-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KO7B+O5OCYzsHecWsTmo2jS86NA4REE66lEaDid7b1Voo0QfITefglmRog1FhsIF s3LnwCJQCXAkDjOyLMarZw== 0000940180-98-000605.txt : 19980529 0000940180-98-000605.hdr.sgml : 19980529 ACCESSION NUMBER: 0000940180-98-000605 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 44 FILED AS OF DATE: 19980528 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WAM NET INC CENTRAL INDEX KEY: 0001060274 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MN FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-53841 FILM NUMBER: 98633334 BUSINESS ADDRESS: STREET 1: 6100 W 110TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55438 BUSINESS PHONE: 6128865100 MAIL ADDRESS: STREET 1: 6100 W 110TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55438 S-4 1 REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1998 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- WAM!NET INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 7379 41-1795247 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 6100 WEST 110TH STREET, MINNEAPOLIS, MINNESOTA 55438 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- EDWARD J. DRISCOLL III PRESIDENT AND CHIEF EXECUTIVE OFFICER WAM!NET INC. 6100 WEST 110TH STREET MINNEAPOLIS, MINNESOTA 55438 (612) 886-5100 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) WITH A COPY TO: DANIEL D. RUBINO, ESQ. WILLKIE FARR & GALLAGHER 787 SEVENTH AVENUE NEW YORK, NEW YORK 10019 (212) 728-8000 --------------- Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED TITLE OF EACH CLASS PROPOSED MAXIMUM AMOUNT OF OF SECURITIES TO AMOUNT TO BE MAXIMUM AGGREGATE OFFERING REGISTRATION BE REGISTERED REGISTERED(1) OFFERING PRICE(2) PRICE(2)(3) FEE(3) - ---------------------------------------------------------------------------------------- 13 1/4% Senior Discount Notes due 2005, Series B.............. $208,530,000 100% $69,510,000 $20,505.45
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) The "Amount to be registered" with respect to the 13 1/4% Senior Discount Notes due 2005, Series B (the "Exchange Notes") represents the maximum amount at maturity of Exchange Notes that may be issued pursuant to the exchange offer described in the Registration Statement. The 13 1/4% Senior Discount Notes due 2005, Series A (the "Original Notes"), into which the Exchange Notes are hereby offered in exchange, were sold at a substantial discount from their principal amount at maturity. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 under the Securities Act. (3) The registration fee for the Exchange Notes offered hereby, $20,505.45, is calculated under Rule 457(f)(2) of the Securities Act as follows: the product of .000295 and $69,510,000, one third of the aggregate principal amount at maturity of the outstanding Original Notes, that may be tendered to the Registrant (which has an accumulated capital deficit) in exchange for the Exchange Notes. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN SUBJECT TO COMPLETION OR AMENDMENTS. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS + +OF ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion dated May 28, 1998 PROSPECTUS [LOGO] WAM!NET INC. OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF 13 1/4% SENIOR DISCOUNT NOTES DUE 2005, SERIES B, FOR EACH $1,000 IN PRINCIPAL AMOUNT OF OUTSTANDING 13 1/4% SENIOR DISCOUNT NOTES DUE 2005, SERIES A, THAT WERE ISSUED AND SOLD IN RELIANCE ON EXEMPTIONS FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED ----------- WAM!NET, a Minnesota corporation ("WAM!NET" or the "Company"), hereby offers to exchange (the "Exchange Offer") $208,530,000 in aggregate principal amount at maturity of its 13 1/4% Senior Discount Notes due 2005, Series B (the "Exchange Notes") for $208,530,000 in aggregate principal amount at maturity of its 13 1/4% Senior Discount Notes due 2005, Series A (the "Original Notes" and, together with the Exchange Notes, the "Notes"), that were issued and sold in reliance on exemptions from registration under the Securities Act of 1933, as amended (the "Securities Act"). The terms of the Exchange Notes are substantially similar (including principal amount, interest rate, maturity and ranking) to the terms of the Original Notes for which they may be exchanged pursuant to the Exchange Offer, except that the Exchange Notes (i) are freely transferable by holders thereof (except as provided below) and are issued without any covenant regarding their registration. The Exchange Notes will be issued under the indenture governing the Original Notes. The Exchange Notes will be, and the Original Notes are, general unsecured obligations of the Company and, as such, will rank pari passu in right of payment with all existing and future unsecured and unsubordinated Indebtedness (as defined herein) of the Company. The Exchange Notes will be, and the Original Notes are, effectively subordinated in right of payment to all secured Indebtedness of the Company to the extent of the value of the assets securing such Indebtedness. As of March 31, 1998, the Company had outstanding approximately $10.4 million of secured Indebtedness (consisting principally of equipment financing), which would have effectively ranked senior in right of payment to the Notes, no Indebtedness which would have ranked pari passu in right of payment with the Notes and $25.9 million of Indebtedness which would have been subordinated in right of payment to the Notes. The Indenture (as defined herein) does not limit the amount of secured Permitted Equipment Financing (as defined herein) that may be incurred by the Company. The Exchange Notes will be, and the Original Notes are, fully and unconditionally guaranteed on an unsecured and unsubordinated basis by all Material Restricted Subsidiaries (as defined herein), which guarantees may be released under certain circumstances. As of the date hereof, the Company does not have any Material Restricted Subsidiaries, and no Subsidiary (as defined herein) of the Company has any Indebtedness. For a complete description of the terms of the Exchange Notes, including provisions relating to the ability of the Company to create indebtedness that is senior or pari passu to the Exchange Notes, see "Description of the Notes." There will be no cash proceeds to the Company from the Exchange Offer. For each Original Note accepted for exchange the holder of such Original Note will receive an Exchange Note having a principal amount equal to that of the surrendered Original Note. Original Notes accepted for exchange will cease to accrete value or accrue interest from and after the date of consummation of the Exchange Offer. Holders of Original Notes whose Old Notes are accepted for exchange will not receive any payment of accrued interest on such Original Notes. The Original Notes were originally issued and sold on March 5, 1998 (the "Issue Date") in transactions exempt from registration under the Securities Act, in reliance upon the exemption provided in Section 4(2) of the Securities Act and Rule 144A of the Securities Act and pursuant to offers and sales that occurred outside the United States within the meaning of Regulation S of the Securities Act (collectively, the "Initial Offering"). Accordingly, the Original Notes may not be reoffered, resold or otherwise pledged, hypothecated or transferred in the United States unless so registered or unless an applicable exemption from the registration requirements of the Securities Act is available. Based upon its view of interpretations provided to third parties by the Staff (the "Staff") of the Securities and Exchange Commission (the "Commission"), the Company believes that the Exchange Notes issued pursuant to the Exchange Offer in exchange for the Original Notes may be offered for resale, resold and otherwise transferred by holders thereof (other than any holder or any such other person which (continued on next page) SEE "RISK FACTORS" ON PAGE 12 HEREOF FOR A DESCRIPTION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------- The date of this Prospectus is , 1998 (continued from previous page) is (i) an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act (an "Affiliate"), (ii) a broker-dealer who acquired Original Notes directly from the Company or (iii) a broker-dealer who acquired Original Notes as a result of market making or other trading activities) without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such Exchange Notes are acquired in the ordinary course of business of such holder and any beneficial owner, and such holders are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of such Exchange Notes. Each broker-dealer who acquired Original Notes directly from the Company and is participating in the Exchange Offer must comply with the registration and prospectus delivery provisions of the Securities Act. Broker- dealers who acquired Original Notes as a result of market making or other trading activities may use this Prospectus, as supplemented or amended, in connection with resales of the Exchange Notes. The Company has agreed that it will make this Prospectus available to broker-dealers for use in connection with any such resale. Each broker-dealer who receives Exchange Notes pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal that is filed as an exhibit to the Registration Statement of which this Prospectus is a part (the "Letter of Transmittal") states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Any holder that cannot rely upon such interpretations must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. The Original Notes and the Exchange Notes constitute new issues of securities with no established public trading market. Any Original Notes not tendered and accepted in the Exchange Offer will remain outstanding. To the extent that Original Notes are tendered and accepted in the Exchange Offer, a holder's ability to sell untendered, and tendered but unaccepted, Original Notes could be adversely affected. Following consummation of the Exchange Offer, the holders of Original Notes will continue to be subject to the existing restrictions on transfer thereof and the Company will have no further obligation to such holders to provide for the registration under the Securities Act of the Original Notes except under certain limited circumstances. (See "Note Registration Rights.") No assurance can be given as to the liquidity of the trading market for either the Original Notes or the Exchange Notes. This Prospectus and the Letter of Transmittal are first being mailed to holders of Original Notes on , 1998. The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Original Notes being tendered or accepted for exchange. The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998 unless extended (the "Expiration Date"). The date of acceptance for exchange of the Original Notes (the "Exchange Date") will be the first business day following the Expiration Date, upon surrender of the Original Notes. Original Notes tendered pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date; otherwise such tenders are irrevocable. The Original Notes were issued originally in global form (the "Global Original Notes"). The Global Original Notes were deposited with, or on behalf of, The Depository Trust Company ("DTC"), as the initial depository with respect to the Original Notes (in such capacity, the "Depositary"). The Global Original Notes are registered in the name of Cede & Co. ("Cede"), as nominee of DTC, and beneficial interests in the Global Original Notes are shown on, and transfers thereof are effected only through, records maintained by the Depositary and its participants. The use of the Global Original Notes to represent certain of the Original Notes permits the Depositary's participants, and anyone holding a beneficial interest in an Original Note registered in the name of such a participant, to transfer interests in the Original Notes electronically in accordance with the Depositary's established procedures without the need to transfer a physical certificate. Exchange Notes issued in exchange for the Global Original Notes will also be issued initially as a note in global form (the "Global Exchange Notes," and, together with the Global Original Notes, the "Global Notes") and deposited with, or on behalf of, the Depositary. After the initial issuance of the Global Exchange Notes, Exchange Notes in certificate form will be issued in exchange for a holder's proportionate interest in the appropriate Global Exchange Note only as set forth in the Indenture. ii AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-4 (the "Registration Statement," which term shall include all amendments, exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the rules and regulations promulgated thereunder, covering the Exchange Notes being offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to in the Registration Statement are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement may be inspected without charge at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The Registration Statement may be obtained from the Commission at prescribed rates at such address, and at the Commission's regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York 10048. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding companies that file electronically with the Commission. The address of such site is http://www.sec.gov. The Company's obligation to file periodic reports with the Commission pursuant to the Exchange Act may be suspended if the Notes are held of record by fewer than 300 Holders at the beginning of the fiscal year of the Company, other than the fiscal year in which the Registration Statement or any Shelf Registration Statement (as defined) becomes effective. The Company has agreed that, whether or not it is required to do so by the rules and regulations of the Commission, for so long as any of the Notes remain outstanding, they will furnish to the Holders of the Notes and submit to the Commission (unless the Commission will not accept such materials) (i) all quarterly and annual financial information that would be required to be contained in filings with the Commission on Forms 10-Q and 10-K if the Company was required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company' certified independent accountants, and (ii) all reports that would be required to be filed with the Commission on Form 8-K if the Company was required to file such reports. In addition, for so long as any of the Notes remain outstanding, the Company has agreed to make available upon request to any prospective purchaser of, or beneficial owner of Notes in connection with any offer or sale thereof, the information required by Rule 144A(d)(4) under the Securities Act. NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. iii FORWARD-LOOKING STATEMENTS CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS UNDER "PROSPECTUS SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," IN ADDITION TO CERTAIN STATEMENTS CONTAINED ELSEWHERE IN THIS PROSPECTUS, ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND ARE THUS PROSPECTIVE. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE MOST SIGNIFICANT OF SUCH RISKS, UNCERTAINTIES AND OTHER FACTORS ARE DISCUSSED UNDER THE HEADING "RISK FACTORS," BEGINNING ON PAGE 12 OF THIS PROSPECTUS, AND PROSPECTIVE INVESTORS ARE URGED TO CAREFULLY CONSIDER SUCH FACTORS. ---------------- Certain statistical data included in this Prospectus has been derived from a publicly available study authorized by the Association for Suppliers of Printing and Publishing Technologies prepared by the research firm Mills Davis (the "Mills Davis Report"), a publicly available paper published in the Proceedings of the International Society for Optical Engineering, Volume 2165, titled "Can Hospitals Afford Digital Storage for Imagery?" (the "SPIE Paper") and a publicly available paper published by GISTICS Incorporated titled "Media Asset Management Market Report--Key Trends, Opportunities and Challenges for 1998" (the "GISTICS Brief"). The Company has retained Morlok Research to extrapolate certain information from the Mills Davis Report and apply it to the Company's target markets (the "Morlok Research"). Although the Company believes the assumptions made in the Mills Davis Report, the SPIE Paper, the GISTICS Brief and the Morlok Research are reasonable, no assurance can be given that such assumptions will prove accurate. Although believed by the Company to be reliable, no representation is made, nor any assurance given, by the Company as to the accuracy of the information contained in the Mills Davis Report, the SPIE Paper, the GISTICS Brief or the Morlok Research. WAM!NET (R), ! (R) (stylized exclamation mark, design only), WAM!PROOF(TM), WAM!BASE(TM), Industry Smart(TM), Industry Smart Network(TM), and Industry Smart Application(TM) are trademarks of the Company or its subsidiaries. iv TABLE OF CONTENTS
PAGE ---- Available Information.................................................... iii Prospectus Summary....................................................... 1 Risk Factors............................................................. 12 Use of Proceeds.......................................................... 21 The Exchange Offer....................................................... 22 Capitalization........................................................... 30 Selected Financial Data.................................................. 31 Pro Forma Financial Data................................................. 33 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 38 Business................................................................. 44 Management............................................................... 60 Ownership of the Company................................................. 66 Certain Transactions and Relationships................................... 67 Description of the Company's Securities.................................. 71 Description of Certain Indebtedness...................................... 75 Description of the Notes................................................. 77 Note Registration Rights................................................. 104 Book Entry; Delivery and Form............................................ 106 Certain Federal Income Tax Considerations................................ 108 Plan of Distribution..................................................... 112 Legal Matters............................................................ 113 Experts.................................................................. 113 Index to Financial Statements............................................ F-1 Glossary................................................................. A-1
v PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Certain capitalized terms used but not defined in this summary are used herein as defined elsewhere in this Prospectus. Unless the context otherwise requires, references herein to "WAM!NET" or the "Company" are to WAM!NET Inc. (formerly known as NetCo Communications Corporation), a Minnesota corporation, and its subsidiaries. Capitalized terms used in this Prospectus, which are not otherwise defined herein, have the respective meanings ascribed to them in "Glossary." All Common Stock share and per share amounts in this Prospectus have been adjusted to reflect a five-for-one stock split which occurred on February 26, 1998. See the "Risk Factors" included in this Prospectus for a description of certain factors that should be considered by participants in the Exchange Offer. See "Risk Factors--Forward-Looking Statements" for certain information relating to statements contained in this Prospectus that are not historical facts. THE COMPANY OVERVIEW WAM!NET provides a managed, high speed digital data delivery network service (the "WAM!NET(R) Service") that integrates the Company's industry-specific work flow applications with commercially available computer and telephony technologies. The Company, an affiliate of WorldCom Inc. ("WorldCom"), offers an "Industry Smart(TM)" service designed to provide its subscribers with a turn-key single source solution for the rapid, secure, accurate and reliable transportation and management of information, with a simple "pay by the megabyte" pricing plan requiring no capital investment. The WAM!NET Service provides seamless digital connectivity among "communities of interest," drawing together customers and trading partners which have collaborative work flows. The Company has developed advanced WAM!NET Service applications, including an on-line digital job tracking and billing system (Customer Information System or "CIS"), an application enabling remote proofing ("WAM!PROOF(TM)") and a remote data archiving, retrieval and distribution system ("WAM!BASE(TM)"). WAM!PROOF was commercially released in the second quarter of 1998 and WAM!BASE is scheduled for commercial release in the second half of 1998. The Company has initially capitalized on the growing need for managed digital data delivery services in the printing, publishing, advertising, pre-press, corporate communication and graphic arts industries (collectively, "Graphic Arts"). The Company believes that the WAM!NET Service is achieving wide acceptance among leading firms within the Graphic Arts community of interest, which in turn encourages those with whom such firms share digital information to subscribe to the WAM!NET Service. Since it commercially released and commenced marketing of the WAM!NET Service in March 1996, the Company has established a subscriber base of more than 1,500 customer locations, including at Time Inc. ("Time"), R.R. Donnelley & Sons Company ("Donnelley"), The Walt Disney Company ("Disney"), J.C. Penney Company, Inc. ("J.C. Penney"), Fox Broadcasting Company ("Fox Broadcasting") and Macy's West (formerly known as Macy's California) department stores ("Macy's"). In October 1997, the WAM!NET Service received the Graphic Arts Technical Foundation (an independent trade association) award for the product or service that will most likely change the manner in which the Graphic Arts industry conducts business. MARKET OPPORTUNITY The Company believes that the increasing digitalization of work product and work flow in data intensive and time sensitive industries is driving demand for managed, secure and reliable electronic data transportation and archiving services. Based on information derived from independent studies, the Company believes that the Graphic Arts industry will spend approximately $10.0 billion between 1998 and 2000 on the digitalization of its production and printing process, including the introduction by commercial printers of computer-to-plate 1 ("CTP") technology, which facilitates a fully digital work product. Despite this movement toward the digital creation, storage and outputting of data, the lack of reliable, cost effective electronic transport mechanisms has resulted in many companies continuing to use overland or air courier services to deliver magnetic tape or optical disk copies of data to others who desire access to such data. This non-digital step results in a method of transporting data which can be inefficient, significantly lengthening production cycle time and leading to possible errors. The Company believes the potential market for managed digital data transportation and asset storage services is $4.3 billion and $2.3 billion, respectively, in the Graphic Arts industry alone. The Company believes that existing electronic means for transporting large digital data files have proven to be ineffective and/or prohibitively expensive for most companies. Large files may take up to several days to transport using the Internet or the fastest standard telephone modems (56,000 bps) and may lose significant quality in transmission. The use of the Internet and standard telephone modems can also lead to other significant disadvantages, most notably high telephone usage charges and a lack of security, accountability and reliability of transmission. Other non-dedicated technologies offer more speed than the Internet or a standard telephone modem, but at a significantly higher cost. Such technologies may also lead to data degradation and integration obstacles. Large data files can be transported reliably in minutes over dedicated point to point telephone lines (such as DS1 and DS3); however, the substantial equipment necessary at each dedicated connecting point and the sizable costs of leasing a dedicated point to point telephone line makes this means of transport uneconomical for most companies transporting large data files. COMPETITIVE ADVANTAGES The Company believes it is uniquely positioned to meet the growing need for a cost-effective and reliable means of electronically transporting, storing and retrieving digital data due to the following competitive advantages: . Purpose-Built, Industry Smart Network. The WAM!NET Service operates via a nationwide network that integrates the Company's proprietary, value-added Industry Smart applications with a purpose-built network of Company owned national, regional and local hubs ("Distribution Hubs") interconnected redundantly with high-bandwidth leased telephone circuits (the "WAM!NET Network"). The Company currently maintains 23 Distribution Hubs, located in major United States and Canadian cities, London, England and Paris, France. The Company operates two mirrored network operations centers ("NOCs") in Minneapolis and Las Vegas through which it monitors all data transmission on a 24 hour a day, 7 day a week basis. The Company believes the WAM!NET Service offers reliable and secure data transmissions with no degradation in quality and guaranteed delivery and throughput. . Single Source, Turn-Key Service Solution. The Company provides each subscriber with all of the hardware, software, transmission facilities and management services necessary to use the WAM!NET Service. Installation of the service, which is performed on behalf of the Company by national service providers, consists of connecting the customer to the nearest Distribution Hub through a Company-owned network access device ("NAD") and an appropriate communications link (such as T1, ISDN, frame relay, ADSL or other suitable facility) matched to the customer's transfer speed and throughput requirements. The WAM!NET Service is designed for ease of use, with a point and click e-mail type interface and a simple "pay by the megabyte" pricing model. The Company's strategy is to offer customers the WAM!NET Service at rates competitive with overland and air courier services furnished on an annual or multi-year subscription basis. There is no up-front capital investment by the customer, who is charged based on a minimum monthly usage fee and volume of data sent per transaction. . Industry Smart Applications. The Company collaborates with leading participants in its target markets and designs applications addressing industry-specific work product and work flow requirements. These Industry Smart applications combined with the guaranteed delivery and throughput of the WAM!NET Service allow work partners in distant geographic locations to collaborate digitally in real time. The WAM!PROOF 2 application will allow customers to directly output across the WAM!NET Network to proofing devices in remote locations, thereby eliminating the need to deliver physical proofs by overnight courier. The WAM!BASE application will provide a collaborative digital asset management service that can eliminate the need for redundant archives and shrink work cycle time by providing more immediate access to desired data files. . Customer Support and CIS. The Company has implemented extensive customer service functions, including customer support technicians who are available 24 hours a day, 7 days a week, are trained extensively in the Company's service offerings and who understand the industry-specific work flow of the Company's customers. CIS allows customers to view data files, verify account information and check the status of transactions on-line, as well as to log help requests. The Company provides its customers itemized information regarding the size, cost, and destination of each "shipment" that may be electronically imported directly into the customer's own accounting system, which facilitates capturing of project-specific costs and billing of services on a job-by-job basis. . First to Market Advantage. By being the first to market a managed, high speed digital data delivery network with Industry Smart applications, the Company believes it is becoming the industry standard in the Graphic Arts industry and is positioned to become the industry standard in its other target industries. The Company has found that industry leaders such as Time and Donnelley (early WAM!NET Service customers) actively encourage their work flow partners to subscribe to the WAM!NET Service to increase work flow efficiencies. Potential entrants into the managed digital data delivery field would need to deploy a nationwide, purpose-built network integrated with customized value-added applications, and simultaneously convert industry leaders and their work flow partners, more than 900 of whom have contracted with the Company for the WAM!NET Service at more than 1,500 locations. Customers currently subscribing to the WAM!NET Service include 11 of the 20 largest publishers, 9 of the 20 largest printers, 16 of the 20 largest advertising agencies, and 10 of the 20 largest pre-press- graphic arts agencies in the United States, as well as the corporate communications and advertising departments of many United States corporations. . Strategic Relationship with WorldCom. The Company has entered into a strategic alliance with WorldCom which includes equity and debt investments and operating loan guarantees totaling approximately $50 million. WorldCom is currently entitled to designate a majority of the Board of Directors of the Company and, through its ownership of convertible debt and warrants, has the right to acquire a majority of the Common Stock of the Company. WorldCom also provides telecommunication and other services to the Company on a non-exclusive basis. The Company anticipates that its relationship with WorldCom will enable it to access the worldwide infrastructure, sales and marketing work force, telephony technologies, high bandwidth carrier service and other services of WorldCom and its affiliates, including UUNet Technologies, Inc. ("UUNet"). BUSINESS STRATEGY The Company's objective is to become the leading provider of enhanced, managed digital data delivery and archiving services to industries comprised of interdependent participants requiring industry specific, high speed digital connectivity. WAM!NET's strategy to achieve this objective and to build a long-term sustainable competitive advantage is to: . Increase its Customer Base to Create Critical Mass. The Company's sales and marketing strategy has been designed to rapidly penetrate its initial target market, the Graphic Arts industry. Elements of this strategy include: (i) creating the WAM!NET Service as a turn-key, single source service solution; (ii) implementing an easy to understand "pay by the megabyte" pricing model (which eliminates the need for any capital investment by customers); (iii) designing aggressive advertising, trade show, event marketing and direct selling to drive trials, including introductory risk-free product evaluations for industry leaders; (iv) building a direct sales force to target leading industry participants who, in turn, encourage their work 3 flow partners to subscribe to the WAM!NET Service; and (v) implementing programs in which large receivers of data (e.g., printers) promote and market the WAM!NET Service, along with the WAM!NET direct sales force, to customers and work flow partners. The Company believes that the customer benefits of the WAM!NET Service will increase exponentially as the total number of WAM!NET Service subscribers increases. . Apply Industry Smart Network Model to Other Industries. The Company believes that the WAM!NET Industry Smart network model can provide the benefits and advantages it offers the Graphic Arts industry to other industries with similar data transportation, storage and retrieval requirements. Some of the Company's customers that are in the entertainment industry, such as Fox Broadcasting and Disney, currently subscribe to the WAM!NET Service for their Graphic Arts-related needs. The Company is presently developing Industry Smart applications suitable to the entertainment industry and is developing corresponding marketing and sales strategies. The Company is also collaborating with industry leaders in the medical imaging industry to develop and implement Industry Smart applications in connection with marketing to that industry. . Drive Utilization Through Value-Added Services and Volume Discounts. The Company incorporates, develops and implements value-added Industry Smart applications for customers, such as CIS, WAM!PROOF and WAM!BASE, which the Company believes will provide significant benefits to its customers and stimulate increased usage of the WAM!NET Service. The Company also offers volume discounts and a variety of promotional programs for industry leaders to induce customers to send increasingly large volumes of data traffic across the WAM!NET Network. . Expand and Enhance Infrastructure and Develop Worldwide Capabilities. The Company intends to invest in resources and systems to ensure that the WAM!NET Network's operating infrastructure and support services provide optimal digital connectivity to its subscribers in a guaranteed performance and competitive rate environment. The Company is currently preparing to expand into parts of Europe and Asia for the purpose of providing its customers with desired international connectivity. The Company expects to expand the WAM!NET Network into approximately 10 countries by the end of 1998, and will initially locate additional Distribution Hubs in London, Frankfurt, Paris, Amsterdam, Milan, Tokyo, Hong Kong, and Sydney. The London and Paris Distribution Hubs were recently installed and the Company is currently in the process of installing a Distribution Hub in Amsterdam. During 1998, the Company expects to further develop its international service infrastructure by providing installation and customer support via third parties, developing local sales and distribution relationships and may establish additional Distribution Hubs and regional NOCs in selected countries. The Company's acquisition of 4-Sight Limited ("4-Sight") will permit subscribers, including 4-Sight's 30,000 customers in 44 countries, to gain remote access to the WAM!NET Network through transmission software being developed by 4-Sight. The Company may also establish its international presence through other acquisitions, joint ventures or other similar business transactions. See "Recent Developments." . Reduce Costs and Improve Operating Margins. The Company seeks to reduce costs and improve operating margins by (i) spreading the cost of installing and operating the WAM!NET Network over a large base of customers; (ii) designing the network to use more expensive hub equipment in a few national and regional operational centers and less expensive equipment at each customer site; (iii) deploying cost-reduced NADs for less volume intense customers; (iv) pursuing programs to reduce the costs of capital equipment, including obtaining mass purchasing discounts for network infrastructure and customer premise equipment; (v) utilizing network management tools to optimize existing and planned network capacity as volume increases and traffic patterns begin to emerge; (vi) deploying new, lower-cost last mile local loop technologies to connect customer sites to Distribution Hubs, including wireless technologies and remote dial-up capabilities; and (vii) deriving other incremental revenue from value-added services such as WAM!BASE, which can be delivered over the existing WAM!NET Network infrastructure. The Company also believes its operating margins will improve as a result of anticipated cost reductions associated with increasing competition in both the local and long distance markets. 4 RECENT DEVELOPMENTS On March 13, 1998, the Company purchased the entire share capital of 4-Sight Limited, a private limited company incorporated under the laws of England and Wales (the "4-Sight Acquisition"), for $20.0 million in cash, which was paid out of the proceeds of the Initial Offering, and 2,500,000 shares of Common Stock which, subject to the satisfaction of certain conditions, may be increased to 3,250,000 shares of Common Stock. 4-Sight develops and distributes ISDN data transmission software and related products and applications targeted to the Graphic Arts industry, with particular emphasis on European, Asian and North American markets. 4-Sight software users are generally responsible for all software and hardware installation, procuring an ISDN telephony connection and verifying the integrity of their files being sent over a public network infrastructure. The Company believes that there are potential synergies in adapting and integrating 4-Sight's data transmission software into WAM!NET's managed network infrastructure. At December 31, 1997, 4-Sight's customer base exceeded 30,000 locations, including 3,000 sites in the United States. The Company expects that the 4-Sight Acquisition will enable the Company to achieve broader market coverage in the Graphic Arts market by combining 4-Sight's international presence and penetration of the lower volume user market with the Company's domestic presence and penetration of the higher volume user market. COMPANY HISTORY The Company was incorporated in Minnesota in September 1994. From incorporation through March 1996, the Company was principally engaged in the development of the WAM!NET Service. In March 1996, the Company commercially released and began marketing the WAM!NET Service. Between September and December 1996, the Company entered into its strategic alliance with WorldCom. In 1997, the Company expanded its marketing efforts, increased its sales and installation of the WAM!NET Service, continued development of WAM!PROOF and WAM!BASE and other advanced applications, and prepared for expansion into overseas markets and for the application of WAM!NET Services to other targeted industries. WAM!PROOF was commercially released in the second quarter of 1998 and WAM!BASE is currently scheduled for commercial release in the second half of 1998. The Company's principal executive offices are located at 6100 West 110th Street, Minneapolis, Minnesota 55438. The Company's telephone number is (612) 886-5100; its facsimile number is (612) 885-0687; its Internet e-mail address is info@netco.com; and its homepage address on the world wide web is www.wamnet.com. 5 THE EXCHANGE OFFER The Exchange Offer.... The Company is offering to exchange up to $208,530,000 aggregate principal amount at maturity of 13 1/4% Senior Discount Notes due 2005, Series B, for each $1,000 in principal amount of outstanding 13 1/4% Senior Discount Notes due 2005, Series A, that were issued and sold in reliance upon an exemption from registration under the Securities Act. The terms of the Exchange Notes will be substantially identical in all respects (including principal amount, interest rate, maturity and ranking) to the terms of the Original Notes for which they may be exchanged pursuant to the Exchange Offer, except that (i) the Exchange Notes will be freely transferable by Holders thereof except as provided herein (see "The Exchange Offer--Terms of the Exchange" and "The Exchange Offer--Terms and Conditions of the Letter of Transmittal") and (ii) the Exchange Notes will be issued without any covenant regarding registration under the Securities Act. Exchange Notes issued pursuant to the Exchange Offer in exchange for the Original Notes may be offered for resale, resold and otherwise transferred by Holders thereof (other than any Holder which is (i) an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act, (ii) a broker-dealer who acquired Original Notes directly from the Company or (iii) broker-dealers who acquired Original Notes as a result of market making or other trading activities) without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such Exchange Notes are acquired in the ordinary course of such Holders' business and such Holders are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of such Exchange Notes. Minimum Condition..... The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Original Notes being tendered for exchange. Expiration Date....... The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998 unless extended. Exchange Date......... The first date of acceptance for exchange for the Original Notes will be the first business day following the Expiration Date. Conditions to the Exchange Offer....... The obligation of the Company to consummate the Exchange Offer is subject to certain conditions. See "The Exchange Offer--Conditions to the Exchange Offer." The Company reserves the right to terminate or amend the Exchange Offer at any time prior to the Expiration Date upon the occurrence of any such condition. Withdrawal Rights..... Tenders may be withdrawn at any time prior to the Expiration Date. Any Original Notes not accepted for any reason will be returned without expense to the tendering Holders thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Procedures for Tendering Original Notes................ See "The Exchange Offer--How to Tender." 6 Federal Income Tax Consequences......... The exchange of Original Notes for Exchange Notes by Holders will not be a taxable exchange for federal income tax purposes, and Holders should not recognize any taxable gain or loss or any interest income as a result of such exchange. See "Certain Federal Income Tax Considerations." Effect on Holders of Original Notes....... As a result of the making of this Exchange Offer, and upon acceptance for exchange of all validly tendered Original Notes pursuant to the terms of this Exchange Offer, the Company will have fulfilled a covenant contained in the terms of the Original Notes and the Registration Rights Agreement (the "Registration Rights Agreement") dated as of March 5, 1998, among the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. (collectively, the "Initial Purchasers"), and, accordingly, the Holders of the Original Notes will have no further registration or other rights under the Registration Rights Agreement, except under certain limited circumstances. See "Original Notes Registration Rights." Holders of the Original Notes who do not tender their Original Notes in the Exchange Offer will continue to hold such Original Notes and will be entitled to all the rights and limitations applicable thereto under the Indenture, dated as of March 5, 1998 among the Company and U.S. Bank Trust National Association (f/k/a First Trust National Association), as Trustee (the "Trustee"), relating to the Original Notes and the Exchange Notes (the "Indenture"). All untendered, and tendered but unaccepted, Original Notes will continue to be subject to the restrictions on transfer provided for in the Original Notes and the Indenture. To the extent that Original Notes are tendered and accepted in the Exchange Offer, the trading market, if any, for the Original Notes could be adversely affected. See "Risk Factors--Consequences of Failure to Exchange." THE NOTES Notes................. $208,530,000 aggregate principal amount at maturity of 13 1/4% Senior Discount Notes due 2005. The Original Notes were issued on March 5, 1998 (the "Issue Date") at a discount to their aggregate principal amount at maturity and generated gross proceeds to the Company of approximately $125.0 million. The yield to maturity of the Notes is 14.59% (computed on a semi-annual bond equivalent basis). Maturity.............. March 1, 2005. Interest.............. Cash interest does not accrue nor is payable on the Notes prior to March 1, 2002. Thereafter, cash interest on the Notes will accrue at a rate of 13 1/4% per annum (calculated on a semi-annual bond equivalent basis) and will be payable semi-annually in arrears on March 1 and September 1 of each year, commencing September 1, 2002. Ranking............... The Notes are general senior obligations of the Company and, as such, rank pari passu in right of payment with all existing and future unsecured and unsubordinated Indebtedness of the Company. The Notes are effectively subordinated to all secured Indebtedness of the Company to the extent of the 7 value of the assets securing such Indebtedness. As of March 31, 1998, the Company had outstanding approximately $10.4 million of secured Indebtedness (consisting principally of equipment financing), which effectively ranked senior in right of payment to the Notes, no Indebtedness which ranked pari passu in right of payment to the Notes and $25.9 million of Indebtedness which would have been subordinated in right of payment to the Notes. Although the Indenture contains limitations on the amount of additional Indebtedness which the Company may incur, under certain circumstances the amount of such Indebtedness could be substantial, and the Indenture does not limit the amount of secured Permitted Equipment Financing that may be incurred by the Company. See "Description of the Notes--Ranking." Subsidiary Guarantees........... The Indenture provides that each Material Restricted Subsidiary (as defined herein) will become a guarantor of the Notes (a "Subsidiary Guarantor"). As of the date hereof, the Company has no Material Restricted Subsidiaries. The guarantees of the Subsidiary Guarantors (collectively, the "Subsidiary Guarantees"), if any, will be general unsecured senior obligations of the Subsidiary Guarantors and will rank pari passu in right of payment with all unsecured and unsubordinated Indebtedness of the Subsidiary Guarantors and senior in right of payment to all subordinated Indebtedness of the Subsidiary Guarantors. The Subsidiary Guarantees may be released under certain circumstances. See "Description of the Notes--Certain Covenants--Issuances of Guarantees by Certain Restricted Subsidiaries; Release of Guarantees." The Subsidiary Guarantees are limited to the extent of any payment that would constitute a fraudulent transfer under federal or state law. See "Risk Factors--Fraudulent Conveyance Considerations Relating to Subsidiary Guarantees." Optional Redemption... The Notes are redeemable at the option of the Company, in whole or in part, at any time upon not less than 30 nor more than 60 days written notice, on or after March 1, 2002, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. In addition, at any time prior to March 1, 2001 (i) the Company may redeem up to 25% of the originally issued aggregate principal amount at maturity of Notes, other than in any circumstance resulting in a Change of Control, at a redemption price equal to 113.25% of the Accreted Value of the Notes so redeemed as of the date of redemption, with the net cash proceeds of an Initial Public Equity Offering resulting in gross cash proceeds to the Company of at least $35.0 million in the aggregate; provided that not less than 75% of the originally-issued aggregate principal amount at maturity of Notes is outstanding immediately following such redemption. See "Description of the Notes--Redemption--Optional Redemption." Change of Control..... In the event of a Change of Control, the Company is required to make an offer to purchase all outstanding Notes at a purchase price equal to 101% of the Accreted Value thereof, plus accrued and unpaid interest thereon, if any, to the date of purchase. See "Description of the Notes--Certain Covenants--Change of Control." Asset Sale Offer...... The Company, subject to certain conditions, is obligated to make an offer to purchase Notes with the Net Cash Proceeds of certain Asset Sales at a purchase price equal to 100% of the Accreted Value thereof, plus accrued and 8 unpaid interest thereon, if any, to the date of purchase. See "Description of the Notes--Certain Covenants--Disposition of Proceeds of Asset Sales." Certain Covenants..... The Indenture contains certain covenants, including, among others, covenants with respect to the following matters: (i) limitation on additional indebtedness, (ii) limitation on restricted payments, (iii) limitation on liens securing certain indebtedness, (iv) issuance of guarantees by certain Restricted Subsidiaries; release of guarantees, (v) change of control, (vi) limitation on dividends and other payment restrictions affecting Restricted Subsidiaries, (vii) disposition of proceeds of Asset Sales, (viii) limitation on issuances and sales of capital stock of Restricted Subsidiaries, (ix) limitation on transactions with affiliates, (x) reports, (xi) limitation on designations of Unrestricted Subsidiaries, (xii) limitation on status as investment company, and (xiii) consolidation, merger, sale of assets, etc. These covenants are subject to important exceptions and qualifications. See "Description of Notes--Certain Covenants" and "--Consolidation, Merger, Sale of Assets, Etc." Exchange Offer; Note Registration Rights............... Pursuant to the Registration Rights Agreement, the Company agreed (i) to file a registration statement (the "Exchange Offer Registration Statement") with respect to an offer to exchange the Original Notes (the "Exchange Offer") for senior debt securities of the Company with terms identical to the Original Notes ( i.e., the Exchange Notes) (except that the Exchange Notes will not contain terms with respect to transfer restrictions) on or prior to the 90th day after the Issue Date, (ii) to use its best efforts to have the Exchange Offer Registration Statement be declared effective by the Commission on or prior to the 150th day after the Issue Date and (iii) commence the Exchange Offer and use its best efforts to issue the Exchange Notes on or prior to the 30th day after the date on which the Exchange Offer Registration Statement was declared effective by the Commission. In the event that applicable law or interpretations of the staff of the Commission do not permit the Company to file the Exchange Offer Registration Statement or to effect the Exchange Offer, if the Exchange Offer is not for any other reason consummated within 180 days after the Issue Date or if certain holders of the Original Notes notify the Company they are not permitted to participate in, or would not receive freely tradable Notes pursuant to, the Exchange Offer, the Company will file and will use its best efforts to cause to become effective a registration statement (the "Shelf Registration Statement") with respect to the resale of the Original Notes and to keep the Shelf Registration effective until up to two years after the effective date thereof. The Company may be required to make cash payments to holders of Notes under certain circumstances if the Company is not in compliance with its obligations under the Registration Rights Agreement. See "Note Registration Rights." RISK FACTORS Prospective participants in the Exchange Offer should carefully consider all of the information set forth in this Prospectus and, in particular, should evaluate the specific risk factors set forth under "Risk Factors," beginning on page 12, for a discussion of certain risks involved in the Exchange Offer. 9 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following tables set forth (i) selected historical consolidated financial data for the Company and its subsidiaries for each of the years in the three year period ended December 31, 1997, and for the three month periods ended March 31, 1997 and 1998, (ii) selected historical consolidated financial data for 4-Sight and its subsidiaries for the year ended August 31, 1996, the month ended September 30, 1996, the year ended September 30, 1997 and the twelve months ended December 31, 1997 and (iii) selected pro forma financial data that gives effect to the Offering and the 4-Sight Acquisition as if they had occurred on January 1, 1997. The 4-Sight Acquisition occurred on March 13, 1998 and the operating results of 4-Sight are included in the Company's operating results from that date through March 31, 1998. The Company's summary historical consolidated financial data as of and for the three months ended March 31, 1997 and 1998 and 4-Sight's selected historical consolidated financial data as of and for the twelve months ended December 31, 1997 have been derived from the respective companies' unaudited financial statements and have been prepared on the same basis as the historical information derived from audited financial statements. In the opinion of the management of the Company and the management of 4-Sight, the unaudited financial statements of the respective companies, from which such data have been derived, contain all adjustments, consisting only of normal recurring accruals, necessary for the fair presentation of the results for and as of the end of such periods. The Company's development and expansion activities during the periods presented below significantly affect the period-to-period comparability of the historical data presented for the Company. The historical data with respect to the three months ended March 31, 1998 should not be regarded as necessarily indicative of the results that may be expected for the entire year. The following information is qualified in its entirety by, and should be read in conjunction with, the consolidated financial statements and the notes thereto of the Company and 4-Sight, "Pro Forma Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
