection (a) to the contrary,
applicable in situations other than as set forth in the preceding subsection
(b), Tenant may extend the term of this Lease for a period of up to three (3)
months by providing Landlord with written notice of exercise at least ninety
(90) days prior to the expiration or earlier termination of the Lease, in which
event Tenant shall remain subject to the same terms and conditions of this
Lease, including the payment of Base Rent equal to one hundred five percent
(105%) of the last current Base Rent. The rights granted to Tenant under this
subsection (c) shall not be available with respect to any space for which Tenant
exercised the rights available under the preceding subsection (b).
23. QUIET ENJOYMENT
---------------
Except as provided in Paragraph 22 hereof to the extent that it may be
applicable, if and so long as Tenant pays the prescribed rent and performs or
observes all of the terms, conditions, covenants and obligations of this Lease
required to be performed or observed by it hereunder, Tenant shall at all times
during the term hereof have the peaceable and quiet enjoyment, possession,
occupancy and use of the Premises without any interference from Landlord or any
person or persons claiming the Premises by, through or under Landlord, subject
to any mortgages, underlying leases or other matters of record to which this
Lease is or may become subject provided that any such mortgagees shall be
required to provide Tenant with a nondisturbance agreement allowing Tenant to
remain in the Premises under the terms of this Lease in the event of a default
under the mortgage by Landlord.
24. PROPERTY MANAGEMENT AGREEMENT
-----------------------------
Concurrently with the execution and delivery of this Lease, Landlord,
as owner, and SGI, as property manager, have entered into that certain Property
Management Agreement of even date herewith under which SGI is to manage the
Project for Landlord. The parties do not intend that any provision of this
Lease shall give to Landlord, any independent right with respect to management
of the Project which is inconsistent with the provisions of the Property
Management Agreement. The parties acknowledge that a condition of the validity
and effectiveness of this Lease is Landlord's and SGI's agreement to enter into
the Property Management Agreement; however, termination of the Property
Management Agreement shall have no effect on the continuing effectiveness of
this Lease.
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<PAGE>
25. NOTICE AND PLACE OF PAYMENT
---------------------------
(a) All rent and other payments required to be made by Tenant to
Landlord shall be delivered or mailed to Landlord' at the address set forth
below or any other address Landlord may specify from time to time by written
notice given to Tenant.
(b) All payments required to be made by Landlord to Tenant shall be
delivered or mailed to Tenant at the address set forth in Paragraph 25(c) hereof
or at any other address within the United States as Tenant may specify from time
to time by written notice given to Landlord.
(c) Any notice, demand or request required or permitted to be given
under this Lease or by law shall be deemed to have been given if reduced to
writing and mailed by Registered or Certified mail, postage prepaid, to the
party who is to receive such notice, demand or request at the address set forth
below or at such other address as Landlord or Tenant may specify from time to
time by written notice. When delivering such notice, demand or request shall be
deemed to have been given as of the date it was so delivered.
<TABLE>
<S> <C>
Landlord: Tenant:
WAM!NET Inc. Silicon Graphics, Inc.
6100 West 110th Street 2011 North Shoreline Boulevard
Minneapolis, MN 55438 Mountain View, CA 94043-1389
ATTN: Edward J. Driscoll III M/S 720
ATTN: Manager, Corporate Facilities
With copies to: With copies to:
WAM!NET INC. Silicon Graphics, Inc.
6100 West 110th Street 2011 North Shoreline Boulevard
Minneapolis, Minnesota 55438 Mountain View, CA 94043-1389
Attention: Legal Counsel Attention: Legal Services
and
Thomas P. Stoltman, Esq. Ronald A. Zamansky, Esq.
Larkin, Hoffman, Daly & Lindgren, Ltd. Zamansky Professional Association
1500 Norwest Financial Center 3901 IDS Tower
7900 Xerxes Avenue South 80 South Eighth Street
Minneapolis, MN 55431 Minneapolis, MN 55402
</TABLE>
26. MISCELLANEOUS GENERAL PROVISIONS
--------------------------------
(a) Payments Deemed Rent. Any amounts of money to be paid by Tenant
--------------------
to Landlord pursuant to the provisions of this Lease, whether or not such
payments are denominated "rent" or "additional rent" and whether or not they are
to be periodic or recurring, shall be deemed rent or additional rent for
purposes
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<PAGE>
of this Lease; and any failure to pay any of same as provided in Paragraph 18(a)
hereof shall entitle Landlord to exercise all of the rights and remedies
afforded hereby or by law for the collection and enforcement of Tenant's
obligation to pay rent. Tenant's obligation to pay any such rent or additional
rent pursuant to the provisions of this Lease shall survive the expiration or
other termination of this Lease and the surrender of possession of the Premises
after any holdover period.
(b) Estoppel Letters. Tenant shall, within ten (10) days following
----------------
written request from Landlord, execute, acknowledge and deliver to Landlord or
to any lender, purchaser or prospective lender or purchaser designated by
Landlord a written statement in a form provided by Landlord certifying (i) that
this Lease is in full force and effect and unmodified (or, if modified, stating
the nature of such modification), (ii) the date to which rent has been paid,
(iii) that there are not, to Tenant's knowledge, any uncured defaults (or
specifying such defaults if any are claimed), and (iv) such further matters
regarding this Lease and/or the Premises customarily included in estoppel
letters or certificates as may be reasonably requested by Landlord, provided
that disclosure of confidential information by Tenant shall not be required.
Any such statement may be relied upon by any prospective purchaser or mortgagee
of all or any part of the Project. Tenant's failure to deliver such statement
within such period shall be conclusive upon Tenant that this Lease is in full
force and effect and unmodified, and that there are no uncured defaults in
Landlord's performance hereunder.
(c) Memorandum of Lease. If requested by Landlord or Tenant, a
-------------------
memorandum of lease, containing the information required by applicable law
concerning this Lease shall be prepared, executed by both parties and filed for
record in the office of the county recorder in Dakota County, Minnesota.
(d) Claims for Fees. Each party hereto shall indemnify and hold
---------------
harmless the other party for any and all liability incurred in connection with
the negotiation or execution of this Lease for any real estate broker's
commission or finder's fee which has been earned by a real estate broker or
other person on such party's behalf. Each party represents to the other that
each party has retained corporate real estate advisors and that each party shall
be responsible for the fees of their own advisors.
(e) Applicable Law. This Lease and all matters pertinent thereto
--------------
shall be construed and enforced in accordance with the laws of the State of
Minnesota.
(f) Entire Agreement. This Lease, including all Exhibits, Riders and
----------------
Addenda, constitutes the entire agreement between the parties hereto regarding
the subject matter hereof and may not be modified except by an instrument in
writing
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<PAGE>
executed by the parties hereto. Notwithstanding anything to the contrary herein
contained, the parties acknowledge that the Landlord has entered into the
Property Management Agreement with Tenant or SGI.
(g) Binding Effect. This Lease and the respective rights and
--------------
obligations of the parties hereto shall inure to the benefit of and be binding
upon the successors and assigns of the parties hereto as well as the parties
themselves; provided, however, that Landlord, its successors and assigns shall
be obligated to perform Landlord's covenants under this Lease only during and in
respect of their successive periods as Landlord during the term of this Lease.
(h) Severability. If any provision of this Lease shall be held to be
------------
invalid, void or unenforceable, the remaining provisions hereof shall not be
affected or impaired, and such remaining provisions shall remain in full force
and effect.
(i) No Partnership. Landlord shall not, by virtue of the execution of
--------------
this Lease or the leasing of the Premises to Tenant, become or be deemed a
partner of Tenant in the conduct of Tenant's business on the Premises or
otherwise.
(j) Headings, Gender, etc. As used in this Lease, the word "person"
---------------------
shall mean and include, where appropriate, an individual, corporation,
partnership or other entity; the plural shall be substituted for the singular,
and the singular for the plural, where appropriate; and words of any gender
shall include any other gender. The topical headings of the several paragraphs
of this Lease are inserted only as a matter of convenience and reference, and do
not affect, define, limit or describe the scope or intent of this Lease.
(k) No Right to Change Buildings Address. Landlord shall have no
------------------------------------
right to change the street address of the Buildings occupied by Tenant without
the prior written consent of Tenant. Landlord reserves the right to change the
name of the Project and/or any Building(s) therein.
(l) Execution by Landlord. Submission of this instrument to Tenant,
---------------------
or Tenant's agents or attorneys, for examination or signature does not
constitute or imply an offer to lease, reservation of space, or option to lease,
and this Lease shall have no binding legal effect until execution hereof by both
Landlord and Tenant.
(m) Time of Essence. Time is of the essence of this Lease and each of
---------------
its provisions.
(n) Year 2000 Disclaimer. Landlord and Tenant each hereby disclaims
--------------------
any liability for any and all damages, injuries or other losses, whether
ordinary, special, consequential, punitive or otherwise, arising out of,
relating to or in
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<PAGE>
connection with (a) the failure of any automated, computerized and/or software
system or other technology used in, on or about the Project or relating to the
management or operation of the Project to accurately receive, provide or process
date/time data (including, but not limited to, calculating, comparing and
sequencing) both before and after September 9, 1999 and before, after, during
and between the years 1999 A.D. and 2000 A.D., and leap year calculations and/or
(b) the malfunction, ceasing to function or providing of invalid or incorrect
results by any such technology as a result of date/time data. The foregoing
disclaimer shall apply to any such technology used in, on or about the Project
or that affect the Project, whether or not such technology is within the control
of Landlord or Tenant or their respective agents or representatives. THE
FOREGOING DISCLAIMER INCLUDES A DISCLAIMER BY LANDLORD OF ALL WARRANTIES OR
REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO THE MATTERS DESCRIBED
HEREIN, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
(o) Drafting Party. The parties represent that they have been
--------------
represented by legal counsel in the negotiation and preparation of this Lease
and that their respective attorneys have substantially participated in the
drafting of this Lease. The parties agree that the rule of construction
regarding ambiguities being construed against the drafting party shall not
apply. Changes from any prior drafts of this Lease shall not be used in
interpreting any of the provisions of this Lease.
(p) Counterparts; Facsimile Signatures. This Lease may be executed in
----------------------------------
one or more counterparts, each of which shall be deemed an original and together
which shall constitute one document. Facsimile signatures on this Lease shall
be deemed valid and acceptable; however, any party executing this Lease by
facsimile signature shall immediately deliver not less than three (3) hard copy
originals to the other party.
27. SECURITY DEPOSIT
----------------
(a) Landlord initially waives the requirement that Tenant pay a
security deposit to Landlord. If on more than one occasion during the Term,
Tenant fails to pay any installment of rent or any other charges required to be
paid to Landlord hereunder and such failure continues beyond the period given to
cure such default as set forth in paragraph 18(a) hereof, Landlord may by notice
to Tenant require the immediate delivery, for security deposit purposes, of a
letter of credit (the "Letter of Credit") for a sum equal to one (1) month of
the then gross rent for the Premises (the "Security Deposit"). The Letter of
Credit shall be held as security for the performance and observance by Tenant of
all of its obligations under the terms, conditions and covenants of this Lease
throughout the Term of this Lease. If Tenant performs and observes all of the
terms, conditions and covenants of this Lease which are required to be performed
and observed by it, Landlord shall return the Letter of
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<PAGE>
Credit to Tenant (within thirty (30) days) after the Expiration Date or after
Tenant surrenders possession of the Premises, whichever is later. In the event
of a default by Tenant in the payment of rent or the performance or observance
of any of the other terms, conditions or covenants of this Lease, then Landlord
may, at its option and without notice, draw on the Letter of Credit and apply
all or any part of the Security Deposit in payment of such rent or to cure any
other such default; and if Landlord does so, Tenant shall, upon request, deposit
with Landlord the amount so applied (in cash or by an additional Letter of
Credit) so that Landlord will have on hand at all times throughout the Term of
this Lease the full amount of the Security Deposit. Landlord shall not be
required to hold the Security Deposit (if cash) as a separate account, but may
commingle it with Landlord's other funds. The use, application or retention of
the Security Deposit or any portion thereof by Landlord shall not prevent
Landlord from exercising any other right or remedy provided by this Lease or by
law (it being intended that Landlord shall not first be required to proceed
against the Security Deposit) and shall not operate as a limitation on any
recovery to which Landlord may otherwise be entitled. The Letter of Credit shall
be issued by Norwest Bank or U.S. Bank or their successors, or such other
financial institution as is mutually agreeable to Landlord and Tenant. The
Letter of Credit shall be a so-called "standby" letter of credit, in writing and
signed by the issuer, in form and content reasonably acceptable to Landlord,
conspicuously stating that it is a letter of credit and expressly stating that
it is irrevocable and that it is transferable to the successors and assigns of
Landlord under this Lease. In the event that the Letter of Credit is not
transferable to such successors and assigns, Tenant agrees to cause the issuance
of a substitute letter of credit (meeting the requirements of this paragraph)
and issued for the benefit of each such successor or assign.
(b) In the event of a sale or any other transfer of the Project,
Landlord shall have the right to transfer the Security Deposit to its purchaser
and, provided that the purchaser assumes liability for the return (if
applicable) of the Security Deposit, Landlord shall thereupon be released by
Tenant from all responsibility for the return of such deposit; and Tenant agrees
to look solely to such purchaser for the return of such deposit. In the event
of an assignment of this Lease, the Security Deposit shall be deemed to be held
by Landlord as a deposit made by the assignee, and Landlord shall have no
further responsibility for the return of such deposit to the assignor.
28. HAZARDOUS SUBSTANCES
--------------------
(a) Tenant covenants that Tenant, with respect to its use and
operation on the Premises and within the Project, will remain in compliance with
all applicable federal, state and local statutes, ordinances, regulations, rules
and other laws presently in force or hereafter enacted relating to public
health, safety,
-37-
<PAGE>
protection of the environment, environmental quality, contamination and clean-up
of hazardous materials, including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, the
Resource, Conservation and Recovery Act of 1976, as amended, and state superfund
and environmental clean-up statutes and all rules and regulations presently or
hereafter enacted ("environmental laws"). Tenant will not cause or knowingly
permit any violations or other failures to comply with environmental laws on or
about the Premises. As used above, the term "hazardous materials" shall mean and
include all hazardous and toxic substances, waste or materials, any pollutant or
contaminant, including, without limitation, asbestos, PCBs, petroleum and
petroleum-based products and raw materials that are included under or regulated
by any environmental laws. Tenant shall not release, generate, manufacture,
store, treat, transport or dispose of any hazardous material on or about the
Project or any part thereof; however, Tenant may store, transport and use such
hazardous materials as historically used by Tenant in the ordinary course of the
operation of its business in compliance with all applicable environmental laws.
Tenant will immediately notify Landlord and provide copies upon receipt of all
written complaints, claims, citations, demands, inquiries, reports or notices
relating to the condition of the Premises or compliance with environmental laws.