WAM!NET INC. --------------------------------------------- THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, -------------------------- ----------------- 1995 1996 1997 1997 1998 ------- ------- -------- ------- -------- (UNAUDITED) (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues................... $ 180 $ 279 $ 1,555 $ 122 $ 1,880 Operating expenses......... 1,437 7,036 31,037 4,205 25,412 Operating income (loss).... (1,257) (6,757) (29,482) (4,083) (23,532) Interest income (expense), net....................... (20) (839) (4,154) (628) (3,151) Income (loss) before income taxes..................... (1,277) (7,596) (33,636) (4,711) (26,683) Net income (loss).......... (1,277) (7,596) (33,636) (4,711) (26,683) OTHER DATA: EBITDA(1).................. $(1,226) $(6,310) $(26,814) $(3,796) $(21,611) Depreciation and amortization.............. 31 447 2,668 287 1,921 Capital expenditures....... 657 4,244 16,599 3,904 10,143 Net cash used in operating activities................ (747) (6,218) (23,917) (3,345) (9,743) Net cash used in investing activities................ (657) (5,244) (15,599) (2,904) (30,396) Net cash provided by (used in) financing activities.. 2,732 24,578 25,346 (1,096) 102,687 Ratio of earnings to fixed charges(2)................ -- -- -- -- -- BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents.. $ 1,328 $15,444 $ 274 $ 7,099 $ 66,760 Total assets............... 2,075 20,070 21,086 15,390 137,770 Total debt(3).............. 1,900 20,473 45,778 20,049 143,478 Shareholders' deficit(4)... (371) (2,683) (30,671) (6,412) (15,316)
Footnotes on the following page. 10
4-SIGHT LIMITED ----------------------------------------------------------------------------- TWELVE MONTHS YEAR ENDED MONTH ENDED YEAR ENDED ENDED AUGUST 31, 1996 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997(5) DECEMBER 31, 1997(6) --------------- ------------------ --------------------- -------------------- (UNAUDITED) (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues................ $11,446 $1,065 $18,264 $19,278 Operating expenses...... 9,380 1,124 15,817 16,031 Operating income (loss)................. 2,066 (59) 2,447 3,247 Interest income (expense), net......... 18 (9) 57 140 Income (loss) before income taxes........... 2,084 (68) 2,504 3,387 Net income (loss)....... 1,478 (61) 1,588 2,109 OTHER DATA: EBITDA(1)............... $ 2,372 $ (20) $ 3,050 $ 3,874 Depreciation and amortization........... 306 39 603 627 Capital expenditures.... 465 87 545 636 Net cash provided by (used in) operating activities............. 380 (759) 707 1,626 Net cash used in investing activities... (327) (87) (540) (633) Net cash provided by (used in) financing activities............. (249) (5) 3,380 3,128 Ratio of earnings to fixed charges(2)....... 39.6x -- 42.7x 100.6x BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents............ $ 1,290 $ 439 $ 3,986 $ 4,253 Total assets............ 6,927 6.095 10,473 11,382 Total debt(3)........... 225 267 206 332 Shareholders' equity.... 2,565 2,531 2.554 3,165
PRO FORMA(7) --------------------------- THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, 1997 1998 ------------ ------------ (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues............................................ $ 20,833 $ 5,363 Operating expenses.................................. 53,483 30,064 Operating income (loss)............................. (32,650) (24,707) Interest income (expense), net...................... (26,828) (6,035) Net income (loss)................................... (60,756) (30,967) OPERATING AND OTHER DATA: EBITDA(1)........................................... $(22,940) $(21,381) Depreciation and amortization....................... 11,359 3,320 Capital expenditures................................ 17,235 10,143 Ratio of earnings to fixed charges(2)............... -- -- BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents........................... $ 84,146 -- Total assets........................................ 149,916 -- Total debt(3)....................................... 146,291 -- Shareholders' equity (deficit)...................... (4,983)(4) --
- -------- (1) EBITDA represents earnings (loss) from operations before taking into consideration net interest expense, income tax expense, depreciation expense and amortization expense. The Company has included information concerning EBITDA as it is used by certain investors as a measure of a company's ability to service its debt. EBITDA should not be considered as an alternative to net income or any other measure of performance or liquidity as determined in accordance with generally accepted accounting principles or as an indicator of the Company's overall financial performance. (2) The ratio of earnings to fixed charges is calculated by dividing (i) net income (loss) before taxes plus fixed charges by (ii) fixed charges. Fixed charges consist of interest incurred and the portion of rent expense which is deemed representative of interest. Earnings were insufficient to cover fixed charges by $1,242, $6,653 and $29,180 for the Company for the years ended December 31, 1995, 1996 and 1997, and $3,907 and $23,184 for the three month period ending March 31, 1997 and 1998, and $33,433 for the pro forma financial data for the year ended December 31, 1997 and $32,448 for the pro forma financial data for the three month period ended March 31, 1998, respectively. (3) Total debt includes long-term debt, current portion of long-term debt and obligations under capitalized leases, net of the unamortized value of warrants issued to debtholders. (4) The estimated value of warrants issued to debtholders and of options issued to consultants is reflected as both a debt discount and an element of paid in capital. (5) 4-Sight changed its fiscal year end to September 30 during 1997. (6) 4-Sight's fiscal year ends on September 30. The financial data of 4-Sight for the twelve months ended December 31, 1997 is presented for comparative purposes and in connection with the pro forma data. (7) The pro forma financial data is not necessarily indicative of either future results of operations or the results that might have occurred if the foregoing transactions had been consummated on the indicated dates. 11 RISK FACTORS Prospective participants in the Exchange Offer should carefully consider the following risk factors, as well as other information contained in this Prospectus, before participating in the Exchange Offer. This Prospectus contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Prospectus and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers, primarily with respect to the future operating performance of the Company. Prospective participants in the Exchange Offer are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The accompanying information contained in this Prospectus, including the information set forth below, identifies important factors that could cause such differences. See "-- Forward-Looking Statements" below. CONSEQUENCES OF FAILURE TO EXCHANGE Holders of Original Notes who do not exchange their Original Notes for Exchange Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Original Notes as set forth in the legend thereon as a consequence of the issuance of the Original Notes pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Original Notes may not be offered or sold unless registered under the Securities Act and applicable state securities laws, or pursuant to an exemption therefrom. Except under certain limited circumstances, the Company does not intend to register the Original Notes under the Securities Act. In addition, any Holder of Original Notes who tenders in the Exchange Offer for the purpose of participating in a distribution of the Exchange Notes may be deemed to have received restricted securities and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. To the extent Original Notes are tendered and accepted in the Exchange Offer, the trading market, if any, for the Original Notes not tendered could be adversely affected. See "Note Registration Rights." LIMITED OPERATING HISTORY; HISTORY OF LOSSES; NO ASSURANCE OF PROFITABILITY The Company was formed in September 1994 and has a limited history of operations. It began operations in March 1995 and has operated at a net loss since inception. The Company expects to incur substantial losses for the foreseeable future as it continues to expand the WAM!NET Network, develop other products and applications and improve and market its services. The Company incurs significant sales commissions and installation costs as customers initially subscribe to the WAM!NET Service. As part of its sales and marketing efforts, the Company offers certain customers, including potentially influential industry leaders, free service for an initial evaluation period. Accordingly, management expects that operating costs will remain high as a percentage of revenue as the Company seeks to continue its rapid growth in subscribers. Since the Company's inception on September 9, 1994, the Company has incurred operating losses of $61.0 million and as of March 31, 1998 had a shareholders' deficit of $15.3 million. The likelihood of the Company achieving profitability must be considered in light of the problems frequently encountered by a new business and the competitive environment in which the Company operates. To keep the price of the WAM!NET Service competitive, the Company must enter into service contracts with and retain additional customers which will enable the Company to increasingly spread the fixed costs of the WAM!NET Service over many customers. There can be no assurance that the Company will develop an adequate revenue generating customer base or will achieve or sustain profitability or generate sufficient positive operating cash flow to service its debt. See "--Requirements for Additional Capital," "--Competition; Technological Change," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Company's consolidated financial statements, including the notes thereto, included elsewhere herein. REQUIREMENTS FOR ADDITIONAL CAPITAL The Company's ability to meet its projected growth is dependent upon its ability to secure substantial additional financing in the future. The Company expects to meet its additional capital needs with the proceeds 12 from sales or issuance of equity securities, credit facilities and other borrowings, or additional debt securities, each to the extent permissible under the Indenture. See "Description of the Notes--Certain Covenants." The Company also intends to pursue one or more financings in 1998 totalling approximately $100.0 million, for which it has received indications of interest from certain financial institutions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company believes that the net proceeds of the Initial Offering and such financings, together with expected cash from operations, will be sufficient to fund the Company's operations through September 30, 1999. There can be no assurance that the Company will be able to obtain such financing if and when it is needed or that, if available, such financing will be on terms acceptable to the Company. Further, there can be no assurance that expenses will not exceed the Company's estimate or that the financing need will not likewise be higher. If the Company is unable to obtain additional financing when needed, it may be required to significantly scale back expansion plans and, depending upon cash flow from its existing business, reduce the scope of its plans and operations. Any additional debt financing, if available, may involve restrictive covenants that attempt to address interests different than those of the holders of the Notes. Further, there can be no assurance that such covenants will not adversely affect the Company's ability to finance its future operations or capital needs or to engage in other business activities that may be in the interest of the Company. The Company's financing needs may vary significantly from its current expectations if it is unable to generate anticipated cash flows or if the Company requires more funds for equipment investments than it currently anticipates, particularly as a result of future network infrastructure installation requirements. No assurance can be given that the Company's current expectations regarding its cash needs will prove accurate, and there can be no assurance that the Company's operations will produce positive cash flow in sufficient amounts to service the Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." LEVERAGE AND DEBT SERVICE The Company is highly leveraged. As of March 31, 1998, the Company had approximately $161.5 million of Indebtedness. As a result of the substantial indebtedness of the Company following the Initial Offering, fixed charges are expected to exceed its operating cash flow for the foreseeable future and there can be no assurance that the Company's operating cash flow will be sufficient to pay cash debt service on the Notes when cash interest begins to accrue on the Notes commencing 2002. In addition, the Indenture permits the Company to incur additional indebtedness under certain conditions, including an unlimited amount of secured equipment financing. The leveraged nature of the Company could limit the ability of the Company to effect future financings or may otherwise restrict the Company's activities. Substantial leverage poses the risk that the Company may not be able to generate sufficient cash flow to service its indebtedness, including the Notes, and to adequately fund its operations. See "Description of the Notes--Ranking." The degree to which the Company is leveraged could have important consequences to the holders of the Notes, including the following: (i) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired in the future; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of debt service, thereby reducing the funds available to the Company for other purposes; (iii) the Company's leverage may hinder its ability to adjust rapidly to changing market conditions; and (iv) the Company's leverage could make the Company more vulnerable in the event of a downturn in general economic conditions or in its business. RISKS ASSOCIATED WITH A CHANGE OF CONTROL The Indenture contains provisions relating to certain events constituting a "change of control" of the Company. Upon the occurrence of such a change of control, the Company would be obligated to make an offer to purchase all of the Notes then outstanding at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. There can be no assurance that the Company would have sufficient funds, or be able to obtain such funds on commercially reasonable terms, to purchase all of the Notes tendered pursuant to such an offer. A failure by the Company to purchase all Notes validly tendered pursuant to such an offer would result in an Event of Default under the Notes and could result in an event of 13 default under other indebtedness of the Company. See "Description of the Notes--Certain Covenants--Change of Control." RISK OF NETWORK FAILURE; LIABILITY FOR DATA The Company's operations are dependent upon its ability to protect its network infrastructure against damage from natural disasters, power loss, telecommunications failures and similar events. Despite the current redundancy of the WAM!NET Service's infrastructure (other than from a customer's NAD to a Distribution Hub), and other precautions taken by the Company, the occurrence of a natural disaster or other unanticipated problem could cause interruptions to the WAM!NET Service. Additionally, failure of the Company's telecommunications providers to provide the telephony capacity required by the Company as a result of operational disruption or for any other reason could cause interruptions in the services provided by the Company. The WAM!NET Service uses an assemblage of telecommunications equipment, software, operating protocols and proprietary applications for high speed transportation of large quantities of digital data among multiple locations. Given the complexity of the WAM!NET Service, it is possible that data files may be lost or distorted. Moreover, most of the Company's customers' needs are extremely time sensitive, and delays in data delivery may cause significant losses to a customer using the WAM!NET Service. The WAM!NET Service and future enhancements or adaptations may contain undetected design faults and software "bugs" that, despite testing by the Company, are discovered only after the WAM!NET Service has been installed and used by customers. The failure of any equipment or facility on the WAM!NET Network could result in the interruption of service to the customers serviced by such equipment or facility until necessary repairs are effected or replacement equipment is installed. Such failures, faults or errors could cause delays or require modifications that could have a material adverse effect on the Company's business, financial condition, competitive position and results of operations. Although the Company's contracts with most WAM!NET Service subscribers limit the Company's liability for damages resulting from any failure in the transportation of data to $100 per transmission, with a maximum liability equal to the subscriber's monthly maximum subscription rate, the Company may nevertheless be subject to significant claims for data losses or delays in the transportation of data over the WAM!NET Network. In addition to general business liability coverage, the Company presently maintains errors and omissions insurance coverage in the amount of $1.0 million per occurrence and $5.0 million for all occurrences relating to the transportation of data over the WAM!NET Network. There can be no assurance that this amount of insurance coverage will be adequate to cover all data loss claims, or that additional coverage will be available on affordable terms to the Company. See "Business-- Liability and Insurance." SECURITY RISKS Despite the WAM!NET Service's extensive security measures, including audit software that constantly monitors security breaches or tampering, the WAM!NET Service is vulnerable to unauthorized access, computer viruses and other disruptive problems. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service to the Company's customers which could have a material adverse effect on the Company's business, financial condition, competitive position and results of operations. DEPENDENCE UPON NETWORK INFRASTRUCTURE AND AVAILABLE BANDWIDTH The Company's ability to generate positive cash flows from operations will depend upon its ability to increase its existing subscriber base, which is a function, in part, of its ability to expand its national network infrastructure and support services in order to supply enhanced capacity, reliability and security to subscribers at an acceptable cost. The continued development and expansion of the Company's national network will require that it enter into additional agreements, on acceptable terms and conditions, with various providers of infrastructure capacity and equipment and support services. No assurance can be given that any or all of the requisite agreements can be obtained on satisfactory terms and conditions. 14 The Company anticipates that future expansions and adaptation of its network infrastructure may be necessary in order to respond to growth in the number of customers served, increased demands to transmit larger amounts of data and changes to its customers' service requirements as customers become more familiar and comfortable with the WAM!NET Service and its various applications. The expansion and adaptation of the Company's network infrastructure will require substantial financial, operational and managerial resources. There can be no assurance that the Company will be able to expand or adapt its network infrastructure to meet the evolving standards or demands of its targeted industries and customers and changing requirements on a timely basis, at a commercially reasonable cost, if at all, or that the Company will be able to deploy successfully any expanded and adapted network infrastructure. REGULATORY MATTERS North America. The Company purchases telephone equipment, routers and relays that are used in the WAM!NET Network from manufacturers and combines that equipment with Company provided software and telephone circuits provided by common carriers regulated by the Federal Communications Commission ("FCC"), the Canadian Radio-Television and Telecommunications Commission ("CRTC") and various state regulatory agencies. The Company believes that under the FCC's interpretation of the Communications Act of 1934, as amended, the services which it offers to its customers are interstate information (enhanced) services. Consequently, it is not required to obtain licenses or other approvals from the FCC or state regulatory agencies to offer such services. If the Company's services were deemed to be intrastate services, certain state regulatory agencies might seek to assert jurisdiction over the Company's offerings. If that were to occur, the Company could be required to expend substantial time and money to acquire the appropriate licenses and to comply with state regulations. The Company also believes that under the CRTC's interpretation of Canadian law, the services that the Company offers do not require it to obtain telecommunications permits or approvals in Canada. Worldwide. The Company believes that European Union directives require that member states permit the provision of the Company's services on a competitive basis. Bilateral agreements have been negotiated between the United States and Japan and the United States and Hong Kong which encourage cross-border provision of enhanced services like those offered by the Company. Pursuant to commitments in the World Trade Organization's ("WTO") General Agreement on Trade in Services, over 50 governments have agreed to permit provision of enhanced services (i.e., value-added) by nationals of WTO member countries. Nevertheless, certain other countries in Europe, Asia and elsewhere might seek to license and regulate the Company's services. Any such license or regulation may limit, delay or increase the costs of operations associated with international locations to which the Company may desire to expand. Medical Imaging. The Company intends to offer its WAM!NET Service and WAM!BASE service as medical imaging applications for transmitting, storing and retrieving medical data for primary diagnostic purposes. Any medical imaging application offered for primary diagnostic purposes is required to comply with the Food, Drug and Cosmetic Act, as amended (the "Food and Drug Act"), and regulations promulgated thereunder by the Food and Drug Administration (the "FDA"). Under proposed FDA rules, the Company's storage and transmission facilities would likely be classified as Class I devices that do not perform "irreversible data compression," which would be exempt from the premarket notification procedures under the Food and Drug Act, and could therefore be marketed without pre-approval from the FDA. The Company's proprietary software applications, however, which operate the storage and retrieval function of the WAM!NET Network's components, would likely be classified as Class II devices. In January 1998 the Company submitted a Premarket Notification 510(k) to the FDA to obtain marketing clearance from the FDA. The Company has adapted the medical imaging applications of its WAM!NET Service and WAM!BASE services to conform to the Digital Imaging and Communications in Medicine ("DICOM") industry standards, which are the standards used by other medical imaging providers who have received FDA marketing clearance for their medical imaging devices and applications. There can be no assurance that the FDA will approve the Company's 510(k) submission or grant marketing clearance for the Company's medical imaging application in a timely fashion, if at all. See "Business-- Government Regulation." 15 DEPENDENCE ON MANAGEMENT The Company is dependent primarily on the services of Edward J. Driscoll III, its Chief Executive Officer, and is also dependent on the services of certain of its other officers and significant employees. The loss of the services of any of these persons could have a material adverse effect on the Company. The Company has employment agreements with substantially all of its officers and significant employees, including Mr. Driscoll, and has purchased life insurance policies on certain employees, including Mr. Driscoll. See "Management." The Company believes its future success will depend in large part on its ability to retain the services of these personnel and to attract and retain qualified technical and marketing personnel. There can be no assurance that the Company will be able to continue to attract and retain the personnel necessary for the successful conduct of its business. RAPID EXPANSION; MANAGEMENT OF GROWTH The Company rapidly expanded its distribution network and added subscribers to the WAM!NET Service during fiscal 1997, and must continue to aggressively expand its network and add subscribers in order to achieve its business objectives. During 1998, the Company intends to expand the WAM!NET Service into international markets. Whether the Company can meet its goal of increasing its customer base while maintaining its price structure and managing costs will depend upon, among other things, the Company's ability to manage its growth effectively. To manage growth effectively, the Company must continue to develop its sales force, external installation capability, customer service teams and information systems, and must maintain its relationships with third-party vendors. The Company's management will also be required to assume greater levels of responsibility. If the Company is unable to manage its growth effectively, the Company's business and results of operations could be materially adversely affected. The 4-Sight Acquisition will require the management of the Company and 4- Sight to spend substantial time integrating the network operations of the Company with the software transmission and services business of 4-Sight. 4- Sight's transmission software and services are sold primarily to customers with lower bandwidth and throughput requirements than that needed by most current subscribers to the WAM!NET Service. Also, the use of 4-Sight's current products requires the use of ISDN lines. DEPENDENCE ON THIRD-PARTY SUPPLIERS FOR EQUIPMENT AND SERVICES The Company is dependent on its third-party local and long distance carriers and on third-party suppliers of the computers, software, routers and related components that the Company assembles and integrates into the WAM!NET Service. Most of these supplier arrangements are for terms of less than one year and are terminable by the other party in certain circumstances. The Company is also dependent on the services of third parties with whom it has contracted or may contract in the future for customer site installations, routine maintenance and on-call repair services. While the Company believes that its relationships with these vendors and suppliers are satisfactory, and that suitable alternative products and services are available, the Company may experience delays and additional costs if any of these relationships is terminated and the Company is unable to reach suitable agreements with alternate vendors, suppliers or carriers in a timely manner. Furthermore, to the extent that the Company is unable to secure suitable installation, maintenance or on call repair services from third-party vendors, the Company may be required to substantially increase its own work force to perform these services, and the Company's growth may be constrained while it builds and trains that work force. See "Business--Supplier Relationships." The Company has historically experienced a 60 to 90 day delay in obtaining telephone line extensions at subscriber premises following the execution of a WAM!NET Service contract. There can be no assurance that the Company will be able to obtain such telephone lines on the scale and within the time frames required by the Company at a commercially reasonable cost, or at all. AFFILIATION OF WORLDCOM Through its ownership of debt and equity securities of the Company, as well as its designation of a majority of the directors of the Board of Directors of the Company, WorldCom has the ability to exercise considerable 16 influence and control over the affairs of the Company. Other than as required under Minnesota law, no formal policies or guidelines have been adopted by the Board of Directors of the Company to deal with Board actions that may involve actual or potential conflicts of interest between the Company and WorldCom. No assurance can be given that any conflict of interest that may arise will not be resolved in a manner adverse to the holders of Notes. In addition, WorldCom and its affiliates are non-exclusive suppliers of telecommunication and other services to the Company. The Company has no contractual right to obtain technological assistance from WorldCom. WorldCom has no obligation to contribute funds to the Company (except with respect to its obligations in connection with the Company's contractual relationship with Time and under the Company's revolving credit facility (the "Revolving Credit Facility"), which obligations are described herein under "Certain Transactions and Relationships"), maintain its equity interest in the Company or support any obligation of the Company with respect to the Notes. Further, a loss of its strategic relationship with WorldCom could have a materially adverse effect on the business and operations of the Company and on the market for the Notes. See "Certain Transactions and Relationships." COMPETITION; TECHNOLOGICAL CHANGE The Company operates in a highly competitive industry which includes many companies that have greater resources and market presence than the Company. The Company's potential competitors have invested and continue to invest substantial sums in research and development which may result in products and services that have a competitive advantage over the WAM!NET Service. A new service called the Graphic Arts Digital Network, which will be a direct competitor of the WAM!NET Service, has been announced but not yet released. As announced, the service will be provided by a joint venture between British Telecommunications and Scytek Inc. ("Scytek"). There are relatively few barriers to entry into the marketplace for the high speed delivery of digital data files, and additional competitors could enter the market at any time. The Company is also at risk from fundamental technological changes in the way connectivity solutions are marketed and delivered. As is typical in the case of a new and evolving industry characterized by rapidly changing technology, evolving industry standards and new product and service introductions, demand and market acceptance for recently introduced products and services are subject to uncertainty of customer acceptance. There can be no assurance that the Company will be able to adapt to future technological changes or that developments by competitors will not render the WAM!NET Service and related services obsolete or noncompetitive. See "Business--Competition" and "-- Intellectual Property and Proprietary Rights." INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company's success may depend, in part, on its ability to maintain its proprietary rights in certain technology underlying the WAM!NET Service and related applications. The Company has applications for three United States patents pending for certain aspects of its technology. To protect its proprietary rights in the technology utilized in the WAM!NET Service, the Company relies on a combination of trade secret and copyright protection as well as patents. The Company also relies on trademark protection concerning various names, marks, logos and other devices which serve to identify the Company as the source for and originator of the WAM!NET Service and related applications. The Company may choose not to apply for patent protection in all foreign countries in which it eventually markets the WAM!NET Service. Consequently, the Company's proprietary rights in the technology underlying the WAM!NET Service and related applications will be protected only to the extent that trade secret, copyright or other non-patent protection is available in such countries and to the extent the Company is able to enforce such rights. Intellectual property litigation is complex and there can be no assurance of the outcome of any such litigation. Any future litigation, regardless of outcome, could result in substantial expense to the Company and significant diversion of the efforts of the Company's technical and management personnel. An adverse determination in any such proceeding could subject the Company to significant liabilities to third parties, require disputed rights to be licensed from such parties, if licenses to such rights could be obtained, and/or require the Company to cease using such technology. There can be no assurance that any such license would or could be obtained at costs reasonable to the Company. If forced to cease using such technology, there can be no assurance 17 that the Company would be able to develop or obtain alternate technology. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent the Company from manufacturing, using or selling certain of its products, which could have a material adverse effect on the Company's financial condition and business results of operations. See "Business--Intellectual Property and Proprietary Rights." DEPENDENCE UPON SIGNIFICANT CUSTOMERS During fiscal 1997, Time and WorldColor Press Inc. ("WorldColor") were the Company's largest customers, representing 10.9% and 9.6%, respectively, of the Company's total net sales. In the event Time or WorldColor significantly reduced, for any reason, or terminated (at the end of its current service contract or otherwise), its use of the WAM!NET Service, the Company's financial condition and business results of operations could be materially adversely affected, both as a direct result of such reduction or termination and through the potential reduction of use of the WAM!NET Service by Time or WorldColor's work flow partners that are, or potentially would be, subscribers to the WAM!NET Service. DISCRETIONARY AUTHORITY OVER USE OF NET PROCEEDS The Company retains a significant amount of discretion over the application of the net proceeds of the Initial Offering. Because of the number and variability of factors that determine the Company's use of the net proceeds of the Initial Offering, there can be no assurance that such applications will not vary substantially from the Company's current intentions. Pending such utilization, the Company invests the net proceeds of the Offering in short- term investment grade and government securities. See "Use of Proceeds." ABSENCE OF PUBLIC MARKET; RESTRICTION ON RESALE The Exchange Notes are a new issue of securities for which there is currently no established market. There can be no assurance as to (i) the liquidity of any such market that may develop, (ii) the ability of the holders of Exchange Notes to sell any of their Exchange Notes, or (iii) the price at which the holders of Exchange Notes would be able to sell any of their Securities. The Company does not presently intend to apply for listing of any of the Exchange Notes on any national securities exchange or on The Nasdaq Stock Market. The Initial Purchasers have advised the Company that they presently intend to make a market in Exchange Notes, if and when issued. The Initial Purchasers are not obligated, however, to make a market in the Exchange Notes and any such market-making may be discontinued at any time at the sole discretion of the Initial Purchasers and without notice. Accordingly, no assurance can be given as to the development or liquidity of any market for any of the Exchange Notes. If a market for any of the Exchange Notes were to develop, such Exchange Notes could trade at prices that may be higher or lower than reflected by their initial offering price depending on many factors, including prevailing interest rates, the Company's operating results and prospects for its performance, the market for similar securities and general economic conditions. Historically, the market for securities such as the Notes has been subject to disruptions that have caused substantial volatility in the prices of similar securities. There can be no assurance that if a market for any of the Notes were to develop, such a market would not be subject to similar disruptions. FRAUDULENT CONVEYANCE CONSIDERATIONS RELATING TO SUBSIDIARY GUARANTEES The Company's obligations under the Notes will be guaranteed on an unsecured senior basis by the Subsidiary Guarantors, if any. Various fraudulent conveyance laws have been enacted for the protection of creditors and may be utilized by a court of competent jurisdiction to subordinate or avoid any Subsidiary Guarantee issued by a Subsidiary Guarantor. It is also possible that under certain circumstances a court could hold that the direct obligations of a Subsidiary Guarantor could be superior to the obligations under its Subsidiary Guarantee. To the extent that a court were to find that (x) a Subsidiary Guarantee was incurred by a Subsidiary Guarantor with the intent to hinder, delay or defraud any present or future creditor or that the Subsidiary 18 Guarantor contemplated insolvency with a design to favor one or more creditors to the exclusion in whole or in part of others or (y) a Subsidiary Guarantor did not receive fair consideration or reasonably equivalent value for issuing a Subsidiary Guarantee and, at the time it issued such Subsidiary Guarantee, the Subsidiary Guarantor (i) was insolvent or rendered insolvent by reason of the issuance of the Subsidiary Guarantee, (ii) was engaged or about to engage in a business or transaction for which the remaining assets of such Subsidiary Guarantor constituted unreasonably small capital or (iii) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, the court could avoid or subordinate such Subsidiary Guarantee in favor of the Subsidiary Guarantor's other creditors. Among other things, a legal challenge of a Subsidiary Guarantee issued by a Subsidiary Guarantor on fraudulent conveyance grounds may focus on the benefits, if any, realized by such Subsidiary Guarantor as a result of the issuance by the Company of the Notes. To the extent any Subsidiary Guarantee is avoided as a fraudulent conveyance or held unenforceable for any other reason, the holders of the Notes would cease to have any claim in respect of the applicable Subsidiary Guarantor and would be creditors solely of the Company. RISKS OF FOREIGN INVESTMENT The Company has expanded its operations into international markets in the first half of 1998. Risks inherent in foreign operations include loss of revenue, property and equipment from expropriation, nationalization and confiscatory taxation. The Company is also exposed to the risk of changes to laws and policies that govern foreign investment in countries where it has operations as well as, to a lesser extent, changes in United States laws and regulations relating to investing in or trading with countries in which the Company may have investments. Certain of the countries in which the Company operates or may operate may be subject to a substantially greater degree of social, political and economic instability than is the case in other countries. Such instability may result from, among other things, the following: (i) authoritarian governments or military involvement in political and economic decision making, and changes in government through coups or other extra-constitutional means; (ii) social unrest associated with demands for improved economic, social and political conditions; (iii) internal insurgencies and terrorist activities; and (iv) hostile relations with neighboring countries. Risks associated with social, political and economic instability in a particular country could materially adversely affect the results of operations and financial condition of the Company and could result in the loss of the Company's assets in such country. FOREIGN CURRENCY EXCHANGE RATES; REPATRIATION As the Company expands its operations into countries outside of the United States, its results of operations and the value of its assets will be affected by the currency exchange rates between the U.S. dollar and the functional currency of countries in which it has assets. The Company may also sell products and services in certain countries in the local functional currency or in a currency other than the U.S. dollar. As a result, the Company may experience an economic loss solely as a result of foreign currency exchange rate fluctuations, which include foreign currency devaluations against the dollar. The Company may in the future acquire interests in companies that operate in countries where the removal or conversion of currency is restricted. There can also be no assurance that countries that do not have such restrictions at the time the Company establishes operations in those countries will not subsequently impose them, especially in situations where there is a deterioration in a country's balance of payments or where the local currency is being heavily converted into other currencies. ORIGINAL ISSUE DISCOUNT CONSEQUENCES OF THE NOTES The Original Notes were sold with original issue discount ("OID") for United States federal income tax purposes. Thus, although cash interest will not be payable on the Notes prior to 2002, the holders of the Notes (including cash basis holders) that are subject to U.S. federal income taxation will be required to include such OID in income, on a constant yield to maturity method basis, in advance of the receipt of the cash payments to which such income is attributable. See "Certain Federal Income Tax Considerations" for a more detailed discussion of the U.S. federal income tax consequences to the U.S. Holders of the Notes of the purchase, ownership and disposition of the Notes. 19 FORWARD-LOOKING STATEMENTS The statements contained in this Prospectus that are not historical fact are "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the reader that these forward- looking statements such as the revenue and profitability levels of the WAM!NET Service and other matters contained above and herein in this Prospectus regarding matters that are not historical facts, are only predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these projections and other forward-looking statements are based upon a variety of assumptions relating to the business of the Company, which, although considered reasonably by the Company, may not be realized. Because of the number and range of the assumptions underlying the Company's projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond the reasonable control of the Company, some of the assumptions inevitably will not materialize and unanticipated events and circumstances may occur subsequent to the date of this Prospectus. These forward-looking statements are based on current expectations, and the Company assumes no obligation to update this information. Therefore, the actual experience of the Company and results achieved during the period covered by any particular projections or forward- looking statements may differ substantially from those projected. Consequently, the inclusion of projections and other forward-looking statements should not be regarded as a representation by the Company or any other person that these estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate. 20 USE OF PROCEEDS There will be no proceeds to the Company from the Exchange Offer. The net proceeds of the Initial Offering were approximately $120.6 million. The net proceeds were or are expected to be used as follows: (i) $20.0 million was used to pay the cash portion of the 4-Sight Acquisition, (ii) approximately $25.0 million was used to repay the Revolving Credit Facility and (iii) the balance is being, and will be, used to further the Company's business development and expansion strategy, to enhance the WAM!NET Service infrastructure and develop additional value-added features and services, to optimize marketing, sales and customer support and service capabilities, and for working capital and other general corporate purposes. The Revolving Credit Facility matures and becomes payable on September 23, 2000. At December 31, 1997, the aggregate principal outstanding under the Revolving Credit Facility was $18.8 million, which bore interest at a rate equal to LIBOR (as defined herein) plus 55 basis points per annum (6.27% at December 31, 1997). The proceeds of the Revolving Credit Facility were used for equipment purchases and working capital purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Certain Indebtedness" for a discussion of the Company's funding requirements. Pending such utilization, the Company invests the net proceeds of the Initial Offering in short-term investment grade and government securities. 21 THE EXCHANGE OFFER PURPOSE OF THE EXCHANGE OFFER The sole purpose of the Exchange Offer is to fulfill the obligations of the Company with respect to the Registration Rights Agreement. The Original Notes were originally issued and sold on March 5, 1998. Such sales were not registered under the Securities Act (i) in reliance upon the exemption provided by Section 4(2) of the Securities Act and Rule 144A of the Securities Act, and (ii) pursuant to offers and sales that occurred outside the United States within the meaning of Regulation S under the Securities Act. Pursuant to the Registration Rights Agreement, the Company agreed to file with the Commission the Exchange Offer Registration Statement on an appropriate form under the Securities Act with respect to an offer to exchange the Original Notes for the Exchange Notes. Upon the effectiveness of the Exchange Offer Registration Statement, the Company will offer to the holders of Original Notes who are able to make certain representations the opportunity to exchange their Original Notes for Exchange Notes. If (i) the Company is not permitted to file the Exchange Offer Registration Statement or to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy, (ii) the Exchange Offer is not for any other reason consummated within 180 days after the Issue Date, (iii) any holder of Original Notes notifies the Company within a specified time period that (a) due to a change in law or policy it is not entitled to participate in the Exchange Offer, (b) due to a change in law or policy it may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and (x) the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such holder and (y) such prospectus is not promptly amended or modified in order to be suitable for use in connection with such resales for such holder and all similarly situated holders or (c) it is a broker-dealer and owns Original Notes acquired directly from the Company or an affiliate of the Company or (iv) the holders of a majority of the Original Notes may not resell the Exchange Notes acquired by them in the Exchange Offer to the public without restriction under the Securities Act and without restriction under applicable blue sky or state securities laws, the Company will file with the Commission the Shelf Registration Statement to cover resales of the Transfer Restricted Notes (as defined below) by the holders thereof. The Company agreed to use its best efforts to cause the applicable registration statement to be declared effective as promptly as possible by the Commission. For purposes of the foregoing, "Transfer Restricted Notes" means each Original Note until (i) the date on which such Original Note has been exchanged by a person other than a broker-dealer for an Exchange Note in the Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of an Original Note for an Exchange Note, the date on which such Exchange Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Original Note has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement, (iv) the date on which such Original Note is distributed to the public pursuant to Rule 144(k) under the Securities Act (or any similar provision then in force, but not Rule 144A under the Securities Act), (v) such Original Note shall have been otherwise transferred by the holder thereof and a new Note not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of such Note shall not require registration or qualification under the Securities Act or any similar state law then in force or (vi) such Original Note ceases to be outstanding. The Registration Rights Agreement provides that: (i) unless the Exchange Offer would not be permitted by applicable law or Commission policy, the Company will file the Exchange Offer Registration Statement with the Commission on or prior to the 90th day after the Issue Date, (ii) unless the Exchange Offer would not be permitted by applicable law or Commission policy, the Company will use its best efforts to have the Exchange Offer Registration Statement declared effective by the Commission on or prior to the 150th day after the Issue Date (the "Target Effectiveness Date"), (iii) unless the Exchange Offer would not be permitted by applicable law or Commission policy, the Company will commence the Exchange Offer and use its best efforts to issue, on or prior to the date which is 30 days after the date on which the Exchange Offer Registration Statement was declared effective by the Commission, Exchange Notes in Exchange for all Original Notes tendered prior thereto 22 in the Exchange Offer and (iv) if obligated to file the Shelf Registration Statement, the Company will use its best efforts to file prior to the later of (a) the 90th day after the Issue Date or (b) the 30th day after such filing obligation arises and will use its best efforts to cause the Shelf Registration Statement to be declared effective by the Commission on or prior to the 60th day after such obligation arises; provided that if the Company has not consummated the Exchange Offer within the date which is 180 days after the Issue Date, then the Company will file the Shelf Registration Statement with the Commission on or prior to the 30th day after such date. The Company shall use its best efforts to keep such Shelf Registration Statement continuously effective, supplemented and amended until the earlier of (i) the second anniversary of the effective date of the Shelf Registration Statement and (ii) such time as all of the Transfer Restricted Notes covered by the Shelf Registration Statement have been sold thereunder or otherwise cease to be Transfer Restricted Notes. If (i) the Company fails to file any of the registration statements required by the Registration Rights Agreement on or before the date specified for such filing, (ii) any of such registration statements is not declared effective by the Commission on or prior to the Target Effectiveness Date (subject to certain limited exceptions), (iii) the Company fails to consummate the Exchange Offer within 30 days of the Target Effectiveness Date with respect to the Exchange Offer Registration Statement, or (iv) the Shelf Registration Statement or the Exchange Offer Registration Statement is declared effective but thereafter, subject to certain limited exceptions, ceases to be effective or usable in connection with the Exchange Offer or resales of Transfer Restricted Notes, as the case may be, during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (i) through (iv) above, a "Registration Default"), then the Company shall pay as liquidated damages interest on the Transfer Restricted Notes as to which any Registration Default exists. If a Registration Default exists with respect to Transfer Restricted Notes, the Company will, with respect to the first 90-day period (or portion thereof) while such Registration Default is continuing immediately following the occurrence of such Registration Default, make cash payments at a rate of .50% per annum multiplied by the Accreted Value of the Transfer Restricted Notes as of the date such payment is required to be made. The rate of such cash payment shall increase by an additional .50% per annum at the beginning of each subsequent 90-day period (or portion thereof) while such Registration Default is continuing until such Registration Default is cured, up to a maximum rate of 1.5% per annum. Following the cure of all Registration Defaults, the making of cash payments with respect to the Notes will cease and the interest rate on the Notes will revert to zero. See "Note Registration Rights." TERMS OF THE EXCHANGE The Company hereby offers to exchange, upon the terms and subject to the conditions set forth herein and in the Letter of Transmittal, $1,000 in principal amount of Exchange Notes for each $1,000 in principal amount of the Original Notes. The terms of the Exchange Notes are identical in all respects to the terms of the Original Notes for which they may be exchanged pursuant to this Exchange Offer, except that the Exchange Notes will generally be freely transferable by holders thereof ("Holders"), and the Holders of the Exchange Notes (as well as remaining Holders of any Original Notes) will not be entitled to registration rights under the Registration Rights Agreement. The Exchange Notes will evidence the same debt as the Original Notes and will be entitled to the benefits of the Indenture. See "Description of the Notes." The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Original Notes being tendered for exchange. Based on interpretations by the Staff set forth in no-action letters issued to third parties, the Company believes that Exchange Notes issued pursuant to the Exchange Offer in exchange for the Original Notes may be offered for resale, resold and otherwise transferred by Holders thereof (other than any Holder which is (i) an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act, (ii) a broker-dealer who acquired Original Notes directly from the Company or (iii) broker-dealers who acquired Original Notes as a result of market making or other trading activities) without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such Exchange Notes are acquired in the ordinary course of such Holder's business, and such Holders are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of such Exchange Notes. If a Holder is not a broker-dealer, it will be required to represent that it is not engaged in, and does not intend to engage in, 23 a distribution of the Exchange Notes. Each broker-dealer that receives Exchange Notes pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging, and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Broker-dealers who acquired Original Notes as a result of market making or other trading activities may use this Prospectus, as supplemented or amended, in connection with resales of the Exchange Notes. The Company have agreed that, for a period not to exceed 180 days after the Exchange Date, they will make this Prospectus available to any broker-dealer for use in connection with any such resale. Any Holder that cannot rely upon such interpretations must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. Tendering Holders of Original Notes will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of the Original Notes pursuant to the Exchange Offer. The Exchange Notes will bear interest from and including their respective dates of issuance. Holders whose Original Notes are accepted for exchange will receive accrued interest thereon to, but not including, the date of issuance of the Exchange Notes, such interest to be payable with the first interest payment on the Exchange Notes, but will not receive any payment in respect of interest on the Original Notes accrued after the issuance of the Exchange Notes. EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS The Exchange Offer expires on the Expiration Date. The term "Expiration Date" means 5:00 p.m., New York City time, on , 1998, unless the Company in its sole discretion extend the period during which the Exchange Offer is open, in which event the term "Expiration Date" means the latest time and date on which the Exchange Offer, as so extended by the Company, expires. The Company reserves the right to extend the Exchange Offer at any time and from time to time prior to the Expiration Date by giving written notice to U.S. Bank Trust National Association (f/k/a First Trust National Association) (the "Exchange Agent") and by timely public announcement communicated, unless otherwise required by applicable law or regulation, by making a release to the Dow Jones News Service. During any extension of the Exchange Offer, all Original Notes previously tendered pursuant to the Exchange Offer will remain subject to the Exchange Offer. The initial Exchange Date will be the first business day following the Expiration Date. The Company expressly reserves the right to (i) terminate the Exchange Offer and not accept for exchange any Original Notes for any reason, including if any of the events set forth below under "--Conditions to the Exchange Offer" shall have occurred and shall not have been waived by the Company and (ii) amend the terms of the Exchange Offer in any manner, whether before or after any tender of the Original Notes. If any such termination or amendment occurs, the Company will notify the Exchange Agent in writing and will either issue a press release or give written notice to the Holders of the Original Notes as promptly as practicable. Unless the Company terminates the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date, the Company will exchange the Exchange Notes for the Original Notes on the Exchange Date. If the Company waives any material condition to the Exchange Offer, or amend the Exchange Offer in any other material respect, and if at the time that notice of such waiver or amendment is first published, sent or given to Holders of Original Notes in the manner specified above, the Exchange Offer is scheduled to expire at any time earlier than the expiration of a period ending on the fifth business day from, and including, the date that such notice is first so published, sent or given, then the Exchange Offer will be extended until the expiration of such period of five business days. This Prospectus and the related Letter of Transmittal and other relevant materials will be mailed by the Company to record Holders of Original Notes and will be furnished to brokers, banks and similar persons whose names, or the names of whose nominees, appear on the lists of Holders for subsequent transmittal to beneficial owners of Original Notes. 