Tenant shall maintain all required records and file any necessary documents with
the appropriate agencies relating to the use, storage or transportation of any
hazardous materials on, to, from or about the Premises. Tenant shall indemnify,
defend (with counsel reasonably acceptable to Landlord and at Tenant's sole
cost), and hold Landlord harmless from and against all losses, liabilities,
obligations, penalties, claims, demands, judgments, costs and other damages,
that may be imposed upon, incurred by or asserted or awarded against Landlord in
connection with or arising from or out of: (i) the release or other deposit
during the Term of this Lease of any hazardous material by Tenant, its
employees, agents or contractors on, in, under or affecting all or any portion
of the Project; (ii) any breach of any obligation or agreement of Tenant in this
Paragraph; and/or (iii) any violation or claim of violation by Tenant of any
environmental law occurring during the Term of this Lease. This indemnification
obligation shall survive the termination of this Lease.
(b) Landlord shall indemnify, defend (with counsel reasonably
acceptable to Tenant and at Landlord's sole cost), and hold Tenant harmless from
and against all losses, liabilities, obligations, penalties, claims, demands,
judgments, costs and other damages, that are suffered or incurred by Tenant and
caused by the release or other deposit of any hazardous material by Landlord,
its employees, agents or contractors (excluding Tenant) which Tenant proves was
released or deposited by Landlord, on, in, under or affecting all or any portion
of the Project. This indemnification obligation shall survive the termination
of this Lease.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of
the day and year first above written.
LANDLORD: TENANT:
WAM!NET INC. SILICON GRAPHICS, INC.
By: /s/ Allen L. Witters By: /s/ William M. Kelly
----------------------------- -----------------------------
Its: Chief Technology Officer Its: Senior Vice President
-39-
<PAGE>
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made effective as of
January 1, 1998, by and between NETCO COMMUNICATIONS Corporation ("NetCo"), of
6100 West 110th Street, Bloomington, Minnesota 55438, and John Kauffman
("Employee") of 5321 Bryant Avenue South, Minneapolis, MN 55419.
BACKGROUND.
- - ----------
A. NetCo is engaged in the business of high speed electronic courier
services for the transportation, storage and retrieval of large
quantities of data for print and, CD-ROM prepares publishing
industries as well as for medical imaging;
B. NetCo desires to have the services of the Employee; and
C. The Employee is willing to be employed by NetCo.
Therefore, in consideration of the mutual promises set forth in this
Agreement, the parties agree as follows:
1. EMPLOYMENT. Effective January 1, 1998, Employee shall serve NetCo as
the Vice President of Strategic Marketing and Communications.
2. BEST EFFORTS OF EMPLOYEE. Employee agrees to perform faithfully,
industriously, and to the best of Employee's ability, experience, and talents,
all of the duties that may be required by the express and implicit terms of this
Agreement, to the reasonable satisfaction of NetCo. Such duties shall be
provided at such place(s) as the needs, business, or opportunities of NetCo may
require from time to time.
3. COMPENSATION OF EMPLOYEE. As compensation for the services provided by
Employee under this Agreement, NetCo will pay the Employee a monthly salary of
Twelve Thousand Five Hundred Dollar's ($12,500). Upon termination of this
Agreement, payments under this paragraph shall cease; provided, however, that
the Employee shall be entitled to payments for periods or partial periods that
occurred prior to the date of termination and for which the Employee has not yet
been paid.
4. INCENTIVE STOCK OPTION. Subject to approval of the NetCo Board of
Directors, and in addition to any other compensation to which the employee may
be entitled by this agreement, Employee shall be entitled to receive an
incentive Stock Option for Seventy Thousand (70,000) shares of NetCo
Communications Corporation according to the Stock Option Agreement in Exhibit 1.
The exercise price of the incentive Stock Option shall be fair market value as
determined as of the
<PAGE>
date of grant by the NetCo Board of Directors, which price shall be inserted
into the appropriate blank on Exhibit 1.
5. REIMBURSEMENT FOR EXPENSES IN ACCORDANCE WITH NETCO POLICY. NetCo will
reimburse Employee for "out-of-pocket" expenses in accordance with NetCo
policies in effect from time to time.
6. RECOMMENDATIONS FOR IMPROVING OPERATIONS. Employee shall reasonably
provide NetCo with all information, suggestions, and recommendations regarding
NetCo's business, of which Employee has knowledge, that will be of benefit to
NetCo.
7. CONFIDENTIALITY. Employee recognizes that NetCo has and will have
information regarding the following:
- - - inventions - business affairs
- - - machinery - processes
- - - products - trade secrets
- - - prices - technical matters
- - - apparatus - customer lists
- - - costs - product designs
- - - discounts - copyrights
- - - future plans
and other vital information (collectively, "Information") which are valuable,
special and unique assets of NetCo. Employee agrees that, except as contemplated
----------------------
by Employee's duties, Employee will not at any time or in any manner, either
- - --------------------
directly or indirectly, divulge, disclose, or communicate in any manner any
Information to any third party without the prior written consent of the NetCo.
Employee will protect the Information and treat it as strictly confidential. A
violation Agreement relating to the protection or nondisclosure of information
shall be a material violation of this Agreement and will justify legal and/or
equitable relief by Employee of this paragraph or of other sections or
paragraphs of this.
8. TRADE SECRETS. Except as contemplated by Employee's duties, Employee
shall not at any time during the term of this agreement or thereafter, or in any
manner, either directly or indirectly, divulge, disclose or communicate to any
person, firm or corporation in any manner whatsoever any information concerning
any matters affecting or relating to the business of the Corporation, including
without limiting the generality of the foregoing, any of its customers, the
prices it obtains or has obtained from the sale of, or at which it sells or has
sold, its products, or any other information concerning the business of the
Corporation, its manner of operation, its plans, processes, or other data
without regard to whether all of the foregoing matters will be deemed
confidential, material, or important, the parties hereto stipulating that as
between them, the same are important,
-2-
<PAGE>
material, and confidential and gravely affect the effective and successful
conduct of the business of the Corporation, and the Corporation's good will, and
that any breach of the terms of the paragraph shall be a material breach of this
Agreement.
9. DISCLOSURE AND ASSIGNMENT. Except as provided elsewhere in this
Agreement, Employee shall treat as for the Corporation's sole benefit and fully
and reasonably promptly disclose to the Corporation, without additional
compensation, all ideas, discoveries, inventions and improvements, whether
patentable or not, which while the Employee is employed by the Corporation are
made, conceived or reduced to practice by Employee, alone or with others, during
or after usual working hours, either on or off the job, and Employee hereby
assigns to the Corporation all such ideas, discoveries, inventions and
improvements to be the Corporation's exclusive property.
10. DISCLOSURE AND RIGHT OF FIRST REFUSAL. Paragraph 9 or this Agreement
shall not apply to any ideas, discoveries, inventions and improvements for which
no equipment, supplies, facility or trade secret information of the Corporation
was used, and which was developed entirely on Employee's own time, and (1) which
does not relate (a) directly to the business of the Corporation or (b) to the
Corporation's actual or demonstrably anticipated research or development, or (2)
which does not result from any work performed by Employee for the Corporation.
Employee will, nonetheless, promptly disclose all such ideas, discoveries,
inventions and improvements to the Corporation and offer to the Corporation the
right of first refusal to enter into a license or purchase agreement covering
the subject idea, discovery, invention or improvement on terms mutually agreed
to by Employee and the Corporation, in the event the Corporation and Employee
cannot agree on terms and Employee receives an offer to enter into a license or
purchase agreement with some other party on terms more favorable to that other
party than the terms offered to the Corporation, then the Corporation shall have
the right and Employee shall have the obligation to offer to the Corporation the
idea, discovery, invention or improvement on such favorable terms. When such an
offer is made to the Corporation pursuant to the preceding sentence, it must be
accepted by the Corporation within thirty (30) days; or if not accepted, the
right of first refusal hereunder as to that offer shall terminate.
NOTICE: Paragraph 9 hereof requires Employee to assign rights to
inventions to the Corporation or its successors. Minnesota Statutes (S) 181.78
limits the scope of agreements requiring the inventions be assigned to
employers. The statute states that such assignment agreements do not apply:
"to an invention for which no equipment, supplies,
facility or trade secret information of the employer
was used and
-3-
<PAGE>
which was developed entirely on the Employee's own
time, and (1) which does not relate (a) directly to the
business of the employer or (b) to the employers actual
or demonstrably anticipated research or development, or
(2) which does not result from any work performed by
the Employee for the employer." (Underlining added).
Please note that Paragraph 9 of this Agreement uses these statutory terms
to define the inventions which are not automatically assigned to the Corporation
but instead are subject to a right of first refusal in favor of the Corporation.
11. UNAUTHORIZED DISCLOSURE OF INFORMATION. If it appears that the
Employee has disclosed (or has threatened to disclose) Information in violation
of this Agreement, NetCo shall be entitled to an injunction to restrain Employee
from disclosing, in whole or in part, such Information, or from providing any
services to any party to whom such Information has been disclosed or may be
disclosed. NetCo shall not be prohibited by this provision from pursuing other
remedies, including a claim for losses and damages.
12. CONFIDENTIALITY AFTER TERMINATION OF EMPLOYMENT. The confidentiality
provisions of this Agreement shall remain in full force and effect for a one
year period after the termination of Employee's employment.
13. NON-COMPETE AGREEMENT. Recognizing that the various items of
Information are special and unique assets of the company, Employee agrees and
covenants that for a period of 12 months following the termination of his or her
employment, whether such termination is voluntary or involuntary, Employee will
not directly engage in any business competitive with NetCo, nor shall Employee
cause or solicit, directly for his or her own behalf or for the benefit of a
third party, any other employee or employees of the Company to terminate their
employment with the Company or to engage in such competitive activities. This
covenant shall apply to the geographical area that includes the United States
and Canada. Directly engaging in any competitive business includes, but is not
limited to, (i) engaging in a business as owner, partner or agent, (ii) becoming
an employee of any third party that is engaged in such business, (iii) becoming
interested directly in any such business, or (iv) soliciting any customer of
NetCo for the benefit of a third party that is engaged in such business. NetCo
agrees that this non-compete provision will not adversely affect the Employee's
livelihood.
14. TERM/TERMINATION. Employee's employment under this Agreement shall be
for an unspecified term on an "at will" basis.
-4-
<PAGE>
This Agreement may be terminated, with or without cause, by either party. Each
party will give notice (as provided in the paragraph of this Agreement captioned
"Notices") of such action to other party. NetCo may terminate Employee's
employment for cause without prior notice and with compensation to Employee only
to the date of the last day of actual work by the Employee. For purposes hereof,
"cause" means (i) a violation of this Agreement or any other agreement between
NetCo and Employee, (ii) Employee's deliberate, willful or gross misconduct in
the performance or Employee's duties on behalf of the Corporation, or (iii)
Employee's being charged with a crime punishable by imprisonment. The
compensation paid under this Agreement shall be the Employee's exclusive remedy.
15. ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement, or its breach, or to the employment relationship between the
Employee and the Company, shall be settled by final and binding arbitration,
upon the request of either party, in Minneapolis, Minnesota. Such arbitration
shall proceed in accordance with the then governing rules of the American
Arbitration Association (AAA) for Commercial Arbitration or Employment Law
Disputes, at the option of the petitioner. Judgment upon the award rendered may
be entered and enforced in any court of competent jurisdiction. It is agreed
that the parties shall choose a single, neutral arbitrator from among a panel of
not less than seven (7) proposed arbitrators, and that the parties may have no
more than two (2) panels of arbitrators presented to them by the AAA. The
parties agree that they shall each bear their own costs associated with the
arbitration, including any filing fee to be paid by them and their own legal
counsel expenses. The parties further agree that they shall share equally In the
reasonable costs and the fees of the neutral.
16. RETURN OF PROPERTY. Upon termination of this Agreement, the Employee
shall deliver all property (including keys, records, notes, data, memoranda,
models, and equipment) that is in the Employee's possession or under the
Employee's control which is NetCo's property or related to NetCo's business.
17. NOTICES. All notices required or permitted under this Agreement shall
be in writing and shall be deemed delivered when delivered in person or
deposited in the United States mail, postage paid, addressed as follows:
-5-
<PAGE>
NetCo:
- - -----
Manager, Human Resources
NetCo Communications Corporation
6100 West 110th Street
Bloomington, Minnesota 55438
Employee:
- - --------
John Kauffman
5321 Bryant Avenue South
Minneapolis, MN 55419
Such addresses may be changed from time to time by either party by providing
written notice in the manner set forth above.
18. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties and there are no other promises or conditions in any other agreement
whether oral or written. This Agreement supersedes any prior written or oral
agreements between the parties.
19. AMENDMENT. This Agreement may be modified or amended, if the amendment
is made in writing and is signed by both parties.
20. SEVERABILITY. If any provisions of this Agreement shall be held to be
invalid or unenforceable for any reason, the remaining provisions shall continue
to be valid and enforceable. If a court finds that any provision of this
Agreement is invalid or unenforceable, but that by limiting such provision it
would become valid or enforceable, then such provision shall be deemed to be
written, construed, and enforced as so limited.
21. WAIVER OF CONTRACTUAL RIGHT. The failure of either party to enforce
any provision of this Agreement shall not be construed as a waiver or limitation
of that party's right to subsequently enforce and compel strict compliance with
every provision of this Agreement.
-6-
<PAGE>
22. APPLICABLE LAW. This Agreement shall be governed by the laws of the
State of Minnesota.
NETCO:
NetCo Communications Corporation
By: /s/ Michael O'Donnell
------------------------------
Its: An Authorized Officer or Agent
AGREED TO AND ACCEPTED
Employee:
John R. Kauffman
/s/ John R. Kauffman
- - ------------------------------
Signature of Employee
-7-
<PAGE>
Amendment No. 1 to John Kauffman Employment Agreement
WAM!NET Inc. ("WAM!NET" or "Corporation") and John Kauffman ("Employee")
are parties to an Employment Agreement dated January 1, 1998 (the "Employment
Agreement").
It is agreed between the parties that effective January 2, 1998
paragraph 3 of the Employment Agreement be amended to read:
COMPENSATION OF EMPLOYEE. As compensation for the services
provided by Employee under this Agreement, WAM!NET will pay
Employee a monthly base salary of $12,500.00. In addition,
Employee will be entitled to quarterly bonus payments of
25,000.00 per calendar quarter. Upon termination of this
Agreement, payments under this paragraph shall cease; provided,
however, that Employee shall be entitled to payment of his base
salary and a pro rata share of his quarterly bonus payments for
periods or partial periods that occurred prior to the date of
termination and for which Employee has not yet been paid.
It is further agreed between the parties that, except as expressly
amended by this Amendment No. 1, the Employment Agreement shall continue
in full force and effect according to its terms.
IN WITNESS WHEREOF, the parties hereto have duly executed the amendment.
Dated: December 30, 1998
-----------------
EMPLOYEE WAM!NET Inc.
/s/ John Kauffman /s/ Michael O'Donnell
------------------------- -------------------------
John Kauffman By Michael O'Donnell
Its: Director of Human Resources
<PAGE>
STOCK OPTION AGREEMENT
THIS AGREEMENT, made and entered into effective this 27th day of July
1997, by and between NetCo Corporation, a Minnesota corporation (hereinafter
referred to as the "Corporation"), and John Kauffman, a resident of the State of
Minnesota (hereinafter referred to as the "Optionee").
WHEREAS, the Corporation considers it desirable and in its best
interests that the Optionee be given an inducement to acquire a proprietary
interest in the Corporation and an added incentive to advance the interests of
the Corporation, by possessing an option to purchase common shares of the
Corporation.
NOW THEREFORE, in consideration of the premises and of the mutual
promises and consideration provided herein, the parties agree as follows:
1. Grant of Option. The Corporation grants to Optionee an Option
---------------
(the "Option") to purchase Forty Five Thousand (45,000) common shares of the
Corporation at a purchase price of Four Dollars Eighty One Cents ($4.81) per
share, in the manner and subject to the conditions herein provided.
2. Time of Exercise of Option. The Option shall vest and become
--------------------------
exercisable in two (2) equal installments of Twenty Two Thousand Five Hundred
(22,500) shares each; the first installment being immediately vested and
exercisable, and the second installment becoming vested and exercisable on
December 31, 1997. To the extent then unexercised, the Option shall expire and
be no longer exercisable on July 27, 2006.
No provision of this Agreement to the contrary withstanding, neither
the Option nor any right claimed thereby or hereby, therein or herein or
thereunder or hereunder shall be exercisable by anyone on or after July 27,
2006.
3. Method of Exercise. The Option shall be exercised by written
------------------
notice to the Board of the Corporation at the Corporation's principal place of
business. The notice shall be accompanied by payment of the option price for the
shares being purchased (ii) in cash, (ii) by cashier's check or certified check,
(iii) by surrendering to the Corporation for cancellation other shares of the
Corporation having a fair market value equal to the exercise price for the
shares to be issued upon exercise of the Option, or (iv) by any other form of
payment that the Board of Directors of the Corporation, in its sole discretion,
determines to be appropriate. The Corporation shall make prompt delivery of a
certificate or certificates representing such common shares, provided that if
any law or regulation requires the Corporation to take any action with respect
to the common shares specified in such notice before the issuance thereof, then
<PAGE>
the date of delivery of such common shares shall be extended for the period
necessary to take such action. The Option must be exercised with respect to at
least 500 of the common shares, unless only a lesser number of the common shares
are then exercisable, in which case it must be exercised with respect to all of
such lesser number.
4. Additional Right to Convert Option.
----------------------------------
4.1. The holder of this Option shall have the right to require the
Company to convert this Option (the "Conversion Right") at any time after it is
exercisable, but prior to its expiration into shares of Company Common Stock as
provided for in this section 4. Upon exercise of the Conversion Right, the
Company shall deliver to the holder (without payment by the holder of any Option
exercise price) shares of the Company's common stock in a number equal to the
quotient obtained by dividing (x) the value of the Option at the time the
Conversion Right is exercised (determined by subtracting the aggregate Option
exercise price at the time the Conversion Right is exercised from the aggregate
Fair Market Value (defined below) of the Option shares immediately prior to the
exercise of the Conversion Right by (y) the Fair Market Value of one share of
common stock immediately prior to the exercise of the Conversion Right.
4.2. The Conversion Right may be exercised by the holder, at any time
or from time to time, prior to its expiration, on any business day by specifying
in the notice of exercise (i) the total number of shares of common stock the
holder will purchase, and (ii) the number of shares of common stock that are to
be acquired pursuant to the Conversion Right and not for cash.
4.3. Upon receipt of the notice of exercise, the Company will
promptly deliver to the holder a certificate or certificates for the number of
shares of common stock issuable upon such conversion, together with cash in lieu
of any fraction of a share, and the Company will deliver to the holder a new
Option representing the number of shares, if any, with respect to which the
Option shall not have been exercised.
4.4. Fair Market Value of a share of common stock as of a particular
date (the "Determination Date") shall mean:
(a) If the Company's common stock is traded on an exchange or is
quoted on NASDAQ, then the average closing or last sale prices,
respectively, reported for the ten (10) business days immediately
preceding the Determination Date;
(b) If the Company's common stock is not traded on an exchange
or on NASDAQ, but is traded in the over-the-counter market, then the
average closing bid and
-2-
<PAGE>
asked prices reported for the ten (10) business days immediately
preceding the Determination Date; and
(c) If the Company's common stock is not publicly traded, then
the Fair Market Value as determined in good faith by the Company's
Board of Directors upon advice of the Company's Investment Banker.
5. Reclassification, Consolidation or Merger.
-----------------------------------------
5.1. If and to the extent that the number of issued common shares of
the Corporation shall be increased or reduced by change in par value, split up,
reverse split, reclassification, distribution of a dividend payable in stock, or
the like, the number of common shares subject to the Option and the option price
per share shall be proportionately adjusted in accordance with the Plan.
5.2. If the Corporation is reorganized or consolidated or merged with
another corporation, the Optionee shall be entitled to receive an option (the
"New Option") covering common shares of such reorganized, consolidated or merged
company in the same proportion, at an equivalent price, and subject to the same
conditions as the Option. For purposes of the preceding sentence, the excess of
the fair market value of the common shares subject to the Option immediately
after the reorganization, consolidation or merger over the aggregate option
price of such common shares shall not be more than the excess of the aggregate
fair market value of all common shares subject to the Option immediately before
such reorganization, consolidation or merger over the aggregate option price of
such common shares, and the New Option or assumption of the Option shall not
give the Optionee additional benefits which he does not have under this Option,
or deprive him of benefits which he has under this Option.
6. Rights Prior to Exercise of Option. This Option is non-
----------------------------------
transferable by Optionee, except in the event of his death, and during his
lifetime is exercisable only by him. No person shall have any rights as a
stockholder with respect to any common shares purchasable hereunder until
payment of the option price and delivery to him of such common shares as herein
provided.
7. Restriction on Disposition. All common shares acquired by
--------------------------
Optionee pursuant to this Agreement shall be subject to the restrictions on
sale, encumbrance and other disposition contained in the Company's By-Laws, or
imposed by applicable state and federal laws or regulations regarding the
registration or qualification of such acquisition of common shares, and may not
be sold or otherwise disposed of (i) within one year after the exercise of the
Option unless Optionee has made adequate provision acceptable to the Corporation
to pay the Corporation the amount of any taxes which may be assessed against the
-3-
<PAGE>
Corporation as a result of such exercise, and (ii) unless the Corporation has
received a prior opinion of Optionee's counsel satisfactory in form and
substance to counsel for the Corporation that such transaction will not violate
the Securities Act of 1933 or any applicable state law regulating the sale of
securities.
8. Binding Effect. This Agreement shall inure to the benefit of and
--------------
be binding upon the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
"Optionee" "Corporation"
NetCo Communications Corporation
/s/ John Kauffman /s/ Edward J. Driscoll III
- - ------------------------------ ----------------------------------
John Kauffman Edward J. Driscoll III
President
-4-
<PAGE>
STOCK OPTION AGREEMENT
THIS AGREEMENT, made and entered into effective this 31st day of
December, 1997, by and between NetCo Corporation, a Minnesota corporation
(hereinafter referred to as the "Corporation"), and John Kauffman, a resident of
the State of Minnesota (hereinafter referred to as the "Optionee").
WHEREAS, the Corporation considers it desirable and in its best
interests that the Optionee be given an inducement to acquire a proprietary
interest in the Corporation and an added incentive to advance the interests of
the Corporation, by possessing an option to purchase common shares of the
Corporation.
NOW THEREFORE, in consideration of the premises and of the mutual
promises and consideration provided herein, the parties agree as follows:
1. Grant of Option. The Corporation grants to Optionee an Option
---------------
(the "Option") to purchase Seventy Thousand (70,000) common shares of the
Corporation at a purchase price of Nineteen Dollars Fifty Cents ($19.50) per
share, in the manner and subject to the conditions herein provided.
2. Time of Exercise of Option.
--------------------------
2.1. Subject to earlier vesting in accordance with the provisions of
paragraph 2.2. hereof, the Option shall vest and become exercisable in
successive installments:
(a) an initial installment of Thirty Four Thousand (34,000) shares
shall vest and become exercisable on October 31, 1998; and
(b) the remaining installments of Three Thousand (3,000) shares shall
vest and become exercisable on the last day of each successive calendar month,
with such first remaining installment so vesting on November 30, 1998, and the
last such remaining installment so vesting on October 31, 1999.
2.2. The Option shall vest and become immediately exercisable upon
occurrence of any of the following events:
(a) Optionee's employment by the Corporation is terminated otherwise
than for any of the reasons specified in Section 7.1(d) hereof;
(b) Optionee's employment by the Corporation is significantly changed
by a management reorganization which results in either (i) Optionee having to
report to someone other than the Corporation's Chief Marketing Officer or the
<PAGE>
Corporation's Chief Executive Officer, or (ii) Optionee, subject to final
approvals of the Corporation's Chief Marketing Officer and Chief Executive
Officer, no longer having principal authority and responsibility for product and
service positioning, product and service branding, or coordination of outside
advertising and/or public relations agencies.
3. Method of Exercise. The Option shall be exercised by written
------------------
notice to the Board of the Corporation at the Corporation's principal place of
business. The notice shall be accompanied by payment of the option price for the
shares being purchased (i) in cash, (ii) by cashier's check or certified check,
(iii) by surrendering to the Corporation for cancellation other shares of the
Corporation having a fair market value equal to the exercise price for the
shares to be issued upon exercise of the Option, or (iv) by any other form of
payment that the Board of Directors of the Corporation, in its sole discretion,
determines to be appropriate. The Corporation shall make prompt delivery of a
certificate or certificates representing such common shares, provided that if
any law or regulation requires the Corporation to take any action with respect
to the common shares specified in such notice before the issuance thereof, then
the date of delivery of such common shares shall be extended for the period
necessary to take such action. The Option must be exercised with respect to at
least 500 of the common shares, unless only a lesser number of the common shares
are then exercisable, in which case it must be exercised with respect to all of
such lesser number.
4. Additional Right to Convert Option.
----------------------------------
4.1. The holder of this Option shall have the right to require the
Company to convert this Option (the "Conversion Right") at any time after it is
exercisable, but prior to its expiration into shares of Company Common Stock as
provided for in this section 4. Upon exercise of the Conversion Right, the
Company shall deliver to the holder (without payment by the holder of any Option
exercise price) shares of the Company's common stock in a number equal to the
quotient obtained by dividing (x) the value of the Option at the time the
Conversion Right is exercised (determined by subtracting the aggregate Option
exercise price at the time the Conversion Right is exercised from the aggregate
Fair Market Value (defined below) of the Option shares immediately prior to the
exercise of the Conversion Right by (y) the Fair Market Value of one share of
common stock immediately prior to the exercise of the Conversion Right.
4.2. The Conversion Right may be exercised by the holder, at any time
or from time to time, prior to its expiration, on any business day by specifying
in the notice of exercise (i) the total number of shares of common stock the
holder will purchase, and (ii) the number of shares of common
-2-
<PAGE>
stock that are to be acquired pursuant to the Conversion Right and not for cash.
4.3. Upon receipt of the notice of exercise, the Company will
promptly deliver to the holder a certificate or certificates for the number of
shares of common stock issuable upon such conversion, together with cash in lieu
of any fraction of a share, and the Company will deliver to the holder a new
Option representing the number of shares, if any, with respect to which the
Option shall not have been exercised.
4.4. Fair Market Value of a share of common stock as of a particular
date (the "Determination Date") shall mean:
(a) If the Company's common stock is traded on an exchange or is
quoted on NASDAQ, then the average closing or last sale prices,
respectively, reported for the ten (10) business days immediately
preceding the Determination Date;
(b) If the Company's common stock is not traded on an exchange
or on NASDAQ, but is traded in the over-the-counter market, then the
average closing bid and asked prices reported for the ten (10)
business days immediately preceding the Determination Date; and
(c) If the Company's common stock is not publicly traded, then
the Fair Market Value as determined in good faith by the Company's
Board of Directors upon advice of the Company's Investment Banker.
5. Reclassification, Consolidation or Merger.
-----------------------------------------
5.1. If and to the extent that the number of issued common shares of
the Corporation shall be increased or reduced by change in par value, split up,
reverse split, reclassification, distribution of a dividend payable in stock, or
the like, the number of common shares subject to the Option and the option price
per share shall be proportionately adjusted in accordance with the Plan.
5.2. If the Corporation is reorganized or consolidated or merged with
another corporation, the Optionee shall be entitled to receive an option (the
"New Option") covering common shares of such reorganized, consolidated or merged
company in the same proportion, at an equivalent price, and subject to the same
conditions as the Option. For purposes of the preceding sentence, the excess of
the fair market value of the common shares subject to the Option immediately
after the reorganization, consolidation or merger over the aggregate option
price of such common shares shall not be more than the excess of the aggregate
fair market value of all common shares subject to the Option immediately before
such reorganization, consolidation or merger over the aggregate option price of
such common shares,
-3-
<PAGE>
and the New Option or assumption of the Option shall not give the Optionee
additional benefits which he does not have under this Option, or deprive him of
benefits which he has under this Option.
6. Rights Prior to Exercise of Option. This Option is non-
----------------------------------
transferable by Optionee, except in the event of his death, and during his
lifetime is exercisable only by him. No person shall have any rights as a
stockholder with respect to any common shares purchasable hereunder until
payment of the option price and delivery to him of such common shares as herein
provided.
7. Termination of Option.
---------------------
7.1. Except as herein otherwise provided, the Option granted under
this Agreement, to the extent not heretofore exercised, shall terminate upon the
first to occur of the following events:
(a) The expiration of twenty four (24) months after the date on which
Optionee's employment by the Corporation is terminated, except if such
termination be by reason of permanent and total disability or death;
(b) The expiration of twelve months after the date on which
Optionee's employment by the Corporation is terminated, if such termination be
by reason of the Optionee's permanent and total disability or death;
(c) The expiration of twelve months from the date of Optionee's death
should Optionee die within three months of termination of employment by the
Corporation; or
(d) The termination of Optionee's employment by the Corporation for
either (i) Optionee's material breach of any agreement with the Corporation or
(ii) Optionee's deliberate, willful or gross misconduct in the performance or
Optionee's duties on behalf of the Corporation.