24 HOW TO TENDER The tender to the Company of Original Notes by a Holder thereof pursuant to one of the procedures set forth below will constitute an agreement between such Holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. General Procedures. A Holder of an Original Note may tender the same by (i) properly completing and signing the Letter of Transmittal or a facsimile thereof (all references in this Prospectus to the Letter of Transmittal shall be deemed to include a facsimile thereof) and delivering the same, together with the certificate or certificates representing the Original Notes being tendered and any required signature guarantees (or a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") pursuant to the procedure described below), to the Exchange Agent at its address set forth on the back cover of this Prospectus on or prior to the Expiration Date or (ii) complying with the guaranteed delivery procedures described below. If tendered Original Notes are registered in the name of the signer of the Letter of Transmittal and the Exchange Notes to be issued in exchange therefor are to be issued (and any untendered Original Notes are to be reissued) in the name of the registered Holder, the signature of such signer need not be guaranteed. In any other case, the tendered Original Notes must be endorsed or accompanied by written instruments of transfer in form satisfactory to the Company and duly executed by the registered Holder and the signature on the endorsement or instrument of transfer must be guaranteed by a firm (an "Eligible Institution") that is a member of a recognized signature guarantee medallion program within the meaning of Rule 17Ad-15 under the Exchange Act. If the Exchange Notes and/or Original Notes not exchanged are to be delivered to an address other than that of the registered Holder appearing on the note register for the Original Notes, the signature on the Letter of Transmittal must be guaranteed by an Eligible Institution. Any beneficial owner whose Original Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender Original Notes should contact such Holder promptly and instruct such Holder to tender Original Notes on such beneficial owner's behalf. If such beneficial owner wishes to tender such Original Notes himself, such beneficial owner must, prior to completing and executing the Letter of Transmittal and delivering such Original Notes, either make appropriate arrangements to register ownership of the Original Notes in such beneficial owner's name or follow the procedures described in the immediately preceding paragraph. The transfer of record ownership may take considerable time. Book-Entry Transfer. The Exchange Agent will make a request to establish an account with respect to the Original Notes at The Depository Trust Company (the "Book-Entry Transfer Facility") for purposes of the Exchange Offer within two business days after receipt of this Prospectus, and any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of Original Notes by causing the Book- Entry Transfer Facility to transfer such Original Notes into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with the Book-Entry Transfer Facility's procedures for transfer. However, although delivery of Original Notes may be effected through book-entry transfer at the Book-Entry Transfer Facility, the Letter of Transmittal, with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received by the Exchange Agent at the address specified on the back cover page of this Prospectus on or prior to the Expiration Date or the guaranteed delivery procedures described below must be complied with. THE METHOD OF DELIVERY OF ORIGINAL NOTES AND ALL OTHER DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE. Unless an exemption applies under the applicable law and regulations concerning "backup withholding" of federal income tax, the Exchange Agent will be required to withhold, and will withhold, 31% of the gross proceeds otherwise payable to a Holder pursuant to the Exchange Offer if the Holder does not provide his taxpayer identification number (social security number or employer identification number) and certify that such 25 number is correct. Each tendering Holder should complete and sign the main signature form and the Substitute Form W-9 included as part of the Letter of Transmittal, so as to provide the information and certification necessary to avoid backup withholding, unless an applicable exemption exists and is proved in a manner satisfactory to the Company and the Exchange Agent. Guaranteed Delivery Procedures. If a Holder desires to accept the Exchange Offer and time will not permit a Letter of Transmittal or Original Notes to reach the Exchange Agent before the Expiration Date, a tender may be effected if the Exchange Agent has received at its office listed on the back cover hereof on or prior to the Expiration Date a letter, telegram or facsimile transmission from an Eligible Institution setting forth the name and address of the tendering Holder, the names in which the Original Notes are registered and, if possible, the certificate numbers of the Original Notes to be tendered, and stating that the tender is being made thereby and guaranteeing that within five New York Stock Exchange trading days after the date of execution of such letter, telegram or facsimile transmission by the Eligible Institution, the Original Notes, in proper form for transfer, will be delivered by such Eligible Institution together with a properly completed and duly executed Letter of Transmittal (and any other required documents). Unless Original Notes being tendered by the above-described method (or a timely Book- Entry Confirmation) are deposited with the Exchange Agent within the time period set forth above (accompanied or preceded by a properly completed Letter of Transmittal and any other required documents), the Company may, at its option, reject the tender. Copies of a Notice of Guaranteed Delivery which may be used by Eligible Institutions for the purposes described in this paragraph are being delivered with this Prospectus and the related Letter of Transmittal. A tender will be deemed to have been received as of the date when the tendering Holder's properly completed and duly signed Letter of Transmittal accompanied by the Original Notes (or a timely Book-Entry Confirmation) is received by the Exchange Agent. Issuances of Exchange Notes in exchange for Original Notes tendered pursuant to a Notice of Guaranteed Delivery or letter, telegram or facsimile transmission to similar effect (as provided above) by an Eligible Institution will be made only against deposit of the Letter of Transmittal (and any other required documents) and the tendered Original Notes (or a timely Book-Entry Confirmation). All questions as to the validity, form, eligibility (including time of receipt) and acceptance for exchange of any tender of Original Notes will be determined by the Company, whose determination will be final and binding. The Company reserves the absolute right to reject any or all tenders not in proper form or the acceptances for exchange of which may, in the opinion of counsel to the Company, be unlawful. The Company also reserves the absolute right to waive any of the conditions of the Exchange Offer or any defect or irregularities in tenders of any particular Holder whether or not similar defects or irregularities are waived in the case of other Holders. None of the Company, the Exchange Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or shall incur any liability for failure to give any such notification. The Company's interpretation of the terms and conditions of the Exchange Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding. TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL The Letter of Transmittal contains, among other things, the following terms and conditions, which are part of the Exchange Offer. The party tendering Original Notes for exchange (the "Transferor") exchanges, assigns and transfers the Original Notes to the Company and irrevocably constitutes and appoints the Exchange Agent as the Transferor's agent and attorney-in-fact to cause the Original Notes to be assigned, transferred and exchanged. The Transferor represents and warrants that it has full power and authority to tender, exchange, assign and transfer the Original Notes and to acquire Exchange Notes issuable upon the exchange of such tendered Original Notes, and that, when the same are accepted for exchange, the Company will acquire good and unencumbered title to the tendered Original Notes, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The Transferor also warrants that it will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the exchange, assignment and transfer of 26 tendered Original Notes. The Transferor further agrees that acceptance of any tendered Original Notes by the Company and the issuance of Exchange Notes in exchange therefor shall constitute performance in full by the Company of its obligations under the Registration Rights Agreement and that the Company shall have no further obligations or liabilities thereunder (except in certain limited circumstances). All authority conferred by the Transferor will survive the death or incapacity of the Transferor and every obligation of the Transferor shall be binding upon the heirs, legal representatives, successors, assigns, executors and administrators of such Transferor. By tendering Original Notes, the Transferor certifies (a) that it is not an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act, that it is not a broker-dealer that owns Original Notes acquired directly from the Company or an affiliate of the Company, that it is acquiring the Exchange Notes offered hereby in the ordinary course of such Transferor's business and that such Transferor has no arrangement with any person to participate in the distribution of such Exchange Notes or (b) that it is an "affiliate" (as defined) of the Company or of the initial purchasers in the Initial Offering of the Original Notes, and that it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable to it. WITHDRAWAL RIGHTS Original Notes tendered pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. For a withdrawal to be effective, a written or facsimile transmission notice of withdrawal must be timely received by the Exchange Agent at its address set forth on the back cover of this Prospectus. Any such notice of withdrawal must specify the person named in the Letter of Transmittal as having tendered Original Notes to be withdrawn, the certificate numbers of Original Notes to be withdrawn, the principal amount of Original Notes to be withdrawn (which must be an authorized denomination), a statement that such Holder is withdrawing his election to have such Original Notes exchanged, and the name of the registered Holder of such Original Notes, and must be signed by the Holder in the same manner as the original signature on the Letter of Transmittal (including any required signature guarantees) or be accompanied by evidence satisfactory to the Company that the person withdrawing the tender has succeeded to the beneficial ownership of the Original Notes being withdrawn. The Exchange Agent will return the properly withdrawn Original Notes promptly following receipt of notice of withdrawal. All questions as to the validity of notices of withdrawals, including time of receipt, will be determined by the Company, and such determination will be final and binding on all parties. ACCEPTANCE OF ORIGINAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES Upon the terms and subject to the conditions of the Exchange Offer, the acceptance for exchange of Original Notes validly tendered and not withdrawn and the issuance of the Exchange Notes will be made on the Exchange Date. For the purposes of the Exchange Offer, the Company shall be deemed to have accepted for exchange validly tendered Original Notes when, as and if the Company has given written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering Holders of Original Notes for the purposes of receiving Exchange Notes from the Company and causing the Original Notes to be assigned, transferred and exchanged. Upon the terms and subject to the conditions of the Exchange Offer, delivery of Exchange Notes to be issued in exchange for accepted Original Notes will be made by the Exchange Agent promptly after acceptance of the tendered Original Notes. Original Notes not accepted for exchange by the Company will be returned without expense to the tendering Holders (or in the case of Original Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the procedures described above, such non-exchanged Original Notes will be credited to an account maintained with such Book-Entry Transfer Facility) promptly following the Expiration Date or, if the Company terminates the Exchange Offer prior to the Expiration Date, promptly after the Exchange Offer is so terminated. 27 CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other provision of the Exchange Offer, or any extension of the Exchange Offer, the Company will not be required to issue Exchange Notes in respect of any properly tendered Original Notes not previously accepted and may terminate the Exchange Offer (by oral or written notice to the Exchange Agent and by timely public announcement communicated, unless otherwise required by applicable law or regulation, by making a release to the Dow Jones News Service) or, at its option, modify or otherwise amend the Exchange Offer, if (a) there shall be threatened, instituted or pending any action or proceeding before, or any injunction, order or decree shall have been issued by, any court or governmental agency or other governmental regulatory or administrative agency or commission, (i) seeking to restrain or prohibit the making or consummation of the Exchange Offer or any other transaction contemplated by the Exchange Offer, (ii) assessing or seeking any damages as a result thereof, or (iii) resulting in a material delay in the ability of the Company to accept for exchange or exchange some or all of the Original Notes pursuant to the Exchange Offer; (b) any statute, rule, regulation, order or injunction shall be sought, proposed, introduced, enacted, promulgated or deemed applicable to the Exchange Offer or any of the transactions contemplated by the Exchange Offer by any government or governmental authority, domestic or foreign, or any action shall have been taken, proposed or threatened, by any government, governmental authority, agency or court, domestic or foreign, that in the sole judgment of the Company might directly or indirectly result in any of the consequences referred to in clauses (a)(i) or (ii) above or, in the sole judgment of the Company, might result in the Holders of Exchange Notes having obligations with respect to resales and transfers of Exchange Notes which are greater than those described in the interpretations of the Commission referred to on the cover page of this Prospectus, or would otherwise make it inadvisable to proceed with the Exchange Offer; or (c) a material adverse change shall have occurred in the business, condition (financial or otherwise), operations, or prospects of the Company. The foregoing conditions are for the sole benefit of the Company and may be asserted by it with respect to all or any portion of the Exchange Offer regardless of the circumstances (including any action or inaction by the Company) giving rise to such condition or may be waived by the Company in whole or in part at any time or from time to time in its sole discretion. The failure by the Company at any time to exercise any of the foregoing rights will not be deemed a waiver of any such right, and each right will be deemed an ongoing right which may be asserted at any time or from time to time. In addition, the Company has reserved the right, notwithstanding the satisfaction of each of the foregoing conditions, to terminate or amend the Exchange Offer. Any determination by the Company concerning the fulfillment or non- fulfillment of any conditions will be final and binding upon all parties. In addition, the Company will not accept for exchange any Original Notes tendered and no Exchange Notes will be issued in exchange for any such Original Notes, if at such time any stop order shall be threatened or in effect with respect to the Registration Statement of which this Prospectus constitutes a part or qualification of the Indenture under the Trust Indenture Act of 1939 (the "Trust Indenture Act"). EXCHANGE AGENT U.S. Bank Trust National Association (formerly First Trust National Association) has been appointed as the Exchange Agent for the Exchange Offer. Letters of Transmittal must be addressed to the Exchange Agent at its address set forth on the back cover page of this Prospectus. Delivery to an address other than as set forth herein, or transmissions of instructions via a facsimile or telex number other than the ones set forth herein, will not constitute a valid delivery. SOLICITATION OF TENDERS; EXPENSES The Company has have not retained any dealer-manager or similar agent in connection with the Exchange Offer and will not make any payments to brokers, dealers or others for soliciting acceptances of the Exchange Offer. The Company will, however, pay the Exchange Agent reasonable and customary fees for its services and 28 will reimburse it for reasonable out-of-pocket expenses in connection therewith. The Company will also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding tenders for their customers. The expenses to be incurred in connection with the Exchange Offer, including the fees and expenses of the Exchange Agent and printing, accounting and legal fees, will be paid by the Company and are estimated at approximately $500,000. No person has been authorized to give any information or to make any representations in connection with the Exchange Offer other than those contained in this Prospectus. If given or made, such information or representations should not be relied upon as having been authorized by the Company. Neither the delivery of this Prospectus nor any exchange made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the respective dates as of which information is given herein. The Exchange Offer is not being made to (nor will tenders be accepted from or on behalf of) Holders of Original Notes in any jurisdiction in which the making of the Exchange Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. However, the Company may, at their discretion, take such action as it may deem necessary to make the Exchange Offer in any such jurisdiction and extend the Exchange Offer to Holders of Original Notes in such jurisdiction. In any jurisdiction the securities laws or blue sky laws of which require the Exchange Offer to be made by a licensed broker or dealer, the Exchange Offer is being made on behalf of the Company by one or more registered brokers or dealers which are licensed under the laws of such jurisdiction. APPRAISAL RIGHTS HOLDERS OF ORIGINAL NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS IN CONNECTION WITH THE EXCHANGE OFFER. FEDERAL INCOME TAX CONSEQUENCES The exchange of Original Notes for Exchange Notes by Holders will not be a taxable exchange for federal income tax purposes, and Holders should not recognize any taxable gain or loss or any interest income as a result of such exchange. OTHER Participation in the Exchange Offer is voluntary and Holders should carefully consider whether to accept. Holders of the Original Notes are urged to consult their financial and tax advisors in making their own decisions on what action to take. As a result of the making of, and upon acceptance for exchange of all validly tendered Original Notes pursuant to the terms of this Exchange Offer, the Company will have fulfilled a covenant contained in the terms of the Original Notes and the Registration Rights Agreement. Holders of the Original Notes who do not tender their certificates in the Exchange Offer will continue to hold such certificates and will be entitled to all the rights, and limitations applicable thereto, under the Indenture, except for any such rights under the Registration Rights Agreement, which by their terms terminate or cease to have further effect as a result of the making of this Exchange Offer. See "Description of the Notes." All untendered Original Notes will continue to be subject to the restriction on transfer set forth in the Indenture. To the extent that Original Notes are tendered and accepted in the Exchange Offer, the trading market, if any, for the Original Notes could be adversely affected. See "Risk Factors--Consequences of Failure to Exchange." The Company may in the future seek to acquire untendered Original Notes in open market or privately negotiated transactions, through subsequent exchange offers or otherwise. The Company has no present plan to acquire any Original Notes which are not tendered in the Exchange Offer. 29 CAPITALIZATION The following table sets forth (i) the historical capitalization of the Company as of December 31, 1997, (ii) the pro forma capitalization of the Company, adjusted to give effect to the 4-Sight Acquisition and (iii) the pro forma capitalization of the Company, as further adjusted to give effect to the Initial Offering as if it had occurred on December 31, 1997 and the application of the estimated net proceeds therefrom as described under "Use of Proceeds," and (iv) the historical capitalization of the Company as of March 31, 1998. The 4-Sight Acquisition was consummated on March 13, 1998. The table, including the notes thereto, should be read in conjunction with the Company's and 4-Sight's respective consolidated financial statements included elsewhere in this Offering Memorandum, "Pro Forma Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." See the footnotes included in "Pro Forma Financial Data" for an explanation of adjustments made to arrive at the pro forma amounts.
DECEMBER 31, 1997 MARCH 31, 1998 --------------------------------- -------------- ACTUAL PRO PRO FORMA WAM!NET FORMA (1) AS ADJUSTED(2) ACTUAL ------- --------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Cash and cash equivalents.............. $ 274 $ 4,527 $ 84,146(3) 66,760 ======= ======= ======== ======== Current portion of long- term debt................ $ 3,129 $ 3,367 $ 3,129 3,541 ------- ------- -------- -------- Long-term debt: 13 1/4% Senior Discount Notes.................. -- -- $114,944(3)(4) 110,686 WorldCom Subordinated Note................... 16,784 16,784 16,784(5) 17,115(5) WorldCom Convertible Note................... 5,000 5,000 5,000(5) 5,253(5) Revolving Credit Facility............... 14,431 14,525 -- -- Equipment financing..... 6,434 6,434 6,434 6,883 ------- ------- -------- -------- Total long-term debt, net of current portion...... 42,649 42,743 143,162 139,937 ------- ------- -------- -------- Total debt.......... 45,778 46,110 146,291 143,478 ------- ------- -------- -------- Redeemable 7% Preferred Stock, Class A, $10 par value, 100,000 authorized, issued, and outstanding(6)....... 1,000 1,000 1,000 1,000 ------- ------- -------- -------- Stockholders' equity (def- icit)(4):................ (30,671) (10,671) (4,983) (15,316) ------- ------- -------- -------- Total capitalization..... $16,107 $36,439 $142,308 $129,162 ======= ======= ======== ========
- -------- (1) Gives effect to the 4-Sight Acquisition as if it had occurred on December 31, 1997. See "Pro Forma Financial Data." (2) Adjusts the pro forma information to give effect to the Initial Offering and the application of the estimated net proceeds therefrom as described under "Use of Proceeds." (3) Reflects the gross proceeds of $125,001, net of expenses of $5,750 incurred in connection with the offering of the Notes, offset by the repayment of $18,800 of the line of credit and the repayment of the 4- Sight mortgage of $332, and the payment of $20,000 to shareholders of 4- Sight and $500 for related expenses in connection with the acquisition of 4-Sight. (4) The estimated value of warrants issued to debtholders and of options issued to consultants is reflected as both a debt discount and an element of additional paid-in capital. (5) Interest is payable semiannually in kind. WorldCom has agreed to defer all cash payments on such indebtedness until a date that is 180 days following the Stated Maturity of the Notes. See "Description of Certain Indebtedness." (6) Dividends are payable quarterly in kind. WorldCom has agreed that no cash dividends or distributions will be payable by the Company on the Class A Preferred Stock owned by WorldCom, and the Class A Preferred Stock owned by WorldCom will not be redeemed by the Company for cash, until a date that is 180 days following the Stated Maturity of the Notes. WorldCom is the sole holder of shares of Class A Preferred Stock. See "Description of Certain Indebtedness." 30 SELECTED FINANCIAL DATA The following tables set forth (i) selected historical consolidated financial data for the Company and its subsidiaries for each of the years in the three year period ended December 31, 1997, and for the three month periods ended March 31, 1997 and 1998 and (ii) selected historical consolidated financial data for 4-Sight and its subsidiaries for the year ended August 31, 1996, the month ended September 30, 1996, the year ended September 30, 1997, and the twelve months ended December 31, 1997. The 4-Sight Acquisition occurred on March 13, 1998 and the operating results of 4-Sight are included in the Company's operating results from that date through March 31, 1998. The Company's selected historical consolidated financial data as of and for the three months ended March 31, 1997 and 1998 and 4-Sight's selected historical consolidated financial data as of and for the twelve months ended December 31, 1997 have been derived from the respective companies' unaudited financial statements and have been prepared on the same basis as the historical information derived from audited financial statements. In the opinion of the management of the Company and the management of 4-Sight, the unaudited financial statements of the respective companies, from which such data have been derived, contain all adjustments, consisting only of normal recurring accruals, necessary for the fair presentation of the results for and as of the end of such periods. The historical data with respect to the three months ended March 31, 1998 should not be regarded as necessarily indicative of the results that may be expected for the entire year. The Company's development and expansion activities during the periods presented below significantly affect the period-to-period comparability of the historical data presented for the Company. The following information is qualified in its entirety by, and should be read in conjunction with, the consolidated financial statements and the notes thereto of the Company and 4-Sight and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
WAM!NET INC. --------------------------------------------- THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, -------------------------- ----------------- 1995 1996 1997 1997 1998 ------- ------- -------- ------- -------- (UNAUDITED) (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales...................... $ 180 $ 279 $ 1,555 $ 122 $ 1,880 Operating expenses............. 1,437 7,036 31,037 4,205 25,412 Interest income (expense), net........................... (20) (839) (4,154) (628) (3,151) Income (loss) before income taxes......................... (1,277) (7,596) (33,636) (4,711) (26,683) Net income (loss).............. (1,277) (7,596) (33,636) (4,711) (26,683) OTHER DATA: EBITDA(1)...................... $(1,226) $(6,310) $(26,814) $(3,796) $(21,611) Depreciation and amortization.. 31 447 2,668 287 1,921 Capital expenditures........... 657 4,244 16,599 3,904 10,143 Net cash used in operating activities.................... (747) (6,218) (23,917) (3,345) (9,743) Net cash used in investing activities.................... (657) (5,244) (15,599) (2,904) (30,396) Net cash provided by (used in) financing activities.......... 2,732 24,578 25,346 1,096 102,687 Ratio of earnings to fixed charges(2).................... -- -- -- -- -- BALANCE SHEET DATA (END OF PERIOD):...................... Cash and cash equivalents...... $ 1,328 $15,444 $ 274 $ 7,099 $ 66,760 Total assets................... 2,075 20,070 21,086 15,390 137,770 Total debt(3).................. 1,900 20,473 45,778 20,049 143,478 Shareholders' deficit(4)....... (371) (2,683) (30,671) (6,412) (15,316)
Footnotes on following page. 31
4-SIGHT LIMITED -------------------------------------------------------------- TWELVE MONTHS YEAR ENDED ENDED YEAR ENDED MONTH ENDED SEPTEMBER 30, DECEMBER 31, AUGUST 31, 1996 SEPTEMBER 30, 1996 1997(5) 1997(6) --------------- ------------------ ------------- ------------- (UNAUDITED) (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales............... $11,446 $1,065 $18,264 $19,278 Operating expenses...... 9,380 1,124 15,817 16,031 Interest income (expense), net......... 18 (9) 57 140 Income (loss) before income taxes........... 2,084 (68) 2,504 3,387 Net income (loss)....... 1,478 (61) 1,588 2,109 OTHER DATA: EBITDA(1)............... $ 2,372 $ (20) $ 3,050 $ 3,874 Depreciation and amortization........... 306 39 603 627 Capital expenditures.... 465 87 545 636 Net cash provided by (used in) operating activities............. 380 (759) 707 1,626 Net cash used in investing activities... (327) (87) (540) (633) Net cash provided by (used in) financing activities............. (249) (5) 3,380 3,128 Ratio of earnings to fixed charges(2)....... 39.6x -- 42.7x 100.6x BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents............ $ 1,290 $ 439 $ 3,986 $ 4,253 Total assets............ 6,927 6,095 10,473 11,382 Total debt(3)........... 225 267 206 332 Redeemable preferred stock.................. -- -- 5,157 5,256 Shareholders' equity.... 2,565 2,531 2,554 3,165
- -------- (1) EBITDA represents earnings (loss) from operations before taking into consideration net interest expense, income tax expense, depreciation expense and amortization expense. The Company has included information concerning EBITDA here as it is used by certain investors as a measure of a company's ability to service its debt. EBITDA should not be considered as an alternative to net income or any other measure of performance or liquidity as determined in accordance with generally accepted accounting principles or as an indicator of the Company's overall financial performance. (2) The ratio of earnings to fixed charges is calculated by dividing (i) net income (loss) before taxes plus fixed charges by (ii) fixed charges. Fixed charges consist of interest incurred and the portion of rent expense which is deemed representative of interest. The Company's earnings were insufficient to cover fixed charges by $1,242, $6,653 and $29,180 for the years ended December 31, 1995, 1996 and 1997, and $3,907 and $23,184 for the three month periods ended March 31, 1997 and 1998, respectively. (3) Total debt includes long-term debt, current portion of long-term debt and obligations under capitalized leases, net of the unamortized value of warrants ($3,679) issued to debtholders. (4) The estimated value of warrants issued to debtholders and of options issued to consultants is reflected as both a debt discount and an element of paid in capital. (5) 4-Sight changed its fiscal year end to September 30 during 1997. (6) 4-Sight's fiscal year ends on September 30. The financial data of 4-Sight for the twelve months ended December 31, 1997 is presented for comparative purposes. 32 PRO FORMA FINANCIAL DATA The following unaudited pro forma financial data (the "Pro Forma Financial Data") of the Company has been derived from and should be read in conjunction with (i) the audited consolidated financial statements of the Company and the related notes thereto, included elsewhere herein, which statements have been audited by Ernst & Young LLP, independent auditors, whose report is included elsewhere herein, (ii) the audited consolidated financial statements as of September 30, 1997 and for the thirteen month period then ended of 4-Sight and the related notes thereto included elsewhere herein, which statements have been audited by Ernst & Young, Chartered Accountants, independent auditors, whose report is included elsewhere herein and (iii) the unaudited consolidated financial statements as of December 31, 1997 and for the twelve month period then ended of 4-Sight. The Pro Forma Financial Data has been prepared to illustrate the effects of the 4-Sight Acquisition and the Initial Offering, including the application of the net proceeds therefrom. This Pro Forma Financial Data does not necessarily present the financial position or results of operations as they would have been if the companies involved had constituted one entity for the period presented. See "Offering Memorandum Summary--Recent Developments" and "Use of Proceeds." The pro forma balance sheet data as of December 31, 1997 gives effect to the 4-Sight Acquisition and the Initial Offering as if they had occurred on December 31, 1997. The pro forma statement of operations data for the twelve month period ended December 31, 1997 gives effect to the 4-Sight Acquisition and the Initial Offering as if they had occurred on January 1, 1997. The Pro Forma Financial Data is not necessarily indicative of either future results of operations or the results that might have occurred if the foregoing transactions had been consummated on the indicated date. The acquisition of 4-Sight was accounted for using the purchase method. After the acquisition, the total purchase price of the acquisition was allocated to the assets and liabilities based upon the estimated fair value of the assets and liabilities acquired. The actual purchase accounting adjustments were not materially different from the pro forma adjustments. 33 PRO FORMA BALANCE SHEET (UNAUDITED)
WAM!NET 4-SIGHT PRO FORMA PRO FORMA DECEMBER 31, 1997 DECEMBER 31, 1997 ADJUSTMENTS COMBINED ----------------- ----------------- ----------- --------- (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equiva- lents................ $ 274 $ 4,253 $125,001 (1) $ 84,146 (19,132)(2) (20,500)(3) (5,750)(4) Accounts receivable... 459 3,179 -- 3,638 Inventories........... -- 1,313 -- 1,313 Prepaid expenses and other current assets............... 554 414 -- 968 -------- ------- -------- --------- Total current assets............. 1,287 9,159 79,619 90,065 Property and equipment, net....... 19,320 1,684 -- 21,004 Deferred taxes........ -- 54 -- 54 Goodwill.............. 479 485 32,079 (5) 33,043 Deferred financing costs................ -- -- 5,750 (4) 5,750 -------- ------- -------- --------- Total assets........ $ 21,086 $11,382 $117,448 $149,916 ======== ======= ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued expenses..... $ 4,979 $ 1,730 $ -- $ 6,709 Income taxes payable.. -- 899 -- 899 Current portion of long-term debt and obligations under capitalized leases... 3,129 238 (238)(2) 3,129 -------- ------- -------- --------- Total current liabilities........ 8,108 2,867 (238) 10,737 Long-term debt, less current maturities... 42,649 94 100,419 (1)(6) 143,162 -------- ------- -------- --------- Total liabilities... 50,757 2,961 100,181 153,899 Redeemable preferred stock................ 1,000 5,256 (5,256)(7) 1,000 Shareholders' equity (deficit)............ (30,671) 3,165 20,000 (3) (4,983) (4,369)(8) (3,165)(7) 10,057 (6) -------- ------- -------- --------- Total liabilities and shareholders' equity (deficit)... $ 21,086 $11,382 $117,448 $ 149,916 ======== ======= ======== =========
See Notes to Unaudited Pro Forma Financial Statements. 34 PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
4-SIGHT WAM!NET TWELVE MONTHS YEAR ENDED ENDED PRO FORMA PRO FORMA DECEMBER 31, 1997 DECEMBER 31, 1997 ADJUSTMENTS COMBINED ----------------- ----------------- ----------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Gross Revenues........ $ 1,628 $ 19,278 $ -- $ 20,906 Less rebates.......... (150) -- -- (150) --------- --------- -------- --------- Net revenues.......... 1,478 19,278 -- 20,756 Other service fees.... 77 -- -- 77 --------- --------- -------- --------- Total revenues...... 1,555 19,278 -- 20,833 Cost of revenues........ -- 5,013 -- 5,013 Operating expenses: Network communication fees................. 7,364 -- -- 7,364 Network operations.... 7,478 -- -- 7,478 Sales and marketing... 9,207 5,989 -- 15,196 General and administrative....... 4,320 5,029 6,415 (9) 15,764 Depreciation and amortization......... 2,668 -- -- 2,668 --------- --------- -------- --------- Total operating ex- penses............. 31,037 11,018 6,415 48,470 --------- --------- -------- --------- (Loss) income from oper- ations................. (29,482) 3,247 (6,415) (32,650) Other income (expenses): Interest income....... 202 168 -- 370 Interest (expense).... (4,356) (28) (22,814)(8) (27,198) --------- --------- -------- --------- (Loss) income before income taxes........... (33,636) 3,387 (29,229) (59,478) Income taxes............ -- 1,278 -- 1,278 --------- --------- -------- --------- (Loss) income before preferred stock dividend............... (33,636) 2,109 (29,229) (60,756) Preferred stock dividend............... (70) (-- ) (-- ) (70) --------- --------- -------- --------- (Loss) income related to common shareholders.... $ (33,706) $ 2,109 $(29,229) $ (60,826) ========= ========= ======== ========= Net income (loss) per common share........... $ (5.19) $ .84 -- $ (6.76) ========= ========= ======== ========= Weighted average number of common shares outstanding............ 6,496,345 2,500,000 -- 8,996,345 ========= ========= ======== =========
See Notes to Unaudited Pro Forma Financial Statements. 35 PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
WAM!NET 4-SIGHT FOR THE THREE MONTHS PERIOD FROM ENDED JANUARY 1, 1998 PRO FORMA PRO FORMA MARCH 31, 1998 TO MARCH 12, 1998 ADJUSTMENTS COMBINED -------------- ----------------- ----------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Gross Revenues........ $ 1,320 $4,305 $ -- $ 5,625 Less rebates.......... (271) -- -- (271) --------- ------ ------- --------- Net revenues.......... 1,049 4,305 -- 5,354 Other service fees.... 9 -- -- 9 --------- ------ ------- --------- Total revenues...... 1,058 4,305 -- 5,363 Cost of revenues........ -- 1,364 -- 1,364 Operating expenses: Network communication fees................. 3,152 -- -- 3,152 Network operations.... 3,259 -- -- 3,254 Sales and marketing... 2,352 -- -- 2,352 General and administrative....... 13,947 2,670 -- 16,617 Depreciation and amortization......... 1,867 157 1,296 (10) 3,320 --------- ------ ------- --------- Total operating ex- penses............. 24,577 2,827 1,296 28,700 --------- ------ ------- --------- (Loss) income from oper- ations................. (23,519) 114 (1,296) (24,701) Other income (expenses): Interest income....... 277 74 -- 351 Interest (expense).... (3,417) (5) (2,964)(11) (6,386) --------- ------ ------- --------- (Loss) income before income taxes........... (26,659) 183 (4,260) (30,736) Income taxes............ -- (231) -- (231) --------- ------ ------- --------- (Loss) income before preferred stock dividend............... (26,659) (48) (4,260) (30,967) Preferred stock dividend............... (18) -- -- (18) --------- ------ ------- --------- (Loss) income related to common shareholders.... $ (26,677) $ (48) $(4,260) $ (30,985) ========= ====== ======= ========= Net income (loss) per common share........... $ (3.65) $ (4.24) ========= ========= Weighted average number of common shares outstanding............ 7,305,734 7,305,734 ========= =========
See Notes to Pro Forma Financial Statements. 36 WAM!NET INC. NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (1) Reflects the gross proceeds of $125,001, net of expenses of $5,750 incurred and the value ($10,057) of the Warrants to purchase 1,257,436 shares of Common Stock at an exercise price of $.01 per share issued in connection with the Original Notes, offset by the repayment of $18,800 of the line of credit and the repayment of the 4-Sight mortgage of $332, and the payment of $20,000 to shareholders of 4-Sight and $500 for related expenses in connection with the 4-Sight Acquisition................................................. $125,001 ======== (2) Repayment of debt Total gross amount--WAM!NET................................. 18,800 --4-Sight................................. 94 --Current portion--4-Sight................ 238 -------- 19,132 Unamortized value of Class A warrants....................... (4,369) -------- $ 14,763 ======== (3) 4-Sight Acquisition Cash payment to 4-Sight shareholders and related acquisition expenses....................................... $ 20,500 ======== Represents the issuance of 2,500,000 shares of the Company's common stock related to the 4-Sight acquisition................................................ $ 5 Additional paid-in capital.................................. 19,995 -------- $ 20,000 ======== (4) Estimated expenses of the Offering.......................... $ 5,750 ======== (5) Reflects the Company's preliminary estimate of the allocation of the purchase price to the fair value of the net assets acquired. The excess of the purchase price over the fair market value of net assets acquired is $32,079 and is being amortized over a five year period. The annual amortization is $6,511...................................... $ 32,079 ======== (6) The estimated value of the Warrants is reflected as both a debt discount and an element of additional paid-in capital.. $ 10,057 ======== (7) Elimination of 4-Sight's historical equity in accordance with the purchase method of accounting Redeemable preferred shares................................. $ 5,256 Common stock................................................ 903 Retained earnings........................................... 2,262 -------- $ 8,421 -------- (8) Represents the incremental interest expense to be incurred by the Company related to the Notes offered hereby plus amortization of deferred financing costs, offset by interest expense related to the repayment of the Line of Credit and the repayment of the 4-Sight mortgage as follows: Write off of unamortized portion of value assigned to Class A warrants................................................. $ 4,369 Interest on Notes offered hereby........................... 17,111 Amortization of value of Warrants.......................... 1,049 Amortization of deferred financing costs................... 600 Interest on Line of Credit--principal to be paid upon completion of the Offering................................. (315) -------- Incremental interest expenses.............................. $ 22,814 ======== (9) Additional amortization expense with respect to intangible assets purchased in the 4-Sight Acquisition using the straight line method over a period of 5 years for the year ended December 31, 1997..................................... $ 6,415 ======== (10) Additional amortization expense with respect to intangible assets purchased in the 4-Sight Acquisition using the straight line method over a period of five years for the three month period ended March 31, 1998..................... $ 1,296 ======== (11) Represents the incremental interest expense to be incurred by the Company related to the Initial Offering of the Notes for the quarter ended March 31, 1998........................ $ 2,964 ========