7.2. To the extent then unexercised, the Option shall expire and be no
longer exercisable on December 31, 2007. No provision of this Agreement to the
contrary withstanding, neither the Option nor any right claimed thereby or
hereby, therein or herein or thereunder or hereunder shall be exercisable by
anyone on or after December 31, 2007.
8. Restriction on Disposition. All common shares acquired by
--------------------------
Optionee pursuant to this Agreement shall be subject to the restrictions on
sale, encumbrance and other disposition contained in the Company's By-Laws, or
imposed by applicable state and federal laws or regulations regarding the
registration or qualification of such acquisition of common shares, and may not
be sold or otherwise disposed of (i) within one year after
-4-
<PAGE>
the exercise of the Option unless Optionee has made adequate provision
acceptable to the Corporation to pay the Corporation the amount of any taxes
which may be assessed against the Corporation as a result of such exercise, and
(ii) unless the Corporation has received a prior opinion of Optionee's counsel
satisfactory in form and substance to counsel for the Corporation that such
transaction will not violate the Securities Act of 1933 or any applicable state
law regulating the sale of securities.
9. Binding Effect. This Agreement shall inure to the benefit of and
--------------
be binding upon the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
"Optionee" "Corporation"
Netco Communications Corporation
/s/ John Kauffman /s/ Edward J. Driscoll III
- - ----------------------------- ----------------------------------
John Kauffman Edward J. Driscoll III
President
-5-
<PAGE>
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made effective as of
November 3, 1997, by and between NETCO, COMMUNICATIONS Corporation ("NetCo"), of
Union Plaza - Suite 102, 333 North Washington Avenue, Minneapolis, Minnesota
55401, and David Ottinger ("Employee") of 8112 Vincent Avenue South,
Bloomington, Minnesota 55431.
BACKGROUND.
----------
A. NetCo is engaged in the business of high speed electronic courier
services for the transportation, storage and retrieval of large quantities of
data for print and CD-ROM prepress publishing industries as well as for medical
imaging;
B. NetCo desires to have the services of the Employee; and
C. The Employee is willing to be employed by NetCo.
Therefore, in consideration of the mutual promises set forth in this
Agreement, the parties agree as follows:
1. EMPLOYMENT. Effective November 3, 1997, Employee shall serve
NetCo as a Vice President of Operations and Engineering.
2. BEST EFFORTS OF EMPLOYEE. Employee agrees to perform
faithfully, industriously, and to the best of Employee's ability, experience,
and talents, all of the duties that may be required by the express and implicit
terms of this Agreement, to the reasonable satisfaction of NetCo. Such duties
shall be provided at such place(s) as the needs, business, or opportunities of
NetCo may require from time to time.
3. COMPENSATION OF EMPLOYEE. As compensation for the services
provided by Employee under this Agreement, NetCo will pay the Employee a monthly
salary of $8,333.34. An additional $20,000 during your first year of employment
based on achievement of specific operational objectives for service support,
deployment, engineering development and network maintenance derived during your
first month in this position by you and myself based on the 1997 Corporate
Priorities. Upon termination of this Agreement, payments under this paragraph
shall cease; provided, however, that the Employee shall be entitled to payments
for periods or partial periods that occurred prior to the date of termination
and for which the Employee has not yet been paid.
4. INCENTIVE STOCK OPTION. Subject to approval of the NetCo
Board of Directors, and in addition to any other compensation to which the
employee may be entitled by this agreement, Employee shall be entitled to
receive an incentive
<PAGE>
Stock Option for up to Thirty Thousand (30,000) shares of NetCo Communications
Corporation under the NetCo 1996 Stock Option Plan according to the incentive
Stock Option Agreement in Exhibit 1. The exercise price of the incentive Stock
Option shall be fair market value as determined as of the date of grant by the
NetCo Board of Directors, which price shall be inserted into the appropriate
blank on Exhibit 1.
5. REIMBURSEMENT FOR EXPENSES IN ACCORDANCE WITH NETCO POLICY.
NetCo will reimburse Employee for "out-of-pocket" expenses in accordance with
NetCo policies in effect from time to time.
6. RECOMMENDATIONS FOR IMPROVING OPERATIONS. Employee shall
provide NetCo with all information, suggestions, and recommendations regarding
NetCo's business, of which Employee has knowledge, that will be of benefit to
NetCo.
7. CONFIDENTIALITY. Employee recognizes that NetCo has and will
have information regarding the following:
- inventions - business affairs
- machinery - processes
- products - trade secrets
- prices - technical matters
- apparatus - customer lists
- costs - product designs
- discounts - copyrights
- future plans
and other vital information (collectively, "Information") which are valuable,
special and unique assets of NetCo. Employee agrees that the Employee will not
at any time or in any manner, either directly or indirectly, divulge, disclose,
or communicate in any manner any Information to any third party without the
prior written consent of the NetCo. Employee will protect the Information and
treat it as strictly confidential. A violation by Employee of this paragraph or
of other sections or paragraphs of this Agreement relating to the protection or
non-disclosure of information shall be a material violation of this Agreement
and will justify legal and/or equitable relief.
TRADE SECRETS. Employee shall not at any time during the term of
this Agreement or thereafter, or in any manner, either directly or indirectly,
divulge, disclose or communicate to any person, firm or corporation in any
manner whatsoever any information concerning any matters affecting or relating
to the business of the Corporation, including without limiting the generality of
the foregoing, any of its customers, the prices it obtains or has obtained from
the sale of, or at which it sells or has sold, its products, or any other
information concerning the business of the Corporation, its manner of operation,
its plans, processes, or other data without regard to whether all of the
foregoing matters will be deemed confidential, material, or
-2-
<PAGE>
important, the parties hereto stipulating that as between them, the same are
important, material, and confidential and gravely affect the effective and
successful conduct of the business of the Corporation, and the Corporation's
good will, and that any breach of the terms of the paragraph shall be a material
breach of this Agreement.
8. DISCLOSURE AND ASSIGNMENT. Except as provided elsewhere in
this Agreement, Employee shall treat as for the Corporation's sole benefit and
fully and promptly disclose to the Corporation, without additional compensation,
all ideas, discoveries, inventions and improvements, whether patentable or not,
which while the Employee is employed by the Corporation are made, conceived or
reduced to practice by Employee, alone or with others, during or after usual
working hours, either on or off the job, and Employee hereby assigns to the
Corporation all such ideas, discoveries, inventions and improvements to be the
Corporation's exclusive property.
9. DISCLOSURE AND RIGHT OF FIRST REFUSAL. Paragraph 9 of this
-------------------------------------
Agreement shall not apply to any ideas, discoveries, inventions and improvements
for which no equipment, supplies, facility or trade secret information of the
Corporation was used, and which was developed entirely on Employee's own time,
and (1) which does not relate (a) directly to the business of the Corporation or
(b) to the Corporation's actual or demonstrably anticipated research or
development, or (2) which does not result from any work performed by Employee
for the Corporation. Employee will, nonetheless, promptly disclose all such
ideas, discoveries, inventions and improvements to the Corporation and offer to
the Corporation the right of first refusal to enter into a license or purchase
agreement covering the subject idea, discovery, invention or improvement on
terms mutually agreed to by Employee and the Corporation, in the event the
Corporation and Employee cannot agree on terms and Employee receives an offer to
in the event the Corporation and employee cannot agree on terms and Employee
receives an offer to enter into a license or purchase agreement with some other
party on terms more favorable to that other party than the terms offered to the
Corporation, then the Corporation shall have the right and Employee shall have
the obligation to offer to the Corporation the idea, discovery, invention or
improvement on such favorable terms. When such an offer is made to the
Corporation pursuant to the preceding sentence, it must be accepted by the
Corporation within thirty (30) days; or if not accepted, the right of first
refusal hereunder as to that offer shall terminate.
NOTICE: Paragraph 9 hereof requires Employee to assign rights to
------ --------------------------------------------------------
inventions to the Corporation or its successors. Minnesota Statutes (S). 181.78
- - -------------------------------------------------------------------------------
limits the scope of agreements requiring the inventions be assigned to
- - ----------------------------------------------------------------------
employers. The statute states that such assignment agreements do not apply:
- - --------------------------------------------------------------------------
-3-
<PAGE>
"to an Invention for which no equipment, supplies,
------------------------------------------------
facility or trade secret information of the employer
----------------------------------------------------
was used and which was developed entirely on the
------------------------------------------------
Employee's own time, and (1) which does not relate (a)
------------------------------------------------------
directly to the business of the employer or (b) to the
------------------------------------------------------
employer's actual or demonstrably anticipated research
------------------------------------------------------
or development, or (2) which does not result from any
-----------------------------------------------------
work performed by the Employee for the employer."
-----------------------------------------------
(Underlining added).
-------------------
Please note that Paragraph 9 of this Agreement uses these
statutory terms to define the inventions which are not automatically assigned to
the Corporation but instead are subject to a right of first refusal in favor of
the Corporation.
10. UNAUTHORIZED DISCLOSURE OF INFORMATION. If it appears that
the Employee has disclosed (or has threatened to disclose) Information in
violation of this Agreement, NetCo shall be entitled to an injunction to
restrain Employee from disclosing, in whole or in part, such Information, or
from providing any services to any party to whom such Information has been
disclosed or may be disclosed. NetCo shall not be prohibited by this provision
from pursuing other remedies, including a claim for losses and damages.
11. CONFIDENTIALITY AFTER TERMINATION OF EMPLOYMENT. The
confidentiality provisions of this Agreement shall remain in full force and
effect for a One year period after the termination of Employee's employment.
During such One year period, neither party shall make or permit the making of
any public announcement or statement of any kind that Employee was formerly
employed by or connected with NetCo.
12. NON-COMPETE AGREEMENT. Recognizing that the various items of
Information are special and unique assets of the company, Employee agrees and
covenants that for a period of 12 months following the termination of his or her
employment, whether such termination is voluntary or involuntary, Employee will
not directly engage in any business competitive with NetCo, nor shall Employee
cause or solicit, directly or indirectly, for his or her own behalf or for the
benefit of a third party, any other employee or employees of the Company to
terminate their employment with the Company or to engage in such competitive
activities. This covenant shall apply to the geographical area that includes the
United States and Canada. Directly engaging in any competitive business
includes, but is not limited to, (i) engaging in a business as owner, partner or
agent, (ii) becoming an employee of any third party that is engaged in such
business, (iii) becoming interested directly in any such business, or (iv)
soliciting any customer of NetCo for the benefit of a third party that is
engaged in such business. Employee agrees that this non-compete provision will
not adversely affect the Employee's livelihood.
-4-
<PAGE>
13. EMPLOYEE'S INABILITY TO CONTRACT FOR NETCO. Employee shall not
have the right to make any contracts or commitments for or on behalf of NetCo
without first obtaining the express written consent of NetCo.
14. TERM/TERMINATION. Employee's employment under this Agreement
shall be for an unspecified term on an "at will" basis. This Agreement may be
terminated, with or without cause, by either party. Each party will give notice
(as provided in the paragraph of this Agreement captioned "Notice") of such
action to other party. NetCo may terminate Employee's employment for cause
without prior notice and with compensation to Employee only to the date of the
last day of actual work by the Employee. For purposes hereof, "cause" means (i)
a violation of this Agreement or any other agreement between NetCo and Employee,
(ii) Employee's deliberate, willful or gross misconduct in the performance or
Employee's duties on behalf of the Corporation, or (iii) Employee's being
charged with a crime punishable by imprisonment. The compensation paid under
this Agreement shall be the Employee's exclusive remedy.
15. ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or its breach, or to the employment relationship between the
Employee and the Company, shall be settled by final and binding arbitration,
upon the request of either party, in Minneapolis, Minnesota. Such arbitration
shall proceed in accordance with the then governing rules of the American
Arbitration Association (AAA) for Commercial Arbitration or Employment Law
Disputes, at the option of the petitioner. Judgment upon the award rendered may
be entered and enforced in any court of competent jurisdiction. It is agreed
that the parties shall choose a single, neutral arbitrator from among a panel of
not less than seven (7) proposed arbitrators, and that the parties may have no
more than two (2) panels of arbitrators presented to them by the AAA. The
parties agree that they shall each bear their own costs associated with the
arbitration, including any filing fee to be paid by them and their own legal
counsel expenses. The parties further agree that they shall share equally in
the reasonable costs and the fees of the neutral.
16. RETURN OF PROPERTY. Upon termination of this Agreement, the
Employee shall deliver all property (including keys, records, notes, data,
memoranda, models, and equipment) that is in the Employee's possession or under
the Employee's control which is NetCo's property or related to NetCo's business.
17. NOTICES. All notices required or permitted under this Agreement
shall be in writing and shall be deemed delivered when delivered in person or
deposited in the United States mail, postage paid, addressed as follows:
-5-
<PAGE>
NetCo:
-----
Manager, Human Resources
NetCo Communications Corporation
Union Plaza - Suite 102
333 North Washington Avenue
Minneapolis, Minnesota 55401
Employee:
--------
David Ottinger
8112 Vincent Avenue South
Bloomington, MN 55431
Such addresses may be changed from time to time by either party by providing
written notice in the manner set forth above.
18. ENTIRE AGREEMENT. This Agreement contains the entire agreement
of the parties and there are no other promises or conditions in any other
agreement whether oral or written. This Agreement supersedes any prior written
or oral agreements between the parties.
19. AMENDMENT. This Agreement may be modified or amended, if the
amendment is made in writing and is signed by both parties.
20. SEVERABILITY. If any provisions of this Agreement shall be held
to be invalid or unenforceable for any reason, the remaining provisions shall
continue to be valid and enforceable. If a court finds that any provision of
this Agreement is invalid or unenforceable, but that by limiting such provision
it would become valid or enforceable, then such provision shall be deemed to be
written, construed, and enforced as so limited.
21. WAIVER OF CONTRACTUAL RIGHT. The failure of either party to
enforce any provision of this Agreement shall not be construed as a waiver or
limitation of that party's right to subsequently enforce and compel strict
compliance with every provision of this Agreement.
-6-
<PAGE>
22. APPLICABLE LAW. This Agreement shall be governed by the laws of
--------------
the State of Minnesota.
NETCO:
NetCo Communications Corporation
By: /s/ John Washburn
--------------------------------
Its: An Authorized Officer
or Agent
AGREED TO AND ACCEPTED
Employee:
David Ottinger
- - ---------------------------------
Printed Name
/s/ David Ottinger
- - ---------------------------------
Signature of Employee
-7-
<PAGE>
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT, made and entered into effective this 10th day of
November, 1997, by and between NETCO COMMUNICATIONS CORPORATION, a Minnesota
corporation (hereinafter referred to as the "Corporation") and DAVID OTTINGER, a
resident of the State of Minnesota (hereinafter referred to as the "Employee").
WHEREAS, the Corporation considers it desirable and in its best
interests that the Employee be given an inducement to acquire a proprietary
interest in the Corporation and an added incentive to advance the interests of
the Corporation, by possessing an option to purchase common shares of the
Corporation, in accordance with Netco Communications Corporation 1994 Stock
Option Plan (the "Plan") adopted by the Directors of the Corporation and
ratified by Shareholders of the Corporation, as amended and ratified.
NOW THEREFORE, in consideration of the premises and of the mutual
promises and consideration provided herein, the parties agree as follows:
1. Definitions. Words and phrases not otherwise defined herein
-----------
shall have the meanings ascribed to them, respectively, in the Plan.
2. Grant of Option. The Corporation grants to Employee an Option
---------------
(the "Option") to purchase Thirty Thousand (30,000) common shares of the
Corporation at a purchase price of $19.50 per share, in the manner and subject
to the conditions provided herein and in the Plan. The Option hereby granted
shall be an ISO as provided in the Plan.
3. Time of Exercise of Option. (a) Subject to earlier vesting and
--------------------------
exercise provisions as provided in subparagraph 3(b) hereof, Employee may
exercise the Option in three successive equal annual increments of ten thousand
(10,000) shares first commencing on October 1, 1998; all of which options shall
expire at midnight on September 30, 2004, as illustrated by the following table:
<TABLE>
Number of Shares
From - To First Exercisable Cumulative Total
- - --------- ----------------- ----------------
<S> <C> <C>
October 1, 1997 -
September 30, 1998 0 0
October 1, 1998 -
September 30, 1999 10,000 10,000
October 1, 1999 -
September 30, 2000 10,000 20,000
</TABLE>
<PAGE>
<TABLE>
Number of Shares
From - To First Exercisable Cumulative Total
- - --------- ----------------- ----------------
<S> <C> <C>
October 1, 2000
September 30, 2001 10,000 30,000
October 1, 2001 -
September 30, 2004 0 30,000
On and after
October 1, 2004 0 0
</TABLE>
(b) In the event of an "Acquisition" or "Change of Control" (as those
terms are hereinafter defined), the vesting and exercise dates for the Option
shall be accelerated to the date and time upon which the Acquisition or Change
of Control becomes effective.
(c) For purposes hereof, (a) "Acquisition" means either (i) the
purchase of all or substantially all of the assets of the Corporation by a third
party, or (ii) the merger or consolidation of the Corporation with a third
party; and (b) "Change of Control" means the election by shareholders of the
Corporation of a majority of directors of the Corporation who were not nominated
for election by the Corporation's management.
(d) No provision of this Agreement to the contrary withstanding,
neither the Option nor any right claimed thereby or hereby, therein or herein or
thereunder or hereunder shall be exercisable by anyone on or after October 1,
2004.
(e) With respect to common shares that are purchasable for the first
time during any calendar year, the Employee may only exercise the Option to
purchase that number of common shares that have an aggregate fair market value
(as of the date first above written) which is less than or equal to $100,000.
The Employee may exercise the Option with respect to common shares valued in
excess of $100,000 in any calendar year to the extent the right to exercise the
Option to purchase such shares has accumulated over a period in excess of one
year.
4. Method of Exercise. The Option shall be exercised by written
------------------
notice to the Board of the Corporation, or the Committee if such exists, at the
Corporation's principal place of business. The notice shall be accompanied by
payment of the option price for the shares being purchased in cash or by
cashier's check or certified check or, in the sole discretion of the Board, or
the Committee if such exists, by such other form of payment as is permitted
under the Plan. The notice shall also be accompanied by any document reasonably
required by the Corporation to be executed by Employee, acknowledging the
applicable restrictions on the transfer of the common shares being purchased as
set forth under Section 8 of this Agreement. The Corporation shall make prompt
delivery of a certificate or
-2-
<PAGE>
certificates representing such common shares, provided that if any law or
regulation requires the Corporation to take any action with respect to the
common shares specified in such notice before the issuance thereof, then the
date of delivery of such common shares shall be extended for the period
necessary to take such action. The Option must be exercised with respect to at
least 500 of the common shares, unless only a lesser number of the common shares
are then exercisable, in which case it must be exercised with respect to all of
such lesser number.
5. Termination of Option. Except as herein otherwise provided, the
---------------------
Option granted under this Agreement, to the extent not heretofore exercised,
shall terminate upon the first to occur of the following events:
(a) The expiration of three months after the date on which Employee's
employment by the Corporation is terminated, except if such
termination be by reason of permanent and total disability or death;
(b) The expiration of twelve months after the date on which
Employee's employment by the Corporation is terminated, if such
termination be by reason of the Employee's permanent and total
disability or death;
(c) The expiration of twelve months from the date of Employee's death
should Employee die within three months of termination of employment
by the Corporation;
(d) The termination of Employee's employment by the Corporation for
either (i) Employee's material breach of any agreement with the
Corporation or (ii) Employee's deliberate, willful or gross misconduct
in the performance of Employee's duties on behalf of the Corporation;
or
(e) October 1, 2004.
6. Reclassification, Consolidation or Merger.
-----------------------------------------
6.1 If and to the extent that the number of issued common shares of
the Corporation shall be increased or reduced by change in par value, split up,
reverse split, reclassification, distribution of a dividend payable in stock, or
the like, the number of common shares subject to the Option and the option price
per share shall be proportionately adjusted in accordance with the Plan.
6.2 If the Corporation is reorganized or consolidated or merged with
another corporation, the Employee shall be entitled to receive an option (the
"New Option") covering common shares of such reorganized, consolidated or merged
company in the same proportion, at an equivalent price, and subject to the same
conditions as the Option. For purposes of the preceding
-3-
<PAGE>
sentence, the excess of the fair market value of the common shares subject to
the Option immediately after the reorganization, consolidation or merger over
the aggregate option price of such common shares shall not be more than the
excess of the aggregate fair market value of all common shares subject to the
Option immediately before such reorganization, consolidation or merger over the
aggregate option price of such common shares, and the New Option or assumption
of the Option shall not give the Employee additional benefits which he does not
have under this Option, or deprive him of benefits which he has under this
Option.
7. Rights Prior to Exercise of Option. This Option is non-
----------------------------------
transferable by Employee, except in the event of his death, and during his
lifetime is exercisable only by him. No person shall have any rights as a
stockholder with respect to any common shares purchasable hereunder until
payment of the option price and delivery to him of such common shares as herein
provided.
8. Restriction on Disposition. All common shares acquired by
--------------------------
Employee pursuant to this Agreement shall be subject to the restrictions on
sale, encumbrance and other disposition contained in the Company's By-Laws, or
imposed by applicable state and federal laws or regulations regarding the
registration or qualification of such acquisition of common shares, and may not
be sold or otherwise disposed of (i) within two years from the date of the
granting of the Option under which such common shares were acquired, (ii) within
one year after the exercise of the Option, and (iii) unless the Corporation has
received a prior opinion of Employee's counsel satisfactory in form and
substance to counsel for the Corporation that such transaction will not violate
the Securities Act of 1933 or any applicable state law regulating the sale of
securities.
9. Binding Effect - Plan Governs.
-----------------------------
9.1 This Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
-4-
<PAGE>
9.2 This Agreement shall be construed in accordance with and shall be
governed by the terms of the Plan as adopted by the Board and approved or to be
approved by the shareholders of the Corporation within the meaning of Section
422 of the Internal Revenue Code of 1986, as the Plan may be amended from time
to time by the Board and the shareholders of the Corporation. Employee
acknowledges receipt of a copy of the Plan prior to the execution hereof. If
possible, this Agreement shall be construed along with and in addition to any
other agreement which the Corporation and Employee may enter into, but any
provision in this Agreement which contradicts any provision of any other
agreement shall take precedence and be binding over such other provision.
"Employee" "Corporation"
NetCo Communications Corporation
/s/ David Ottinger By: /s/ Edward J. Driscoll III
- - --------------------------- --------------------------------
President
-5-
<PAGE>
EXHIBIT 10.27
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (this "Agreement") is made effective as of September
8, 1998, by and between WAM!NET Inc. ("WAM!NET" or the "Corporation"), of 6100
West 110th Street, Bloomington, Minnesota 55438, and Bradley E. Sparks
("Employee") of 2900 Thomas Avenue S., Apt. 1715, Minneapolis, Minnesota 55416.
BACKGROUND
A. WAM!NET is engaged in the business of high speed electronic courier
services for the transportation, storage and retrieval of large quantities of
data for print and CD-ROM prepress publishing industries as well as for medical
imaging;
B. WAM!NET desires to have the services of the Employee; and
C. The Employee is willing to be employed by WAM!NET.
Therefore, in consideration of the mutual promises set forth in this
Agreement, the parties agree as follows:
1. EMPLOYMENT. Effective September 8,1998, Employee shall serve WAM!NET
as Executive Vice President and Chief Financial Officer.
2. BEST EFFORTS OF EMPLOYEE. Employee agrees to perform faithfully,
industriously, and to the best of Employee's ability, experience, and talents,
all of the duties that may be reasonably required by the express and implicit
terms of this Agreement, to the reasonable satisfaction of WAM!NET. Such duties
shall be provided at such place(s) as the needs, business, or opportunities of
WAM!NET may reasonably require from time to time.
3. Notwithstanding the foregoing, Employee shall also be permitted to
serve on the Board of Directors of other non-competing business corporations and
may participate in charitable, cultural, professional, civic, and business
association activities.
4. WAM!NET shall add Employee to its Director and Officer insurance and
indemnification policies. Additionally, WAM!NET hereby indemnifies and holds
harmless Employer from any losses, damages, claims, and causes of action arising
out of the actions or inactions of the Board of Directors and/or the Officers of
the Company for any period before September 8, 1998.
5. COMPENSATION OF EMPLOYEE. As compensation for the services provided by
Employee under this Agreement, WAM!NET will pay the Employee a monthly base
salary of $16,666.67 (which salary may be adjusted upward by WAM!NET after the
first anniversary of the date of this Agreement). In addition, a bonus of up to
30% of Employee's annualized base salary (annualized for 1998 only) may be
earned if Employee achieves specific performance objectives.
<PAGE>
These objectives will be determined by Employee and the Chief Executive Officer
or his successors. Upon termination of this Agreement, payments under this
paragraph shall cease; provided, however, that the Employee shall be entitled to
payments for periods or partial periods that occurred prior to the date of
termination and for which the Employee has not yet been paid.
6. STOCK OPTIONS. Subject to approval of the WAM!NET Board of Directors,
and in addition to any other compensation to which Employee may be entitled by
this Agreement, Employee shall be entitled to receive Incentive Stock Options
and/or Nonqualified Stock Options, as determined by the Board of Directors,
(cumulatively, the "Options") for Six Hundred Thousand (600,000) shares of
common stock of WAM!NET Inc. (the "Shares") under and subject to the provisions
of the WAM!NET Inc. Amended and Restated 1994 Stock Option Plan and/or the
WAM!NET Inc. 1998 Combined Stock Option Plan (cumulatively, the "Plans"). The
exercise price of the Options shall be Fair Market Value or Eight and no/100
Dollars ($8.00) per share for Four Hundred Thousand (400,000) of the Shares, and
shall be Twelve and no/100 Dollars ($12.00) for Two Hundred Thousand (200,000)
of the Shares. The Options shall vest and first become exercisable as follows at
the rate of twenty-five percent (25%) per year, with the first twenty-five
percent (25%) becoming vested and exercisable on the first anniversary of the
date of this Agreement:
<TABLE>
<CAPTION>
Number of Shares Number of Shares
---------------- ----------------
First Exercisable First Exercisable
----------------- -----------------
Vesting Date at $8.00 Per Share at $12.00 Per Share
------------ ------------------ -------------------
<S> <C> <C>
First Anniversary of
date of Agreement 100,000 50,000
Second Anniversary of
date of Agreement 100,000 50,000
Third Anniversary of
date of Agreement 100,000 50,000
Fourth Anniversary of
date of Agreement 100,000 50,000
</TABLE>
The previous provisions of this Paragraph 4 notwithstanding, any Options not
then exercised by Employee shall terminate and be forfeited by Employee upon the
termination of Employee's employment with WAM!NET or any subsidiary for either:
(i) Employee's material breach of Paragraph 6, 7, 8, 9, 10, 11 or 12 of this
Agreement, or (ii) Employee's commission of a felony or other willful act which
is materially and significantly detrimental to WAM!NET.
7. STOCK GRANT. Subject to approval of the WAM!NET Board of Directors,
Employee shall be entitled to purchase 37,500 shares of restricted stock at
$8.00 per share under terms and conditions of a Stock Restriction Agreement to
be negotiated.
2
<PAGE>
8. RELOCATION EXPENSES. Employee is entitled to receive relocation
benefits as outlined in Exhibit A, hereto. Employee may exercise his right to
relocation benefits at any time prior to September 30, 1999.
9. FAMILY VISITS. WAM!NET will pay for up to 12 round trip Economy Class
Airfares between Minneapolis and Washington DC to facilitate Employee's family
visits, and shall reimburse Employee for reasonable expenses incurred by him for
auto and lodging associated with such family visits up to two nights a month.
10. AUTOMOBILE ALLOWANCE. WAM!NET shall provide Employee with an annual
automobile allowance which amount shall cover lease payments of $750.00 per
month (payable monthly), plus maintenance, insurance and fuel costs associated
with the use of such automobile, which will be submitted as expenses.
11. REIMBURSEMENT FOR EXPENSES IN ACCORDANCE WITH WAM!NET POLICY. WAM!NET
will reimburse Employee for "out-of-pocket" expenses in accordance with WAM!NET
policies in effect from time to time.
12. CONFIDENTIALITY. Employee recognizes that WAM!NET has and will have
information regarding the following:
- - - inventions - business affairs
- - - machinery - processes
- - - products - trade secrets
- - - prices - technical matters
- - - apparatus - customer lists
- - - costs - product designs
- - - discounts - copyrights
- - - future plans
and other vital information (collectively, "Information") which are valuable,
special and unique assets of WAM!NET. Employee agrees that he will not at any
time or in any manner, either directly or indirectly, divulge, disclose, or
communicate in any manner any Information to any third party without prior
written consent of WAM!NET. Employee will protect the Information and treat it
as strictly confidential. Information under this paragraph shall not include
information that is generally available in the public domain or information that
WAM!NET disseminates to its the public at large or information that is filed as
a matter of public record with the SEC or similar state regulatory agencies.
13. TRADE SECRETS. Employee shall not at any time during the term of this
Agreement or thereafter, or in any manner, either directly or indirectly,
divulge, disclose or communicate to any person, firm or corporation in any
manner whatsoever any information which constitutes a "trade secret" as that
term is defined in section 325C.01, subd. 5 of Minnesota Statutes. In applying
this paragraph, the arbitrator may also take into account the special
circumstances of the Corporation's business.