37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is based on the historical and pro forma results of the Company and should be read in conjunction with the Company's Financial Statements and "Pro Forma Financial Data" included herein. Certain statements set forth below constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. See "Risk Factors--Forward-Looking Statements." OVERVIEW The Company was organized in September 1994 and commenced operations in March 1995. From March 1995 through February 1996, the Company was engaged primarily in the design and development of the WAM!NET Network and the WAM!NET Service. The Company announced the commercial release of the WAM!NET Service in February 1996 at a major Graphic Arts industry trade show. Through March 31, 1998, approximately 830 customers had contracted for the WAM!NET Service at a total of 1,370 customer sites. As of that date, the WAM!NET Service had been installed at 816 customer sites, with the balance of the contracted sites expected to be installed during the first half of 1998. On March 13, 1998, the Company consummated the purchase of 4-Sight. 4-Sight develops and distributes ISDN data transmission software and related products and applications targeted to the Graphic Arts industry, with particular emphasis on European, Asian and North American markets. At December 31, 1997, 4-Sight's customer base exceeded 30,000 locations, including 3,000 sites in the United States. The Company expects that the 4-Sight Acquisition will enable the Company to achieve broader market coverage in the Graphic Arts market by combining 4-Sight's international presence and penetration of the lower volume user market with the Company's domestic presence and penetration of the higher volume user market. Due to costs associated with the design, development, installation and operation of the WAM!NET Network and its related applications, the Company has operated at a loss since inception and expects to incur substantial operating losses for the years ending December 31, 1998 and 1999. The Company has incurred an accumulated deficit of approximately $69,192 million through March 31, 1998. Revenue. The Company's revenue is derived primarily from WAM!NET Service contracts which are usually annual, automatically renewable service contracts with a minimum monthly fee and additional charges for usage exceeding the monthly minimum. The Company offers the WAM!NET Service at scaled minimum usage fees, generally ranging from $250 per month to $3,000 per month. Service installation typically lags contract signing by approximately 90 days due to the time required to obtain telephone service installation from local telephone companies. The Company begins to earn gross revenue following installation of service at a customer's premise and the expiration of a promotional period, if any, extended to such customer. The Company also incurs service rebates that offset the gross revenue generated by the Company. Free trial periods under the Company's various promotional programs have ranged from 60 days to six months and have been extended to 47.9% of the Company's customer base to date. As a result, the Company's generation of net revenue from any customer may lag contract signing by a period of three to nine months. The Company's experience with promotional programs has been favorable to date, with approximately 97% of customers continuing to subscribe to the WAM!NET Service following expiration of the promotional period extended to them. The Company expects the use of promotional programs in the Graphic Arts industry to decline with increasing penetration of the market, but the Company will likely use similar promotional programs to introduce the WAM!NET Service to its other targeted industries. The Company also plans to continue to develop new, Industry Smart applications to increase the volume of files transferred over the network. 38 Revenue is primarily driven by the number of installed customer locations, the length of time a customer has been using the service, the number of work flow partners with whom a customer exchanges data and the size of the files exchanged. Network Communications Fees. Network communications fees include both the costs of the high bandwidth carrier services interconnecting the Company's national infrastructure of NOCs and Distribution Hubs and the costs of local telephone circuits connecting NADs to the nearest Distribution Hub. Local telephone circuit ("last mile") connections account for approximately 60% of these charges, with significant differences between urban and rural connection costs. National carrier service, provided primarily by WorldCom, accounts for most of the balance of these charges. Network communication fees are generally a fixed monthly cost per circuit. The excess of these fees over revenue represents excess capacity costs which the Company expects will decline with increasing utilization of the WAM!NET Network. The Company actively seeks to obtain and deploy technologies that will reduce the costs of last mile connections, including wireless technologies and remote dial-up capabilities. The Company also intends to use its network management tools to optimize existing and planned network capacity as volume increases and traffic patterns begin to emerge. The Company plans to consider new pricing for its services which take into account the significant cost differential between urban and rural last mile connections. The Company also believes it may benefit from growing competition among telephony and communications providers for the provision of last mile connectivity. Network Operations Expense. Network operations expense represents costs directly associated with developing, maintaining, managing and servicing the WAM!NET Network. Such costs include direct labor, vendor service fees, point- of-presence charges and research and development charges which are often incurred in advance of receiving revenue. The Company's currently installed NOCs, which account for the substantial majority of direct labor and network operating costs, are capable of providing for and managing the Company's current and planned North American operations. Costs associated with the development of WAM!BASE, WAM!PROOF and other network applications are also contained in network operations expense and are incurred in advance of revenue receipt. The Company expects that network operations costs will increase as the WAM!NET Network expands; however, the cost of network operations as a percentage of revenue is expected to decline. Sales and Marketing Expense. The Company's sales and marketing efforts are intended to create awareness of the WAM!NET Service, communicate its potential for work flow enhancement, demonstrate its reliability and establish strong brand recognition. As a result, the Company aggressively markets the WAM!NET Service through a combination of trade journal advertising, trade show attendance, promotional programs, direct field sales, tele-sales, cooperative sales presentations and active participation in industry sponsored seminars and publications. The Company expects to continue to incur significant sales and marketing expenses to obtain increased penetration of the Graphic Arts industry, to generate increased traffic among customers and to market the WAM!NET Service to other targeted industries. General and Administrative Expense. The Company's general and administrative expense includes administrative salaries, related overhead and professional service fees. These costs reflect expenditures related to the rapid growth and expansion of the Company's administrative infrastructure necessary to manage its expanding operations, costs incurred in 1997 for relocation to its new administrative and network operations facility and professional service fees for financing activities, contract negotiations and acquisitions. The Company expects to continue to incur substantial general and administrative expense as the Company deploys the WAM!NET Service internationally. Depreciation and Amortization. To facilitate entry into its target markets, the Company furnishes its customers with all the hardware and software necessary for them to use the WAM!NET Service on a turn-key, pay-by-use basis. As a result, the Company retains ownership of the NADs it furnishes to customers for their use of the WAM!NET Service. Depreciation and amortization expense includes depreciation of NADs, Distribution Hubs and equipment located in the NOCs. The Company's network infrastructure is organized to use the most expensive equipment in the NOCs, less expensive equipment for Distribution Hubs and the least 39 expensive equipment in the NADs. The Company anticipates substantial capital investments for additional Distribution Hubs to be located in North America and internationally, WAM!BASE storage facilities to be located in the existing NOCs and NADs to be located at customer premises. As a result, the Company anticipates that depreciation and amortization expense will continue to increase in future periods commensurate with future equipment purchases. RESULTS OF OPERATIONS THREE MONTH PERIOD ENDED MARCH 31, 1998 COMPARED WITH THREE MONTH PERIOD ENDED MARCH 31, 1997 Revenue Revenue from the WAM!NET Service for the three month period ended March 31, 1998 was $1,320,026, compared to $116,678 for the three month period ended March 31, 1997, an increase of $1,203,348, or 1,031%. This increase was due to a 486.3% increase in the number of subscribers to the WAM!NET Service from approximately 153 installed customer sites on March 31, 1997 to approximately 744 installed customer sites on March 31, 1998. At March 31, 1998, the Company had contracts to install NAD's at 625 customer sites awaiting installation of telephony services. Service rebates for the three month period ended March 31, 1998 were $271,000, or 20.5% of revenue. Service rebates for the three month period ended March 31, 1997 were $0. Revenue from software and hardware sales for the three month period ended March 31, 1998 was $822,000, compared to $0 for the three month period ended March 31, 1997. Revenues from software and hardware sales are a result of the Company's acquisition of 4-Sight, which was consummated as of March 13, 1998. Other service fee revenue for the three month period ended March 31, 1998 was $9,000, compared to $5,108 for the three month period ending March 31, 1997, an increase of $3,892, or 76.2%. Other service fees revenue is primarily derived from ancillary transactions with existing WAM!NET Service customers which includes consulting services and hardware sales. The increase reflects a minor increase in customer consulting hours during the three month period ended March 31, 1998. Operating Expenses Network communications fees for the three month period ended March 31, 1998 were $3,151,571, compared to $862,369 for the three month period ended March 31, 1997, an increase of $2,289,202 or 376.7%. Network operations expense for the three month period ended March 31, 1998 was $3,259,126, compared to $848,834 for the three month period ended March 31, 1997, an increase of $2,410,292 or 283.9%. These increases were primarily due to the 386.3% increase in customers that subscribed to the WAM!NET Service during the three month period ending March 31, 1998. Cost of software and hardware sales for the three month period ended March 31, 1998 was $261,000, compared to $0 for the three month period ended March 31, 1997. Costs of software and hardware sales are a result of the Company's acquisition of 4-Sight, which was consummated as of March 13, 1998. Sales and marketing expenses for the three month period ended March 31, 1998 were $2,352,529, compared to $1,229,345 for the three month period ended March 31, 1997, an increase of $1,123,184, or 91.4%. This increase primarily resulted from the costs associated with building the Company's direct sales force and marketing department, and higher outside advertising agency and trade show expenditures. General and administrative expense for the three month period ended March 31, 1998 was $14,466,910, compared to $977,318 for the three month period ended March 31, 1997, an increase of $13,489,592, or 1,380.3%. This increase is primarily due to a $11,423,502 non-cash charge relating to officer compensation expense arising from the Company's election to accelerate the vesting period for options granted to selected officers. The additional increase in general and administrative expenses of $2,066,090 during the three month 40 period ended March 31, 1998 as compared to the three month period ending March 31, 1997 was due to increased operational support requirements due to the rapid expansion of the Company's services and corporate facilities. Depreciation and amortization for the three month period ended March 31, 1998 was $1,921,248, compared to $287,302 for the three month period ended March 31, 1997, an increase of $1,633,946, or 568.72%. As a percentage of gross WAM!NET Service revenue, depreciation and amortization was 246.2% in 1997, compared to 68.7% for the same period in 1998. This increase is primarily due to an increase in the installed customer premise and communications backbone equipment as a result of the increase in the number of customers that are being provided with the WAM!NET Service. Interest expense for the three month period ended March 31, 1998 was $3,444,282, compared to $778,297 for the three month period ended March 31, 1997, an increase of $2,665,985, or 342.5%. The increase was primarily due to the Company's financing of its 1997 and 1998 operations through the issuance of various debt instruments including $24 million of long-term subordinated notes to WorldCom, $9.6 million of equipment financing and $208.5 million of Notes issued in the Initial Offering. Income Taxes For the three months ended March 31, 1998, the Company experienced net operating losses of $26,682,969 and paid no income taxes. These losses are available to offset future taxable income through the year 2013 and are subject to the limitations of Section 382 of the Internal Revenue Code of 1986, as amended. These limitations may result in expiration of net operating loss carryforwards before they can be utilized. YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996 Revenue Revenue for the year ended December 31, 1997 was $1,627,590 compared to $110,424 for the year ended December 31, 1996, an increase of $1,517,166, or 1,373.9%. This was primarily due to a 1,375.8% increase in the number of subscribers to the WAM!NET Service from approximately 33 installed customer sites on December 31, 1996 to approximately 487 installed customer sites on December 31, 1997. At December 31, 1997, the Company had contracts to install NADs at 578 customer sites awaiting installation of telephony services. Service rebates for the year ended December 31, 1997 were $150,400, or 9.2% of revenue. Service rebates for the year ended December 31, 1996 were $0. Other service fees revenue for the year ended December 31, 1997 was $77,748, compared to $168,290 for the year ended December 31, 1996, a decrease of $90,542, or 53.8%. Other service fees revenue is primarily derived from minor transactions with currently existing WAM!NET Service customers which includes consulting services and hardware sales. The decrease was primarily due to the expiration of a contractual consulting relationship that the Company had in place with a customer during 1996. Operating Expenses Network communications fees for the year ended December 31, 1997 were $7,363,667, compared to $816,403 for the year ended December 31, 1996, an increase of $6,547,264, or 802.0%. Network operations expense for the year ended December 31, 1997 was $7,477,753, compared to $1,108,807 for the year ended December 31, 1996, an increase of $6,368,946, or 574.4%. These increases were primarily due to the 1375.8% 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 primarily resulted from costs associated with building the Company's direct sales force and marketing department, and higher outside advertising agency and trade show expenditures. 41 General and administrative expense for the year ended December 31, 1997 was $4,320,128, compared to $2,609,879 for the year ended December 31, 1996, an increase of $1,710,249, or 65.5%. General and administrative expense increased during 1997 as operational support requirements intensified due to the rapid expansion of the Company's services and corporate facilities. Depreciation and amortization for the year ended December 31, 1997 was $2,668,177, compared to $447,233 for the year ended December 31, 1996, an increase of $2,220,944, or 496.6%. As a percentage of total revenue, depreciation and amortization was 171.6% in 1997 compared to 160.5% in 1996. This increase is primarily due to an increase in the installed customer premise and communications backbone equipment as a result of the increase in the number of customers. Interest expense for the year ended December 31, 1997 was $4,355,676, compared to $903,443 for the year ended December 31, 1996, an increase of $3,452,233, or 382.1%. The increase was primarily due to the Company's financing of its 1997 operations through the issuance of various debt instruments, including $24 million of long term subordinated notes to WorldCom, $18.8 million in borrowings from the Revolving Credit Facility and $9.6 million of equipment financing. Income Taxes For the year ended December 31, 1997, the Company experienced net operating losses of $29,482,273 and paid no income taxes. These losses are available to offset future taxable income through the year 2013 and are subject to the limitations of Section 382 of the Internal Revenue Code of 1986, as amended. These limitations may result in expiration of net operating loss carryforwards before they can be utilized. YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995 Revenue Revenue for the year ended December 31, 1996 was $110,424, compared to $20,480 for the year ended December 31, 1995, an increase of $89,944 or 439.2%. This was due primarily to the increase in the number of customers using the WAM!NET Service. On December 31, 1995, the Company serviced approximately 6 installed customer sites and on December 31, 1996 serviced 33 installed customer sites. Other service fees revenue for the year ended December 31, 1996 was $168,290, compared to $159,851 for the year ended December 31, 1995, an increase of $8,439 or 5.3%. Other service fees revenue is primarily derived from minor transactions with currently existing WAM!NET Service customers which includes consulting services and hardware sales. Operating Expenses Network communication fees for the year ended December 31, 1996 were $816,403, compared to $46,267 for the year ended December 31, 1995, an increase of $770,136, or 1,664.5%. Network operations expense for the year ended December 31, 1996 was $1,108,807, compared to $539,003 for the year ended December 31, 1995, an increase of $569,804, or 105.7%. These increases were primarily due to the 450.0% increase in the number of WAM!NET Service customers during 1996 and the installation of certain Distribution Hubs throughout the United States. Sales and marketing expense for the year ended December 31, 1996 was $2,052,860, compared to $93,832 for the year ended December 31, 1995, an increase of $1,959,028, or 2,087.8%. This increase, to a large extent, represents the significant costs associated with building and supporting a dedicated direct sales force and product marketing organization. General and administrative expense for the year ended December 31, 1996 was $2,609,879, compared to $727,434 for the year ended December 31, 1995, an increase of $1,882,445, or 258.8%. General and 42 administrative expense increased during 1996 as operational support requirements intensified due to the expansion of the Company's services and corporate facilities. Depreciation and amortization for the year ended December 31, 1996 was $447,233, compared to $30,677 for the year ended December 31, 1995, an increase of $416,556, or 1,357.9%. As a percentage of gross revenue, depreciation and amortization was 160.5% in 1996 compared to 17.0% in 1995. This increase is primarily due to the intense expansion of the WAM!NET Network during 1996 and the corresponding requirement for both customer premise and communications backbone equipment. The Company's results of operations for the years ended December 31, 1996 and 1997 are not necessarily indicative of future periods. The Company's principal focus during such time was the selection and hiring of personnel for sales, marketing operations, customer service, development, network infrastructure implementation and maintenance necessary to conduct its activities, and the development and release of various proprietary WAM!NET Service products. The Company expects that future results will reflect the commercial operations of the WAM!NET Service. LIQUIDITY AND CAPITAL RESOURCES From inception through March 31, 1998, the Company has derived substantially all of its operating capital from the issuance of short- and long-term debt instruments. At March 31, 1998, the Company had a total of approximately $143.4 million in long-term debt, of which approximately $2.7 million becomes payable during 1998. During September of 1997, the Company established the Revolving Credit Facility, the proceeds of which are being used by the Company to fund its operations and purchase WAM!NET Network equipment. The Revolving Credit Facility was established under an agreement with WorldCom, by which WorldCom guaranteed the Company's obligations under the Revolving Credit Facility. At March 31, 1998, the Company had $0 borrowed under the Revolving Credit Facility. Interest and principal on the Revolving Credit Facility become payable in July 1999. Borrowings by the Company under the Revolving Credit Facility require the prior consent of WorldCom. On March 5, 1998, the Company consummated the Initial Offering, and received net proceeds therefrom of approximately $120.6 million. Cash interest does not accrue nor is payable on the Notes prior to March 1, 2002. Thereafter, cash interest on the Notes will accrue at a rate of 13 1/4% per annum (calculated on a semi-annual bond equivalent basis) and will be payable semi-annually in arrears on March 1 and September 1 of each year, commencing September 1, 2002. The Company used the proceeds of the Initial Offering as follows: (i) $20.0 million to pay the cash portion of the 4-Sight Acquisition, (ii) approximately $25.0 million to repay the borrowings under the Revolving Credit Facility and (iii) the balance to be used further the Company's business development and expansion strategy, to enhance the WAM!NET Service infrastructure and develop additional value-added features and services, to optimize marketing, sales and customer support and service capabilities, and for working capital and other general corporate purposes. The Company intends to pursue one or more financings in 1998, totalling approximately $100.0 million, for which it has received indications of interest from certain financial institutions. The Company believes that the net proceeds of the Offering and such financings together with expected cash from operations will be sufficient to finance the Company's operations through September 30, 1999. This includes the purchase and installation of all necessary WAM!NET Network and WAM!BASE equipment required for both national and international operations, marketing and sales activities, continued development of enhancements to the WAM!NET Service and service of its debt obligations. 43 BUSINESS OVERVIEW WAM!NET provides a managed, high speed digital data delivery network service, the WAM!NET Service, that integrates the Company's industry-specific work flow applications with commercially available computer and telephony technologies. The Company, an affiliate of WorldCom, offers an Industry Smart service designed to provide its subscribers with a turn-key single source solution for the rapid, secure, accurate and reliable transportation and management of information, with a simple "pay by the megabyte" pricing plan requiring no capital investment. The WAM!NET Service provides seamless digital connectivity among "communities of interest," drawing together customers and trading partners which have collaborative work flows. The Company has developed advanced WAM!NET Service applications, including an on-line digital job tracking and billing system, CIS, an application enabling remote proofing, WAM!PROOF, and a remote data archiving, retrieval and distribution system WAM!BASE. WAM!PROOF was commercially released in the second quarter of 1998 and WAM!BASE is scheduled for commercial release in the second half of 1998. The Company has initially capitalized on the growing need for managed digital data delivery services in the printing, publishing, advertising, pre- press, corporate communication and graphic arts industries (collectively, "Graphic Arts"). The Company believes that the WAM!NET Service is achieving wide acceptance among leading firms within the Graphic Arts community of interest, which in turn encourages those with whom such firms share digital information to subscribe to the WAM!NET Service. Since it commercially released and commenced marketing of the WAM!NET Service in March 1996, the Company has established a subscriber base of more than 1,500 customer locations, including Time, Donnelley, Disney, J.C. Penney, Fox Broadcasting and Macy's. In October 1997, the WAM!NET Service received the Graphic Arts Technical Foundation (an independent trade association) award for the product or service that will most likely change the manner in which the Graphic Arts industry conducts business. MARKET OPPORTUNITY The Company believes that the increasing digitalization of work product and work flow in data intensive and time sensitive industries is driving demand for managed, secure and reliable electronic data transportation and archiving services. Based on information derived by Morlok Research from independent studies, the Company believes that the Graphic Arts industry will spend approximately $10.0 billion between 1998 and 2000 on the digitalization of its production and printing process, including the introduction by commercial printers of CTP technology, which facilitates a fully digital work product. Despite this movement toward the digital creation, storage and outputting of data, the lack of reliable, cost effective electronic transport mechanisms has resulted in many companies continuing to use overland or air courier services to deliver magnetic tape or optical disk copies of data to others who require access to such data. This non-digital step results in a method of transporting data which can be inefficient, significantly lengthening production cycle time and leading to possible errors. The Company believes the potential market for managed digital data transportation and asset storage services is $4.3 billion and $2.3 billion, respectively, in the Graphic Arts industry alone. The Company believes that existing electronic means for transporting large digital data files have proven to be ineffective and/or prohibitively expensive for most companies. Large files may take up to several days to transport using the Internet or the fastest standard telephone modems (56,000 bps) and may lose significant quality in transmission. The use of the Internet and standard telephone modems can also lead to other significant disadvantages, most notably high telephone usage charges and a lack of security, accountability and reliability of transmission. Other non-dedicated technologies offer more speed than the Internet or a standard telephone modem, but at a significantly higher cost. Such technologies may also lead to data degradation and integration obstacles. Large data files can be transported reliably in minutes over dedicated point to point telephone lines (such as DS1 and DS3); however, the substantial equipment necessary at each dedicated connecting point and the sizable costs of leasing a dedicated point to point telephone line makes this means of transport uneconomical for most companies transporting large data files. 44 COMPETITIVE ADVANTAGES The Company believes it is uniquely positioned to meet the growing need for a cost-effective and reliable means of electronically transporting, storing and retrieving digital data due to the following competitive advantages: . Purpose-Built, Industry Smart Network. The WAM!NET Service operates via a nationwide network that integrates the Company's proprietary, value-added Industry Smart applications with a purpose-built network of Company owned Distribution Hubs interconnected redundantly with high-bandwidth leased telephone circuits. The Company currently maintains 23 Distribution Hubs, located in major United States and Canadian cities, London, England and Paris, France. The Company operates two NOCs in Minneapolis and Las Vegas through which it monitors all data transmission on a 24 hour a day, 7 day a week basis. The Company believes the WAM!NET Service offers reliable and secure data transmissions with no degradation in quality and guaranteed delivery and throughput. . Single Source, Turn-Key Service Solution. The Company provides each subscriber with all of the hardware, software, transmission facilities and management services necessary to use the WAM!NET Service. Installation of the service, which is performed on behalf of the Company by national service providers, consists of connecting the customer to the nearest Distribution Hub through a Company-owned NAD and an appropriate communications link (such as T1, ISDN, frame relay, ADSL or other suitable facility) matched to the customer's transfer speed and throughput requirements. The WAM!NET Service is designed for ease of use, with a point and click e-mail type interface and a simple "pay by the megabyte" pricing model. The Company's strategy is to offer customers the WAM!NET Service at rates competitive with overland and air courier services furnished on an annual or multi-year subscription basis. There is no up-front capital investment by the customer, who is charged based on a minimum monthly usage fee and volume of data sent per transaction. . Industry Smart Applications. The Company collaborates with leading participants in its target markets and designs applications addressing industry-specific work product and work flow requirements. These Industry Smart applications combined with the guaranteed delivery and throughput of the WAM!NET Service allow work partners in distant geographic locations to collaborate digitally in real time. The WAM!PROOF application will allow customers to directly output across the WAM!NET Network to proofing devices in remote locations, thereby eliminating the need to deliver physical proofs by overnight courier. The WAM!BASE application will provide a collaborative digital asset management service that can eliminate the need for redundant archives and shrink work cycle time by providing more immediate access to desired data files. . Customer Support and CIS. The Company has implemented extensive customer service functions, including customer support technicians who are available 24 hours a day, are trained extensively in the Company's service offerings and who understand the industry-specific work flow of the Company's customers. CIS allows customers to view data files, verify account information and check the status of transactions on-line, as well as to log help requests. The Company provides its customers itemized information regarding the size, cost, and destination of each "shipment" that may be electronically imported directly into the customer's own accounting system, which facilitates capturing of project-specific costs and billing of services on a job-by-job basis. . First to Market Advantage. By being the first to market a managed, high speed digital data delivery network with Industry Smart applications, the Company believes it is becoming the industry standard in the Graphic Arts industry and is positioned to become the industry standard in its other target industries. The Company has found that industry leaders such as Time and Donnelley (early WAM!NET Service customers) actively encourage their work flow partners to subscribe to the WAM!NET Service to increase work flow efficiencies. Potential entrants into the managed digital data delivery field would need to deploy a nationwide, purpose-built network integrated with customized value-added applications, and simultaneously convert industry leaders and their work flow partners, more than 900 of whom have contracted with the Company for the WAM!NET Service at more than 1,500 locations. Customers currently subscribing to the WAM!NET Service include 11 of the 20 largest publishers, 9 of the 20 largest printers, 45 16 of the 20 largest advertising agencies, and 10 of the 20 largest pre- press-graphic arts agencies in the United States, as well as the corporate communications and advertising departments of many United States corporations. . Strategic Relationship with WorldCom. The Company has entered into a strategic alliance with WorldCom which includes equity and debt investments and operating loan guarantees totaling approximately $50.0 million. WorldCom is currently entitled to designate a majority of the Board of Directors of the Company and, through its ownership of convertible debt and warrants, has the right to acquire a majority of the Common Stock of the Company. WorldCom also provides telecommunication and other services to the Company on a non-exclusive basis. The Company anticipates that its relationship with WorldCom will enable it to access the worldwide infrastructure, sales and marketing work force, telephony technologies, high bandwidth carrier service and other services of WorldCom and its affiliates, including UUNet. BUSINESS STRATEGY The Company's objective is to become the leading provider of enhanced, managed digital data delivery and archiving services to industries comprised of interdependent participants requiring industry specific, high speed digital connectivity. WAM!NET's strategy to achieve this objective and to build a long-term sustainable competitive advantage is to: . Increase its Customer Base to Create Critical Mass. The Company's sales and marketing strategy has been designed to rapidly penetrate its initial target market, the Graphic Arts industry. Elements of this strategy include: (i) creating the WAM!NET Service as a turn-key, single source service solution; (ii) implementing an easy to understand "pay by the megabyte" pricing model (which eliminates the need for any capital investment by customers); (iii) designing aggressive advertising, trade show, event marketing and direct selling to drive trials, including introductory risk-free product evaluations for industry leaders; (iv) building a direct sales force to target leading industry participants who, in turn, encourage their work flow partners to subscribe to the WAM!NET Service; and (v) implementing programs in which large receivers of data (e.g., printers) promote and market the WAM!NET Service, along with the WAM!NET direct sales force, to customers and work flow partners. The Company believes that the customer benefits of the WAM!NET Service will increase exponentially as the total number of WAM!NET Service subscribers increases. . Apply Industry Smart Network Model to Other Industries. The Company believes that the WAM!NET Industry Smart network model can provide the benefits and advantages it offers the Graphic Arts industry to other industries with similar data transportation, storage and retrieval requirements. Some of the Company's customers that are in the entertainment industry, such as Fox Broadcasting and Disney, currently subscribe to the WAM!NET Service for their Graphic Arts-related needs. The Company is presently developing Industry Smart applications suitable to the entertainment industry and is developing corresponding marketing and sales strategies. The Company is also collaborating with industry leaders in the medical imaging industry to develop and implement Industry Smart applications in connection with marketing to that industry. . Drive Utilization Through Value-Added Services and Volume Discounts. The Company incorporates, develops and implements value-added Industry Smart applications for customers, such as CIS, WAM!PROOF and WAM!BASE, which the Company believes will provide significant benefits to its customers and stimulate increased usage of the WAM!NET Service. The Company also offers volume discounts and a variety of promotional programs for industry leaders to induce customers to send increasingly large volumes of data traffic across the WAM!NET Network. . Expand and Enhance Infrastructure and Develop Worldwide Capabilities. The Company intends to invest in resources and systems to ensure that the WAM!NET Network's operating infrastructure and support services provide optimal digital connectivity to its subscribers in a guaranteed performance and competitive rate environment. The Company is currently preparing to expand into parts of Europe and Asia for the purpose of providing its customers with desired international connectivity. The Company expects to expand 46 the WAM!NET Network into approximately 10 countries by the end of 1998, and will initially locate additional Distribution Hubs in London, Frankfurt, Paris, Amsterdam, Milan, Tokyo, Hong Kong, and Sydney. The London and Paris Distribution Hubs were recently installed and the Company is currently in the process of installing a Distribution Hub in Amsterdam. During 1998, the Company expects to further develop its international service infrastructure by providing installation and customer support via third parties, developing local sales and distribution relationships and may establish additional Distribution Hubs and regional NOCs in selected countries. The Company's acquisition of 4-Sight will permit subscribers, including 4- Sight's 30,000 customers in 44 countries, to gain remote access to the WAM!NET Network through transmission software being developed by 4-Sight. The Company may also establish its international presence through other acquisitions, joint ventures or other similar business transactions. . Reduce Costs and Improve Operating Margins. The Company seeks to reduce costs and improve operating margins by (i) spreading the cost of installing and operating the WAM!NET Network over a large base of customers; (ii) designing the network to use more expensive hub equipment in a few national and regional operational centers and less expensive equipment at each customer site; (iii) deploying cost-reduced NADs for less volume intense customers; (iv) pursuing programs to reduce the costs of capital equipment, including obtaining mass purchasing discounts for network infrastructure and customer premise equipment; (v) utilizing network management tools to optimize existing and planned network capacity as volume increases and traffic patterns begin to emerge; (vi) deploying new, lower-cost last mile local loop technologies to connect customer sites to Distribution Hubs, including wireless technologies and remote dial-up capabilities; and (vii) deriving other incremental revenue from value-added services such as WAM!BASE, which can be delivered over the existing WAM!NET Network infrastructure. The Company also believes its operating margins will improve as a result of anticipated cost reductions associated with increasing competition in both the local and long distance markets. TARGET MARKET OVERVIEW The WAM!NET Service has been designed to support a community of interest among interdependent participants in time sensitive and data intensive industries with highly collaborative work flows. The Company is currently actively marketing its services to the Graphic Arts industry, and is preparing to market the WAM!NET Service to other communities of interest with similar data transportation and archiving needs as those found in the Graphic Arts industry, including the entertainment and medical imaging industries. The Company believes it can apply its business strategy to these other industries by capitalizing on the network, operations, service, application engineering and sales/marketing infrastructure already developed by the Company and by developing and offering "Industry Smart" applications that are tailored to the work flow requirements of those industries. Graphic Arts. The Graphic Arts industry is comprised of printers, pre-press production firms, advertising agencies, publishing firms, graphic artists and list management firms who design, prepare and produce printed materials. Based on information in the Mills Davis Report, the GISTICS Brief and research performed for the Company by Morlok Research, 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. Morlok Research's estimate of the number of potential sites in key segments of the Graphic Arts industry are outlined below, based on information contained in the Mills Davis Report. POTENTIAL SITES BY MARKET SEGMENT AND FIRM SIZE
LARGE MEDIUM SMALL TOTAL ----- ------ ------- ------- Printers(1)..................................... 1,088 4,169 64,830 70,087 Pre-Press(1).................................... 108 427 4,584 5,119 Publishers(2)................................... 597 3,031 39,522 43,150 Ad Agencies/Graphic Designers(3)................ 1,615 10,742 68,478 80,835 Corporate Communications(4)..................... 2,402 5,405 112,294 120,101 List Management(4).............................. 103 231 649 983 ----- ------ ------- ------- Total Sites.................................... 5,913 24,005 290,357 320,275
Footnotes on the following page. 47 - -------- (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 the Mills Davis Report, approximately 50% of content in the Graphic Arts industry currently created in a digital format using specialized software applications such as Adobe PhotoShop and Quark Express, and by the year 2000, more than 64% of the Graphic Arts industry is expected to be using digital page/imaging software. File assembly and printing preparation activities are also becoming digital with the increasing use of digital scanners and cameras. Analog images, including photographs, can now be easily scanned and digitally incorporated into the production process. Additionally, adoption of CTP technologies by large- and medium-sized printers facilitates a fully digital work flow throughout the entire creation and printing process. The digitalization of the printing process has resulted in the need for higher bandwidth connectivity to move data intensive printing jobs through the print production process and storage solutions which provide asset management capabilities and collaborative access to the stored digital assets. Today, the majority of work files are stored on magnetic or optical disks and transported via local or overnight couriers, such as Federal Express and United Parcel Service. The Company anticipates that large portions of data will increasingly be delivered via digital networks, driven primarily by the need to compress time schedules and reduce production costs. The Company expects that once market leaders and other influential participants in these industries become significant users of managed data delivery services, other industry participants will follow in an effort to remain competitive. The Company believes it is positioned to take advantage of the following factors, identified by the Mills Davis Report, which indicate that between 1996 and the year 2000: (i) the percentage of print jobs transferred across networks will quadruple, representing over 40% of all print jobs and two thirds of print job revenue; (ii) more than 50% of all publishing work flow and more than 60% of all creative services workflow will be conducted almost entirely over networks; (iii) businesses with the equivalent of TI wide area connectivity will increase 5 times; (iv) manufacturers will integrate CTP equipment creating a total digital pre-press work flow; (v) high resolution digital cameras will be affordable for most Graphic Arts users; and (vi) most medium to large printers and pre-press firms will offer digital content management services to support re-purposing of digital data into other products. Entertainment Industry. The entertainment industry, which is closely related to the Graphic Arts industry, provides another potential community of interest for the expansion of the WAM!NET Service. This industry consists of many subsectors, including feature films, broadcast, cable and satellite video, high-definition television, home video, video games and video applications on the Internet. An adjunct market to the entertainment industry is the distance learning market, which includes corporate (training, marketing and communications) and educational distance learning. Each of these subsectors is moving away from traditional analog media, such as film, photographs and other physical media expression, and toward digital media. Digital tools previously available only to large media customers (such as television networks and major film studios) are now widely available to the entire industry. The Company believes the WAM!NET Service will be affordable to a wide spectrum of customers, including the independent contractor/artist and small, medium or large production and post-production studios, as well as to global media conglomerates. In contrast to the Graphic Arts industry, however, which involves the creation of static or still imagery, the entertainment industry principally produces motion imagery coupled with digital audio. As a comparison, a 30- second television advertisement is comprised of approximately 500 times the amount of digital data found in the 48 typical full page magazine advertisement. The Company believes the WAM!NET Network is sufficiently scalable and robust to accommodate the high-speed data transfer rates necessary to transport motion imaging in the entertainment industry. The Company's strategy is to enable remote collaboration throughout all phases of production, including pre-production (planning, CAD and previsualization), to production (filming and "video dailies"), post production (picture and sound editing and special effects creation) and eventually distribution services. The Company believes that the WAM!NET Service, by speeding up the iterative cycle of collaborative production, will provide significant creative advantages and cost savings to existing production processes. Medical Imaging. The emergence of digital medicine disciplines has created another community of interest that may have promising applications for the WAM!NET Service. The increasing availability of advanced computer technology combined with continued pressures to contain health care costs is resulting in significant portions of the medical imaging work flow being completely digitized, including output from medical scanning equipment such as Computed Tomography ("CT") and Magnetic Resonance Imaging ("MRI") devices. These devices capture and display patient data in digital formats, generating data files often in excess of 35 megabytes per file. The Company has identified multiple steps in the medical imaging work flow process which may effectively be addressed by the WAM!NET Service. For example, radiologists and other healthcare professionals who examine the output generated by CT and MRI devices are often located in facilities separate from the facilities where the digital images are created. Furthermore, the increasing prominence of health maintenance organizations and other provider alliances, where member patients can go to any facility within the provider's network, may necessitate the increased ability to retrieve and transport data, including medical imaging data, between physically separate facilities. Currently, most files are either printed to film or copied to optical disks and then physically transported via courier services between facilities. In cases where digital images are printed to film, healthcare professionals lose the ability to do real time reads of the images. Current methods of storing medical images also present file transportation and storage problems. Analog files need to be manually located, copied and couriered to the healthcare professional for examination. It is estimated in the SPIE Paper that 10%-25% of images stored in a (non-digital) film format are misplaced after they are stored. Digital file storage is emerging as an option, but optical disks still need to be located, copied and then transported to remote sites. As a result, real-time remote imaging and archiving among hospitals is gaining momentum and may create efficiencies by allowing radiologists to collaborate more effectively. As documented in the January 1998 Journal of Diagnostic Imaging, Hammersmith Hospital in London, England, found that the change from hardcopy to digital archiving reduced staffing requirements by 8 positions, saved an estimated $0.7 million per year, and increased workload by 4,500 exams per year without adding additional radiologists. The Company believes the industry will need to eliminate multiple archives to adopt full digital implementation and provide affordable long-term on-line storage. The Company believes that medical service providers, particularly those of substantial size or that span a number of separate facilities, have significant medical imaging requirements. It is estimated in the SPIE Paper that the current medical imaging storage costs of medical institutions in the United States is $7.5 billion per year. 4-SIGHT BUSINESS On March 13, 1998, the Company consummated the purchase of the entire share capital of 4-Sight, a private limited company incorporated under the laws of England and Wales, for $20.0 million in cash and up to 3,250,000 shares of the Company's Common Stock. 4-Sight is a provider of data transmission software and related products and applications targeted to the Graphic Arts industry, primarily utilizing ISDN lines, with particular emphasis on European, Asian and North American markets and is engaged primarily in software development and distribution. The software user is generally responsible for all software and hardware installation, procuring an ISDN telephony connection and verifying the integrity of their files being sent over a 49 public network infrastructure. The Company believes that there are potential synergies in coupling 4-Sight's data transportation software with WAM!NET's managed, network infrastructure and that the 4-Sight Acquisition will enable the Company to achieve broader market coverage in the Graphic Arts market by combining 4-Sights international presence and penetration of the lower volume user market with the Company's domestic presence and penetration of the higher volume user market. At December 31, 1997, 4-Sight had a customer base of more than 30,000 customer locations, including 3,000 sites in the United States. 4-Sight's current set of products has been designed to work with public ISDN telephony infrastructures used widely in Europe and Japan and to a lesser extent in the United States. 4-Sight does not provide managed network services to deliver files. 4-Sight employs developers to design and distributes its software products on a global basis through resellers. 4-Sight currently has 4 offices located in the United Kingdom, the United States and Germany. In addition, 4-Sight has formal sales agreements with resellers who distribute 4- Sight's products in 19 countries. 4-Sight's software products are installed at over 12,000 sites in the United Kingdom, where 4-Sight estimates it has a 90% market share in the Graphic Arts market segment. Key users of 4-Sight software in the United States include Xerox Corporation ("Xerox"), Ogilvy & Mather Worldwide, Inc., McCann-Erickson Worldwide and National Geographic Society. 4-Sight Product Description. 4-Sight engages solely in software development and distribution and does not provide data transportation services with any of its products. The software user is responsible for all software and hardware installation, procuring an ISDN connection and verifying the integrity of their files being sent over a public network infrastructure. iSDN Manager is 4-Sight's flagship product for ISDN file transfer. The current release, iSDN Manager (4), comes in a MacIntosh ("Mac") version and a PC version, which supports Windows 95 and Windows NT platforms. iSDN Manager supports cross platform file exchanges between Mac and PC desktops and is compatible with over 75,000 ISDN systems world-wide. iSDN Manager supports different ISDN cards with various throughput capabilities. The majority of software sales are bundled with an ISDN card. The software functions like an e-mail application, where the user selects one or more sites to which files are to be sent from an address book, attaches files and then transmits the data via the public, dial- up ISDN network to other 4-Sight compatible sites. In addition, 4-Sight offers a less powerful version of iSDN Manager and other products and services, including a version of iSDN Manager that is customized for the newspaper advertisement delivery market and desktop fax software. Key Benefits from the 4-Sight Acquisition. The Company expects to realize multiple benefits from the 4-Sight Acquisition including: Providing Additional Network Access: 4-Sight's current software applications can be modified to allow access to the WAM!NET Network. New versions of 4- Sight software can be introduced which are WAM!NET Service compatible and can be used to send to and receive data from other WAM!NET and 4-Sight sites. The Company believes this will significantly improve its ability to attract and retain customers at the lower end of the market segment where ISDN lines are most common. The Company expects that the 4-Sight Acquisition will enable the Company to achieve broader market coverage in the Graphic Arts market by combining 4-Sight's international presence and penetration of the lower volume user market with the Company's domestic presence and penetration of the higher volume user market. In addition, many of the Company's current customers have work flow partners who use 4-Sight's software. Modifying 4-Sight technology will allow 4-Sight customers to transmit data to WAM!NET Service customers with whom they require periodic data exchange and thereby increase traffic over the WAM!NET Network. Facilitating 4-Sight Customer Upgrades: 4-Sight software upgrades that are WAM!NET Service compatible can be marketed to existing 4-Sight customers and bundled with WAM!NET Service contracts. In addition, the Company could potentially re-provision local loop ISDN lines for the current 4-Sight customer base or upgrade higher traffic sites to NADs. Accelerating International Expansion: 4-Sight has already invested in developing distribution channels in the United Kingdom, Germany, Benelux, Scandinavia and Japan and has plans to expand distribution capabilities 50 in France and other Asian markets. The 4-Sight investment is represented by the formal working relationships 4-Sight has developed with dealers, by the people it employs to manage dealer relationships in these international markets and by the working knowledge 4-Sight employees have developed regarding unique business practices in these international markets. The Company believes that it can utilize 4-Sight's existing distribution infrastructure and investment to bundle the WAM!NET Services with new versions of 4-Sight's transmission software. By utilizing 4-Sight's infrastructure and investment, the Company also believes that it can reduce the time that it will take to enter certain international markets by nine to twelve months. Accelerate Development Activities: 4-Sight has invested significant resources to build software development competencies in data transmission user applications. In addition, 4-Sight has developed capabilities to localize its software applications for use in specific international markets including the French, German, Benelux and Japanese markets. These capabilities may augment the Company's development staff and help increase application development staffing expertise. PRODUCTS AND SERVICES The WAM!NET Service. To send or receive a data file over the WAM!NET Network, a customer uses a proprietary software program designed and furnished by the Company. The WAM!NET Service appears as a icon on the customer's desktop, like a multi-layered e-mail or fax application. Clients can use the application to manage an address book of WAM!NET users with whom they send and receive packages of files and to set application default parameters. To send a package, the user "highlights" and "drags" a file to the appropriate address "hot tile" which appears across the top of the user interface. Once a file is dropped onto an address tile, a packing slip is automatically opened and the user is prompted to fill out basic packing slip information. Additional files can be added to the package to be included in the transmission. Similarly, additional sites can be identified for simultaneous package delivery. The user then selects the send button and the package is automatically delivered to the user's NAD for processing, coding and routing. Once a package has been delivered to a NAD, the package will be transported regardless of whether the sending or receiving computer is operating. If the destination computer is unavailable, the package will be held for delivery until the destination computer becomes available to receive the file. Unlike a dial-up network, where both computers need to be on and available at either end or there will be a busy signal, the WAM!NET Service's store and forward function holds the file in transit until the file can be delivered. To receive a package, customers are prompted on screen to view packages that have been received by their NAD. Files can be transferred from the NAD to the client's LAN either by dragging and dropping files from the NAD icon to the local network or by using a file retrieval menu. Each transaction over the WAM!NET Service is tracked and accounted for as an individual "shipment" of data. On a monthly basis, the Company furnishes its customers with an invoice summarizing the customer's WAM!NET Service use and charges. If requested by a customer, the Company will also deliver to such customer an electronic data file over the WAM!NET Service that contains itemized information regarding the size, cost and destination of each shipment as well as information regarding other services used by the customer. This data file may be imported directly into the customer's own accounting system, providing what the Company believes to be a valuable service for customers who need to capture costs and bill for services on a job-by-job basis. Customer Care and the Customer Information System. The Company has implemented extensive customer support functions, including customer support technicians available 24 hours a day, 7 days a week. These technicians are trained to understand the Company's product and service offerings, and the industry specific work flow of the Company's customers. Customer support technicians routinely answer customer questions concerning product functions, update address books, handle upgrade requests, and resolve product use issues. In addition, customer calls are logged into call management software for tracking and analysis purposes. The Company's CIS application allows customers to verify account information and check the status of their transactions on-line. The CIS appears as an icon on the customer's computer desk-top. When activated, the CIS accesses a menu which provides the customer with several options, including viewing packages, viewing account information or logging a help request. The "view packages" option allows customers to view sent and received 51 package activity for user definable time periods between one hour and 90 days. This option also provides key transmission statistics for each package sent or received including date, time, size, content and file type. The account information option allows customers to view relevant account information, including billing information, site contact names and phone numbers and also enables customers to update account information on-line. The "help" option allows customers to log a help request by e-mailing questions or requests directly to the Company's customer support group. See "--Network Management." WAM!PROOF. The Company has developed an application, "WAM!PROOF," which allows customers to directly output across the WAM!NET Network to proofing devices located at remote locations. WAM!PROOF was commercially released in the second quarter of 1998. Proofs, which are physical representations of printed output, are created throughout the production process at major check points. Because work flow participants are often located in geographically diverse locations, proofs have historically been printed and delivered by overnight couriers to remote participants. WAM!PROOF enables customers to print proofs in geographically diverse locations as if they were printing to a proofer on their LAN, thereby reducing turnaround times and creating work flow efficiencies. The Company has collaborated with leading manufacturers of printing/proofing devices to ensure compatibility with WAM!PROOF. "WAM!PROOF Ready" printing/proofing devices include devices made by Canon, Inc., Hewlett Packard Company ("HP"), Imation Corp., Eastman Kodak Company, Tektronix, Inc. and Xerox. WAM!BASE. The Company has also developed a wide area data repository service, WAM!BASE, which provides WAM!NET Service users access to a remote data archive and allows them to store, retrieve and manage data on a per- megabyte cost basis. WAM!BASE is scheduled for commercial release in the second half of 1998. The Company believes that the ability to manage and access digital assets is becoming significantly more challenging due to increasing digitalization in the Company's target industries. The implementation of a workable and cost-effective solution requires the integration of hardware, software and networking in a manner that is accessible by multiple work flow partners and the reduction of redundant processes and storage facilities. The implementation of such a system requires substantial investments in capital equipment, systems integration and archive management and often takes months to complete. Typical problems that can occur are inadequate scalabilty, high operations costs and the lack of high-speed and secure network infrastructure needed to share large digital data files. The Company believes that WAM!BASE provides a collaborative digital asset management service that addresses the following significant issues for its customers, and eliminates the need for investment in capital and archive management. Given the speed at which technology changes and the need to ensure reliable access to stored images, many participants are unwilling to make these investments. Because it has been designed to be scaleable to the needs of entire industries, WAM!BASE can spread infrastructure and operating costs across numerous users. WAM!BASE is designed to offer a turn-key archiving system that is cost competitive in relation to an individual customer's investment in a local, stand-alone archiving system. Customers send their data files over the WAM!NET Service to the WAM!BASE repository where files are stored in customer configurable libraries. Customers will be charged a monthly per megabyte fee for storage. Since customers are using the WAM!NET Service to retrieve data from the WAM!BASE repository, they can obtain quick and secure access to their data. WAM!BASE will provide collaborative access to stored data files. With existing systems, industry participants working on the same job often store multiple copies of the same data files because they do not have a collaborative means of sharing file access. Participants who use WAM!BASE and store files in their private library space, can control security access to each individual file in their library, and can change security access privileges at any time. This eliminates the need to store redundant copies of files at multiple participant sites, can shrink cycle time by providing more immediate access to important data files, and supports the job driven work flow by enabling customers to control security access to images on a job-by- job basis. When commercially released, the WAM!BASE service will use two mirrored storage facilities linked by dedicated leased high bandwidth data connections. The initial WAM!BASE storage centers will be located in 52 Minneapolis and Las Vegas within the NOCs already located in each city. Each storage facility will be connected to the WAM!NET Network through redundant links and customer data files will be stored in both locations. Customers will use proprietary software provided by the Company to upload data to the storage facilities and to browse, retrieve and forward files stored in the repository. Customers will be able to restrict access to individual files, groupings of files or complete libraries of files, manage the distribution of files, and will also be able to catalogue, identify and search for stored files using assigned attributes. The Company intends to locate additional mirrored storage facilities in Europe and Asia/Pacific to accommodate international storage requirements as needed. SERVICE CONTRACTS The Company believes that the WAM!NET Service is achieving wide acceptance among leading participants in the Graphic Arts industry, which in turn encourages those with whom information is shared to subscribe to the WAM!NET Service. Since it commercially released and commenced marketing of the WAM!NET Service in March 1996, the Company has established a subscriber base of more than 1,100 customer locations. As of February 11, 1998, 608 customer locations were connected to the WAM!NET Network with an additional 561 contracted sites expected to be installed during the first half of 1998, concurrent with the installation of customer premise telephony access. As of April 30, 1998, the Company's mix of service contracts was as follows:
SERVICE LEVEL (IN MEGABYTES PER HOUR) # OF CONTRACTS % OF CONTRACTS ------------------------------------- -------------- -------------- 40 MPH Service.............................. 129 8% 120 MPH Service............................. 756 49 400 MPH Service............................. 532 35 1,000 MPH Service........................... 24 2 Other....................................... 95 6 ----- --- Total..................................... 1,536 100% ===== ===
The Company's standard WAM!NET service contract is structured to assess charges based on the minimum throughput capability (i.e., the minimum number of megabytes per hour of the customer's data that the Company is obligated to transfer via the WAM!NET Network), the monthly minimum volume and any usage in excess of such monthly minimum volume. The pricing structure varies depending on the monthly minimum fee and on volume, with higher minimum fees and higher volumes generally resulting in lower per megabyte charges. Each WAM!NET customer typically signs a service contract for a fixed term of one to three years, at a specified location with minimum monthly fee of $250, $500, $1,000, or $2,500 per month up to the specified volume. The standard service contract is automatically renewable for additional one year periods at the Company's then prevailing pricing structure, unless the customer gives notice of termination at least 60 days prior to any automatic renewal date. Each service contract also grants the customer a limited, non-transferable license to use the Company's proprietary software and certain other intellectual property solely in connection with the customer's use of the WAM!NET Service. Under each service contract, a customer generally agrees to pay all taxes and fees imposed by governmental authorities, to be responsible for all loss or damage to the NAD, to maintain certain insurance coverage for the NAD, to preserve the Company's ownership of the licensed intellectual property, to keep the NAD at the leased location, to return the NAD and all licensed intellectual property at the termination of the service contract, and to pay all of the Company's costs of enforcement in the event the customer breaches the service contract. In addition to the standard service contract, the Company also negotiates custom service contracts with large users of the Company's services. These custom service contracts generally address specific customer work flow requirements or multi-site installations, and typically contain scheduled rebates and discounts based upon the number of third party trading-partners who become connected to the WAM!NET Network and upon the volume 53 of data received from those third parties. These custom service contracts also typically contain negotiated provisions relating to issues of non- infringement, indemnification and damages for breach. The Company plans to offer WAM!BASE and WAM!PROOF services, when commercially released, as add-on features to the WAM!NET Service. Subscribers for WAM!BASE and WAM!PROOF services will sign an addendum to their WAM!NET service contract separately licensing the software necessary to utilize the WAM!BASE or WAM!PROOF services, as the case may be, and containing other appropriate terms. The Company intends to furnish the WAM!BASE software without charge to customers who agree to minimum monthly WAM!BASE storage fees. WAM!PROOF customers will be charged for usage on a per megabyte basis like any other transmission over the WAM!NET Network. The Company may require a nominal one-time license fee covering the costs incurred by the Company to furnish the WAM!PROOF software. SALES AND MARKETING Over the past year, the Company has spent significant time and resources developing and building national marketing and sales capabilities, including increasing its sales force from four to 36 people, who are located in New York, Chicago, Los Angeles, Boston, Washington D.C., Minneapolis, San Francisco, Dallas, Atlanta, Toronto and other major metropolitan areas. The Company has created a product marketing organization responsible for the definition, commercialization and ongoing management of its products and services, and a direct sales organization responsible for all new sales and account management functions. The product marketing organization is divided into six functional groups, based on customer needs and demands, consisting of a WAM!NET Service product group, a WAM!BASE product group, an Industry Smart applications product group, a pricing group, a business analysis group and a co-marketing group. The sales organization has also been split into five groups, including an account executive group for new sales, a sales consultant group for telesales support, a business development group for managing large national accounts, an account management group for increasing utilization within existing accounts and a product specialist group for new products. Primary marketing and sales strategies focus on making inroads with major participants in the Company's target industries. In the Graphic Arts industry, the Company's initial sales focus was on signing large commercial printers, the final data destination in the digital work flow. Once several printers subscribed to the WAM!NET Service, the Company's sales organization sought to connect the printer's customers (pre-press firms, advertising agencies and publishers) to the WAM!NET Network using a combination of sales and marketing strategies. Such strategies include implementing promotional programs in which printers promoted and marketed the WAM!NET Service to their customers and work flow partners along with the Company's direct sales force. Similar strategies are being applied by the Company to its other target industries. As more customers subscribe to the WAM!NET Service, the Company's strategic sales focus is expected to shift. While new site acquisition will still be important, significant resources will also be devoted to increasing inter- connectivity among WAM!NET Service users and network traffic, in an effort to embed the WAM!NET Service into an industry's work flow. As a result, the sales organization may further employ account managers to work with customers to help them better utilize WAM!NET Services and expand the circle of WAM!NET users with whom they send and receive data. The Company's product marketing will focus on commercializing new features and new products that are also intended to help increase the utilization of the WAM!NET Network. This will include full scale commercialization of Industry Smart applications like WAM!PROOF and WAM!BASE and the addition of new Industry Smart features into existing products, including directory services with white and yellow pages functionality, and directed billing capabilities which will enable customers to reverse bill or bill third parties for data transportation services. 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 54 build an installation function which coordinates and performs all aspects of service installation for the customer . When a new contract is signed, an installation project manager is assigned to manage the installation. Site surveys are completed to capture and confirm key customer information including NAD placement, appropriate service level, account information and network connectivity requirements. The project manager coordinates installation of the NAD with on-site third-party installers and the Company's circuit engineers, who test and certify connectivity and throughput between the customer's site and the Distribution Hub. Installation of the WAM!NET Service consists of installing a simple, graphical user interface ("GUI") on the customer's computer or LAN, connecting the customer's computer or network to a NAD, and connecting the NAD through telephone service to the nearest Distribution Hub. The Company has entered into an agreement with National Computer Systems ("NCS"), a national provider of computer installation and maintenance services, to provide installation, maintenance and repair services on customer sites. NETWORK ARCHITECTURE The WAM!NET Network is comprised of national, regional and local Distribution Hubs that are owned by the Company and interconnected redundantly with high-bandwidth leased telephone circuits. The Company currently maintains 23 Distribution Hubs, located in major United States and Canadian cities, London, England and Paris, France. The Company also operates two mirrored NOCs in Minneapolis and Las Vegas through which it manages and operates all data transmission. The Company has also contracted with an independent third-party for the provision of satellite transmission services for added redundancy with respect to services provided to Time. The Company is currently negotiating to employ satellite services to add redundancy for the entire WAM!NET Network. The hub infrastructure consists of large Cisco Systems, Inc. ("Cisco") routers which are co-located with WorldCom points of presence and which primarily route data traffic across the WAM!NET back-bone. The 23 Distribution Hubs are interconnected with a meshed DS3 ATM back-bone provided by WorldCom. Additional network diversity is provided by a layer of private lines leased from Sprint Corporation ("Sprint") which primarily serve as network back-up. Local loop connections between Distribution Hubs and NADs at customer sites are provided almost exclusively by WorldCom and regional bell operating companies. The Company's policy is to procure local loop lines from the lowest-cost, highest-quality provider, and the Company has business relationships with approximately 15 telephony providers in North America. Network traffic patterns are continuously monitored and the existing network back-bone infrastructure is operating at approximately 5% to 10% of its capacity. Operating agreements with WorldCom and MCI Communications Corporation ("MCI") enable the Company to increase backbone bandwidth to accommodate planned growth on an as-needed basis. The WAM!NET Network incorporates multiple firewalls, constant monitoring and other security features to prevent unauthorized access or tampering with either the Company's or the customers' data systems. For security purposes, the WAM!NET Network is designed to prevent customers from gaining unauthorized access to the WAM!NET Network through a NAD, from logging onto any other device attached to the WAM!NET Network and from exploring the WAM!NET Service or activating or controlling any of its other functions. The Company's software installed on the user's computer only delivers files to or from the NAD. NETWORK MANAGEMENT The Company provides customers toll-free access to its technical services support team 24 hours a day, 7 days a week. The Company believes that because its customers are in time sensitive, data intensive industries, they rely on the WAM!NET Service to provide guaranteed delivery and throughput. The Company has sought to build reliability into its network by interconnecting all Distribution Hubs and NOCs with at least two redundant paths so that in the event of network line failures data can still be transmitted. In addition, automated network monitoring software from HP has been installed and configured to provide continuous monitoring capabilities, including an alarm system that automatically alerts network engineers of problems. Key aspects of the WAM!NET Network are continuously monitored, including NOC equipment, Distribution Hub equipment, 55 backbone lines, local customer connections and the NADs. The network management team is trained to proactively work with telephony and on-site service providers using specially developed processes to identify and resolve network issues quickly and efficiently. MANUFACTURING The Company conducts only limited equipment assembly functions. The Company presently installs proprietary software and assembles standard computer, router and power management equipment components into steel housings for use as NADs, Distribution Hubs and equipment in the NOCs. The equipment housing is manufactured by a third party to the Company's specifications. The Company contracts with third parties for installation of NADs at customer sites. See "--Supplier Relationships--Installation and Field Maintenance." The Company installs Distribution Hubs and equipment in the NOCs. The Company intends to outsource the assembly of NADs. SUPPLIER RELATIONSHIPS Equipment. The Company has procurement arrangements with Silicon Graphics, Inc. ("SGI"), Cisco and Osicom Technologies, Inc. for certain computer equipment, routers and computer interface cards used in the WAM!NET Network. These arrangements qualify the Company for discounts off participant list pricing for such equipment. The Company is presently negotiating more formal supply arrangements with Cisco and SGI. The Company also purchases certain high volume data storage equipment from HP and Hitachi Data Systems Corporation under supply agreements. Installation and Field Maintenance. The Company has an agreement with NCS to provide installation, maintenance and repair services on customer sites. Telephone Carriage and Infrastructure Support. The Company currently leases local loop and long distance telephone carriage in the United States from WorldCom. In addition, the Company has procurement agreements with MCI and Sprint, and purchases local loop telephony services from approximately 15 local loop providers. None of the supplier agreements described or contemplated above contains a long-term commitment on behalf of the supplier. See "Risk Factors--Dependence on Third-Party Suppliers for Equipment and Services." COMPETITION Despite what the Company believes to be meaningful product differentiation, the Company faces competition in the provision of digital data transportation and archiving services, including from companies that have substantially greater financial, technological, marketing, and research and development resources than the Company and which have an established presence in markets that the Company serves. The Company's competitors include major long-distance companies, regional Bell operating companies, Internet service providers, systems integrators, such as Digital Art Exchange, and other smaller companies which manage routers as part of more comprehensive public, private and virtual private wide area network service offerings. Some companies have begun to offer data communications networks which use standard communication technology in conjunction with emerging frame-relay and ATM technology. The architecture of these networks is similar to that of the WAM!NET Service. These competitors, including the Sprint DRUMS network, MCI SMDS telecommunications service and a joint venture arrangement between AT&T Corp. and Xerox, offer some of the services the Company offers or plans to offer in the future. Additionally, a new competitive service called the Graphic Arts Digital Network which directly targets the WAM!NET Service was announced in Spring 1997, but has not yet been released. This service will be provided by a joint venture between British Telecommunications and Sytek. Pricing, product and service information are not yet available for that service. While the Internet is not currently an effective competitor to the WAM!NET Service, efforts are under way, through a consortium of research universities, the Federal Government's Very-High-Performance Backbone Network Service and several 56 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. GOVERNMENT REGULATION, STANDARDS North America. The Company purchases telephone equipment, routers and relays that are used in the WAM!NET Network from telecommunications equipment manufacturers and combines that equipment with Company-provided software and telephone circuits provided by common carriers regulated by the FCC the CRTC and various state regulatory agencies. The Company believes that under the FCC's interpretation of the Communications Act of 1934, as amended, the services which it offers to its customers are interstate information (enhanced) services. Consequently, it is not required to obtain licenses or other approvals from the FCC or state regulatory agencies to offer such services. If the Company's services were deemed to be intrastate services, certain state regulatory agencies might seek to assert jurisdiction over the Company's offerings. If that were to occur, the Company could be required to expend substantial time and money to acquire the appropriate licenses and to comply with state regulations. The Company also believes that, under the CRTC's interpretation of Canadian law, the services that the Company offers do not require it to obtain telecommunications permits or approvals in Canada. Worldwide. The Company believes that European Union directives require that member states permit the provision of the Company's services on a competitive basis. Bilateral agreements exist between the United States and Japan and the United States and Hong Kong which encourage cross-border provision of enhanced services like those offered by the Company. Pursuant to commitments in the WTO General Agreement on Trade and Services, over fifty governments have agreed to permit provision of enhanced services (i.e., value-added) by nationals of WTO member countries. Nevertheless, certain other countries in Europe, Asia and elsewhere in the world might seek to license and regulate the Company's services. Any such license or regulation may limit, delay or increase the costs of operations as associated with the international locations to which the Company may desire to expand. Medical Imaging. The Company intends to offer its WAM!NET Service and WAM!BASE service for medical imaging applications including the transmission, storage and retrieval of medical data for primary diagnostic purposes. Any medical imaging application offered for primary diagnostic purposes is required to comply with the Food and Drug Act, and regulations promulgated thereunder by the FDA. Under proposed FDA rules, the Company's storage and transmission facilities would likely be classified as Class I devices that do not perform "irreversible data compression," which would be exempt from the premarket notification procedures under the Food and Drug Act, and could therefore be marketed without pre-approval from the FDA. The Company's proprietary software applications, however, which operate the storage and retrieval function of the WAM!NET Network's components, would likely be classified as Class II devices. In January 1998, the Company submitted a Premarket Notification 510(k) to the FDA to obtain marketing clearance from the FDA. The Company has adapted the medical imaging applications of its WAM!NET Service and WAM!BASE services to conform to DICOM industry standards, which are the standards used by other medical imaging providers who have received FDA marketing clearance for their medical imaging devices and applications. The process of obtaining 510(k) marketing clearance typically can take six to nine months or longer and may require the submission of extensive data supporting the assertion that the device is substantially similar to a predicate device that was marketed prior to the 1976 amendments to the Food and Drug Act. In this regard, the Company likely would have to demonstrate through scientifically and statistically valid tests that the medical images produced from digital transmissions over the WAM!NET Service were sufficiently indistinguishable from the original image to be effective for diagnostic purposes. 57 RESEARCH AND DEVELOPMENT The Company's employees have significant experience in the research, development, design, engineering, implementation and management of complex software and networking systems. Six of the Company's employees hold advanced computer engineering degrees. The Company's current research and development activities are focused on completing development of additional functions, including the next generation of network and transportation management software and protocols necessary to provide applications such as broadcast transmissions, queue management, directed billing, directory services and job ticketing, including integrating such features into the shipping and customer information management facilities. The Company utilizes its technical capabilities to monitor and evaluate developments in computer hardware and software and in relay and telephony equipment and, to the extent possible, to incorporate appropriate advancements or enhancements into the WAM!NET Service in a timely fashion. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS It is the Company's policy to protect its intellectual property, to seek patent protection for those aspects of its technology that the Company believes may be patentable and to preserve any copyrights or trade secrets (to the extent not disclosed in any patent) that may be applicable to the WAM!NET Service, the WAM!PROOF and WAM!BASE services and their related software. The Company is designing or has designed most of the proprietary software necessary for the management of the WAM!NET Service, including NAD operations and the GUI, CIS, WAM!PROOF and WAM!BASE applications. The Company believes that its proprietary software and trade secrets applicable to the operation of the WAM!NET Service and the WAM!BASE data archiving system may be of equal or greater importance to the Company than patent or copyright protection. The Company is not aware of any claims of infringement of patents or other intellectual property belonging to others. However, the Company has conducted only a limited inquiry regarding the possibility of other infringement. See "Risk Factors--Intellectual Property and Proprietary Rights." The Company has entered into confidentiality agreements with certain of its employees, consultants and others to protect the Company's proprietary information and trade secrets. LIABILITY AND INSURANCE The WAM!NET Service uses an assemblage of telecommunications equipment, software, operating protocols and proprietary applications for high speed transmission of large quantities of data among multiple locations. In such operations, it is possible that data files may be lost, altered or distorted. Moreover, the Company's targeted industries' businesses are extremely time sensitive, and delays in delivering data may cause a significant loss to a customer using the network for managed data delivery service. The WAM!NET Service, and future enhancements or adaptations, may contain undetected design faults and software "bugs" that, despite testing by the Company, are discovered only after the system has been installed and used by customers. Such faults or errors could cause delays or require design modifications that could adversely affect the Company's competitive position and results of operations. The Company obtains contractual agreements from its customers limiting the Company's liability for damages resulting from errors in the transportation of data to a maximum of $100 per transmission. Nevertheless, the Company may still be subject to significant claims for data losses in the transportation of data over the WAM!NET Service. In addition to general business liability insurance coverage, the Company presently maintains errors and omissions insurance coverage issued by St. Paul Fire and Marine Insurance Company in the amount of $1.0 million per occurrence and $5.0 million for all occurrences relating to the transportation of data over the WAM!NET Service. EMPLOYEES Including its officers, the Company presently employs 405 persons. The Company's executive and technical personnel have significant experience in the design, programming, implementation, marketing, sales and support 58 of complex data networks and software programs. The Company considers its employee relations to be good. None of the Company's current employees are subject to a collective bargaining agreement. FACILITIES The Company occupies approximately 45,000 square feet of office space located in a modern facility in an industrial park complex in Bloomington, Minnesota, a suburb of Minneapolis. The building is occupied under a 99 month lease which expires in November 2005. To meet its future space requirements, the Company is currently considering construction activities to reconfigure its existing facility for greater space efficiency. The Company's leased properties also include: (i) an approximately 18,000 square foot manufacturing and warehousing facility located in Minneapolis, (ii) an approximately 1,540 square foot office facility located in Minneapolis, where one of the Company's NOCs is located, (iii) an approximately 7,970 square foot facility located in Las Vegas, Nevada where the Company's other NOC is located and which serves as a backup customer service center, (iv) an approximately 1,500 square foot office facility located in Missoula, Montana where the headquarters of FreeMail, Inc., an entity acquired by the Company in December 1997, is located, (v) small offices in Toronto, New York, Chicago, and Washington, D.C. for use by the Company's business development managers and account executives stationed in those cities, and (vi) an approximately 18,800 square foot office facility located in Minneapolis, which previously served as the Company's headquarters and which the Company intends to sub-lease. In addition, 4-Sight currently leases properties in (i) Bournemouth, Dorset, England, (ii) Hamburg, Germany, (iii) Woburn, Massachusetts and (iv) West Des Moines, Iowa. LEGAL PROCEEDINGS The Company is not party to any material legal proceedings. 59 MANAGEMENT The Company's executive officers and directors are:
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- Edward J. Driscoll III........... 37 Chairman of the Board, Chief Executive Officer, President and Treasurer Allen L. Witters................. 40 Chief Technology Officer James R. Clancy.................. 37 Chief Sales and Marketing Officer David T. Ottinger................ 49 Senior Vice President of Engineering and Operations John R. Kauffman................. 41 Vice President of Strategic Marketing and Communications Raymond Kang..................... 39 Vice President of Product Marketing and Development Gary Jader....................... 47 Vice President and General Manager of Medical Services David Townend.................... 40 Managing Director, WAM!NET U.K. Mark Marlow...................... 33 Director of Finance Charles T. Cannada............... 39 Director Robert L. Hoffman................ 69 Director Curtis G. Gray................... 48 Director K. William Grothe, Jr............ 42 Director
The Board of Directors of the Company consists of five directors, two of whom (currently Messrs. Driscoll and Hoffman) are elected by the holders of the Common Stock and three of whom (currently Messrs. Grothe, Cannada and Gray) are elected by the holders of the Company's Class A Preferred Stock. See "Description of the Company's Securities." Edward J. Driscoll III is a founder and principal shareholder of the Company and has served as its Chairman of the Board, Chief Executive Officer, President and Treasurer since inception. Previously, Mr. Driscoll was the principal shareholder, Chief Executive Officer, and a director of Cybernet Systems, Inc. ("Cybernet"). Mr. Driscoll founded Cybernet in 1991 to provide network integration services to the pre-press industry. Prior to founding Cybernet, he held various marketing and management positions, most recently as general manager of Roland Marketing, Inc., a regional wholesale produce marketing and packaging company. He holds a Bachelor of Arts degree in economics from St. John's University, Minnesota and a Master of Business Administration degree from the University of St. Thomas. Allen L. Witters is a founder and principal shareholder of the Company and has served as its Chief Technology Officer since inception. He is principally responsible for designing and implementing the WAM!NET Service architecture. Mr. Witters has been engaged in technical consulting to the computer industry since 1975, including serving as a technical consultant from 1992 to 1996 for Cybernet, and has broad experience in the invention, design, engineering and implementation of software, networks, and network management systems. From 1987 to 1992, Mr. Witters was the Chief Executive Officer and a principal shareholder of Datamap, Inc., a company that was engaged in the development and sale of GIS (geographic information systems) software. In 1994, Mr. Witters filed a petition for bankruptcy under Chapter 7 of the United States Bankruptcy Code. James R. Clancy joined the Company in April 1996 and currently serves as Chief Marketing and Sales Officer. From 1994 to 1996, Mr. Clancy was employed by Ceridian Corporation as Director of Marketing and 60 Strategic Planning. From 1988 to 1994, Mr. Clancy was employed by General Mills, Inc., in various marketing and marketing management capacities, most recently as Marketing Manager. Prior to General Mills, Mr. Clancy was a founder and senior manager of two Macintosh supply manufacturing companies. Mr. Clancy holds a Bachelor of Arts degree in economics from Moorhead State University and a Master of Business Administration degree from the Wharton School of Business. David T. Ottinger joined the Company in November 1997 as Vice President of Engineering & Operations. From April 1997 to November 1997, he served as President and Chief Executive Officer of NetAccess, Inc., a network security company. From April 1996 to April 1997, he served as Vice President, Professional Services of Parallel Technologies, Inc. From October 1993 to April 1996, he served as Vice President, Network Services of COMDISCO Network Services. From 1989 to October 1993, he served as Branch Manager for the Minneapolis, Minnesota office of Cap Gemini America. John R. Kauffman joined the Company in January 1998 as Vice President of Strategic Marketing & Communications. From 1991 to December 1997 Mr. Kauffman was President of Kauffman Marketing Group, Inc. and in that capacity provided the company's strategic positioning and outside marketing services from November 1995 to November 1997. Previous to that position Mr. Kauffman was President of Kauffman Stewart Advertising. Raymond Kang joined the Company in March 1998 and currently serves as Vice President of Product Marketing and Development. Prior to joining the Company, Mr. Kang was employed by MCI Telecommunications for fourteen years in various management and sales positions, most recently as Director of Broadband and Multimedia Marketing. Gary Jader joined the Company in February 1998 and currently serves as Vice President and General Manager of Medical Services. Prior to joining the Company, Mr. Jader was employed from 1996 to February 1998 by NeuroMotion Inc., a medical device company, as Vice President, Marketing and Sales. From 1991 to 1996, Mr. Jader was employed by 3M Corporation as Marketing Supervisor. David Townend joined the Company in March 1998 upon the consummation of the 4-Sight Acquisition, and currently serves as Managing Director of WAM!NET U.K. Mr. Townend served as Managing Director of 4-Sight from more than five years prior to March 1998. Mark Marlow joined the Company in May 1995 and currently serves as its Director of Finance. From 1994 until May 1995, he was employed as an accounting senior by the public accounting firm of Brunberg, Thorsen and Associates, Minneapolis, Minnesota. Mr. Marlow is a certified public accountant. From 1991 to 1994, he was employed as an assistant controller at Miller, Johnson and Kuehn, Incorporated, a licensed securities brokerage firm. He holds a Bachelor of Science degree in accounting from the University of Minnesota, and also holds a general securities license. Charles T. Cannada has served as a Director of the Company since 1996 and currently serves as WorldCom's Senior Vice President of Corporate Development and Real Estate and Facilities Management. Mr. Cannada joined WorldCom in 1989 as WorldCom's Chief Financial Officer. Mr Cannada received his Bachelors of Business Administration degree in Accounting from the University of Mississippi. Robert L. Hoffman has served as a Director of the Company since October 1995. Mr. Hoffman is a founder and shareholder of the law firm of Larkin, Hoffman, Daly & Lindgren, Ltd, where he has practiced for more than the past five years, and has served as its Chairman of the Board and President. He has been extensively involved in land use and development for the past 35 years as both an attorney and in various elective and appointive offices, including 14 years as a member of the Bloomington City Council, seven years as a member of the Metropolitan Council, a land use law instructor at Hamline University School of Law, a member of the Urban Land Institute Development Policies and Regulations Council, and a member of the Land Use Advisory Group for the Public Technologies Institute of Washington, D.C. Curtis G. Gray has served as a Director of the Company since 1996 and since November 1991 has served as WorldCom's Vice President of Enhanced Data Networks. Mr. Gray has more than 20 years of experience in the data communication arena including his own consulting firm and engineering and management positions with 61 GTE Laboratories and Blue Cross and Blue Shield Association. Mr. Gray received his Masters and Bachelors degrees in Engineering from the University of Wisconsin. K. William Grothe, Jr. has served as a Director of the Company since 1996 and has served as Vice President of Corporate Development of WorldCom since January 1996. From July 1990 to January 1996, Mr. Grothe was Senior Vice President and Chief Financial Officer of MobileCom, a national paging company headquartered in Jackson Mississippi. Mr. Grothe is a Certified Public Accountant and received a Bachelor of Science degree in Accounting from the University of Illinois. BOARD COMMITTEES The Company currently has an Executive Committee consisting of Edward J. Driscoll III and K. William Grothe, Jr., an Audit Committee consisting of Charles T. Cannada and Curtis G. Gray and a Compensation Committee consisting of K. William Grothe, Jr. and Robert L. Hoffman. EXECUTIVE COMPENSATION The following table summarizes all compensation paid to the Company's Chief Executive Officer and to each of the Company's executive officers other than the Chief Executive Officer (collectively, the "Named Executive Officers") whose salaries and bonus exceed $100,000 for services rendered in all capacities to the Company for the year ended December 31, 1997. SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS -------------------- ---------------------- RESTRICTED SECURITIES ALL OTHER STOCK UNDERLYING COMPEN- NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARD(S) OPTIONS (#) SATION - --------------------------- ---- ---------- --------- ---------- ----------- --------- Edward J. Driscoll III... 1997 $ 150,000 $ 75,000 $-- -- $-- Chairman of the Board, Chief Executive Officer, President and Treasurer Allen L. Witters......... 1997 150,000 75,000 -- -- -- Chief Technology Officer James R. Clancy.......... 1997 135,000 67,500 -- 500,000 -- Chief Sales and Marketing Officer Mark Marlow.............. 1997 75,000 37,500 -- 150,000 -- Director of Finance
The following table sets forth certain information for the fiscal year ended December 31, 1997 with respect to stock options granted to the Named Executive Officers. For the fiscal year ended December 31, 1997, no stock appreciation rights were granted to the Named Executive Officers and no stock options were granted to the Named Executive Officers at an option price below market value on the date of the grant, as determined through an independent valuation. STOCK OPTION GRANTS IN 1997
INDIVIDUAL GRANTS ---------------------------------------------------------- POTENTIAL REALIZED VALUE AT ASSUMED ANNUAL RATES OF % OF TOTAL EXERCISE STOCK APPRECIATION NUMBER OF SECURITIES OPTIONS GRANTED OR BASE FOR OPTION TERM UNDERLYING OPTIONS TO EMPLOYEES PRICE EXPIRATION ------------------- NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% 10% ---- -------------------- --------------- -------- ------------ --------- --------- Edward J. Driscoll III.. -- -- $ -- -- $ -- $ -- Allen L. Witters........ -- -- -- -- -- -- James R. Clancy......... 500,000 14.4 0.962 July 1, 2002 132,891 302,498 Mark Marlow............. 150,000 4.3 0.962 July 1, 2002 39,867 90,749
62 The following table sets forth certain information with respect to the value of unexercised stock options held by the Named Executive Officers as of December 31, 1997. As of December 31, 1997, no Named Executive Officer held any stock appreciation rights. In 1997, no Named Executive Officer exercised any stock options. FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FY-END (#) OPTIONS AT FY-END ------------------------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Edward J. Driscoll III..... 195,250 1,804,750 $573,645 $5,302,356 Allen L. Witters........... 195,250 1,804,750 573,645 5,302,356 James R. Clancy............ 259,825 615,175 763,366 1,807,320 Mark Marlow................ 35,000 140,000 115,630 411,320
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. Mr. Robert L. Hoffman has been granted 75,000 stock options at an exercise price of $0.962 per share, which options expire November 30, 2005. As of December 31, 1997, 50,000 stock options were vested and exercisable, 25,000 of which vested and became exercisable during fiscal year 1997. The remaining 25,000 stock options vest and become exercisable during fiscal year 1998. Other than Mr. Hoffman, no Director received compensation in any form for services rendered as a Director from the Company during fiscal year 1997. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of the Company's Compensation Committee is or has been an officer or employee of the Company or any of its subsidiaries. During 1997, no executive officer of the Company served on the Compensation Committee or as a director of another entity, one of whose executive officers served on the Company's Compensation Committee or Board of Directors. 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 established by the Board of Directors based upon achievement of performance goals, (iv) use of a company automobile, (v) non- competition by Mr. Driscoll with the business of the Company during the term of the agreement and for a period of two years after its termination and non- solicitation of the employees or customers of the Company during such period, (vi) confidentiality with respect to all information and trade secrets of the Company and (vii) automatic assignment to the Company of all ideas, inventions, discoveries and improvements of Mr. Driscoll relating to the business of the Company. In the event that the agreement is terminated by the Company without cause, Mr. Driscoll is entitled to receive severance, payable in cash, in an amount equal to the sum of (a) the greater of (x) his then base salary for two years or (y) the amounts reasonably estimated to be due under the agreement for the two year period following termination, and (b) one half of the bonus to which he would have been entitled for the year of termination. In connection with the executive employment agreement, the Company and Mr. Driscoll also entered into a stock option agreement which provides for the grant of an option, expiring December 31, 2007, to purchase up to 2,000,000 shares of the Company's Common Stock at a price of $0.962 per share. These options vested on January 2, 1998. Effective October 1, 1996, the Company entered into an employment agreement and a stock option agreement with Allen L. Witters on terms substantially the same as those of the employment agreements with Mr. Driscoll. The stock options issued to Mr. Witters vested on January 2, 1998. 63 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, (iii) confidentiality with respect to all information and trade secrets of the Company during the term of employment and for a period of one year after the termination of employment, and (iv) non-competition by Mr. Clancy with the business of the Company for a period of 18 months after the termination of employment and non-solicitation of the customers of the Company during such period. The employment agreement is for an unspecified term on an "at will" basis. In connection with the employment agreement, the Company and Mr. Clancy have entered into incentive stock option agreements with respect to the grant of options to purchase 875,000 shares of the Common Stock of the Company at a purchase price of $0.962 per share. 750,000 options vest in annual increments ending May 1, 2000 and the remaining 125,000 vested on January 2, 1998. The Company has implemented a quarterly bonus compensation program pursuant to which directors and key managers can receive up to 30%, and other employees up to 20%, of their annual salary in cash bonuses based upon individual achievement and the achievement of corporate goals and objectives. The Company's other officers and significant technical employees are employed pursuant to annually renewing employment agreements which continue until terminated by either the Company or the employee. Each such agreement contains confidentiality and assignment of invention provisions benefiting the Company. The Company currently has no retirement, pension, or insurance plans for its officers. The Company may in the future adopt such plans and may also adopt a compensation plan substantially increasing officers' salaries and other compensation based upon the performance of the Company. STOCK OPTION PLANS The Company's Stock Option Plan (the "1994 Plan") was adopted in September 1994 by the Company's Board of Directors and was approved by the shareholders of the Company in October 1994. The 1994 Plan has been subsequently amended, most recently on April 24, 1998 (as so amended and restated in April 1998, the "Amended 1994 Plan") in conjunction with the adoption of the Company's 1998 Combined Stock Option Plan (the "1998 Plan" and, collectively, the "Plans"), to reflect the Company's name change to WAM!NET Inc., to incorporate prior amendments to the 1994 Plan, to provide that no new options be granted under the 1994 Plan and to limit the number of shares of Common Stock available for issuance under the Amended 1994 Plan to 7,000,000. Each Plan is currently administered by the Company's Board of Directors. The 1998 Plan and the amendments to the 1994 Plan adopted by the Board of Directors on April 24, 1998 will be submitted for shareholder approval at the next meeting of shareholders of the Company. The Amended 1994 Plan and the 1998 Plan provide for the granting of Common Stock options which qualify as "incentive stock options" under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), as well as the granting of "nonqualified options." Under each Plan, the Board or, if the Board appoints one, a "Stock Option Committee" has complete discretion to select the optionees and to establish the terms and conditions of each option, subject in all cases to the provisions of a Plan and applicable provisions of the Code. Options granted under a Plan are not transferable and are subject to various other conditions and restrictions. Participation in the Amended 1994 Plan is limited to officers and regular full-time executive, administrative, professional, production and technical employees of the Company or a subsidiary of the Company, who are salaried employees of the Company or a subsidiary of the Company, and consultants or the Company or a subsidiary. Non-employee directors of the Company may be granted nonqualified options. Participation in the 1998 Plan is limited to employees of the Corporation or a subsidiary of the Corporation and to non-employee directors and non-employee consultants. The 1998 Plan provides that without amending such 1998 Plan, the Stock Option Committee may grant options to eligible employees who are foreign nationals on such terms and conditions different from those specified in this Plan as may in the judgment of the committee be necessary or desirable to foster and promote achievement of the purposes of the 1998 Plan, and, in furtherance of such purposes the Committee may make such addenda, modifications, amendments, procedures, subplans and the like as may be necessary or advisable to comply with provisions of laws in other countries in which the Company operates or has employees. 64 7,000,000 shares of Common Stock have been reserved for issuance under the Amended 1994 Plan and a total of 25,000,000 shares of Common Stock have been reserved for issuance under the 1998 Plan, subject to adjustment for stock splits or recapitalizations. Shares subject to canceled, unexercised, lapsed or terminated options are available for subsequently granted options under a Plan. The exercise price of all incentive stock options granted under a Plan must be at least equal to the fair market value of the shares on the date of grant, and the maximum term of each option is ten years. Under the terms of a Plan, the aggregate fair market value of the Common Stock (determined at the date of the option grant) for which any employee may first exercise incentive stock options in any calendar year may not exceed $100,000. Upon exercise of an option, payment of the exercise price in cash is required, or, at the discretion of the Company, by the delivery of Common Stock of the Company already owned by the optionee or a promissory note for all or a portion of the exercise price of the shares so purchased or a combination of the foregoing. There is no express limitation on the duration of a Plan; provided, however, that incentive stock options may not be granted after the date that is ten years from the date of Shareholder approval of a Plan. The Board may terminate a Plan and, subject to certain limitations, may amend the Plan at any time. As of the date hereof, there were 5,764,900 options issued and outstanding under the Amended 1994 Plan, consisting of incentive stock options to employees to purchase a total of 5,454,900 shares of Common Stock at exercise prices ranging from $0.45 to $3.90 per share, and non-qualified stock options to directors to purchase a total of 310,000 shares of Common Stock at an exercise price of $0.962 per share. No options have been granted under the 1998 Plan. In addition to options granted under the Plans, the Company has also granted certain officers and consultants options to purchase a total of 5,125,000 shares of Common Stock at exercise prices ranging from $0.45 to $3.90 per share. 65 OWNERSHIP OF THE COMPANY The following table sets forth the beneficial ownership of the Company's Common Stock as of April 30, 1998 for (i) each of the Company's executive officers and directors, (ii) all executive officers and directors as a group, and (iii) each person known by the Company to own beneficially 5% or more of the Company's outstanding shares of Common Stock. All persons indicated have sole voting and dispositive power over such shares unless otherwise indicated. Except as indicated below, none of the persons in the table have beneficial ownership in any class of equity securities of any parent or subsidiary of the Company.