3
<PAGE>
14. DISCLOSURE AND ASSIGNMENT. Except as provided elsewhere in this
Agreement, Employee shall treat for the Corporation's sole benefit and fully and
promptly disclose to the Corporation, without additional compensation, all
ideas, discoveries, inventions and improvements, whether patentable or not,
which while the Employee is employed by the Corporation are made, conceived or
reduced to practice by Employee, alone or with others, during or after usual
working hours, either on or off the job, and Employee hereby assigns to the
Corporation all such ideas, discoveries, inventions and improvements to be the
Corporation's exclusive property.
15. DISCLOSURE AND RIGHT OF FIRST REFUSAL. Paragraph 14 of this Agreement
shall not apply to any ideas, discoveries, inventions and improvements for which
no equipment, supplies, facility or trade secret information of the Corporation
was used, and which was developed entirely on Employee's own time, and (1) which
does not relate (a) directly to the business of the Corporation or (b) to the
Corporation's actual or demonstrably anticipated research or development, or (2)
which does not result from any work performed by Employee for the Corporation.
Employee will, nonetheless, promptly disclose all such ideas, discoveries,
inventions and improvements to the Corporation and offer to the Corporation the
right of first refusal to enter into a license or purchase agreement covering
the subject idea, discovery, invention or improvement on terms mutually agreed
to by Employee and the Corporation. In the event the Corporation and Employee
cannot agree on terms and Employee receives an offer to enter into a license or
purchase agreement with some other party on terms more favorable to that other
party than the terms offered to the Corporation, then the Corporation shall have
the right and Employee shall have the obligation to offer to the Corporation the
idea, discovery, invention or improvement on such favorable terms. When such an
offer is made to the Corporation pursuant to the preceding sentence, it must be
accepted by the Corporation within thirty (30) days; or if not accepted, the
right of first refusal hereunder as to that offer shall terminate.
NOTICE: Paragraph 14 hereof requires Employee to assign rights to inventions to
the Corporation or its successors. Minnesota Statutes (S)181.78 limits the
scope of agreements requiring the inventions be assigned employers. The statute
states that such assignment agreements do not apply:
"to an invention for which no equipment, supplies, facility or
trade secret information of the employer was used and which was
developed entirely on the Employee's own time, and (1) which does
not relate (a) directly to the business of the employer or (b) to
the employer's actual or demonstrably anticipated research or
development, or (2) which does not result from any work performed
by the Employee for the employer."
Please note that Paragraph 14 of this Agreement uses these statutory terms
to define the inventions which are not automatically assigned to the Corporation
but instead are subject to a right of first refusal in favor of the Corporation.
16. UNAUTHORIZED DISCLOSURE OF INFORMATION. If it appears that the
Employee has disclosed (or has threatened to disclose) Information or Trade
Secrets in violation
4
<PAGE>
of this Agreement, WAM!NET shall be entitled to an injunction to restrain
Employee from disclosing, in whole or in part, such Information, or from
providing any services to any party to whom such Information has been disclosed.
WAM!NET shall not be prohibited by this provision from pursuing other remedies,
including a claim for losses and damages.
17. CONFIDENTIALITY AFTER TERMINATION OF EMPLOYMENT. The confidentiality
provisions of this Agreement shall remain in full force and effect for a one
year period after the termination of Employee's employment.
18. NON-COMPETE AGREEMENT.
(a) Recognizing that the various items of Information are special and
unique assets of the company, Employee agrees and covenants that for a
period of 12 months following the termination of his or her employment,
whether such termination is voluntary or involuntary (unless such
termination is the result of a failure by WAM!NET to issue stock options or
to obtain Board approval therefor in accordance with paragraph 4), Employee
will not directly engage in any business competitive with WAM!NET, nor
shall Employee cause or solicit, directly for his own behalf or for the
benefit of a third party, any other employee or employees of WAM!NET to
terminate their employment with WAM!NET to engage in such competitive
activities. This covenant shall apply to the geographical area that
includes the United States and Canada. Directly engaging in any competitive
business includes, but is not limited to, (i) engaging in a business as
owner, partner or agent (other than as an owner of less than five (5%)
percent of a publicly traded company), (ii) becoming an employee of any
third party that is engaged in such business, (iii) becoming interested
directly in any such business, or (iv) soliciting any customer of WAM!NET
for the benefit of a third party that is engaged in such business. Employee
agrees that this non-compete provisions will not adversely affect the
Employee's livelihood.
(b) In the event that, solely because of this non-competition covenant,
the Employee is precluded from working in an industry for which he is
qualified by virtue of his experience, education, or training, then,
WAM!NET agrees to pay, after a period of three (3) months, and up to a
total period not to exceed six (6) months, the base compensation earned by
the Employee immediately prior to his separation from employment.
19. EMPLOYEE'S INABILITY TO CONTRACT FOR WAM!NET. Employee shall not have
the right to make any contracts or commitments for or on behalf of WAM!NET
except in accordance with WAM!NET policies or with the express written consent
of WAM!NET.
20. TERM/TERMINATION. Employee's employment under this Agreement shall be
for an unspecified term on an "at will" basis. This Agreement may be terminated,
with or without cause, by either party. Each party will give notice (as provided
in the paragraph of this Agreement captioned "Notices") of such action to other
party.
21. SEVERANCE PAY. If WAM!NET terminates Employee's employment other than
for cause WAM!NET agrees to pay Employee as severance pay an amount equal to 6
5
<PAGE>
months of Employee's base pay as of the date of his termination, less customary
payroll deductions, to be paid in monthly installments in the same manner as
paid during his employment. The first severance payment shall be made to
Employee on WAM!NET's first regular payday after the date of Employee's
termination. WAM!NET's responsibility to pay the severance pay will immediately
terminate if Employee violates paragraphs 8, 13, or 14 of this Agreement. For
purposes of this Agreement "for cause" shall mean: (1) the Employee's dishonesty
or theft of WAM!NET's property; (2) the Employee's gross negligence or
inefficiency in the execution of his duties; (3) the Employee's material
violation of WAM!NET's rules, regulations, instructions or policies; (4) the
Employee's commission of a crime or other act which would materially damage the
reputation of WAM!NET; or (5) the Employee's material breach of provisions of
this Agreement.
22. ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement, or its breach, or to the employment relationship between the
Employee and the Company, shall be settled by final and binding arbitration,
upon the request of either party, in Minneapolis, Minnesota. Such arbitration
shall proceed in accordance with the then governing rules of the American
Arbitration Association (AAA) for Commercial Arbitration or Employment Law
Disputes, at the option of the petitioner. Judgment upon the award rendered may
be entered and enforced in any court of competent jurisdiction. It is agreed
that the parties shall choose a single, neutral arbitrator from among a panel of
not less than seven (7) proposed arbitrators, and that the parties may have no
more than two (2) panels of arbitrators presented to them by the AAA. The
parties agree that they shall each bear their own costs associated with the
arbitration, including any filing fee to be paid by them and their own legal
counsel expenses. The parties further agree that they shall share equally in the
reasonable costs and the fees of the neutral.
23. RETURN OF PROPERTY. Upon termination of this Agreement, the Employee
shall deliver all property (including keys, records, notes, data, memoranda,
models, and equipment) that is in the Employee's possession or under the
Employee's control which is WAM!NET's property.
24. NOTICES. All notices required or permitted under this Agreement shall
be in writing and shall be deemed given when delivered in person or five (5)
days after deposited in the United States mail, postage paid, addressed as
follows:
WAM!NET:
- - -------
President
WAM!NET Inc.
6100 West 110th Street
Bloomington, Minnesota 55438
Employee:
- - --------
Bradley E. Sparks
2900 Thomas Avenue S., Apt. 1715
Minneapolis, Minnesota 55416
6
<PAGE>
Such addresses may be changed from time to time by either party by providing
written notice in the manner set forth above.
25. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties and there are no other promises or conditions in any other agreements
whether oral or written. This Agreement supersedes any prior written or oral
agreements between the parties.
26. AMENDMENT. This Agreement may be modified or amended, if the amendment
is made in writing and is signed by both parties.
27. SEVERABILITY. If any provisions of this Agreement shall be held to be
invalid or unenforceable for any reason, the remaining provisions shall continue
to be valid and enforceable. If a court finds that any provision of this
Agreement is invalid or unenforceable, but that by limiting such provision it
would become valid or enforceable, then such provision shall be deemed to be
written, construed, and enforced as so limited.
28. WAIVER OF CONTRACTUAL RIGHT. The failure of either party to enforce
any provision of this Agreement shall not be construed as a waiver or limitation
of that party's right to subsequently enforce and compel strict compliance with
every provision of this Agreement.
29. APPLICABLE LAW. This Agreement shall be governed by the laws of the
State of Minnesota.
WAM!NET:
WAM!NET Inc.
Dated: September 8, 1998 By: /s/ Edward J. Driscoll III
__________________ _________________________________
Its: An authorized Officer or Agent
AGREED AND ACCEPTED.
Employee:
Printed Name Bradley E. Sparks
Dated: September 8, 1998 /s/ Bradley E. Sparks
__________________ _____________________________________
Signature of Employee
7
<PAGE>
EXHIBIT A
RELOCATION PACKAGE
Household Goods Shipment. WAM!NET will pay for the shipment of Sparks' personal
- - ------------------------
household goods via a professional moving service including packing and
unpacking services. WAM!NET will also pay for storage of Sparks' personal
household goods for up to 90 days and delivery out of storage.
Home sale Assistance - Guaranteed Buy-Out. Listing, marketing, home sale and
- - -----------------------------------------
closing assistance for Sparks' current home will be provided by Edina Realty
Relocation Services/American Escrow and Closing at WAM!NET'S expense. The
Guaranteed Buy-Out will be at a purchase price based upon the average of two
independent fee appraisals ordered by American Escrow and Closing. If the
appraisals are not within 5% of each other, a third appraisal will be ordered
and the purchase price will be determined by averaging the two closest
appraisals. Upon determination of the purchase price American Escrow and Closing
will prepare a contract to purchase the property for the purchase price. From
the date of the contract Sparks will have 120 days in which to sell the house to
a third party and during which time Sparks will be responsible for all home
related expenses. Sparks agrees that the listing and marketing of the house
during the 120 day period shall be coordinated through Edina Realty Relocation
Services. If such sale does not take place within the 120 day period the home
will be purchased by American Escrow and Closing at the purchase price listed in
the contract. The Guaranteed Buy-Out is subject to a satisfactory home
inspection and to the house being available for showings. Any work orders or
repairs mandated by the inspection are to be made at Sparks' expense. The costs
of any such work orders or repairs not made prior to the sale to American Escrow
and Closing shall be deducted from the purchase price.
Temporary Living Expenses. WAM!NET will pay for up to 90 days of temporary
- - -------------------------
lodging expenses incurred by Sparks upon his arrival in the Twin City area, such
lodging to be approved by WAM!NET.
Home Seeking Expenses. WAM!NET will pay for the cost of Sparks to travel to the
- - ---------------------
Twin Cities for the purpose of locating permanent housing as well as all related
and reasonable expenses incurred during this trip.
Tax Gross-Up. If Sparks' uses the Home Sale Assistance and Guaranteed Buy-Out
- - ------------
package offered by WAM!NET through Edina Realty Relocation Services/American
Escrow and Closing WAM!NET will provide Sparks with tax liability assistance for
non-deductible, taxable relocation income. Such tax liability assistance will be
based on WAM!NET income only. The gross-up for federal, state and FICA will be
based on established standards and will be calculated by an agent selected by
WAM!NET.
<PAGE>
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT, made and entered into effective this 11th day of September,
1998, by and between WAM!NET INC., a Minnesota corporation (hereinafter referred
to as the "Corporation") and BRADLEY SPARKS, a resident of the State of
Minnesota (hereinafter referred to as the "Employee").
WHEREAS, the Corporation considers it desirable and in its best interests
that the Employee be given an inducement to acquire a proprietary interest in
the Corporation and an added incentive to advance the interests of the
Corporation, by possessing an option to purchase common shares of the
Corporation, in accordance with WAM!NET Inc. 1994 Stock Option Plan (the
"Plan").
NOW THEREFORE, in consideration of the premises and of the mutual promises
and consideration provided herein, the parties agree as follows:
1. Definitions. Words and phrases not otherwise defined herein shall have
-----------
the meanings ascribed to them, respectively, in the Plan.
2. Grant of Option. The Corporation grants to Employee an Option (the
---------------
"Option") to purchase Five Thousand (37,500) common shares of the Corporation at
a purchase price of $8.00 per share, in the manner and subject to the conditions
provided herein and in the Plan. The Option hereby granted shall be an ISO as
provided in the Plan.
3. Time of Exercise of Option. Employee may exercise the Option in four
--------------------------
equal increments; the initial increment of 9,375 shares being exercisable on and
after September 11, 1999 and the second increment of 9,375 shares being
exercisable on and after September 11, 2000, the third increment of 9,375 shares
being exercisable on and after September 11, 2001, and the fourth increment of
9,375 shares being exercisable on and after September 11, 2002. All options
shall expire at midnight on September 10, 2008, as illustrated by the following
table:
<TABLE>
Number of Shares
From-To First Exercisable Cumulative Total
------- ----------------- ----------------
<S> <C> <C>
September 11, 1999 -
September 10, 2000 9,375 9,375
September 11, 2000-
September 10, 2001 9,375 18,750
September 11, 2001-
September 10, 2002 9,375 28,125
September 11, 2002-
September 10, 2003 9,375 37,500
On and after
September 11, 2008 0 0
</TABLE>
No provision of this Agreement to the contrary withstanding, neither the
Option nor any right claimed thereby or hereby, therein or herein or thereunder
or hereunder shall be exercisable by anyone on or after September 11, 2008.
With respect to common shares that are purchasable for the first time
during any calendar year, the Employee may only exercise the Option to purchase
that number of common shares that have an aggregate fair market value (as of the
date first above written) which is less than or equal to $100,000. The Employee
may exercise the Option with respect to common shares valued in excess of
$100,000 in
<PAGE>
any calendar year to the extent the right to exercise the Option to purchase
such shares has accumulated over a period in excess of one year.
4. Method of Exercise. The Option shall be exercised by written notice to
------------------
the Board of the Corporation, or the Committee if such exists, at the
Corporation's principal place of business. The notice shall be accompanied by
payment of the option price for the shares being purchased in cash or by
cashier's check or certified check or, in the sole discretion of the Board, or
the Committee if such exists, by such other form of payment as is permitted
under the Plan. The notice shall also be accompanied by any document reasonably
required by the Corporation to be executed by Employee, acknowledging the
applicable restrictions on the transfer of the common shares being purchased as
set forth under Section 8 of this Agreement. The Corporation shall make prompt
delivery of a certificate or certificates representing such common shares,
provided that if any law or regulation requires the Corporation to take any
action with respect to the common shares specified in such notice before the
issuance thereof, then the date of delivery of such common shares shall be
extended for the period necessary to take such action. The Option must be
exercised with respect to at least 500 of the common shares, unless only a
lesser number of the common shares are then exercisable, in which case it must
be exercised with respect to all of such lesser number.
5. Termination of Option. Except as herein otherwise provided, the Option
---------------------
granted under this Agreement, to the extent not heretofore exercised, shall
terminate upon the first to occur of the following events:
a. The expiration of three months after the date on which Employee's
employment by the Corporation is terminated, except if such
termination be by reason of permanent and total disability or
death;
b. The expiration of twelve months after the date on which
Employee's employment by the Corporation is terminated, if such
termination be by reason of the Employee's permanent and total
disability or death;
c. The expiration of twelve months from the date of Employee's death
should Employee die within three months of termination of
employment by the Corporation;
d. The termination of Employee's employment by the Corporation for
either (i) Employee's material breach of any agreement with the
Corporation or (ii) Employee's deliberate, willful or gross
misconduct in the performance or Employee's duties on behalf of
the Corporation; or
e. September 11, 2008.
6. Reclassification, Consolidation or Merger.
-----------------------------------------
6.1 If and to the extent that the number of issued common shares of the
Corporation shall be increased or reduced by change in par value, split up,
reverse split, reclassification, distribution of a dividend payable in stock, or
the like, the number of common shares subject to the Option and the option price
per share shall be proportionately adjusted in accordance with the Plan.
6.2 If the Corporation is reorganized or consolidated or merged with
another corporation, the Employee shall be entitled to receive an option (the
"New Option") covering common shares of such reorganized, consolidated or merged
company in the same proportion, at an equivalent price, and subject to the same
conditions as the Option. For purposes of the preceding sentence, the excess of
the fair market value of the common shares subject to the Option immediately
after the reorganization, consolidation or merger over the aggregate option
price of such common shares shall not be more than the excess of the aggregate
fair market value of all common shares subject to the Option immediately before
such reorganization, consolidation or merger over the aggregate option price of
such common
-2-
<PAGE>
shares, and the New Option or assumption of the Option shall not give the
Employee additional benefits which he does not have under this Option, or
deprive him of benefits which he has under this Option.
7. Rights Prior to Exercise of Option. This Option is non-transferable by
----------------------------------
Employee, except in the event of his death, and during his lifetime is
exercisable only by him. No person shall have any rights as a stockholder with
respect to any common shares purchasable hereunder until payment of the option
price and delivery to him of such common shares as herein provided.
8. Restriction on Disposition. All common shares acquired by Employee
--------------------------
pursuant to this Agreement shall be subject to the restrictions on sale,
encumbrance and other disposition contained in the Company's By-Laws, or imposed
by applicable state and federal laws or regulations regarding the registration
or qualification of such acquisition of common shares, and may not be sold or
otherwise disposed of (i) within two years from the date of the granting of the
Option under which such common shares were acquired, (ii) within one year after
the exercise of the Option, and (iii) unless the Corporation has received a
prior opinion of Employee's counsel satisfactory in form and substance to
counsel for the Corporation that such transaction will not violate the
Securities Act of 1933 or any applicable state law regulating the sale of
securities.
9. Binding Effect - Plan Governs.
-----------------------------
9.1 This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, administrators, successors
and assigns.
This Agreement shall be construed in accordance with and shall be
governed by the terms of the Plan as adopted by the Board and approved or to be
approved by the shareholders of the Corporation within the meaning of Section
422 of the Internal Revenue Code of 1986, as the Plan may be amended from time
to time by the Board and the shareholders of the Corporation. Employee
acknowledges receipt of a copy of the Plan prior to the execution hereof. If
possible, this Agreement shall be construed along with and in addition to any
other agreement which the Corporation and Employee may enter into, but any
provision in this Agreement which contradicts any provision of any other
agreement shall take precedence and be binding over such other provision.
"Employee" "Corporation"
Bradley Sparks WAM!NET Inc.
/s/ Bradley E. Sparks By: /s/ Michael O'Donnell
____________________________ __________________________________
An Authorized Agent or Officer
-3-
<PAGE>
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, made and entered into effective this 11th day of September,
1998, by and between WAM!NET INC., a Minnesota corporation (hereinafter referred
to as the "Corporation") and BRADLEY SPARKS, a resident of the State of
Minnesota (hereinafter referred to as the "Employee").
WHEREAS, the Corporation considers it desirable and in its best interests
that the Employee be given an inducement to acquire a proprietary interest in
the Corporation and an added incentive to advance the interests of the
Corporation, by possessing an option to purchase common shares of the
Corporation, in accordance with WAM!NET Inc. 1994 Stock Option Plan (the
"Plan").
NOW THEREFORE, in consideration of the premises and of the mutual promises
and consideration provided herein, the parties agree as follows:
1. Definitions. Words and phrases not otherwise defined herein shall have
-----------
the meanings ascribed to them, respectively, in the Plan.
2. Grant of Option. The Corporation grants to Employee an Option (the
---------------
"Option") to purchase Five Thousand (362,500) common shares of the Corporation
at a purchase price of $8.00 per share, in the manner and subject to the
conditions provided herein and in the Plan. The Option hereby granted shall be
an NQO as provided in the Plan.
3. Time of Exercise of Option. Employee may exercise the Option in three
--------------------------
equal increments; the initial increment of 90,625 shares being exercisable on
and after September 11, 1999 and the second increment of 90,625 shares being
exercisable on and after September 11, 2000, the third increment of 90,625
shares being exercisable on and after September 11, 2001, and the fourth
increment for 90,625 shares being exercisable on and after September 11, 2002.
All options shall expire at midnight on September 10, 2008, as illustrated by
the following table:
<TABLE>
<CAPTION>
Number of Shares
From-To First Exercisable Cumulative Total
------- ----------------- ----------------
<S> <C> <C> <C>
September 11, 1999 - 90,625 9,375
September 10, 2000
September 11, 2000 - 90,625 18,750
September 10, 2001
September 11, 2001 - 90,625 28,125
September 10, 2002
September 11, 2002 - 90,625 37,500
September 10, 2003
On and after 0 0
September 11, 2008
</TABLE>
No provision of this Agreement to the contrary withstanding, neither the
Option nor any right claimed thereby or hereby, therein or herein or thereunder
or hereunder shall be exercisable by anyone on or after September 11, 2008.
With respect to common shares that are purchasable for the first time
during any calendar year, the Employee may only exercise the Option to purchase
that number of common shares that have an aggregate fair market value (as of the
date first above written) which is less than or equal to $100,000.
<PAGE>
The Employee may exercise the Option with respect to common shares valued in
excess of $100,000 in any calendar year to the extent the right to exercise the
Option to purchase such shares has accumulated over a period in excess of one
year.
4. Method of Exercise. The Option shall be exercised by written notice to
------------------
the Board of the Corporation, or the Committee if such exists, at the
Corporation's principal place of business. The notice shall be accompanied by
payment of the option price for the shares being purchased in cash or by
cashier's check or certified check or, in the sole discretion of the Board, or
the Committee if such exists, by such other form of payment as is permitted
under the Plan. The notice shall also be accompanied by any document reasonably
required by the Corporation to be executed by Employee, acknowledging the
applicable restrictions on the transfer of the common shares being purchased as
set forth under Section 8 of this Agreement. The Corporation shall make prompt
delivery of a certificate or certificates representing such common shares,
provided that if any law or regulation requires the Corporation to take any
action with respect to the common shares specified in such notice before the
issuance thereof, then the date of delivery of such common shares shall be
extended for the period necessary to take such action. The Option must be
exercised with respect to at least 500 of the common shares, unless only a
lesser number of the common shares are then exercisable, in which case it must
be exercised with respect to all of such lesser number.
5. Termination of Option. Except as herein otherwise provided, the Option
---------------------
granted under this Agreement, to the extent not heretofore exercised, shall
terminate upon the first to occur of the following events:
a. The expiration of three months after the date on which Employee's
employment by the Corporation is terminated, except if such
termination be by reason of permanent and total disability or
death;
b. The expiration of twelve months after the date on which
Employee's employment by the Corporation is terminated, if such
termination be by reason of the Employee's permanent and total
disability or death;
c. The expiration of twelve months from the date of Employee's death
should Employee die within three months of termination of
employment by the Corporation;
d. The termination of Employee's employment by the Corporation for
either (i) Employee's material breach of any agreement with the
Corporation or (ii) Employee's deliberate, willful or gross
misconduct in the performance or Employee's duties on behalf of
the Corporation; or
e. September 11, 2008.
6. Reclassification, Consolidation or Merger.
-----------------------------------------
6.1 If and to the extent that the number of issued common shares of the
Corporation shall be increased or reduced by change in par value, split up,
reverse split, reclassification, distribution of a dividend payable in stock, or
the like, the number of common shares subject to the Option and the option price
per share shall be proportionately adjusted in accordance with the Plan.
6.2 If the Corporation is reorganized or consolidated or merged with
another corporation, the Employee shall be entitled to receive an option (the
"New Option") covering common shares of such reorganized, consolidated or merged
company in the same proportion, at an equivalent price, and subject to the same
conditions as the Option. For purposes of the preceding sentence, the excess of
the fair market value of the common shares subject to the Option immediately
after the reorganization, consolidation or merger over the aggregate option
price of such common shares shall not be more than the excess of the aggregate
fair market value of all common shares subject to the Option immediately
-2-
<PAGE>
before such reorganization, consolidation or merger over the aggregate option
price of such common shares, and the New Option or assumption of the Option
shall not give the Employee additional benefits which he does not have under
this Option, or deprive him of benefits which he has under this Option.
7. Rights Prior to Exercise of Option. This Option is non-transferable by
----------------------------------
Employee, except in the event of his death, and during his lifetime is
exercisable only by him. No person shall have any rights as a stockholder with
respect to any common shares purchasable hereunder until payment of the option
price and delivery to him of such common shares as herein provided.
8. Restriction on Disposition. All common shares acquired by Employee
--------------------------
pursuant to this Agreement shall be subject to the restrictions on sale,
encumbrance and other disposition contained in the Company's By-Laws, or imposed
by applicable state and federal laws or regulations regarding the registration
or qualification of such acquisition of common shares, and may not be sold or
otherwise disposed of (i) within two years from the date of the granting of the
Option under which such common shares were acquired, (ii) within one year after
the exercise of the Option, and (iii) unless the Corporation has received a
prior opinion of Employee's counsel satisfactory in form and substance to
counsel for the Corporation that such transaction will not violate the
Securities Act of 1933 or any applicable state law regulating the sale of
securities.
9. Binding Effect - Plan Governs.
-----------------------------
9.1 This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, administrators, successors
and assigns.
9.2 This Agreement shall be construed in accordance with and shall be
governed by the terms of the Plan as adopted by the Board and approved
or to be approved by the shareholders of the Corporation within the
meaning of Section 422 of the Internal Revenue Code of 1986, as the
Plan may be amended from time to time by the Board and the
shareholders of the Corporation. Employee acknowledges receipt of a
copy of the Plan prior to the execution hereof. If possible, this
Agreement shall be construed along with and in addition to any other
agreement which the Corporation and Employee may enter into, but any
provision in this Agreement which contradicts any provision of any
other agreement shall take precedence and be binding over such other
provision.
"Employee" "Corporation"
Bradley E. Sparks WAM!NET Inc.
/s/ Bradley E. Sparks By: /s/ Michael O'Donnell
____________________________ _____________________________
An Authorized Agent or Officer
-3-
<PAGE>
WAM!NET INC.
NONQUALIFIED STOCK OPTION AGREEMENT
1998 COMBINED STOCK OPTION PLAN
THIS AGREEMENT, made and entered into effective this 11th day of September,
1998, by and between WAM!NET Inc., a Minnesota corporation (hereinafter referred
to as the "Corporation") and Bradley Sparks, an employee of the Corporation
("Employee").
WHEREAS, the Corporation considers it desirable and in its best interests
that Employee be given an inducement to acquire a proprietary interest in the
Corporation and an added incentive to advance the interests of the Corporation,
by possessing an option to purchase common shares of the Corporation, in
accordance with the WAM!NET Inc. 1998 Combined Stock Option Plan (the "Plan").
NOW THEREFORE, on the basis of the premises and of the mutual
considerations provided herein, the parties agree as follows:
1. Definitions. Words and phrases not otherwise defined herein shall have
-----------
the meanings ascribed to them, respectively, in the Plan.
2. Grant of Option. The Corporation grants to Employee an Option (the
---------------
"Option") to purchase 139,250 common shares of the Corporation at a purchase
price of $12.00 per share, in the manner and subject to the conditions provided
herein and in the Plan. The Option hereby granted shall be a nonqualified stock
option as provided in the Plan.
3. Time of Exercise of Option. Employee may exercise the Option in 4
--------------------------
equal increments; the initial increment for 34,812 shares being exercisable on
and after September 11, 1999, the second increment for 34,812 shares being
exercisable on and after September 11, 2000, the third increment for 34,813
shares being exercisable on and after September 11, 2001, and the fourth
increment for 34,813 shares being exercisable on and after September 11, 2002.
All options shall expire at midnight on September 10, 2008, as illustrated by
the following table:
<TABLE>
Number of Shares
From - To First Exercisable Cumulative Total
--------- ----------------- ----------------
<S> <C> <C>
September 11, 1999- 34,812 34,812
September 10, 2000
September 11, 2000- 34,812 69,624
September 10, 2001
September 11, 2001- 34,813 104,437
September 10, 2002
September 11, 2002- 34,813 139,250
September 10, 2003
</TABLE>
No provision of this Agreement to the contrary withstanding, neither the
Option nor any right claimed thereby or hereby, therein or herein or thereunder
of hereunder shall be exercisable by anyone on or after September 11, 2008.
4. Method of Exercise. The Option shall be exercised by written notice to
------------------
the Board of the Corporation, or the Committee if such exists, at the
Corporation's principal place of business. The notice shall be accompanied by
payment of the option price for the shares being purchased in cash or by
cashier's check or certified check or, in the sole discretion of the Board of
Directors, or the Committee if
<PAGE>
such exists, by such other form of payment as is permitted under the Plan. The
notice shall also be accompanied by any document reasonably required by the
Corporation to be executed by Employee, acknowledging the applicable
restrictions on the transfer of the common shares being purchased as set forth
under this Agreement. The Corporation shall make prompt delivery of a
certificate or certificates representing such common shares, provided that if
any law or regulation requires the Corporation to take any action with respect
to the common shares specified in such notice before the issuance thereof, then
the date of delivery of such common shares shall be extended for the period
necessary to take such action. The Option must be exercised with respect to at
least 100 of the common shares, unless the Option is only exercisable with
respect to a lesser number of common shares, in which case it must be exercised
with respect to all of such lesser number.