NUMBER OF SHARES PERCENTAGE BENEFICIALLY OF TOTAL SHARES NAME OF BENEFICIAL OWNER OWNED(1) OUTSTANDING(1) ------------------------ ---------------- --------------- Edward J. Driscoll III(/2/).. 4,000,000(3) 35.5% Allen L. Witters(/2/)........ 4,000,000(3) 35.5 James R. Clancy(/2/)......... 416,650(4) 4.3 Mark Marlow(/2/)............. 35,000(5) 0.4 John R. Kauffman(/2/)........ 225,000(6) 2.4 David T. Ottinger(/2/)....... -- -- Robert L. Hoffman............ 62,500(7) 0.7 K. William Grothe, Jr.(/8/).. -- (/9/) -- Charles L. Cannada(/8/)...... -- (/1//0/) -- Curtis G. Gray(/8/).......... -- (/1//1/) -- WorldCom, Inc.(/8/).......... 34,183,670(12) 78.7 David Townend(/1//3/)........ 1,317,300 14.2 James L. Ecker............... 922,520(/14/) 9.0 All executive officers and directors as a group (13 persons).................... 10,056,450(/3/)(/4/)(/5/)(/6/)(/7/)(/11/) 71.8
- -------- (1) Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission, and includes general voting power and/or investment power with respect to securities. Shares of Common Stock subject to options or warrants currently exercisable or exercisable within 60 days of the date of this Prospectus, are deemed outstanding for purposes of computing the beneficial ownership percentage of the person holding such options but are not deemed outstanding for purposes of computing the percentage of any other person. (2) Address: 6100 W. 110th Street, Minneapolis, Minnesota 55438. (3) Includes 2,000,000 shares issuable upon exercise of stock options currently exercisable. (4) Includes 354,150 shares issuable upon exercise of stock options currently exercisable and 62,500 shares issuable upon exercise of stock options exercisable within 60 days of the date of this Prospectus. (5) Includes 35,000 shares issuable upon exercise of stock options currently exercisable. (6) Includes 225,000 shares issuable upon exercise of stock options currently exercisable. (7) Includes 62,500 shares issuable upon exercise of stock options currently exercisable. Address: Larkin, Hoffman, Daly & Lindgren, Ltd., 1500 Northwest Financial Center, 7900 Xerxes Avenue South, Bloomington, MN 55431. (8) Address: 515 East Amite, Suite 400, Jackson, MS 39201. (9) Mr. Grothe is the beneficial owner of 30,666 shares of Common Stock of WorldCom, representing fewer than 1% of the total shares outstanding, which total includes 30,666 shares issuable upon exercise of stock options exercisable within 60 days of the date of this Prospectus. (10) Mr. Cannada is the beneficial owner of 391,666 shares of Common Stock of WorldCom, representing fewer than 1% of the total shares outstanding, which total includes 391,666 shares issuable upon exercise of stock options exercisable within 60 days of the date of this Prospectus. (11) Mr. Gray is the beneficial owner of 55,000 shares of Common Stock of WorldCom, representing fewer than 1% of the total shares outstanding, which total includes 55,000 shares issuable upon exercise of stock options exercisable within 60 days of the date of this Prospectus. (12) Includes 29,183,670 shares issuable upon exercise of warrants currently exercisable and 5,000,000 shares issuable upon conversion of a convertible subordinated note in the principal amount of $5 million. WorldCom also owns 100,000 shares of Class A Preferred Stock. See "Description of the Company's Securities--Preferred Stock." (13) Address: 64-68 Norwich Avenue West, Bournemouth, Dorset, BH26AW England. (14) Includes 131,580 shares issuable upon exercise of a convertible subordinated debenture, 416,665 shares issuable upon exercise of currently exercisable warrants and 50,000 shares owned by the Ecker Family Limited Partnership, of which he is a partner. Address: 5061 Interlachen Bluff, Edina, MN 55436. 66 CERTAIN TRANSACTIONS AND RELATIONSHIPS WorldCom has the right to elect a majority of the Board of Directors of the Company and is a principal shareholder of the Company. In September 1996, the Company issued to WorldCom a $5.0 million Convertible Subordinated Note due September 30, 1999 (the "WorldCom Convertible Note"). Interest on the WorldCom Convertible Note accrues at an annual rate of 10%, payable semi-annually, commencing with the first payment on March 30, 1997. At any time prior to September 30, 1999, WorldCom may convert the principal amount of the WorldCom Convertible Note into shares of Common Stock at a conversion price of $1.00 per share, subject to adjustment in the event of stock splits, reorganizations or recapitalizations. Payment of principal and interest on the WorldCom Convertible Note is subordinated to existing and future obligations of the Company for money borrowed from bank, trust, insurance or other financial institutions. WorldCom has agreed to defer all cash payments in respect of the WorldCom Convertible Note until a date that is 180 days following the Stated Maturity of the Notes. The shares of Common Stock underlying the WorldCom Convertible Note are subject to certain registration rights. See "Description of the Company's Securities--Certain Options, Warrants, Convertible Subordinated Debt and Registration Rights." In November 1996, the Company and WorldCom entered into a Preferred Stock, Subordinated Note and Warrant Purchase Agreement (the "WorldCom Agreement"). Pursuant to the WorldCom Agreement, the Company issued 100,000 shares of its Class A Preferred Stock, par value $10.00 per share, to WorldCom for an aggregate purchase price of $1.0 million. Except for voting with respect to the election of Directors, holders of shares of Class A Preferred Stock are entitled to one vote for each share held of record, voting together with the holders of Common Stock as a single class, on all matters submitted to a vote of shareholders. With respect to the election of Directors, holders of Class A Preferred Stock, voting separately as a class, are entitled to elect a majority of the Board of Directors. Holders of shares of Class A Preferred Stock, in preference to holders of shares of Common Stock, are entitled to receive a quarterly dividend in the amount of $0.175 per share, payable in cash or in kind, commencing on January 1, 1997, if declared by the Board of Directors. If the net earnings of the Company in a particular year are insufficient to pay such dividend, the unpaid amount accumulates and must be paid in subsequent years before any dividends are paid on shares of Common Stock. At any time that quarterly dividends owing to holders of shares of Class A Preferred Stock are in arrears, the Company may not, without the consent of the Directors elected by the holders of shares of Class A Preferred Stock, (i) declare or pay dividends on any stock ranking junior to the Class A Preferred Stock, (ii) declare or pay dividends on any stock ranking a parity with the Class A Preferred Stock, unless such dividends are paid ratably to the holders of shares of Class A Preferred Stock, (iii) redeem, purchase or otherwise acquire for consideration any share of stock ranking junior to the Class A Preferred Stock or (iv) redeem or purchase or otherwise acquire for consideration any shares of Class A Preferred Stock, or any shares of stock ranking on a parity with the Class A Preferred Stock, except in accordance with an offer to all holders upon such terms as the Board of Directors shall determine in good faith will result in a fair and equitable treatment among the respective series or classes of stock. Holders of shares of Class A Preferred Stock are entitled to preferential distributions upon liquidation equal to $10.00 per share of Class A Preferred Stock plus accumulated and unpaid dividends thereon. The Company is required to redeem all shares of Class A Preferred Stock outstanding as of December 31, 1999 at a redemption price equal to $10 per share plus an amount equal to all accumulated and unpaid dividends thereon. WorldCom has agreed that no cash dividends or distributions will be payable by the Company on the Class A Preferred Stock owned by WorldCom, and the Class A Preferred Stock owned by WorldCom will not be redeemed by the Company for cash, until a date that is 180 days following the Stated Maturity of the Notes. WorldCom is the sole holder of shares of Class A Preferred Stock. See "Description of the Company's Securities-- Preferred Stock." Pursuant to the WorldCom Agreement, the Company also issued to WorldCom a $28.5 million Subordinated Note due December 31, 2003 (the "WorldCom Subordinated Note"), of which $20.4 million aggregate principal amount was outstanding as of December 31, 1997. The WorldCom Subordinated Note accrues interest at an annual rate of 7%, payable semi-annually, commencing March 31, 1997. Payment of principal and interest on the WorldCom Subordinated Note is subordinated to existing and future obligations of the Company for money borrowed from bank, trust, insurance or other financial institutions. WorldCom has 67 agreed to defer all cash payments in respect of the WorldCom Subordinated Note until a date that is 180 days following the Stated Maturity of the Notes. See "Descriptions of Certain Indebtedness." In February 1998, in connection with the Initial Offering, WorldCom agreed to defer all cash payments of principal (or premium on) or interest on, or dividend, distribution or other payment in respect of the WorldCom Convertible Note, the shares of Class A Preferred Stock owned by WorldCom and the WorldCom Subordinated Note until a date that is 180 days following the Stated Maturity of the Notes. The agreement also provides that the payment of the principal of and interest on the WorldCom Convertible Note and the WorldCom Subordinated Note may be accelerated only in the event of the acceleration of the payment of the principal amount of the Notes following an Event of Default with respect to the Notes. The agreement grants WorldCom an option to convert (a) interest otherwise due on the WorldCom Convertible Note and deferred pursuant to WorldCom's agreement, and (b) the interest accrued on the outstanding principal amount of the WorldCom Subordinated Note from December 31, 2003 through the date such amount is paid pursuant to WorldCom's agreement into shares of Common Stock at the per share price on the date of such conversion. Pursuant to the WorldCom Agreement, the Company also issued to WorldCom warrants to purchase, on or before December 31, 2000, up to 20,787,500 shares of the Company's Common Stock at an initial exercise price of $0.962 per share, subject to adjustment in the event of stock splits, reorganizations or recapitalizations (the "WorldCom Warrants"). The exercise price increased to $0.982 per share on March 31, 1997, and thereafter will automatically increase by the amount of $0.016 per share on the last day of each calendar quarter, subject to certain abatement provisions. The exercise price is currently $1.03 per share. The WorldCom Warrants are subject to certain registration rights. See "Description of the Company's Securities--Certain Options, Warrants, Convertible Subordinated Debt and Registration Rights." The WorldCom Agreement provides that if the Company is not publicly held by the year 2000 its managers and Board of Directors will obtain an independent valuation by a nationally recognized investment bank of the fair market value per share of the Company's Common Stock, without any premium allocated for any controlling interest (the "Tender Valuation"). Upon receipt of the Tender Valuation, WorldCom may, but is not required to tender (the "First Tender") to purchase all outstanding shares of Common Stock and all outstanding options, warrants, convertible securities and other rights to purchase shares of Common Stock (collectively, "Company Common Securities") for at least the per share amount of the Tender Valuation. If the owners of a majority of the then outstanding shares of the Company's Common Stock (excluding shares held by WorldCom or its affiliates) reject the First Tender, WorldCom will have 60 days following such rejection to again tender (the "Second Tender") to purchase the same securities. During such 60-day period, the Company will use its good faith efforts to determine what offer price would be acceptable to the owners of such shares and will communicate such information to WorldCom. Subject to certain conditions, WorldCom will sell and the Company will purchase the WorldCom Warrants, any shares acquired upon exercise of the WorldCom Warrants and any shares acquired upon the conversion of the WorldCom Convertible Note (collectively, the "WorldCom Securities") if (i) WorldCom fails to make the First Tender within 90 days after receipt of the Tender Valuation; (ii) owners of a majority of the then outstanding shares of Common Stock (excluding shares held by WorldCom or its affiliates) reject the First Tender and WorldCom makes no Second Tender; or (iii) owners of a majority of the then outstanding shares of Common Stock (excluding shares held by WorldCom or its affiliates) reject the Second Tender. The Company's purchase price for the WorldCom Securities will be as follows: (a) If WorldCom fails to make the First Tender, an amount equal to the Tender Valuation (or the spread between the Tender Valuation and the exercise price in the case of warrants). (b) If the First Tender is rejected by the Company's shareholders and WorldCom does not make the Second Tender, an amount equal to the purchase price offered by WorldCom in the First Tender (or the spread between the offer price and the exercise price in the case of warrants). (c) If the Second Tender is rejected by the Company's shareholders, an amount equal to the purchase price offered by WorldCom in the Second Tender (or the spread between the offer price and the exercise price in the case of warrants). 68 The Company will have nine months in which to pay the purchase price for the WorldCom Securities. From the time the obligation of the Company to purchase the WorldCom Securities arises until the expiration of such nine-month period, Edward J. Driscoll III and Allen L. Witters will jointly hold a limited proxy with regard to all of the WorldCom Securities. If the Company fails to timely pay the purchase price for the WorldCom Securities, WorldCom will be relieved of all obligations to sell such securities to the Company, the Company will have no right to cause WorldCom to sell such securities and the Company will not be obligated to pay the purchase price for such securities. The parties have agreed to waive their respective obligations thereunder if the Company determines to become, and thereafter becomes, a publicly-held company. In December 1996, WorldCom, Edward J. Driscoll III and Allen L. Witters executed a Right of Refusal Agreement which provides: (i) for a restriction on transfer by Mr. Driscoll and Mr. Witters of the shares of Common Stock of the Company held by them as of the date thereof (the "Shares") and (ii) that in the event Mr. Driscoll or Mr. Witters desires to sell his Shares, then he shall offer to the other a right of first refusal and, in the event the other does not elect to purchase such Shares, he shall offer to WorldCom a right of second refusal. In September 1997, the Company entered into the Revolving Credit Facility. WorldCom has guaranteed the payment of all amounts owed under the Revolving Credit Facility, and, accordingly, the Company must obtain WorldCom's consent prior to obtaining any advances under the Revolving Credit Facility. The Company intends to repay all amounts outstanding under the Revolving Credit Facility with the net proceeds of the Offering, but the Revolving Credit Facility is expected to remain in place. See "Descriptions of Certain Indebtedness." In consideration of WorldCom's guaranty, the Company granted to WorldCom 8,396,170 Class A warrants and 14,204,835 Class B warrants to purchase shares of the Company's Common Stock at an initial exercise price of $3.90 per share, subject to adjustment in the event of stock splits, reorganizations or recapitalizations. The Class A warrants may be exercised at any time on or before December 31, 2000. The Class B warrants begin to vest after the 24th month of the Revolving Credit Facility depending upon the outstanding balance under the Revolving Credit Facility at certain times and whether certain qualified repayments are made thereunder. If the Company repays all obligations under the Revolving Credit Facility prior to the 24th month with certain qualified repayments, no Class B warrants will vest. The Class A warrants and Class B warrants are subject to certain registration rights. See "Description of the Company's Securities--Certain Options, Warrants, Convertible Subordinated Debt and Registration Rights." WorldCom has also guaranteed the performance of the Company's obligations under a Service Provision Agreement, dated July 18, 1997, between the Company and Time. The Company has entered into service arrangements with WorldCom, including an Application for Data Services pursuant to which WorldCom provides the Company with interexchange telecommunications service, frame relay service and ATM service, and co-location agreements pursuant to which the Company leases space for its Distribution Hubs. The Company believes that these arrangements are at terms that are similar to those that could be obtained from an independent third party on an arm's-length basis. 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. The Company's marketing services were performed by Kauffman Marketing Group, Inc. from November 1995 to December 1997. The former President of Kauffman Marketing Group, Inc., John Kauffman, joined the Company as Vice President of Strategic Marketing and Communications in December 1997. During the years ended December 31, 1995, 1996 and 1997, the Company incurred marketing expenses of approximately $0.0, $0.3 million and $1.6 million, respectively, to such firm for marketing services. In addition, Mr. Kauffman was granted, in July 1997, an option to purchase up to 225,000 shares of Common Stock at a price of $0.962 per share and Mr. Kauffman was granted, in December 1997, an option to purchase up to 350,000 shares of Common Stock at a price of $3.90 per share. 69 DESCRIPTION OF THE COMPANY'S SECURITIES GENERAL The Company's authorized capital stock consists of 100,000,000 shares, of which 90,000,000 shares are designated as Common Stock, 100,000 shares are designated as Class A Preferred Stock, par value $10.00 per share ("Class A Preferred Stock"), and 9,900,000 shares are designated as Undesignated Stock. COMMON STOCK The Company currently has outstanding 9,271,363 shares of Common Stock. An additional 68,606,626 shares are reserved for issuance upon exercise of outstanding options and warrants, conversion of convertible debt securities and for payment of the portion of the consideration of the 4-Sight Acquisition that is subject to the satisfaction of certain conditions. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. There is no cumulative voting for the election of directors, which means that the holders of more than 50% of the outstanding Common Stock voting for the election of directors can elect all of the directors of the Company to be elected by the holders of Common Stock. As discussed below, the holders of Class A Preferred Stock, voting separately as a class, are entitled to elect a majority of the Board of Directors. Subject to the preferences of the Class A Preferred Stock and any other class or series of outstanding preferred stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor and are entitled to share ratably in all assets of the Company available for distribution to holders of the Common Stock upon liquidation, dissolution or winding up of the affairs of the Company. Holders of Common Stock have no preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions applicable thereto. All outstanding shares of Common Stock are fully paid and nonassessable. PREFERRED STOCK In November 1996, the Company issued 100,000 shares of Class A Preferred Stock to WorldCom for an aggregate purchase price of $1.0 million. Except for voting with respect to the election of Directors, holders of shares of Class A Preferred Stock are entitled to one vote for each share held of record, voting together with the holders of Common Stock as a single class, on all matters submitted to a vote of shareholders. With respect to the election of Directors, holders of Class A Preferred Stock, voting separately as a class, are entitled to elect a majority of the Board of Directors. Holders of shares of Class A Preferred Stock, in preference to holders of shares of Common Stock, are entitled to receive a quarterly dividend in the amount of $0.175 per share, payable in cash or in kind, commencing January 1, 1997, if declared by the Board of Directors. If the net earnings of the Company in a particular year are insufficient to pay such dividend, the unpaid amount accumulates and must be paid in subsequent years before any dividends are paid on shares of Common Stock. At any time that the quarterly dividends owing to holders of shares of Class A Preferred stock are in arrears, the Company may not, without the consent of the Directors elected by the holders of Class A Preferred Stock, (i) declare or pay dividends on any stock ranking junior to the Class A Preferred Stock, (ii) declare or pay dividends on any stock ranking on a parity with the Class A Preferred Stock, unless such dividends are paid ratably to the holders of shares of Class A Preferred Stock, (iii) redeem, purchase or otherwise acquire for consideration any share of stock ranking junior to the shares of Class A Preferred Stock or (iv) redeem or purchase or otherwise acquire for consideration any shares of Class A Preferred Stock, or any shares of stock ranking on a parity with the Class A Preferred Stock, except in accordance with an offer to all holders upon such terms as the Board of Directors shall determine in good faith will result in a fair and equitable treatment among the respective series or classes of stock. Holders of shares of Class A Preferred Stock are entitled to preferential distributions upon liquidation equal to $10.00 per share of Class A Preferred Stock plus accumulated and unpaid dividends thereon. Holders of Class A Preferred Stock have no preemptive, subscription or conversion rights. The Company is required to redeem all shares of Class A Preferred Stock outstanding as of December 31, 1999 at a redemption price equal to $10 per share plus an amount equal to all accumulated and unpaid dividends thereon. WorldCom has agreed that no cash dividends or distributions will be payable by the Company on the Class A Preferred Stock owned by WorldCom, and the Class A Preferred Stock owned by WorldCom will not be redeemed by the Company for cash, until a date that is 180 days following the Stated Maturity of the Notes. WorldCom is the sole holder of shares of Class A Preferred Stock. 70 UNDESIGNATED STOCK The Company's Articles of Incorporation authorize the Company's Board of Directors, without further shareholder action, to issue up to 9,900,000 shares of Undesignated Stock in one or more series and to fix the voting rights, liquidation preferences, dividend rights, repurchase rights, conversion rights, redemption rights and terms, including sinking fund provisions, and certain other rights and preferences of the Undesignated Stock. This authority permits the Board of Directors to create out of the Undesignated Stock one or more classes or series of preferred stock which may have rights, including voting and conversion rights, that are different from or greater than the rights of Common shareholders. Such preferred stock could adversely affect the voting power or dividend rights of the holders of Common Stock and may have the effect of delaying, deferring or preventing a change in control of the Company. CERTAIN OPTIONS, WARRANTS, CONVERTIBLE SUBORDINATED DEBT AND REGISTRATION RIGHTS As of April 28, 1998, the Company had granted options to purchase a total of 10,889,900 shares of Common Stock at exercise prices ranging from $0.45 to $8.00 per share, of which 6,216,504 are currently vested and exercisable and the remainder vest and become exercisable at various times until 2008. In the first half of 1995, the Company issued a total of $250,000 aggregate principal amount of 8% Convertible Subordinated Debentures due December 31, 1999, of which $100,000 aggregate principal amount is currently outstanding. The Convertible Subordinated Debentures entitle the holder to convert at any time prior to December 1, 1999, the date represented thereby into shares of the Company's Common Stock at a conversion price ("Conversion Price") of $0.38 per share, subject to adjustment in the event of stock splits, reorganizations or recapitalizations, and on a weighted-average basis in the event the Company issues any Common Stock or security convertible into, or exercisable to purchase, Common Stock at a price less than the then prevailing Conversion Price. The Company may redeem the Convertible Subordinated Debentures at any time commencing January 1, 1997 at 110% of the face amount, plus interest. Except in certain limited circumstances, the holders of the Convertible Subordinated Debentures have the right to include the shares of Common Stock underlying the Convertible Subordinated Debentures in any registration statement the Company may file in the future with respect to the Company's Common Stock. The Convertible Subordinated Debentures also provide that the Company may require the holders to convert the Convertible Subordinated Debentures into Common Stock at any time the Company files a registration statement. In June 1995, the holder of $100,000 of Convertible Subordinated Debentures exercised the right to convert the Debenture into 263,160 shares of the Company's Common Stock at the Conversion Price of $0.38 per share. In each of July, 1996 and December 1997, the holder of $25,000 of Convertible Subordinated Debentures exercised the right to convert the Debenture into 65,790 shares of the Company's Common Stock at the Conversion Price of $0.38 per share. Holders of 1,650,000 shares of the Company's Common Stock issued in a private placement in June through August 1995 are entitled to the same "demand" or "piggy back" registration rights that the Company may grant to any other shareholder. From December 1995 through July 1996, the Company issued, in three series, an aggregate of $5.6 million principal amount of subordinated promissory notes (the "Bridge Financing"). In connection therewith, the Company issued to the lenders of the Bridge Financing, for nominal consideration, warrants to purchase a total of 5,600,000 shares of Common Stock and issued to the placement agent in connection with such financing warrants to purchase 560,000 shares of Common Stock (collectively, the "Bridge Warrants"). The Bridge Warrants expire as follows: 1,760,000 on December 31, 2000, 1,100,000 on March 31, 2003 and 3,300,000 on June 30, 2003. The exercise price of the 1,760,000 warrants expiring on December 31, 2000 is $1.00 per share, and the initial exercise price of the remaining 4,400,000 warrants is $1.50 per share, subject to adjustment in the event of stock splits, reorganizations or recapitalizations. Beginning on the date three years after the date of a holder's Bridge Warrants, such holder of Bridge Warrants, or of Common Stock acquired upon exercise of Bridge Warrants, may have the right to include such Bridge Warrants or Common Stock in a registration statement the Company may file after such date, subject to the right of the Company to exclude such Bridge 71 Warrants or Common Stock that are eligible for sale under an applicable exemption from registration or if the managing underwriter reasonably deems that the inclusion of such securities in such registration statement would unreasonably interfere with the contemplated offering. In September 1996, the Company issued to WorldCom the WorldCom Convertible Note. Interest on the WorldCom Convertible Note accrues at an annual rate of 10%, payable semi-annually, commencing with the first payment on March 30, 1997. At any time prior to September 30, 1999, WorldCom may convert the principal amount of the WorldCom Convertible Note, in whole or in part, into shares of Common Stock at a conversion price of $1.00 per share, subject to adjustment in the event of stock splits, reorganizations or recapitalizations. The Company may redeem the WorldCom Convertible Note, in whole or in part, at any time on or after January 1, 1998 at its face amount plus accrued and unpaid interest. Except in certain limited circumstances, WorldCom has the right to include the shares of Common Stock underlying the WorldCom Convertible Note in any registration statement filed by the Company under the Securities Act. Notwithstanding the foregoing, if the managing underwriter of such an offering believes in good faith that inclusion of all such shares would reduce the number of shares to be offered or interfere with the successful marketing of the shares to be offered, the number of such shares to be included in such Registration Statement may be reduced; provided that any such reduction shall be pro rata among all persons participating in the offering. In addition, on one occasion only, at any time prior to September 17, 2001, WorldCom may request that the Company use its best efforts to register or qualify the WorldCom Convertible Note or the shares issued upon the conversion of the WorldCom Convertible Note under the Securities Act and such state laws as are reasonably requested. Until the WorldCom Convertible Note is paid in full or converted, the Company may not declare any dividends on its Common Stock, except for certain stock splits in the form of a dividend payable in shares of Common Stock. In March 1996, the Company entered into an arrangement with Leasing Technologies International, Inc. ("LTI") pursuant to which LTI agreed to provide the Company with up to $1,000,000 for the purchase of certain equipment. See "Description of Certain Indebtedness." In partial consideration for entering into this arrangement, the Company granted to LTI warrants to purchase on or before April 30, 2003, up to 45,000 shares of the Company's Common Stock at an exercise price of $1.50 per share, subject to adjustment in the event of stock splits, reorganizations or recapitalizations. Beginning April 26, 1999, LTI may have the right to include such warrants, or Common Stock acquired upon exercise of such warrants, in a registration statement the Company may file after such date. In connection with the execution of the WorldCom Agreement, in December 1996, the Company granted to WorldCom the WorldCom Warrants to purchase on or before December 31, 2000, up to 20,787,500 shares of the Company's Common Stock at an initial exercise price of $0.962 per share, subject to adjustment in the event of stock splits, reorganizations or recapitalizations. See "Certain Transactions and Relationships." The exercise price increased to $0.982 per share on March 31, 1997, and thereafter will automatically increase by the amount of $0.016 per share on the last day of each calendar quarterly, subject to certain abatement provisions. Beginning December 16, 1999, WorldCom has the right to include such WorldCom Warrants, or Common Stock acquired upon exercise of such WorldCom Warrants, in a registration statement the Company may file after such date, subject to the right of the Company to exclude such WorldCom Warrants or Common Stock that are eligible for sale under an applicable exemption from registration or if the managing underwriter reasonably deems that the inclusion of such securities in such registration statement would unreasonably interfere with the contemplated offering. In September 1997, the Company entered into the Revolving Credit Facility. In consideration for WorldCom's guaranty of the Company's obligations under the Revolving Credit Facility, the Company granted to WorldCom 8,396,170 Class A warrants and 14,204,835 Class B warrants to purchase shares of the Company's Common Stock at an exercise price of $3.90 per share, subject to adjustment in the event of stock splits, reorganizations or recapitalizations and subject to further adjustment after further consideration to determine the "fair market value" as of September 15, 1997 of such warrants. The Class A warrants may be exercised at any time on or before December 31, 2000. The Class B warrants begin to vest after the 24th month of the Revolving 72 Credit Facility depending upon the outstanding balance under the Revolving Credit Facility at certain times and whether certain qualified repayments are made. If the Company repays all obligations under the Revolving Credit Facility prior to the 24th month with certain qualified repayments no Class B warrants will vest. Beginning September 26, 2000, WorldCom has the right to include such warrants, or shares of Common Stock acquired upon exercise of such warrants, in a registration statement filed by the Company after such date, subject to the right of the Company to exclude such warrants or Common Stock that are eligible for sale under an applicable exemption from registration or if the managing underwriter reasonably deems that the inclusion of such securities in such registration statement would unreasonably interfere with the contemplated offering. WorldCom has the option to convert (a) interest otherwise due on the WorldCom Convertible Note and deferred pursuant to its agreement with the Company, and (b) the interest accrued on the outstanding principal amount of the WorldCom Subordinated Note from December 31, 2003 through the date such amount is paid into shares of Common Stock at the per share price on the date of such conversion. The Company has obtained waivers from all persons that have, or arguably may have, the right to include such securities in the Exchange Offer Registration Statement or any Shelf Registration Statement to be filed for the benefit of Noteholders. PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND THE MINNESOTA BUSINESS CORPORATION ACT The Company is a Minnesota corporation and is governed by the Minnesota Business Corporation Act. The existence of authorized but unissued Undesignated Stock, and certain provisions of Minnesota law, could have an anti-takeover effect. These provisions are intended to provide management flexibility to discourage an unsolicited takeover of the Company if the Board determines that such a takeover is not in the best interests of the Company and its shareholders. However, these provisions could have the effect of discouraging some attempts to acquire the Company. Section 302A.671 of the Minnesota Business Corporation Act applies, with certain exceptions, to any acquisition of voting stock of the Company (from a person other than the Company, and other than in connection with certain mergers and exchanges to which the Company is a party) resulting in the beneficial ownership of 20 percent or more of the voting stock then outstanding. Section 302A.671 requires approval of any such acquisitions by a majority vote of the shareholders of the Company prior to its consummation. In general, shares acquired in the absence of such approval are denied voting rights and are redeemable at their then fair market value by the Company within 30 days after the acquiring person has failed to give a timely information statement to the Company or the date the shareholders voted not to grant voting rights to the acquiring person's shares. Section 302A.673 of the Minnesota Business Corporation Act generally prohibits any business combination by the Company, or any subsidiary of the Company, with any shareholder which purchases 10% or more of the Company's voting shares (an "interested shareholder") within four years following such interested shareholder's share acquisition date, unless the business combination is approved by a committee of all of the disinterested members of the Board of Directors of the Company before the interested shareholder's share acquisition date. 73 DESCRIPTION OF CERTAIN INDEBTEDNESS In March 1996, the Company entered into an equipment leasing arrangement with LTI pursuant to which LTI agreed to lease up to $1.0 million of equipment to the Company. In April 1996, the Company leased from LTI $245,396.60 of computer hardware equipment for a term of 30 months, commencing May 1, 1996, at a monthly rental of $9,480, subject to certain adjustments. In September 1996, the Company issued to WorldCom the WorldCom Convertible Note due September 30, 1999 in the principal amount of $5.0 million. Interest on the WorldCom Convertible Note accrues at an annual rate of 10%, payable semi-annually, commencing with the first payment on March 30, 1997. WorldCom has agreed to defer all cash payments in respect of the WorldCom Convertible Note until a date that is 180 days following the Stated Maturity of the Notes. At any time prior to September 30, 1999, WorldCom may convert the principal amount of the WorldCom Convertible Note into shares of Common Stock at a conversion price of $1.00 per share, subject to adjustment in the event of stock splits, reorganizations or recapitalizations. Payment of principal and interest on the WorldCom Convertible Note is subordinated to existing and future obligations of the Company for money borrowed from bank, trust, insurance or other financial institutions. The Company may redeem the WorldCom Convertible Note at any time commencing January 1, 1998 at its face amount plus accrued and unpaid interest. The shares of Common Stock underlying the Convertible Note are subject to certain registration rights. See "Description of the Company's Securities--Certain Options, Warrants, Convertible Subordinated Debt and Registration Rights." In December 1996, the Company issued to WorldCom the WorldCom Subordinated Note due December 31, 2003 in the principal amount of $28.5 million, of which $20.4 aggregate principal amount was outstanding as of December 31, 1997. The WorldCom Subordinated Note accrues interest at an annual rate of 7%, payable semi-annually, commencing March 31, 1997. WorldCom has agreed to defer all cash payments in respect of the WorldCom Subordinated Note until a date that is 180 days following the Stated Maturity of the Notes. WorldCom will, upon the request of the Company, make additional disbursements under the WorldCom Subordinated Note in an amount up to $332,500 not more frequently than once each quarter, commencing March 31, 1997. Payment of principal and interest on the WorldCom Subordinated Note is subordinated to existing and future obligations of the Company for money borrowed from bank, trust, insurance or other financial institutions. In September 1997, the Company entered into the Revolving Credit Facility with The First National Bank of Chicago ("FNBC"), an affiliate of First Chicago Capital Markets, Inc., one of the Initial Purchasers. At the Company's election, the interest rate per annum applicable to the Revolving Credit Facility is a fluctuating rate of interest measured by reference to either: (i) the adjusted London inter-bank offered rate ("LIBOR") plus 55 basis points (the "Eurodollar Rate") or (ii) the greater of the Federal Funds Effective Rate or the corporate base rate announced by FNBC plus 50 basis points (the "Floating Rate") . On March 31, 1998, the Eurodollar Rate was equal to 6.2375% per annum and the Floating Rate was equal to 8.5% per annum. The aggregate principal amount outstanding under the Revolving Credit Facility as of March 31, 1998 was $0. The Revolving Credit Facility matures and becomes payable in full on September 26, 2000. Subject to the written authorization of WorldCom, as guarantor of the obligations of the Company under the Revolving Credit Facility, the Company may from time to time make additional draws under the Revolving Credit Facility up to an aggregate of $25.0 million outstanding at any one time. The Company has outstanding the following items of indebtedness relating to the purchase of certain equipment and the licensing of certain proprietary software by the Company: (i) An installment note in favor of FINOVA Technology Finance, Inc. ("FINOVA") bearing monthly payments of $43,324 and an additional final payment of $241,955, due April 2001. (ii) An installment note in favor of FINOVA bearing monthly payments of $90,995 and an additional final payment of $509,052, due May 2001. 74 (iii) An installment note in favor of Transamerica Business Credit Corporation ("Transamerica") bearing monthly payments of $46,043 and an additional final payment of $206,552, due May 2001. (iv) An installment note in favor of Transamerica bearing monthly payments of $41,692 and an additional final payment of $187,349, due May 2001. (v) An installment note in favor of Transamerica bearing monthly payments of $40,638 and an additional final payment of $183,668, due June 2001. (vi) An installment note in favor of Transamerica bearing monthly payments of $10,509 and an additional final payment of $47,503, due July 2001. (vii) An installment note in favor of Leasetec Corporation ("Leasetec") bearing monthly payments of $46,667, due December 1998. (viii) An installment note in favor of Leasetec bearing monthly payments of $82,690, due April 1999. Each of the installment notes held by FINOVA, Transamerica and Leasetec is secured by certain items of equipment or proprietary software. 75 DESCRIPTION OF THE NOTES The Original Notes are, and the Exchange Notes will be, issued under an Indenture (the "Indenture") to be dated as of March 5, 1998, between WAM!NET Inc. (the "Issuer") and U.S. Bank Trust National Association (f/k/a First Trust National Association), as Trustee, a copy of which has been filed as an exhibit to the Exchange Offer Registration Statement. Upon the issuance of the Exchange Notes, if any, or the effectiveness of a Shelf Registration Statement with respect to the Notes, the Indenture will be subject to and governed by the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following summary of certain provisions of the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Trust Indenture Act and to all of the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part of the Indenture by reference to the Trust Indenture Act, as in effect on the date of the Indenture. The definitions of certain capitalized terms used in the following summary are set forth below under "--Certain Definitions." GENERAL The Original Notes are, and the Exchange Notes will be, issued only in fully registered form without coupons, in denominations of $1,000 principal amount and integral multiples thereof. Principal of, premium, if any, and interest on the Notes are payable, and the Notes are exchangeable and transferable, at the office or agency of the Issuer in the City of New York maintained for such purposes (which initially will be the corporate trust office of the Trustee). See "--Book-Entry; Delivery and Form." No service charge will be made for any registration of transfer, exchange or redemption of the Notes, except in certain circumstances for any tax or other governmental charge that may be imposed in connection therewith. MATURITY, INTEREST AND PRINCIPAL The Original Notes are, and the Exchange Notes will be, general unsecured obligations of the Issuer, limited to $208,530,000 aggregate principal amount at maturity, and will mature on March 1, 2005. The Notes will not bear cash interest prior to March 1, 2002. See "Certain Federal Income Tax Considerations." Commencing on September 1, 2002, interest on the Notes will be payable, in cash, at a rate of 13 1/4% per annum, semi-annually in arrears on each March 1 and September 1 to registered holders of Notes on the February 15 or August 15, as the case may be, immediately preceding such interest payment date. Interest on the Notes will accrue from the most recent interest payment date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from March 1, 2002. Based on the foregoing, the yield to maturity of each Note will be 14.59% (computed on a semi-annual bond equivalent basis). Interest will be computed on the basis of a 360-day year of twelve 30-day months. If the Issuer defaults on any payment of principal (whether at maturity, upon redemption or otherwise), cash interest will continue to accrue and, to the extent permitted by law, cash interest will accrue on overdue installments of interest at the rate of interest borne by the Notes. As discussed under "Exchange Offer; Note Registration Rights," pursuant to the Registration Rights Agreement, the Issuer has agreed, for the benefit of the holders of Notes, to effect at its expense a registered exchange offer under the Securities Act to exchange the Notes for Exchange Notes. The failure to comply with such agreement in certain respects may result in the Issuer paying cash interest on the Notes as liquidated damages. 76 REDEMPTION Optional Redemption. The Notes are redeemable, at the option of the Issuer, in whole or in part, on or after March 1, 2002, upon not less than 30 nor more than 60 days' written notice at the redemption prices (expressed as percentages of principal amount at maturity) set forth below, plus accrued and unpaid interest thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on March 1 of each of the years indicated below:
YEAR PERCENTAGE ---- ---------- 2002.............................. 106.6250% 2003.............................. 103.3125% 2004.............................. 100.0000%