5. Termination of Option. Except as herein otherwise provided, the Option
---------------------
granted under this Agreement, to the extent not heretofore exercised, shall
terminate upon the first to occur of the following events:
a. The expiration of three months after the date on which Employee
ceases for a reason other than death, permanent disability, or
deliberate, willful or gross misconduct to be an employee within
the meaning of the Plan;
b. The date on which Employee ceases to be an employee within the
meaning of the Plan by reason of Employee's deliberate, willful or
gross misconduct as determined by the Committee;
c. The expiration of twelve months after the date on which Employee
ceases to be an employee within the meaning of the Plan by reason
of permanent disability;
d. The expiration of twelve months from the date of Employee's death;
or
e. September 10, 2008 (being the date immediately preceding the 10th
anniversary of the date of this Agreement).
6. Reclassification, Consolidation or Merger.
-----------------------------------------
6.1 If and to the extent that the number of issued common shares of the
Corporation shall be increased or reduced by change in par value, split up,
reverse split, reclassification, distribution of a dividend payable in stock, or
the like, the number of common shares subject to the Option and the option price
per share shall be proportionately adjusted in accordance with the Plan.
6.2 If the Corporation is reorganized or consolidated or merged with
another corporation, Employee shall be entitled to receive an option (the "New
Option") covering common shares of such reorganized, consolidated or merged
company in the same proportion, at an equivalent price, and subject to the same
conditions as the Option. For purposes of the preceding sentence, the excess of
the fair market value of the common shares subject to the Option immediately
after the reorganization, consolidation or merger over the aggregate option
price of such common shares shall not be more than the excess of the aggregate
fair market value of all common shares subject to the Option immediately before
such reorganization, consolidation or merger over the aggregate option price of
such common shares, and the New Option or assumption of the Option shall not
give Employee additional benefits which he does not have under this Option, or
deprive him of benefits which he has under this Option.
7. Rights Prior to Exercise of Option. This Option is non-transferable by
----------------------------------
Employee, except in the event of his death, and during his lifetime is
exercisable only by him; provided, however, that this Option may be transferred
by Employee's for estate planning purposes subject to prior or other written
approval by the Corporation, or the Committee if such exists, in its sole
discretion or pursuant to any policy and requirements concerning such transfers
as may then be in effect. In the event of death, this Option may be exercised by
Employee's personal representative or the party inheriting the Option. No
-2-
<PAGE>
person shall have any rights as a stockholder with respect to any common shares
purchasable hereunder until payment of the option price and delivery to him of
such common shares as herein provided.
8. Restriction on Disposition. All common shares acquired by Employee
--------------------------
pursuant to this Agreement shall be subject to the restrictions on sale,
encumbrance and other disposition contained in the Corporation's By-Laws, or
imposed by applicable laws or regulations of the State of Minnesota or the
United States of America regarding the registration or qualification of such
acquisition of common shares. The Corporation may require a prior opinion of its
counsel, which the Corporation shall use its best efforts to obtain, that the
transfer or other disposition of common shares acquired pursuant to this
Agreement will not violate the Securities Act of 1933 or any applicable state
law regulating the sale of securities.
9. Binding Effect - Plan Governs.
-----------------------------
9.1 This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, administrators, successors
and assigns.
9.2 This Agreement shall be construed in accordance with and shall be
governed by the terms of the Plan as adopted by the Board and approved or to be
approved by the shareholders of the Corporation within the meaning of Section
422 of the Internal Revenue Code of 1986, as the Plan may be amended from time
to time by the Board, and if appropriate the shareholders, of the Corporation.
Employee acknowledges receipt of a copy of the Plan prior to the execution
hereof and agrees to be bound by the terms of the Plan. If possible, this
Agreement shall be construed along with and in addition to any other agreement
which the Corporation and Employee may enter into, but any provision in this
Agreement which contradicts any provision of any other agreement shall take
precedence and be binding over such other provision.
9.3 The provisions of this Agreement, the Plan or other document
incorporated therein, shall be governed by, interpreted and enforced in
accordance with the laws of the State of Minnesota, unless and to the extent
they are pre-empted by the laws of the United States of America.
9.4 This Agreement shall be effective as of the dated first stated above.
"Employee" "Corporation"
Bradley E. Sparks WAM!NET Inc.
/s/ Bradley E. Sparks By: /s/ Michael O' Donnell
____________________________ __________________________________
An Authorized Agent or Officer
Dated: September 11, 1998 Dated: September 11, 1998
______________________ _____________________________
-3-
<PAGE>
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, made and entered into effective this 11th day of
September, 1998, by and between WAM!NET INC., a Minnesota corporation
(hereinafter referred to as the "Corporation") and BRADLEY SPARKS, a resident of
the State of Minnesota (hereinafter referred to as the "Employee").
WHEREAS, the Corporation considers it desirable and in its best
interests that the Employee be given an inducement to acquire a proprietary
interest in the Corporation and an added incentive to advance the interests of
the Corporation, by possessing an option to purchase common shares of the
Corporation, in accordance with WAM!NET Inc. 1994 Stock Option Plan (the
"Plan").
NOW THEREFORE, in consideration of the premises and of the mutual
promises and consideration provided herein, the parties agree as follows:
1. Definitions. Words and phrases not otherwise defined herein shall have
-----------
the meanings ascribed to them, respectively, in the Plan.
2. Grant of Option. The Corporation grants to Employee an Option (the
---------------
"Option") to purchase Five Thousand (60,750) common shares of the Corporation at
a purchase price of $12.00 per share, in the manner and subject to the
conditions provided herein and in the Plan. The Option hereby granted shall be
an NQO as provided in the Plan.
3. Time of Exercise of Option. Employee may exercise the Option in three
--------------------------
equal increments; the initial increment of 15,187 shares being exercisable on
and after September 11, 1999 and the second increment of 15,187 being
exercisable on and after September 11, 2000, the third increment of 15,188
shares being exercisable on and after September 11, 2001, and the fourth
increment of 15,188 shares being exercisable on and after September 11, 2002.
All options shall expire at midnight on September 10, 2008, as illustrated by
the following table:
<TABLE>
Number of Shares
From-To First Exercisable Cumulative Total
------- ----------------- ----------------
<S> <C> <C> <C>
September 11, 1999- 15,187 15,187
September 10, 2000
September 11, 2000- 15,187 30,374
September 10, 2001
September 11, 2001- 15,188 45,562
September 10, 2002
September 11, 2002- 15,188 60,750
September 10, 2003
On and after 0 0
September 11, 2008
</TABLE>
No provision of this Agreement to the contrary withstanding, neither the
Option nor any right claimed thereby or hereby, therein or herein or thereunder
or hereunder shall be exercisable by anyone on or after September 11, 2008.
With respect to common shares that are purchasable for the first time
during any calendar year, the Employee may only exercise the Option to purchase
that number of common shares that have an aggregate fair market value (as of the
date first above written) which is less than or equal to $100,000. The Employee
may exercise the Option with respect to common shares valued in excess of
$100,000 in
<PAGE>
any calendar year to the extent the right to exercise the Option to purchase
such shares has accumulated over a period in excess of one year.
4. Method of Exercise. The Option shall be exercised by written notice to
------------------
the Board of the Corporation, or the Committee if such exists, at the
Corporation's principal place of business. The notice shall be accompanied by
payment of the option price for the shares being purchased in cash or by
cashier's check or certified check or, in the sole discretion of the Board, or
the Committee if such exists, by such other form of payment as is permitted
under the Plan. The notice shall also be accompanied by any document reasonably
required by the Corporation to be executed by Employee, acknowledging the
applicable restrictions on the transfer of the common shares being purchased as
set forth under Section 8 of this Agreement. The Corporation shall make prompt
delivery of a certificate or certificates representing such common shares,
provided that if any law or regulation requires the Corporation to take any
action with respect to the common shares specified in such notice before the
issuance thereof, then the date of delivery of such common shares shall be
extended for the period necessary to take such action. The Option must be
exercised with respect to at least 500 of the common shares, unless only a
lesser number of the common shares are then exercisable, in which case it must
be exercised with respect to all of such lesser number.
5. Termination of Option. Except as herein otherwise provided, the Option
---------------------
granted under this Agreement, to the extent not heretofore exercised, shall
terminate upon the first to occur of the following events:
a. The expiration of three months after the date on which Employee's
employment by the Corporation is terminated, except if such
termination be by reason of permanent and total disability or
death;
b. The expiration of twelve months after the date on which Employee's
employment by the Corporation is terminated, if such termination
be by reason of the Employee's permanent and total disability or
death;
c. The expiration of twelve months from the date of Employee's death
should Employee die within three months of termination of
employment by the Corporation;
d. The termination of Employee's employment by the Corporation for
either (i) Employee's material breach of any agreement with the
Corporation or (ii) Employee's deliberate, willful or gross
misconduct in the performance or Employee's duties on behalf of
the Corporation; or
e. September 11, 2008.
6. Reclassification, Consolidation or Merger.
-----------------------------------------
6.1 If and to the extent that the number of issued common shares of the
Corporation shall be increased or reduced by change in par value, split up,
reverse split, reclassification, distribution of a dividend payable in stock, or
the like, the number of common shares subject to the Option and the option price
per share shall be proportionately adjusted in accordance with the Plan.
6.2 If the Corporation is reorganized or consolidated or merged with
another corporation, the Employee shall be entitled to receive an option (the
"New Option") covering common shares of such reorganized, consolidated or merged
company in the same proportion, at an equivalent price, and subject to the same
conditions as the Option. For purposes of the preceding sentence, the excess of
the fair market value of the common shares subject to the Option immediately
after the reorganization, consolidation or merger over the aggregate option
price of such common shares shall not be more than the excess of the aggregate
fair market value of all common shares subject to the Option immediately before
such reorganization, consolidation or merger over the aggregate option price of
such common
-2-
<PAGE>
shares, and the New Option or assumption of the Option shall not give the
Employee additional benefits which he does not have under this Option, or
deprive him of benefits which he has under this Option.
7. Rights Prior to Exercise of Option. This Option is non-transferable by
----------------------------------
Employee, except in the event of his death, and during his lifetime is
exercisable only by him. No person shall have any rights as a stockholder with
respect to any common shares purchasable hereunder until payment of the option
price and delivery to him of such common shares as herein provided.
8. Restriction on Disposition. All common shares acquired by Employee
--------------------------
pursuant to this Agreement shall be subject to the restrictions on sale,
encumbrance and other disposition contained in the Company's By-Laws, or imposed
by applicable state and federal laws or regulations regarding the registration
or qualification of such acquisition of common shares, and may not be sold or
otherwise disposed of (i) within two years from the date of the granting of the
Option under which such common shares were acquired, (ii) within one year after
the exercise of the Option, and (iii) unless the Corporation has received a
prior opinion of Employee's counsel satisfactory in form and substance to
counsel for the Corporation that such transaction will not violate the
Securities Act of 1933 or any applicable state law regulating the sale of
securities.
9. Binding Effect - Plan Governs.
-----------------------------
9.1 This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, administrators, successors
and assigns.
9.2 This Agreement shall be construed in accordance with and shall be
governed by the terms of the Plan as adopted by the Board and approved or to be
approved by the shareholders of the Corporation within the meaning of Section
422 of the Internal Revenue Code of 1986, as the Plan may be amended from time
to time by the Board and the shareholders of the Corporation. Employee
acknowledges receipt of a copy of the Plan prior to the execution hereof. If
possible, this Agreement shall be construed along with and in addition to any
other agreement which the Corporation and Employee may enter into, but any
provision in this Agreement which contradicts any provision of any other
agreement shall take precedence and be binding over such other provision.
"Employee" "Corporation"
Bradley E. Sparks WAM!NET Inc.
/s/ Bradley E. Sparks By: /s/ Michael O'Donnell
____________________________ ________________________________
An Authorized Agent or Officer
-3-
<PAGE>
EXHIBIT 12
WAM!NET INC.
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS, EXCEPT RATIO)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997 1888
--------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Charges
Net loss from continuing operations (1,277) (7,596) (33,636) (121,878)
--------------------------------------------------
Fixed Charges:
Interest expense and amortization
of deferred finance charges on
all indebtedness 20 903 4,356 22,626
Interest portion of rent 15 40 100 225
---------------------------------------------------
Total fixed charges 35 943 4,456 22,851
Earnings before loss and fixed
charges (1,242) (6,653) (29,180) (99,027)
===================================================
Ratio of earnings to fixed
charges - - - -
===================================================
</TABLE>
<PAGE>
EXHIBIT 21
Subsidiaries of WAM!NET Inc.
----------------------------
1. FreeMail, Inc.
2. WAM!NET Medical Inc.
3. WAM!NET International Inc.
4. WAM!NET Canada Inc. (currently Netco Communications of Canada, Inc.)
5. WAM!NET Limited
6. WAM!NET Holdings (UK) Limited
7. WAM!NET UK Limited
8. 4-Sight (Software), Ltd.
9. 4-Sight Inc.
10. WAM!NET Deutschland GmbH (currently 4-Sight Deutschland GmbH)
11. WAM!NET Nederlands B.V.
12. WAM!NET (EOC) Belgium S.A.
13. WAM!NET (Holdings) Japan K.K.
14. WAM!NET Sverige AB
15. WAM!NET Spain S.L. (Pending)
16. WAM!NET France, S.A.R.L. (Pending)
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-4 No. 333-53841) of WAM!NET Inc. and in the related Prospectus of our report
dated March 19, 1999, with respect to the consolidated financial statements of
WAM!NET Inc. included in this Annual Report (Form 10-K) for the year ended
December 31, 1998.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,272
<SECURITIES> 0
<RECEIVABLES> 3,896
<ALLOWANCES> 430
<INVENTORY> 1,534
<CURRENT-ASSETS> 14,459
<PP&E> 78,866
<DEPRECIATION> 16,399
<TOTAL-ASSETS> 121,079
<CURRENT-LIABILITIES> 30,398
<BONDS> 209,238
1,000
0
<COMMON> 93
<OTHER-SE> (109,854)
<TOTAL-LIABILITY-AND-EQUITY> 121,080
<SALES> 10,830
<TOTAL-REVENUES> 17,629
<CGS> 3,537
<TOTAL-COSTS> 21,796
<OTHER-EXPENSES> 98,185
<LOSS-PROVISION> 430
<INTEREST-EXPENSE> 22,626
<INCOME-PRETAX> (123,230)
<INCOME-TAX> (1,352)
<INCOME-CONTINUING> (123,230)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (121,948)
<EPS-PRIMARY> (13.87)
<EPS-DILUTED> (13.87)
</TABLE>