In addition, at any time on or prior to March 1, 2001, the Issuer may, other than in any circumstances resulting in a Change of Control, redeem, at its option, up to a maximum of 25% of the originally-issued aggregate principal amount at maturity of Notes at a redemption price (determined at the redemption date) equal to 113.25% of the Accreted Value of the Notes so redeemed, with the net cash proceeds of an Initial Public Equity Offering resulting in gross cash proceeds to the Issuer of at least $35.0 million in the aggregate; provided that not less than 75% of the originally-issued aggregate principal amount at maturity of Notes is outstanding immediately following such redemption. Any such redemption must be effected upon not less than 30 nor more than 60 days' notice given within 30 days after the consummation of the Initial Public Equity Offering. Mandatory Redemption. The Issuer will not be required to repurchase the Notes or make any mandatory redemption or sinking fund payments in respect of the Notes. However, (i) following the occurrence of a Change of Control the Issuer will be required to make an offer to purchase all outstanding Notes at a price equal to 101% of the Accreted Value thereof as of the date of purchase and (ii) following the occurrence of an Asset Sale the Issuer may be obligated to make an offer to purchase all or a portion of the outstanding Notes at a price equal to 100% of the Accreted Value thereof as of the date of purchase, in each case plus accrued and unpaid interest, if any, to the date of purchase. See "--Certain Covenants--Change of Control" and "--Disposition of Proceeds of Asset Sales," respectively. Selection; Effect of Redemption Notice. In the case of a partial redemption, selection of the Notes for redemption will be made pro rata, by lot or such other method as the Trustee in its sole discretion deems appropriate and just; provided that any redemption pursuant to the provisions relating to redemptions from the proceeds of one or more Public Equity Offerings or sales to one or more Strategic Equity Investors shall be made on a pro rata basis or on as nearly a pro rata basis as practicable (subject to DTC procedures). No Notes of a principal amount at maturity of $1,000 or less shall be redeemed in part. Notice of redemption shall be mailed by first-class mail at least 30 but not more than 60 days before the redemption date to each holder of Notes to be redeemed at its registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in a principal amount at maturity equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon surrender for cancellation of the original Note. Upon giving of a redemption notice, interest on Notes called for redemption will cease to accrue from and after the date fixed for redemption (unless the Issuer defaults in providing the funds for such redemption) and such Notes will cease to be outstanding. RANKING The Indebtedness of the Issuer evidenced by the Notes ranks senior in right of payment to all Subordinated Indebtedness of the Issuer and pari passu in right of payment with all existing and future unsecured and unsubordinated Indebtedness of the Issuer. The Notes are effectively subordinated in right of payment to all secured Indebtedness of the Issuer. Assuming the Notes had been issued on December 31, 1997, and after giving effect to the application of the estimated net proceeds thereof, the Issuer would have had outstanding at that date approximately $9.6 million of secured Indebtedness, which would have been effectively senior to the Notes, no Indebtedness which would have ranked pari passu with the Notes and $25.4 million of Indebtedness which would have been subordinated in right of payment to the Notes. 77 Although the Indenture contains limitations on the amount of additional Indebtedness which the Issuer or its Restricted Subsidiaries may incur, under certain circumstances the amount of such Indebtedness could be substantial, and the Indenture does not limit the amount of secured Permitted Equipment Financing that may be incurred by the Issuer. See "--Certain Covenants-- Limitation on Additional Indebtedness" below. If the Issuer becomes insolvent or is liquidated, or if payment under the any secured Permitted Equipment Financing or other secured credit facility is accelerated, the lenders under the Permitted Equipment Financing or such other facility would be entitled to exercise the remedies available to a secured lender under applicable law pursuant to the terms of the applicable financing agreements. Accordingly, any claims of such lenders with respect to assets secured in their favor will be prior to any claims of the holders of the Notes with respect to such assets. The Notes are guaranteed on an unsecured basis by all Material Restricted Subsidiaries of the Issuer, which guarantees may be released under certain circumstances. As of the Issue Date and as of the date hereof, the Issuer did not have any Material Restricted Subsidiaries. No other Subsidiary of the Issuer will be required to guarantee the Indebtedness represented by the Notes, except under the circumstances described under "--Certain Covenants-- Issuance of Guarantees by Certain Restricted Subsidiaries; Release of Guarantees'' below. As of the date hereof, the Subsidiaries of the Issuer have no Indebtedness. CERTAIN COVENANTS Set forth below are certain covenants that are contained in the Indenture. Limitation on Additional Indebtedness. The Indenture provides that the Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume, issue, guarantee or in any manner become directly or indirectly liable for or with respect to, contingently or otherwise, the payment of (collectively, to "incur") any Indebtedness (including any Acquired Indebtedness), except for Permitted Indebtedness (including Acquired Indebtedness to the extent it would constitute Permitted Indebtedness); provided (i) the Issuer will be permitted to incur Indebtedness (including Acquired Indebtedness) and (ii) a Restricted Subsidiary will be permitted to incur Acquired Indebtedness, if, in either case, after giving pro forma effect to such incurrence (including the application of the net proceeds therefrom), the Indebtedness to EBITDA Ratio would be less than or equal to 5 to 1. Indebtedness of any person or any of its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary (or is merged into or consolidated with the Issuer or any Restricted Subsidiary), whether or not such Indebtedness was incurred in connection with, or in contemplation of, such person becoming a Restricted Subsidiary (or being merged into or consolidated with the Issuer or any Restricted Subsidiary) shall be deemed incurred at the time any such person becomes a Restricted Subsidiary or merges into or consolidates with the Issuer or any Restricted Subsidiary. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness may be incurred by meeting the criteria of one or more items of Permitted Indebtedness, the Issuer may, in its sole discretion, classify and divide such item of Indebtedness among more than one of such items of Permitted Indebtedness. Limitation on Restricted Payments. The Indenture provides that the Issuer will not, and will not permit any of the Restricted Subsidiaries to, make, directly or indirectly, any Restricted Payment unless: (i) no Default shall have occurred and be continuing at the time of or upon giving effect to such Restricted Payment; (ii) immediately after giving effect to such Restricted Payment, the Issuer would be able to incur $1.00 of Indebtedness under the proviso of the covenant "--Limitation on Additional Indebtedness"; and (iii) immediately after giving effect to such Restricted Payment, the aggregate amount of all Restricted Payments declared or made on or after the Issue Date does not exceed an amount equal to the sum of, without duplication, (a) 50% of the Consolidated Net Income accrued on a cumulative basis during the 78 period beginning on the first day of the first fiscal quarter immediately following the Issue Date and ending on the last day of the fiscal quarter of the Issuer immediately preceding the date of such proposed Restricted Payment (or, if such cumulative Consolidated Net Income of the Issuer for such period is a deficit, minus 100% of such deficit) for which financial statements have been provided pursuant to "--Reports'' below, in any event determined by excluding income resulting from transfers of assets by the Issuer or a Restricted Subsidiary to an Unrestricted Subsidiary, plus (b) the aggregate net cash proceeds received by the Issuer either (x) as capital contributions to the Issuer after the Issue Date or (y) from the issuance and sale of its Capital Stock (other than Disqualified Stock) or options, warrants or other rights to acquire its Capital Stock (other than Disqualified Stock) (exclusive of any convertible Indebtedness or any options, warrants or other rights that are redeemable at the option of the holder, or are required to be redeemed, prior to the Stated Maturity of the Notes), in each case on or after the Issue Date to a person who is not a Subsidiary of the Issuer, plus (c) the aggregate net proceeds received by the Issuer from the issuance (other than to a Subsidiary of the Issuer) on or after the Issue Date of its Capital Stock (other than Disqualified Stock) upon the conversion of, or in exchange for, Indebtedness of the Issuer or upon the exercise of options, warrants or other rights of Issuer, plus (d) in the case of the disposition or repayment (in whole or in part) of any Investment constituting a Restricted Payment made after the Issue Date, an amount equal to the lesser of the return of capital with respect to the applicable portion of such Investment and the cost of the applicable portion of such Investment, in either case, less the cost of the disposition of such Investment, plus (e) in the case of any Revocation with respect to a Subsidiary of the Issuer that was made subject to a Designation after the Issue Date, an amount equal to the lesser of the Designation Amount with respect to such Subsidiary or the Fair Market Value of the Investment of the Issuer and the Restricted Subsidiaries in such Subsidiary at the time of Revocation, minus (f) 50% of the principal amount of any Indebtedness incurred pursuant to clause (g) of the definition of "Permitted Indebtedness," minus (g) the greater of (x) $0 and (y) the Designation Amount (measured as of the date of Designation) with respect to any Subsidiary that has been designated as an Unrestricted Subsidiary in accordance with "--Limitation on Designations of Unrestricted Subsidiaries'' below. For purposes of the preceding clauses (b) (y) and (c), as applicable, (A) the value of the aggregate net proceeds received by the Issuer upon the issuance of Capital Stock either upon the conversion of convertible Indebtedness or in exchange for outstanding Indebtedness or upon the exercise of options, warrants or rights will be the net cash proceeds received upon the issuance of such Indebtedness, options, warrants or rights plus the incremental amount received, if any, by the Issuer upon the conversion, exchange or exercise thereof, (B) there shall be excluded in all cases any issuance and sale of Capital Stock financed, directly or indirectly, using funds (I) borrowed from the Issuer or any Subsidiary until and to the extent such borrowing is repaid or (II) contributed, extended, guaranteed or advanced by the Issuer or any Subsidiary (including, without limitation, in respect of any employee stock ownership or benefit plan) and (C) there shall be excluded in all cases any issuance and sale of Capital Stock in an Initial Public Equity Offering to the extent the net cash proceeds are used, prior to March 1, 2001, to redeem Notes as described under "--Redemption--Optional Redemption." The Issuer may not redeem Notes as described under "--Redemption--Optional Redemption'' from net cash proceeds received by the Issuer from the issuance on or after the Issue Date of its Capital Stock if such net cash proceeds have ever been included in a determination of the amount of Restricted Payments that may be made by the Issuer pursuant to this covenant. For purposes of determining the amount expended for Restricted Payments, cash distributed shall be valued at the face amount thereof and property other than cash shall be valued at its Fair Market Value. The provisions of this covenant shall not prohibit the following (each of which shall be given independent effect): (i) the payment of any dividend or other distribution within 60 days after the date of declaration thereof if at such date of declaration such payment would be permitted by the provisions of the Indenture; (ii) the purchase, redemption, retirement or other acquisition of any shares of Capital Stock of the Issuer in exchange for, or out of the net cash proceeds of the substantially concurrent issue and sale (other than to a Subsidiary of the Issuer) of, shares of Capital Stock of the Issuer (other than Disqualified Stock); provided that any such net cash proceeds are excluded from clause (iii) (b) of the second preceding paragraph; (iii) so long as no Default 79 shall have occurred and be continuing, the purchase, redemption, retirement, defeasance or other acquisition of Subordinated Indebtedness made by exchange for, or out of the net cash proceeds of, a substantially concurrent issue and sale (other than to a Subsidiary of the Issuer) of (x) Capital Stock (other than Disqualified Stock) of the Issuer or (y) other Subordinated Indebtedness to the extent that its stated maturity for the payment of principal thereof is not prior to the 180th day after the final stated maturity of the Notes; provided that any such net cash proceeds are excluded from clause (iii) (b) of the second preceding paragraph; (iv) so long as no Default shall have occurred and be continuing, purchases or redemptions of Capital Stock (including cash settlements of stock options) held by employees, officers or directors upon or following termination of their employment with the Issuer or one of its Subsidiaries; provided that payments shall not exceed $750,000 in any fiscal year in the aggregate or $3.0 million in the aggregate during the term of the Notes; (v) so long as no Default shall have occurred and be continuing, Investments in Unrestricted Subsidiaries to the extent reasonably promptly made with the proceeds of (x) a capital contribution to the Issuer or (y) an issue or sale of Capital Stock (other than Disqualified Capital Stock) of the Issuer (other than to a Subsidiary); provided that any such net cash proceeds are excluded from clause (iii) (b) of the second preceding paragraph; and (vi) so long as no Default shall have occurred and be continuing, Investments in (x) joint ventures formed to engage in the Digital Network Business and (y) other persons principally engaged in the Digital Network Business; provided that no more than $12.5 million of Investments made pursuant to this clause (vi) shall be outstanding at any time. In determining the amount of Restricted Payments permissible under this covenant, amounts expended pursuant to clauses (i), (iv) and (vi) above shall be included, without duplication, as Restricted Payments. Limitation on Liens Securing Certain Indebtedness. The Indenture provides that the Issuer will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Liens of any kind against or upon any of the property or assets of the Issuer or any Restricted Subsidiary, whether now owned or hereafter acquired, or any proceeds therefrom, which secure either (x) Subordinated Indebtedness unless the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to the Liens securing such Subordinated Indebtedness or (y) Indebtedness of (A) the Issuer or any Subsidiary Guarantor that is not Subordinated Indebtedness or (B) any Restricted Subsidiary (other than a Subsidiary Guarantor), unless the Notes are equally and ratably secured with the Liens securing such other Indebtedness, except, in the case of this clause (y), Permitted Liens. Issuance of Guarantees by Certain Restricted Subsidiaries; Release of Guarantees. The Indenture provides that each Material Restricted Subsidiary will become a guarantor of the Notes (each a "Subsidiary Guarantor" and collectively the "Subsidiary Guarantors"); provided, that a Material Restricted Subsidiary that is a Foreign Subsidiary shall not become a Subsidiary Guarantor if by doing so it would violate applicable law of its jurisdiction of organization or incorporation. Each Subsidiary Guarantor will fully and unconditionally guarantee (collectively, the "Subsidiary Guarantees"), jointly and severally, on a senior unsecured basis to each holder of a Note the due and punctual payment of the principal of, premium, if any, and interest on, and all other amounts owing in respect of such Note and under the Indenture. Each Subsidiary Guarantor will execute a supplemental indenture evidencing its Subsidiary Guarantee in the form attached to the Indenture. The Issuer will not permit any Restricted Subsidiary that is not a Subsidiary Guarantor, directly or indirectly, to Guarantee any Indebtedness of any person unless, in each case, such Restricted Subsidiary simultaneously executes and delivers to the Trustee a supplemental indenture pursuant to which such Restricted Subsidiary shall guarantee the full and punctual payment of all obligations of the Issuer under the Indenture and the Notes on the same terms and conditions as the Subsidiary Guarantees by the Subsidiary Guarantors. Pursuant to each Subsidiary Guarantee, if the Issuer defaults in payment of any amount owing in respect of the Notes or the Indenture, the Subsidiary Guarantor will be obligated to duly and punctually pay the same. Pursuant to the terms of the Indenture, each of the Subsidiary Guarantors will agree that its obligations under its Subsidiary Guarantee will be unconditional, irrespective of the validity, regularity or enforceability of the Notes or the Indenture, the absence of any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge of defense of a guarantor. 80 Upon (i) any sale or disposition (by merger or otherwise) of any Subsidiary Guarantor by the Issuer, or a Restricted Subsidiary of the Issuer, to any person that is not an Affiliate of the Issuer or any of its Subsidiaries (and which is otherwise in compliance with the terms of the Indenture) as a result of which such Subsidiary Guarantor ceases to be a Restricted Subsidiary of the Issuer or (ii) the Designation of any Restricted Subsidiary that is a Subsidiary Guarantor as an Unrestricted Subsidiary in compliance with the covenant "--Limitation on Designations of Unrestricted Subsidiaries," such Subsidiary Guarantor will be deemed to be automatically and unconditionally released from all obligations under its Subsidiary Guarantee. Change of Control. Upon the occurrence of a Change of Control (the date of such occurrence being the "Change of Control Date"), the Issuer shall make an offer to purchase (the "Change of Control Offer"), on a business day (the "Change of Control Payment Date") not later than 60 days following the Change of Control Date, all Notes then outstanding at a purchase price equal to 101% of the Accreted Value thereof as of any Change of Control Payment Date, plus accrued and unpaid interest thereon, if any, to such Change of Control Payment Date. Notice of a Change of Control Offer shall be given to holders of Notes, not less than 25 days nor more than 45 days before the Change of Control Payment Date. The Change of Control Offer is required to remain open for at least 20 business days and until the close of business on the Change of Control Payment Date. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the holders of the Notes to require that the Issuer repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction which may be highly leveraged. If a Change of Control Offer is made, there can be no assurance that the Issuer will have available funds sufficient to pay for all of the Notes that might be delivered by holders of Notes seeking to accept the Change of Control Offer. The Issuer's obligation to make a Change of Control Offer following a Change of Control shall be satisfied if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements applicable to a Change of Control Offer made by the Issuer and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. See "Risk Factors--Risks Associated with a Change of Control." If the Issuer is required to make a Change of Control Offer, the Issuer will comply with all applicable tender offer laws and regulations, including, to the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other applicable securities laws and regulations. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. The Indenture provides that the Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise enter into or cause to become effective any consensual encumbrance or consensual restriction of any kind on the ability of any Restricted Subsidiary to pay dividends, in cash or otherwise, or make any other distributions on its Capital Stock or any other interest or participation in, or measured by, its profits to the extent owned by the Issuer or any Restricted Subsidiary, except for (i) any encumbrance or restriction in existence on the Issue Date, (ii) customary non-assignment provisions, (iii) any encumbrances or restriction pertaining to an asset subject to a Lien to the extent set forth in the security documentation governing such Lien, (iv) any encumbrance or restriction applicable to a Restricted Subsidiary at the time that it becomes a Restricted Subsidiary that is not created in contemplation thereof, (v) any encumbrance or restriction existing under any agreement that refinances or replaces an agreement containing a restriction permitted by clause (iv) above; provided that the terms and conditions of any such encumbrance or restriction are not materially less favorable to the holders of Notes than those under or pursuant to the agreement being replaced or the agreement evidencing the Indebtedness refinanced, (vi) any encumbrance or restriction imposed upon a Restricted Subsidiary pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary or any Asset Sale to the extent limited to the Capital Stock or assets in question, (vii) any customary encumbrance or restriction applicable to a Restricted Subsidiary that is contained in an agreement or instrument governing or relating to Indebtedness contained in any Debt Securities; provided that the terms and conditions of any such encumbrance or restriction are no more restrictive than those contained 81 in the Indenture; and provided further, that the provisions of such agreement or instrument permit the payment of interest and principal and mandatory repurchases pursuant to the terms of the Indenture and the Notes and other Indebtedness (other than Subordinated Indebtedness) that is solely an obligation of the Issuer; and (viii) any customary encumbrance or restriction contained in (x) a Permitted Credit Facility or (y) a pledge agreement applicable to Capital Stock of a Restricted Subsidiary that is Foreign Subsidiary pledged to secure Indebtedness incurred pursuant to Permitted Equipment Financing; provided that the provisions of any such agreement do not restrict the payment of cash dividends or distributions to the Issuer or any Restricted Subsidiary prior to the occurrence of a default or an event of default under such Permitted Credit Facility or Permitted Equipment Financing. Disposition of Proceeds of Asset Sales. The Indenture provides that the Issuer will not, and will not permit any Restricted Subsidiary to, make any Asset Sale unless (a) the Issuer or such Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the shares or assets sold or otherwise disposed of and (b) at least 80% of such consideration consists of cash or Cash Equivalents; provided that the following shall be treated as cash for purposes of this covenant: (x) the amount of any Indebtedness (other than Subordinated Indebtedness) of the Issuer or any Restricted Subsidiary that is actually assumed by the transferee in such Asset Sale and from which Issuer and the Restricted Subsidiaries are fully released and (y) the amount of any notes or other obligations that within 30 days of receipt are converted into cash (to the extent of the cash (after payment of any costs of disposition) so received). The Issuer or the applicable Restricted Subsidiary, as the case may be, may (i) apply the Net Cash Proceeds from such Asset Sale within 365 days of the receipt thereof to repay secured Indebtedness incurred pursuant to a Permitted Credit Facility, (ii) apply such Net Cash Proceeds within 365 days of the receipt thereof to repay Indebtedness of any Restricted Subsidiary that is not a Subsidiary Guarantor and permanently reduce the amount of the commitments thereunder by the amount of the Indebtedness so repaid, and/or (iii) apply such Net Cash Proceeds within 365 days of the receipt thereof to the an investment in properties and assets that will be used in a Digital Network Business of the Company or any Restricted Subsidiary (or in Capital Stock of any person that will become a Restricted Subsidiary as a result of such investment if all or substantially all of the properties and assets of such person are used in a Digital Network Business). To the extent all or part of the Net Cash Proceeds of any Asset Sale are not applied within 365 days of such Asset Sale as described in clause (i), (ii) or (iii) of the preceding paragraph (such Net Cash Proceeds, the "Unutilized Net Cash Proceeds"), the Issuer shall, within 20 days after such 365th day, make an offer to purchase (an "Asset Sale Offer") all outstanding Notes up to a maximum Accreted Value (expressed as a multiple of $1,000) equal to the Note Pro Rata Share of Unutilized Net Cash Proceeds, at a purchase price in cash equal to 100% of the Accreted Value thereof as of any purchase date, plus accrued and unpaid interest, if any, to such purchase date; provided, however, that an Asset Sale Offer may be deferred by the Issuer until there are Unutilized Net Cash Proceeds equal to at least $5.0 million, at which time the entire amount of such Unutilized Net Cash Proceeds (and not just the amount in excess of $5.0 million) shall be applied as required pursuant to this paragraph. In the event that any other Indebtedness of the Issuer which ranks pari passu with the Notes (the "Other Indebtedness") requires that an offer to repurchase such Indebtedness be made upon the consummation of an Asset Sale, the Issuer may apply the Unutilized Net Cash Proceeds otherwise required to be applied to an Asset Sale Offer to offer to purchase such Other Indebtedness and to an Asset Sale Offer so long as the amount of such Unutilized Net Cash Proceeds applied to repurchase the Notes is not less than the Note Pro Rata Share of Unutilized Net Cash Proceeds. Any offer to purchase such Other Indebtedness shall be made at the same time as the Asset Sale Offer, and the purchase date in respect of any such offer to purchase and the Asset Sale Offer shall occur on the same day. For purposes of this covenant, "Note Pro Rata Share of Unutilized Net Cash Proceeds" means the amount of the Unutilized Net Cash Proceeds equal to the product of (x) the Unutilized Net Cash Proceeds and (y) a fraction, the numerator of which is the Accreted Value of all Notes validly tendered and not withdrawn pursuant to an Asset Sale Offer related to such Unutilized Net Cash Proceeds (the "Note Amount") and the denominator 82 of which is the sum of the Note Amount and the lesser of the aggregate principal face amount or accreted value as of the relevant purchase date of all Other Indebtedness validly tendered and not withdrawn pursuant to a concurrent offer to purchase such Other Indebtedness made at the time of such Asset Sale Offer. Each Asset Sale Offer shall remain open for a period of 20 business days or such longer period as may be required by law. To the extent that the Accreted Value of Notes validly tendered and not withdrawn pursuant to an Asset Sale Offer is less than the Note Pro Rata Share of Unutilized Net Cash Proceeds, the Issuer or any Restricted Subsidiary may use such deficiency for general corporate purposes. If the Accreted Value of Notes validly tendered and not withdrawn by holders thereof exceeds the amount of Notes which can be purchased with the Unutilized Net Cash Proceeds, Notes to be purchased will be selected on a pro rata basis. Upon completion of an Asset Sale Offer, the amount of Unutilized Net Cash Proceeds shall be reset to zero. If the Issuer is required to make an Asset Sale Offer, the Issuer will comply with all applicable tender offer rules, including, to the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other applicable securities laws and regulations. Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries. The Indenture provides that the Issuer will not sell, and will not permit any Restricted Subsidiary, directly or indirectly, to issue or sell, any shares of Capital Stock (or any options, warrants or other rights to purchase such Capital Stock) of a Restricted Subsidiary, except (i) to the Issuer or a Wholly Owned Restricted Subsidiary, (ii) to directors as director qualifying shares, but only to the extent required under applicable law, (iii) the Issuer or a Restricted Subsidiary may pledge Capital Stock of a Restricted Subsidiary that is a Foreign Subsidiary to the extent and in the manner permitted under clause (g) of the definition of "Permitted Liens;" (iv) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary or (v) if the covenant "--Disposition of Proceeds of Asset Sales" is complied with. Limitation on Transactions with Affiliates. The Indenture provides that the Issuer will not, and will not permit, cause or suffer any Restricted Subsidiary to, directly or indirectly, conduct any business, sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into any contract, agreement, loan, advance or Guarantee or engage in any other transaction (or series of related transactions which are similar or part of a common plan) with or for the benefit of any of their respective Affiliates or any beneficial owner of 10% or more of the Common Stock of the Issuer or any officer or director of the Issuer or any Subsidiary (each, an "Affiliate Transaction"), unless the terms of the Affiliate Transaction are set forth in writing and are no less favorable to the Issuer or such Restricted Subsidiary, as the case may be, than would be available in a comparable transaction with an unaffiliated third party. Each Affiliate Transaction (or series of related Affiliate Transactions) involving aggregate payments and/or other consideration having Fair Market Value (i) in excess of $1 million shall be approved by a majority of the Board, such approval to be evidenced by a Board Resolution stating that the Board has determined that such transaction or transactions comply with the foregoing provisions, (ii) in excess of $5.0 million shall further require the approval of a majority of the Disinterested Directors and (iii) in excess of $10.0 million shall require that the Issuer obtain a written opinion from an Independent Financial Advisor stating that the terms of such Affiliate Transaction (or series of related Affiliate Transactions) to the Issuer or the Restricted Subsidiary, as the case may be, are fair from a financial point of view; provided, however, that the dollar thresholds set forth in clauses (i), (ii) and (iii) above shall be increased to $2.5 million, $10.0 million and $25.0 million, respectively, in the case of any Affiliate Transaction with WorldCom or any of its Affiliates. For purposes of this covenant, any Affiliate Transaction approved by a majority of the Disinterested Directors or as to which a written opinion has been obtained from an Independent Financial Advisor, on the basis set forth in the preceding sentence, shall be deemed to be on terms that are no less favorable to the Issuer or such Restricted Subsidiary, as the case may be, than would be available in a comparable transaction with an unaffiliated third party and, therefore, shall be permitted under this covenant. Notwithstanding the foregoing, the restrictions set forth in this covenant shall not apply to (i) transactions with or among, or solely for the benefit of, the Issuer and/or any of the Restricted Subsidiaries, provided that in 83 any such case, no officer, director or beneficial owner of 10% or more of any class of Capital Stock of the Issuer shall beneficially own any Capital Stock of any such Restricted Subsidiary, (ii) transactions pursuant to agreements and arrangements existing on the Issue Date and specified on a schedule to the Indenture, (iii) any Restricted Payment made in compliance with the covenant "--Limitation on Restricted Payments," (iv) customary directors' fees, indemnification and similar arrangements, consulting fees, legal fees, employee salaries, bonuses and employment agreements, compensation or employee benefit arrangements and incentive arrangements with any officer, director or employee of the Issuer or any Restricted Subsidiary entered into in the ordinary course of business and payments under indemnification arrangements permitted by applicable law, (v) loans and advances to officers, directors and employees of the Issuer or any Restricted Subsidiary for travel, entertainment, moving and other relocation expenses, in each case made in the ordinary course of business and consistent with past business practices; (vi) any agreement or arrangement entered into in the ordinary course of business by the Issuer or any Restricted Subsidiary with WorldCom or any of its Affiliates with respect to communications or communications related products and services; and (vii) any Permitted Investment. Reports. The Indenture provides that, whether or not the Issuer is subject to Section 13(a) or 15(d) of the Exchange Act or any successor provision of law, the Issuer shall furnish without cost to each holder of Notes and file with the Trustee (i) within 135 days after the end of each fiscal year of the Issuer (commencing with its 1998 fiscal-year end), all annual financial information that would be required to be contained in a filing with the SEC on Form 10-K (whether or not the Issuer is then required to file such Form with the SEC), including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and a report thereon by the Issuer's certified public accountants, (ii) within 60 days after the end of each of the first three fiscal quarters of each fiscal year of the Issuer, all quarterly financial information that would be required to be contained in a filing with the SEC on Form 10-Q (whether or not the Issuer is then required to file such Form with the SEC), including a "Management's Discussion and Analysis of Financial Condition and Results of Operations," and (iii) on a timely basis, any information concerning the Issuer or any Restricted Subsidiary required to be contained in a current report on Form 8-K (whether or not the Issuer is then required to file such Form with the SEC). Until such time as the Issuer is otherwise required to file periodic reports with the SEC under the Exchange Act (or any successor provision of law), the Issuer will file with the SEC (if permitted by SEC practice and applicable law and regulations), for public availability, a copy of the annual and quarterly financial information and other information prepared by it for distribution to holders of Notes. In addition, for so long as any Notes remain outstanding the Issuer will furnish to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act, and, to any beneficial holder of Notes, if not obtainable from the SEC, information of the type that wold be filed with the SEC pursuant to the foregoing provisions, upon the request of any such holder. Limitation on Designations of Unrestricted Subsidiaries. The Indenture provides that the Issuer will not designate any Subsidiary of the Issuer (other than a newly created Subsidiary in which the Issuer has made an Investment of $1,000 or less) as an "Unrestricted Subsidiary" under the Indenture (a "Designation") unless: (a) no Default shall have occurred and be continuing at the time of or after giving effect to such Designation; (b) except in the case of Permitted Investments and any Investment made pursuant to clause (v) of the third paragraph of the covenant "--Limitation on Restricted Payments," at the time of and after giving effect to such Designation, the Issuer would be able to incur $1.00 of Indebtedness (other than Permitted Indebtedness) under the covenant described under "-- Limitation on Additional Indebtedness'' above; and (c) the Issuer would be permitted under the Indenture to make an Investment at the time of such Designation (assuming the effectiveness of such Designation) in an amount (the "Designation Amount") equal to the Fair Market Value of the interest of the Issuer and its Restricted Subsidiaries in such Restricted Subsidiary on such date. In the event of any such Designation, the Issuer shall be deemed to have made an Investment constituting a Restricted Payment pursuant to the covenant "--Limitation on Restricted Payments'' for all purposes of the 84 Indenture in an amount equal to the Designation Amount. The Indenture will further provide that neither the Issuer nor any Restricted Subsidiary shall at any time (x) provide credit support for, subject any of its properties or assets (other than the Capital Stock of any Unrestricted Subsidiary) to the satisfaction of, or Guarantee, any Indebtedness of any Unrestricted Subsidiary (including any undertaking, agreement or instrument evidencing such Indebtedness), (y) be directly or indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be directly or indirectly liable for any other Indebtedness which provides that the holder thereof may (upon notice, lapse of time or both) declare a default thereon (or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity) upon the occurrence of a default with respect to any other Indebtedness that is Indebtedness of an Unrestricted Subsidiary (including any corresponding right to take enforcement action against such Unrestricted Subsidiary), except in the case of clause (x) or (y) to the extent otherwise permitted under the Indenture, including, without limitation, under the covenant "--Limitation on Restricted Payments" above. The Indenture further provides that the Issuer will not revoke any Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation") unless: (a) no Default shall have occurred and be continuing at the time of and after giving effect to such Revocation; and (b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of the Indenture. All Designations and Revocations must be evidenced by Board Resolutions delivered to the Trustee certifying compliance with the foregoing provisions. The Issuer designated 4-Sight and each of its Subsidiaries as a Restricted Subsidiary at such time as 4-Sight and its Subsidiaries became Subsidiaries of the Issuer. Limitation on Status as Investment Company. The Indenture provides that the Issuer will not, and will not permit any of its Subsidiaries or Affiliates to, conduct its business in a fashion that would cause the Issuer to be required to register as an "investment company" (as that term is defined in the Investment Company Act of 1940, as amended (the "Investment Company Act")), or otherwise become subject to regulation under the Investment Company Act. For purposes of establishing the Issuer's compliance with this provision, any exemption which is or would become available under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act will be disregarded. CONSOLIDATION, MERGER, SALE OF ASSETS, ETC. The Indenture provides that the Issuer will not (i) consolidate or combine with or merge with or into or, directly or indirectly, sell, assign, convey, lease, transfer or otherwise dispose of all or substantially all of its properties and assets to any person or persons in a single transaction or through a series of transactions, or (ii) permit any of the Restricted Subsidiaries to enter into any such transaction or series of transactions if it would result in the disposition of all or substantially all of the properties or assets of the Issuer and the Restricted Subsidiaries on a consolidated basis, unless, in the case of either (i) or (ii), (a) the Issuer shall be the continuing person or, if the Issuer is not the continuing person, the resulting, surviving or transferee person (the "surviving entity") shall be a company organized and existing under the laws of the United States or any State or territory thereof; (b) the surviving entity (if other than the Issuer) shall expressly assume all of the obligations of the Issuer under the Notes and the Indenture, and shall execute a supplemental indenture to effect such assumption which supplemental indenture shall be delivered to the Trustee and shall be in form and substance reasonably satisfactory to the Trustee; (c) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), the Issuer or the surviving entity (assuming such surviving entity's assumption of the Issuer's obligations under the Notes and the Indenture), as 85 the case may be, would be able to incur $1.00 of Indebtedness (other than Permitted Indebtedness) under the covenant described under "--Certain Covenants--Limitation on Additional Indebtedness'' above; (d) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), no Default shall have occurred and be continuing; and (e) the Issuer or the surviving entity, as the case may be, shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel stating that such transaction or series of transactions, and, if a supplemental indenture is required in connection with such transaction or series of transactions, such supplemental indenture complies with this covenant and that all conditions precedent in the Indenture relating to the transaction or series of transactions have been satisfied. Upon any consolidation or merger or any sale, assignment, conveyance, lease, transfer or other disposition of all or substantially all of the assets of the Issuer in accordance with the foregoing in which the Issuer or the Restricted Subsidiary, as the case may be, is not the surviving corporation, the successor corporation formed by such a consolidation or into which the Issuer or such Restricted Subsidiary is merged or to which such transfer is made, will succeed to, and be substituted for, and may exercise every right and power of, the Issuer or such Restricted Subsidiary, as the case may be, under the Indenture with the same effect as if such successor corporation had been named as the Issuer or such Restricted Subsidiary therein; and thereafter, except in the case of (i) any lease or (ii) any sale, assignment, conveyance, transfer, lease or other disposition to a Restricted Subsidiary of the Issuer, the Issuer shall be discharged from all obligations and covenants under the Indenture and the Notes. The Indenture provides that for all purposes of the Indenture and the Notes (including the provisions of this covenant and the covenants described under "--Certain Covenants--Limitation on Additional Indebtedness,"""--Limitation on Restricted Payments" and "--Limitation on Liens Securing Certain Indebtedness"), Subsidiaries of any surviving entity will, upon such transaction or series of related transactions, become Restricted Subsidiaries or Unrestricted Subsidiaries as provided pursuant to the covenant "--Certain Covenants--Limitation on Designations of Unrestricted Subsidiaries" and all Indebtedness, and all Liens on property or assets, of the Issuer and the Restricted Subsidiaries in existence immediately prior to such transaction or series of related transactions will be deemed to have been incurred upon such transaction or series of related transactions. The meaning of the phrase "all or substantially all" as used above varies according to the facts and circumstances of the subject transaction, has no clearly established meaning under relevant law and is subject to judicial interpretation. Accordingly, in certain circumstances, there may be a degree of uncertainty in ascertaining whether a particular transaction would involve a disposition of "all or substantially all" of the assets of the Issuer, and therefore it may be unclear whether the foregoing provisions are applicable. EVENTS OF DEFAULT The following are "Events of Default" under the Indenture: (i) default in the payment of interest on the Notes when it becomes due and payable and continuance of such default for a period of 30 days or more; or (ii) default in the payment of the principal of, or premium, if any, on the Notes when due at maturity, upon redemption or otherwise; or (iii) default in the payment of the Accreted Value of, and any accrued and unpaid interest on, any Notes required to be purchased pursuant to a Change of Control Offer or Asset Sale Offer when due and payable; or (iv) default in the performance, or breach, of any covenant described under "--Certain Covenants--Change of Control," "--Disposition of Proceeds of Asset Sales" or "--Consolidation, Merger, Sale of Assets, Etc."; or (v) default in the performance, or breach, of any covenant in the Indenture (other than defaults specified in clause (i), (ii), (iii) or (iv) above), and continuance of such default or breach for a period of 30 86 days or more after written notice to the Issuer by the Trustee or to the Issuer and the Trustee by the holders of at least 25% in aggregate principal amount at maturity of the outstanding Notes; or (vi) (a) failure to pay, following any applicable grace period, any installment of principal due (whether at maturity or otherwise) under one or more classes or issues of Indebtedness in an aggregate principal amount of $5 million or more under which the Issuer or any Material Restricted Subsidiary is obligated or (b) failure by the Issuer or any Material Restricted Subsidiary to perform any other term, covenant, condition or provision of one or more classes or issues of Indebtedness in an aggregate principal amount of $5 million or more under which the Issuer or such Material Restricted Subsidiary is obligated and, in the case of this clause (b), such failure results in an acceleration of the maturity thereof; or (vii) any holder of Indebtedness in an aggregate principal amount of $5.0 million or more of the Issuer or any Material Restricted Subsidiary shall commence judicial proceedings or take any other action to foreclose upon, or dispose of assets of the Issuer or any Material Restricted Subsidiary having an aggregate Fair Market Value, individually or in the aggregate, of $5.0 million or more or shall have exercised any right under applicable law or applicable security documents to take ownership of any such assets in lieu of foreclosure; provided that, in any such case, the Issuer or any Material Restricted Subsidiary shall not have obtained, prior to any such foreclosure or disposition of assets, a stay of all such actions that remains in effect; or (viii) one or more judgments, orders or decrees for the payment of money of $5.0 million or more, either individually or in the aggregate, shall be entered against the Issuer or any Material Restricted Subsidiary or any of their respective properties and shall not be paid or discharged and there shall have been a period of 60 consecutive days or more during which a stay of enforcement of such judgment or order, by reason of pending appeal or otherwise, shall not be in effect; or (ix) certain events of bankruptcy, insolvency, reorganization, administration or similar proceedings with respect to the Issuer or any Subsidiary Guarantor shall have occurred; or (x) the Indenture or the Registration Rights Agreement ceases to be in full force and effect or is declared null and void or the Issuer denies that it has any further obligation or liability thereunder or gives notice to that effect (other than by reason of termination or release in accordance with the terms thereof); or (xi) any Subsidiary Guarantee or any provision thereof shall at any time cease to be the legal, valid and binding obligation of the Subsidiary Guarantor party thereto, such that the Holders of Notes could not reasonably be expected to realize the material benefits intended to be provided by such Subsidiary Guarantor under its Subsidiary Guarantee or any Subsidiary Guarantor shall assert that its Subsidiary Guarantee is not a legal, valid and binding obligation or shall purport to revoke its obligations thereunder. If an Event of Default (other than an Event of Default specified in clause (ix) above with respect to the Issuer or any Subsidiary Guarantor) occurs and is continuing, then the Trustee or the holders of at least 25% in principal amount at maturity of the outstanding Notes may, by written notice, and the Trustee upon the request of the holders of not less than 25% in principal amount at maturity of the outstanding Notes shall, declare the Default Amount of all outstanding Notes to be immediately due and payable and upon any such declaration such amount shall become immediately due and payable. If an Event of Default specified in clause (ix) above with respect to the Issuer or any Subsidiary Guarantor occurs and is continuing, then the Default Amount of all outstanding Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holder. After a declaration of acceleration, the holders of a majority in aggregate principal amount at maturity of outstanding Notes may, by notice to the Trustee, rescind such declaration of acceleration if all existing Events of Default, other than nonpayment of the Default Amount of the Notes that has become due solely as a result of such acceleration, have been cured or waived and if the rescission of acceleration would not conflict with any judgment or decree. The holders of a majority in principal amount at maturity of the outstanding Notes also have the right to waive past defaults under the Indenture, except a default in the payment of principal of, or any interest on, any outstanding Note, or in respect of certain covenants or provisions that cannot be modified or amended without the consent of all holders of Notes. 87 No holder of any of the Notes has any right to institute any proceeding with respect to the Indenture or any remedy thereunder, unless the holders of at least 25% in principal amount at maturity of the outstanding Notes have made written request, and offered reasonable security or indemnity, to the Trustee to institute such proceeding as Trustee, the Trustee has failed to institute such proceeding within 60 days after receipt of such notice and the Trustee has not within such 60-day period received directions inconsistent with such written request by holders of a majority in principal amount at maturity of the outstanding Notes. Such limitations do not apply, however, to a suit instituted by a holder of a Note for the enforcement of the payment of the principal of, or any accrued and unpaid interest on, such Note on or after the respective due dates expressed in such Note. During the existence of an Event of Default, the Trustee is required to exercise such rights and powers vested in it under the Indenture and use the same degree of care and skill in its exercise thereof as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. Subject to the provisions of the Indenture relating to the duties of the Trustee, if an Event of Default shall occur and be continuing, the Trustee is not under any obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the holders unless such holders shall have offered to such Trustee reasonable security or indemnity. Subject to certain provisions concerning the rights of the Trustee, the holders of a majority in principal amount at maturity of the outstanding Notes have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. The Indenture provides that the Trustee will, within 45 days after the occurrence of any Default, give to the holders of the Notes notice of such Default known to it, unless such Default shall have been cured or waived; provided that the Trustee shall be protected in withholding such notice if it determines in good faith that the withholding of such notice is in the interest of such holders. The Issuer is required to furnish to the Trustee annually a statement as to its compliance with all conditions and covenants under the Indenture. DEFEASANCE The Issuer may at any time terminate all of the obligations of the Issuer and any Subsidiary Guarantor with respect to the Notes ("defeasance"), except for certain obligations, including those regarding any trust established for a defeasance and obligations to register the transfer or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes as required by the Indenture and to maintain agencies in respect of Notes. The Issuer may at any time terminate the obligations of the Issuer and any Subsidiary Guarantor under certain covenants set forth in the Indenture, some of which are described under "--Certain Covenants" above, and any omission to comply with such obligations shall not constitute a Default or an Event of Default with respect to the Notes ("covenant defeasance"). To exercise either defeasance or covenant defeasance, the Issuer must irrevocably deposit in trust, for the benefit of the holders of the Notes, with the Trustee money (in United States dollars) or U.S. government obligations (denominated in United States dollars), or a combination thereof, in such amounts as will be sufficient to pay the Accreted Value of and premium, if any, and accrued but unpaid interest on the Notes to redemption or maturity and comply with certain other conditions, including the delivery of a legal opinion as to certain tax matters. The requirements for defeasance shall not be deemed satisfied if a Default specified in clause (ix) of "--Events of Default" above occurs on or prior to the 91st calendar day after the date of the deposit of money or securities in the defeasance trust. SATISFACTION AND DISCHARGE The Indenture will be discharged and will cease to be of further effect (except as to surviving rights or registration of transfer or exchange of Notes) as to all outstanding Notes when either (a) all such Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes that have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from such trust) have been delivered to the Trustee 88 for cancellation; or (b) (i) all such Notes not theretofore delivered to the Trustee for cancellation have become due and payable and the Issuer has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount of money sufficient to pay and discharge the entire indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal amount, premium, if any, and accrued and unpaid interest to the date of such deposit; (ii) the Issuer has paid all sums payable by it under the Indenture; and (iii) the Issuer has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of the Notes at maturity or on the redemption date, as the case may be. In addition, the Issuer must deliver an Officers' Certificate and an Opinion of Counsel stating that all conditions precedent to satisfaction and discharge have been complied with. AMENDMENT AND WAIVERS From time to time, the Issuer and any Subsidiary Guarantors, when authorized by resolutions of their respective Boards of Directors, and the Trustee, without the consent of the holders of the Notes, may amend, waive or supplement the Indenture or the Notes for certain specified purposes, including, among other things, curing ambiguities, defects or inconsistencies, maintaining the qualification of the Indenture under the Trust Indenture Act or making any change that does not adversely affect the rights of any holder. Other amendments and modifications of the Indenture and the Notes may be made by the Issuer, the Subsidiary Guarantors and the Trustee by supplemental indenture with the consent of the holders of not less than a majority of the aggregate principal amount at maturity of the outstanding Notes; provided that no such modification or amendment may, without the consent of the holder of each outstanding Note affected thereby, (i) reduce the principal amount at maturity of, change the fixed maturity of, or alter the redemption provisions of, the Notes or amend or modify the calculation of the Accreted Value or the Default Amount so as to reduce the amount of the Accreted Value or the Default Amount, (ii) change the currency in which any Notes or amounts owing thereon is payable, (iii) reduce the percentage of the aggregate principal amount at maturity of the outstanding Notes which must consent to an amendment, supplement or waiver or consent to take any action under the Indenture or the Notes, (iv) impair the right to institute suit for the enforcement of any payment on or with respect to the Notes or any Subsidiary Guarantee, (v) waive a default in payment with respect to the Notes or any Subsidiary Guarantee, except a rescission of acceleration of the relevant Notes by the holders thereof as provided in the Indenture and a waiver of the payment default that resulted from such acceleration, (vi) reduce the rate or change the time for payment of interest on the Notes, (vii) alter the Issuer's obligation to purchase the Notes following the occurrence of a Change of Control or an Asset Sale in accordance with the Indenture or waive any default in the performance thereof, (viii) affect the ranking of the Notes in a manner adverse to the holder of the Notes or (ix) release any Subsidiary Guarantor from any of its obligations under its Subsidiary Guarantee or the Indenture except in compliance with the terms of the Indenture. Holders of a majority in aggregate principal amount at maturity of the outstanding Notes, on behalf of all holders of Notes, may waive compliance by the Issuer with certain restrictive provisions of the Indenture. Subject to certain rights of the Trustee as provided in the Indenture, the holders of a majority in aggregate principal amount at maturity of the Notes, on behalf of all holders, may waive any past Default under the Indenture (including any such waiver obtained in connection with a tender offer or exchange offer for such Notes), except a default in the payment of principal or interest or a Default arising from failure to purchase any Notes tendered pursuant to an offer to purchase required to be made by any provision of the Indenture, or a Default in respect of a provision that under the Indenture cannot be modified or amended without the consent of the holder of each Note that is affected. REGARDING THE TRUSTEE U.S. Bank Trust National Association (f/k/a First Trust National Association) serves as Trustee under the Indenture. GOVERNING LAW The Indenture provides that the Indenture and the Notes, respectively, will be governed by and construed in accordance with the laws of the State of New York, without giving effect to principles of conflicts of law. 89 CERTAIN DEFINITIONS Set forth below is a summary of certain defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Accreted Value" means, as of any date (the "Specified Date"), with respect to each $1,000 principal amount at maturity of Notes: (i) if the Specified Date is one of the following dates (each a "Semi- Annual Accrual Date"), the amount set forth opposite such date below:
SEMI-ANNUAL ACCRETED ACCRUAL DATE VALUE ------------ --------- Issue Date...................................................... $ 599.44 September 1, 1998............................................... 638.24 March 1, 1999................................................... 680.53 September 1, 1999............................................... 725.61 March 1, 2000................................................... 773.68 September 1, 2000............................................... 824.94 March 1, 2001................................................... 879.59 September 1, 2001............................................... 937.87 March 1, 2002................................................... 1,000.00
(ii) if the Specified Date occurs between two Semi-Annual Accrual Dates, the sum of (A) the Accreted Value for the Semi-Annual Accrual Date immediately preceding the Specified Date and (B) an amount equal to the product of (x) the Accreted Value for the immediately following Semi-Annual Accrual Date less the Accreted Value for the immediately preceding Semi- Annual Accrual Date and (y) a fraction, the numerator of which is the number of days actually elapsed from the immediately preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day year of twelve 30-day months, and the denominator of which is 180; and (iii) if the Specified Date is on or after March 1, 2002, $1,000. "Acquired Indebtedness" means Indebtedness of a person (i) assumed in connection with an Asset Acquisition from such person or (ii) existing at the time such person is merged or consolidated with or into the Issuer or any Restricted Subsidiary or becomes a Restricted Subsidiary, in each case not incurred in connection with, or in anticipation of, such Asset Acquisition or merger or consolidation or such person becoming a Restricted Subsidiary; provided that Indebtedness of such person which is redeemed, defeased, retired or otherwise repaid at the time of or immediately upon consummation of such Asset Acquisition or the transactions by which such person is merged or consolidated with or into the Issuer or any Restricted Subsidiary or becomes a Restricted Subsidiary shall not constitute Acquired Indebtedness. "Affiliate" of any specified person means any other person which, directly or indirectly, controls, is controlled by or is under direct or indirect common control with, such specified person. For the purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. "Asset Acquisition" means (i) any capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others) by the Issuer or any Restricted Subsidiary in any other person, or any acquisition or purchase of Capital Stock of any other person by the Issuer or any Restricted Subsidiary, in either case pursuant to which such person shall (a) become a Restricted Subsidiary or (b) shall be merged or consolidated with or into the Issuer or any Restricted Subsidiary or (ii) any acquisition by the Issuer or any Restricted Subsidiary of the assets of any person which constitute substantially 90 all of an operating unit or line of business of such person or which is otherwise outside of the ordinary course of business. "Asset Sale" means any direct or indirect sale, conveyance, transfer or lease (that has the effect of a disposition and is not for security purposes) or other disposition (that is not for security purposes) to any person other than the Issuer or a Wholly Owned Restricted Subsidiary, in one transaction or a series of related transactions, of (i) any Capital Stock of any Restricted Subsidiary, (ii) any assets of the Issuer or any Restricted Subsidiary which constitute substantially all of an operating unit or line of business of the Issuer and the Restricted Subsidiaries or (iii) any other property or asset of the Issuer or any Restricted Subsidiary outside of the ordinary course of business. For the purposes of this definition, the term "Asset Sale" shall not include (i) any disposition of properties and assets of the Issuer that is governed under "--Consolidation, Merger, Sale of Assets, Etc." above, (ii) sales of property or equipment that have become worn out, obsolete or damaged or otherwise unsuitable for use in connection with the business of the Issuer or any Restricted Subsidiary, as the case may be, and (iii) for purposes of the covenant "--Certain Covenants--Disposition of Proceeds of Asset Sales," sales, conveyances, transfers, leases or other dispositions of property or assets, whether in one transaction or a series of related transactions occurring within one year, either (x) involving assets with a Fair Market Value not in excess of $1.0 million in any 12 month period, or (y) which constitutes the incurrence of a Capitalized Lease Obligation. "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the interest rate implicit in the terms of the lease included in such Sale/Leaseback Transaction) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction (including any period for which such lease has been extended). "Average Life to Stated Maturity" means, with respect to any Indebtedness, as at any date of determination, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from such date to the date or dates of each successive scheduled principal payment (including, without limitation, any sinking fund requirements) of such Indebtedness multiplied by (b) the amount of each such principal payment by (ii) the sum of all such principal payments; provided that, in the case of any Capitalized Lease Obligation, all calculations hereunder shall give effect to any applicable options to renew in favor of the Issuer or any Restricted Subsidiary. "Board" means the Board of Directors of the Issuer. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Issuer to have been duly adopted by the Board and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Capital Stock" means, with respect to any person, any and all shares, interests, participations, rights in, or other equivalents (however designated and whether voting and/or non-voting) of, such person's capital stock, whether outstanding on the Issue Date or issued after the Issue Date, and any and all rights (other than any evidence of Indebtedness), warrants or options exchangeable for or convertible into such capital stock. "Capitalized Lease Obligation" means any obligation to pay rent or other amounts under a lease of (or other agreement conveying the right to use) any property (whether real, personal or mixed, immovable or movable) that is required to be classified and accounted for as a capitalized lease obligation under GAAP, and, for the purpose of the Indenture, the amount of such obligation at any date shall be the capitalized amount thereof at such date, determined in accordance with GAAP. "Cash Equivalents" means (i) any evidence of Indebtedness with a maturity of 365 days or less issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof or such Indebtedness constitutes a general obligation of such country); (ii) deposits, certificates of deposit or acceptances with a maturity of 365 days or less of any financial institution that is a member of the Federal Reserve System, in each case having 91 combined capital and surplus and undivided profits (or any similar capital concept) of not less than $500.0 million and whose senior unsecured debt is rated at least "A-l" by S&P or "P-l" by Moody's; (iii) commercial paper with a maturity of 365 days or less issued by a corporation (other than an Affiliate of the Issuer) organized under the laws of the United States or any State thereof and rated at least "A-l" by S&P or "P-1" by Moody's; (iv) repurchase agreements and reverse repurchase agreements relating to marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States Government maturing within 365 days from the date of acquisition; (v) money market funds in the United States which invest substantially all of their assets in securities of the type described in any of the preceding clauses (i) through (iv); and (vi) any evidence of Indebtedness with a maturity of 365 days or less issued by WorldCom and rated at least "BBB-" or "A2" by S&P and at least "Baa3" or "P2" by Moody's. "Change of Control" means the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) or 14(d) of the Exchange Act), excluding Permitted Holders, is or becomes the "beneficial owner" (as defined in Rules 13d-3 or 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has or acquires the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total voting power of all Voting Stock of the Issuer (unless the Permitted Holders "beneficially own" (as so defined), directly or indirectly, in the aggregate a greater percentage of the voting power of the Voting Stock of the Issuer) or has, directly or indirectly, the right to elect or designate a majority of the Board or (b) the Issuer consolidates with, or merges with or into, another person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any person, or any person consolidates with, or mergers with or into, the Issuer, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Issuer is converted into or exchanged for cash, securities or other property, other than any such transaction where (i) the outstanding Voting Stock of the Issuer is converted into or exchanged for (1) Voting Stock (other than Disqualified Stock) of the surviving or transferee corporation or its parent corporation and/or (2) cash, securities and other property in any amount which could be paid by the Issuer as a Restricted Payment under the Indenture, (ii) the "beneficial owners" (as so defined) of the Voting Stock of the Issuer immediately before such transaction own, directly or indirectly, immediately after such transaction, at least a majority of the voting power of all Voting Stock of the surviving or transferee corporation or its parent corporation immediately after such transaction, as applicable, or (iii) no "person" or "group" (as such terms are used in Sections 13(d) or 14(d) of the Exchange Act), excluding the Permitted Holders, is the "beneficial owner" (as so defined), directly or indirectly, of more than 35% of the Voting Stock or such surviving or transferee corporation or is parent corporation, as applicable (unless the Permitted Holders "beneficially own" (as so defined), directly or indirectly, in the aggregate a greater percentage of the voting power of the Voting Stock of such surviving or transferee corporation or its parent corporation (as the case may be)), or has, directly or indirectly, the right to elect or designate a majority of the board of directors of the surviving or transferee corporation or its parent corporation, as applicable, or (c) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board (together with any new directors whose election by the Board or whose nomination for election by the stockholders of the Issuer was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board then in office. The good faith determination by the Board, based upon advice of outside counsel, of the beneficial ownership of securities of the Issuer with the meaning of Rules 13d-3 and 13d-5 under the Exchange Act shall be conclusive, absent contrary controlling precedent or contrary written interpretation published by the SEC. No inference shall be created that officers or employees of the Issuer are acting as a "person" or "group" (as such terms are used in Sections 13(d) or 14(d) of the Exchange Act) with the power to designate a majority of the members of the Board solely because such officers or employees constitute a majority of the members of the Board. "Common Stock" means, with respect to any person, any and all shares, interest or other participations in, and other equivalents (however designated and whether voting or nonvoting) of such person's common stock and includes, without limitation, all series and classes of such common stock. 92 "Consolidated Income Tax Expense" means, with respect to any period, the provision for federal, state, local, foreign and other income taxes of the Issuer and the Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" means, with respect to any period, without duplication, the sum of (i) the interest expense of the Issuer and the Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP, including, without limitation, (a) any amortization of debt discount, (b) the net cost under Interest Rate Obligations and Currency Hedge Obligations (including any amortization of discounts), (c) the interest portion of any deferred payment obligation, (d) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and similar transactions and (e) all capitalized interest and accrued interest, (ii) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the Issuer and the Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP, (iii) the portion of any rental obligation in respect of any Sale/Leaseback Transaction allocable to interest expense (determined as if such were treated as a Capital Lease Obligation) and (iv) the amount of dividends and distributions in respect of Disqualified Stock paid by the Issuer and the Restricted Subsidiaries during such period. "Consolidated Net Income" means, with respect to any period, the net income (or loss) of the Issuer and the Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, adjusted, to the extent included in calculating such consolidated net income (or loss), by excluding, without duplication, (i) all extraordinary, unusual or nonrecurring gains or losses and all gains or losses from sales or other dispositions of assets (including Asset Sales) out of the ordinary course of business (net of taxes, fees and expenses relating to the transaction giving rise thereto) for such period, (ii) that portion of such net income (or loss) derived from or in respect of Investments in persons other than Restricted Subsidiaries, except to the extent of any cash dividends actually received by the Issuer or any Restricted Subsidiary (subject, in the case of any Restricted Subsidiary, to the provisions of clause (vi) of this definition); (iii) any gain or loss, net of taxes, realized upon the termination of any employee pension benefit plan during such period, (iv) that portion of such net income (or loss) allocable to minority interests in any Restricted Subsidiary for such period, (v) net income (or loss) of any other person combined with the Issuer or any Restricted Subsidiary on a "pooling of interests" basis attributable to any period prior to the date of combination and (vi) the net income of any Restricted Subsidiary for such period to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is not at the time permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulations applicable to that Restricted Subsidiary or its stockholders. "Consolidated Net Worth" means, with respect to any person, the consolidated stockholders' or partners' equity of such person reflected on the most recent balance sheet of such person, determined in accordance with GAAP, less any amounts attributable to redeemable capital stock (as determined under applicable accounting standards promulgated by the SEC) of such person. "Consolidated Operating Cash Flow" means, with respect to any period, Consolidated Net Income for such period (a) increased (without duplication), to the extent deducted in arriving at such Consolidated Net Income, by the sum of (i) Consolidated Income Tax Expense for such period; (ii) Consolidated Interest Expense for such period; and (iii) depreciation, amortization and any other non-cash items for such period of the Issuer and the Restricted Subsidiaries (other than any non-cash item which requires the accrual of, or a reserve for, cash charges for any future period), including, without limitation, amortization of capitalized debt issuance costs for such period, all determined on a consolidated basis in accordance with GAAP, and (b) decreased by any non-cash items (including non-recurring gains and non- recurring items of income) to the extent they increased Consolidated Net Income for such period (including any partial or complete reversal of reserves taken in a prior period). "consolidation" means, with respect to the Issuer, the consolidation of the accounts of the Restricted Subsidiaries with those of the Issuer, all in accordance with GAAP; provided that "consolidation" will not 93 include consolidation of the accounts of any Unrestricted Subsidiary with the accounts of the Issuer or any Restricted Subsidiary. The term "consolidated" has a correlative meaning to the foregoing. "Currency Hedge Obligation" means the obligations of a person, incurred in the ordinary course of business, pursuant to a foreign currency exchange agreement, option or futures contract or other similar agreement or arrangement designed to protect against or manage such person's or its subsidiaries' exposure to fluctuations in foreign currency exchange rates. "Debt Securities" means any debt securities issued by the Issuer in a public offering or in a private placement to institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act). "Deeply Subordinated Indebtedness" means Indebtedness of the Issuer as to which the payment of principal of (and premium, if any) and interest and other payment obligations in respect of such Indebtedness shall be subordinate to the prior payment in full of the Notes to at least the following extent: (i) no payments of principal of (or premium on) or interest on or otherwise in respect of such Indebtedness may be made prior to the date that is 180 days following the Stated Maturity of the principal of the Notes; except that such indebtedness may be redeemed or retired by the Issuer with, or converted at the option of the holder into, Capital Stock (other than Disqualified Stock) of the Issuer or options, warrants or other rights to purchase any such Capital Stock (other than Disqualified Stock); and (ii) the payment of the principal of and interest on such Indebtedness may be accelerated only in the event of the acceleration of the payment of the principal amount of the Notes following an Event of Default; provided, that any payment in respect of such Indebtedness following the acceleration thereof shall be subordinated to the prior payment in full of all amounts due in respect of the Notes and under the Indenture; and provided, further, in the event of the recission of any such acceleration of the Notes, the acceleration of such Indebtedness shall be deemed rescinded upon notice to such effect to the holder(s) of such Indebtedness from the Trustee. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Default Amount" means (i) as of any date prior to March 1, 2002, the Accreted Value of the Notes (and any applicable premium thereon) as of such date and (ii) as of any date on and after March 1, 2002, the principal amount at maturity of the Notes (and any applicable premium thereon) and any accrued and unpaid interest thereon. "Designation" has the meaning set forth under "--Certain Covenants-- Limitation on Designations of Unrestricted Subsidiaries." "Digital Network Business" means the business of developing, implementing, operating, managing or maintaining networks or systems for the transportation or management of data and any related, ancillary or complementary business; provided, that the determination of what constitutes a Digital Network Business shall be made in good faith by the Board, which determination shall be conclusive. "Disinterested Director" means, with respect to any transaction or series of related transactions, a member of the Board of Directors of the Issuer other than a director who (i) has any material direct or indirect financial interest in or with respect to such transaction or series of related transactions or (ii) is an employee or officer of the Issuer or an Affiliate that is itself a party to such transaction or series of transactions or an Affiliate of a party to such transaction or series of related transactions. "Disqualified Stock" means, with respect to any person, any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or becomes mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or becomes exchangeable for Indebtedness at the option of the holder thereof, or becomes redeemable at the option of the holder thereof, in whole or in part, on or prior to the final maturity date of the Notes. 94 "Exchange Act" means the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder. "Fair Market Value" means, with respect to any asset or property, the price (after taking into account any liabilities relating to such asset or property) that could be negotiated in an arms-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under pressure or compulsion to complete the transaction. Unless otherwise specified in the Indenture, Fair Market Value shall be determined by the Board acting in good faith and shall be evidenced by a Board Resolution. "Foreign Subsidiary" means any Subsidiary of the Issuer that is organized or incorporated under the laws of any jurisdiction other than the laws of the United States or any State or territory thereof. "4-Sight" means 4-Sight Limited, a private limited company incorporated under the laws of England and Wales. "GAAP" means, at any date of determination, generally accepted accounting principles in effect in the United States and which are applicable as of the date of determination and which are consistently applied for all applicable periods. "Guarantee" means, as applied to any obligation, (i) a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner, of any part or all of such obligation and (ii) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of all or any part of such obligation, including, without limiting the foregoing, any obligation (A) to pay amounts drawn down by letters of credit, (B) to purchase or pay (or advance or supply funds for the purchase or payment of) such obligation (whether arising by virtue of partnership arrangement, agreements to keep-well, to purchase assets, goods, securities or services, to take-or- pay, or to maintain financial statement conditions or otherwise) or (C) entered into for purposes of assuring in any other manner the obligee of such obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Indebtedness" means, with respect to any person, without duplication (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof), and whether or not contingent, (i) every liability of such person (A) for borrowed money, (B) evidenced by notes, bonds, debenture or other similar instruments (whether or not negotiable), (c) for reimbursement of amounts expended under letters of credit, bankers' acceptances or similar facilities issued for the account of such person, (D) issued or assumed as the deferred purchase price of property or services, (E) relating to a Capitalized Lease Obligation and all Attributable Debt in respect of Sale/Leaseback Transactions of such person and (F) in respect of an Interest Rate Obligation or Currency Hedge Obligation of such person; (ii) every liability of others of the kind described in the preceding clause (i) which such person has guaranteed or which is otherwise its legal liability; or (iii) every obligation secured by a Lien (other than (x) Permitted Liens of the types described in clauses (b), (d) or (e) of the definition of Permitted Liens; provided that the obligations secured would not constitute Indebtedness under clauses (i) or (ii) or (iii) of this definition, and (y) Liens on Capital Stock or Indebtedness of any Unrestricted Subsidiary) to which the property or assets of such person are subject, whether or not the obligations secured thereby shall have been assumed by or shall otherwise be such person's legal liability (the amount of such obligation being deemed to be the lesser of the Fair Market Value of such property or asset or the amount of the obligation so secured); (iv) all Disqualified Stock of such person, valued at the greater of its voluntary or involuntary maximum fixed repurchase or redemption price (plus accrued and unpaid dividends to the date of determination); and (v) any and all deferrals, renewals, extensions and refundings of, or amendments, modifications or supplements to, any liability of the kind described in any of the preceding clauses (i), (ii), (iii) or (iv). In no event shall "Indebtedness" include trade payables and accrued liabilities that are current liabilities incurred in the ordinary course of business, excluding the current maturity of any obligation which would 95 otherwise constitute Indebtedness. For purposes of the covenants described under "--Certain Covenants-- Limitation on Additional Indebtedness" and "-- Limitation on Restricted Payments" and the definition of "Events of Default," in determining the principal amount of any Indebtedness to be incurred by the Issuer or a Restricted Subsidiary or which is outstanding at any date, (i) the principal amount of any Indebtedness which provides that an amount less than the principal amount at maturity thereof shall be due upon any declaration of acceleration thereof shall be the accreted value thereof at the date of determination; (ii) the principal amount of any Indebtedness shall be reduced by any amount of cash or Cash Equivalent collateral securing on a perfected basis, and dedicated for disbursement exclusively to the payment of principal of and interest on, such Indebtedness and (iii) the amount of Indebtedness of any person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations that are included in any clause above, the maximum liability upon the occurrence of the contingency giving rise to the obligation. "Indebtedness to EBITDA Ratio" means, as at any date of determination (the "Transaction Date"), the ratio of (i) Total Consolidated Indebtedness (including all Permitted Indebtedness) as at the Transaction Date to (ii) Consolidated Operating Cash Flow for the four full fiscal quarters immediately preceding the Transaction Date for which financial information has been distributed to the holders of the Notes in accordance with "Certain Covenants--Reports" above (such four full fiscal quarter period being referred to herein as the "Measurement Period"). For purposes of calculating Consolidated Operating Cash Flow for the relevant Measurement Period prior to a Transaction Date, (A) any person that is a Restricted Subsidiary on the Transaction Date (or would become a Restricted Subsidiary on such Transaction Date in connection with the transaction that requires the calculation of such Consolidated Operating Cash Flow) shall be deemed to have been a Restricted Subsidiary at all times during the Measurement Period, (B) any person that is not a Restricted Subsidiary on such Transaction Date (or would cease to be a Restricted Subsidiary on such Transaction Date in connection with the transaction that requires the calculation of Consolidated Operating Cash Flow) will be deemed not to have been a Restricted Subsidiary at any time during the Measurement Period, (c) if the Issuer or any Restricted Subsidiary shall have in any manner (x) acquired through an Asset Acquisition or (y) disposed of (including by way of an Asset Sale or the termination or discontinuance of activities constituting such operating business) any operating business during such Measurement Period or after the end of such period and on or prior to the Transaction Date, such calculation will be made on a pro forma basis in accordance with GAAP as if, in the case of an Asset Acquisition, such transaction had been consummated on the first day of the Measurement Period and, in the case of a Asset Sale or other disposition, termination or discontinuance of activities constituting such an operating business, such transaction had been consummated prior to the first day of the Measurement Period; provided, however that such pro forma adjustment shall not give effect to the operating cash flow of any person that would become a Restricted Subsidiary on the Transaction Date in connection with the transaction that requires the calculation of Consolidated Operating Cash Flow to the extent that such person's net income would be excluded from the calculation of Consolidated Net Income pursuant to clause (vi) of the definition of Consolidated Net Income. "Independent Financial Advisor" means a United States investment banking firm of national or regional standing in the United States (i) which does not, and whose directors, officers and employees or Affiliates do not have, a direct or indirect financial interest in the Issuer and (ii) which, in the judgment of the Board, is otherwise independent and qualified to perform the task for which it is to be engaged. "Initial Public Equity Offering" means an underwritten primary public offering of Capital Stock (other than Disqualified Stock) of the Issuer for cash pursuant to an effective registration statement filed under the Securities Act. "Interest Rate Obligations" means the obligations of any person pursuant to any arrangement with any other person whereby, directly or indirectly, such person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars, forward interest rate agreements and similar agreements. 96 "Investment" means, with respect to any person, any direct or indirect advance, loan, account receivable (other than an account receivable arising in the ordinary course of business), or other extension of credit (including, without limitation, by means of any guarantee) or any capital contribution to (by means of transfers of cash or other property or assets to others, payments for property or services for the account or use of others, or otherwise), or any purchase or acquisition of capital stock, bonds, notes, debentures or other securities or evidences of Indebtedness of any other person. The amount of any Investment shall be the original cost of such Investment, plus the cost of all additions thereto, and minus the amount of any portion of such Investment repaid to such person in cash as a repayment of principal or a return of capital, as the case may be, but without any other adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. In determining the amount of any Investment involving a transfer of any property or assets other than cash, such property shall be valued at its Fair Market Value at the time of transfer. "Issue Date" means the original date of issuance of the Notes. "Lien" means any mortgage, charge, pledge, lien (statutory or other), security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance upon or with respect to any property of any kind whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). A person shall be deemed to own subject to a Lien any property which such person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "Market Capitalization" of any person means, as of any day of determination, the product of (i) the average Closing Price of a share of such person's Common Stock over the 20 consecutive trading days immediately preceding such date and (ii) the number of shares of such Common Stock issued and outstanding on such date. "Closing Price" on any trading day with respect to the per share price of any shares of Common Stock means the last reported sale price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange or, if such shares of Common Stock are not listed or admitted to trading on such exchange, on the principal national securities exchange on which such shares are listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the Nasdaq National Market or, if such shares are not listed or admitted to trading on any national securities exchange or quoted on the Nasdaq National Market but such person is a "foreign issuer" (as defined Rule 3b-4(b) under the Exchange Act) and the principal securities exchange on which such shares are listed or admitted to trading is a "designated offshore securities market" (as defined in Rule 902(a) under the Securities Act), the average of the reported closing bid and asked prices regular way on such principal exchange or, if such shares are not listed or admitted to trading on any national securities exchange or quoted on the Nasdaq National Market and such person and any securities markets in which such person's Common Stock trades does not meet any of the foregoing such requirements, the average of the closing bid and asked prices in the over-the-counter marked as furnished by any New York Stock Exchange member firm that is selected from time to time by the Issuer for the purpose and is reasonably acceptable to the Trustee. "Material Restricted Subsidiary" means any Restricted Subsidiary, together with its Subsidiaries that are themselves Restricted Subsidiaries, of the Issuer which, at any date of determination, (i) is a "Significant Subsidiary" under the definition of that term set forth in Regulation S-X promulgated under the Securities Act, as in effect on the Issue Date (but substituting "5 percent" for each occurrence of "10 percent" in such definition), (ii) contributed 5% or more of the Consolidated Operating Cash Flow of the Issuer on a pro forma basis in the immediately preceding fiscal quarter for which financial information is available, (iii) when aggregated with all other Restricted Subsidiaries that are not otherwise Material Restricted Subsidiaries and as to which any event described in clauses (vi), (vii) or (viii) of the definition of "Events of Default" above has occurred, would constitute a Material Restricted Subsidiary under clause (i) or (ii) of this definition. "Maturity Date" means, with respect to any Note, the date specified in such Note as the fixed date on which the principal of such Note is due and payable. 97 "Moody's" means Moody's Investors Service, Inc. (and any successor). "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds thereof received by the Issuer or any Restricted Subsidiary in the form of cash (including assumed Indebtedness (other than Subordinated Indebtedness) and other items deemed to be cash under the proviso to the first sentence of the covenant described under "--Certain Covenants--Disposition of Proceeds of Asset Sales") or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (except to the extent that such obligations are financed or sold with recourse to the Issuer or any Restricted Subsidiary) net of (i) brokerage commissions and other fees, costs and expenses (including fees and expenses of legal counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes paid or payable as a result of such Asset Sale, (iii) amounts required to be paid to any person (other than the Issuer or any Restricted Subsidiary) owning a beneficial interest in or having a Lien on the assets subject to the Asset Sale, (iv) with respect to Asset Sales by Restricted Subsidiaries, the portion of such cash and Cash Equivalents attributable to any persons holding a minority interest in such Restricted Subsidiary and (v) appropriate amounts to be provided by the Issuer or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP against any liabilities associated with such Asset Sale and retained by the Issuer or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in an Officers' Certificate delivered to the Trustee. "Permitted Credit Facility" means any senior secured or unsecured commercial term loan and/or revolving credit facility (including any letter of credit subfacility) entered into principally with commercial banks and/or other financial institutions. "Permitted Equipment Financing" means any credit facility (including a Permitted Credit Facility) or other financing arrangement entered into with any vendor, supplier or other third party (or any financial institution for the purpose of financing purchases from any vendor, supplier or third party) to the extent the Indebtedness thereunder is incurred for the purpose of financing the cost (including the cost of design, development, construction, improvement, enhancement, upgrade, replacement, integration, manufacture or acquisition) of real or personal property (tangible or intangible) used, or to be used, in the Digital Network Business of the Issuer or any of its Restricted Subsidiaries. "Permitted Holders" means (i) WorldCom and each of its Affiliates and (ii) Edward J. Driscoll III (the Chairman of the Board and Chief Executive Officer of the Issuer as of the date of the Indenture) and his family members, any trust for the benefit of any of the foregoing persons and their respective estates and heirs. As used herein, "family member" means the spouse, siblings and lineal descendants of Mr. Driscoll. "Permitted Indebtedness" means the following Indebtedness (each of which shall be given independent effect): (a) Indebtedness under the Notes, the Subsidiary Guarantees and the Indenture; (b) Indebtedness (including Disqualified Stock) of the Issuer and/or any Restricted Subsidiary outstanding on the Issue Date and identified on a schedule to the Indenture; provided, that Indebtedness that may be borrowed under credit facilities in place on the Issue Date shall be deemed outstanding for purposes of this clause (b); (c)(i) Indebtedness of any Restricted Subsidiary owed to and held by the Issuer or a Restricted Subsidiary and (ii) Indebtedness of the Issuer, which is not secured by any Lien and is subordinated to the Issuer's obligations with respect to the Notes, owed to and held by any Restricted Subsidiary; provided that an incurrence of Indebtedness shall be deemed to have occurred upon (x) any sale or other disposition of any Indebtedness of the Issuer or a Restricted Subsidiary referred to in this clause (c) to a person other than the Issuer or a Restricted Subsidiary, (y) any sale or other disposition of Capital Stock of a Restricted Subsidiary which holds Indebtedness of the Issuer or another Restricted Subsidiary such that such Restricted Subsidiary ceases to be a Restricted Subsidiary or (z) the Designation of a Restricted Subsidiary which holds Indebtedness of the Issuer or another Restricted Subsidiary as an Unrestricted Subsidiary; 98 (d) Interest Rate Obligations of the Issuer and/or any Restricted Subsidiary relating to Indebtedness of the Issuer and/or such Restricted Subsidiary, as the case may be (which Indebtedness (x) bears interest at fluctuating interest rates and (y) is otherwise permitted to be incurred under the "Limitation on Additional Indebtedness" covenant), but only to the extent that the notional amount of such Interest Rate Obligations does not exceed the principal amount of the Indebtedness (and/or Indebtedness subject to commitments) to which such Interest Rate Obligations relate; (e) Indebtedness of the Issuer and/or any Restricted Subsidiary in respect of performance bonds of the Issuer or any Restricted Subsidiary or surety bonds provided by the Issuer or any Restricted Subsidiary, in each case incurred in the ordinary course of business; (f) Indebtedness of the Issuer and/or any Restricted Subsidiary to the extent it represents a replacement, renewal, refinancing or extension (a "refinancing") of outstanding Indebtedness of the Issuer and/or of any Restricted Subsidiary incurred or outstanding pursuant to clause (a), (b), (g), (h) or (i) of this definition or the proviso of the covenant described under "--Certain Covenants--Limitation on Additional Indebtedness"; provided that (1) no Restricted Subsidiary may incur Indebtedness to refinance Indebtedness of the Issuer, (2) any such refinancing shall not (x) result in a lower Average Life to Stated Maturity of such Indebtedness as compared with the Indebtedness being refinanced or (y) exceed the sum of the principal amount (or, if such Indebtedness provides for a lesser amount to be due and payable upon a declaration of acceleration thereof, an amount no greater than such lesser amount) of the Indebtedness being refinanced, plus the amount of accrued and unpaid interest thereon, plus the amount of any reasonably determined prepayment premium necessary to accomplish such refinancing and such reasonable fees and expenses incurred in connection therewith; (3) Indebtedness that ranks pari passu with the Notes may be refinanced only with Indebtedness that is made pari passu with or subordinate in right of payment to the Notes, and Subordinated Indebtedness may only be refinanced with Subordinated Indebtedness; and (5) the refinancing Indebtedness shall be incurred by the obligor on the Indebtedness being refinanced or by the Issuer; (g) Indebtedness of the Issuer such that, after giving effect to the incurrence thereof, the total aggregate principal amount of Indebtedness incurred under this clause (g) and any refinancings thereof otherwise incurred in compliance with the Indenture would not exceed 175% of Total Incremental Equity; (h) Indebtedness of the Issuer incurred under one or more Permitted Credit Facilities and/or Indebtedness of the Issuer represented by Debt Securities of the Issuer, and any refinancings of the foregoing otherwise incurred in compliance with the Indenture, in an aggregate principal amount not to exceed $50 million at any time outstanding; and Guarantees by any Restricted Subsidiary that is a Subsidiary Guarantor of Indebtedness of the Issuer incurred under any Permitted Credit Facility; provided, however, the incurrence of such Indebtedness by the Issuer under such Permitted Credit Facility is permitted by the covenant described under "--Certain Covenants--Limitation on Additional Indebtedness"; (i) Indebtedness of the Issuer incurred under any Permitted Equipment Financing and Guarantees of any Restricted Subsidiary that is a Foreign Subsidiary of Indebtedness incurred under any Permitted Equipment Financing in an amount not in excess of the amount of Indebtedness incurred in respect of the property acquired by such Restricted Subsidiary under such Permitted Equipment Financing; provided, such Restricted Subsidiary is a Subsidiary Guarantor or complies with the covenant "--Certain Covenants-- Issuance of Guarantees by Certain Restricted Subsidiaries; Release of Guarantees"; and provided, further that the issuance of any Guarantees pursuant to this clause (i) shall be in addition to any Guarantees issued pursuant to clause (h) above; (j) Indebtedness in respect of any Currency Hedge Obligations of the Issuer and/or any Restricted Subsidiary (which Indebtedness is otherwise permitted to be incurred under the covenant described under "--Certain Covenants--Limitation on Additional Indebtedness"), but only to the extent that the notional amount of such Currency Hedge Obligations do not exceed the principal amount of the Indebtedness (and/or Indebtedness subject to commitments) to which such Currency Hedge Obligations relate; (k) in addition to any Indebtedness of the Issuer referred to in clause (b) above, Deeply Subordinated Indebtedness of the Issuer owed to and held by WorldCom or any other Strategic Equity Investor in an 99 aggregate principal amount not to exceed $50.0 million at any time outstanding; provided, at the time of incurrence of such Indebtedness by the Issuer, the payee is the "beneficial owner" (as defined in Rules 13d-3 or 13d-5 under the Exchange Act, (except that WorldCom shall be deemed to have "beneficial ownership" of all Voting Stock of the Issuer that it, directly or indirectly, has or acquires the right to acquire, whether such right is exercisable immediately or only after the passage of time) of at least 10% of the total voting power of all Voting Stock of the Issuer; (l) Indebtedness of 4-Sight and each of its Subsidiaries existing at the time 4-Sight and such Subsidiaries become Restricted Subsidiaries; and (m) in addition to the items referred to in clauses (a) through (k) above, Indebtedness of the Issuer having an aggregate principal amount not to exceed $15.0 million at any time outstanding. "Permitted Investments" means (a) Cash Equivalents; (b) Investments in prepaid expenses, negotiable instruments held for collection and lease, utility and workers' compensation, performance and other similar deposits; (c) Interest Rate Obligations and Currency Hedge Obligations incurred in compliance with the covenant described under "--Certain Covenants--Limitation on Additional Indebtedness"; (d) loans and advances to employees made in the ordinary course of business not to exceed $750,000 in the aggregate at any one time outstanding; (e) bonds, notes, debentures or other securities received as a result of Asset Sales permitted under "--Certain Covenants--Disposition of Proceeds of Asset Sales" above not to exceed 15% of the total consideration for such Asset Sales; (f) any Investment to the extent that the consideration therefor consists of Capital Stock (other than Disqualified Stock) of the Issuer; and (d) the extension by the Issuer of (i) trade credit to Subsidiaries of the Issuer represented by accounts receivable, extended on usual and customary terms in the ordinary course of business or (ii) guarantees of commitments for the purchase of goods or services incurred in the ordinary course of business so long as such guarantees, to the extent constituting Indebtedness, are permitted to be incurred under the covenant described under "--Certain Covenants--Limitation on Additional Indebtedness." "Permitted Liens" means (a) Liens on property of a person existing at the time such person is merged into or consolidated with the Issuer or any Restricted Subsidiary or becomes a Restricted Subsidiary; provided that such Liens were in existence prior to the contemplation of such merger, consolidation or acquisition and do not secure any property or assets of the Issuer or any Restricted Subsidiary other than the property or assets subject to the Liens prior to such merger or consolidation or acquisition; (b) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens and other similar Liens arising in the ordinary course of business that secure payment of obligations not more than 60 days past due or that are being contested in good faith and by appropriate proceedings; (c) Liens existing on the Issue Date; (d) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted; provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (e) easements, rights of way, restrictions and other similar easements, licenses, restrictions on the use of properties, or minor imperfections of title that, in the aggregate, are not material in amount and do not in any case materially detract from the properties subject thereto or interfere with the ordinary conduct of the business of the Issuer or the Restricted Subsidiaries; (f) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (g) Liens securing Indebtedness consisting of Permitted Equipment Financing, provided, however, that (I) such Liens attach within 180 days of the incurrence of such Indebtedness and (II) if such Liens include a pledge of Capital Stock of any Restricted Subsidiary that is a Foreign Subsidiary, (x) such Liens were created in connection with financing the cost of property acquired or used by such Restricted Subsidiary, directly or indirectly, with Indebtedness incurred pursuant to a Permitted Equipment Financing and (y) such Liens do not secure Indebtedness in excess of the amount of Indebtedness incurred with respect to the purchase of such property by such Restricted Subsidiary; (h) Liens securing Indebtedness incurred under a Permitted Credit Facility; provided, however, that (I) the incurrence of such Indebtedness is permitted by the covenant described under "--Certain Covenants--Limitation on Additional Indebtedness" above and (II) such Liens attach within 180 days of the incurrence of such Indebtedness; (i) Liens to secure any refinancing of any Indebtedness secured 100 by Liens referred to in the clauses above, but only to the extent that such Liens do not extend to any other property or assets (other than improvements thereto); (j) Liens to secure the Notes; (k) Liens on real property incurred in connection with the financing of the purchase of such real property (or incurred within 60 days of purchase) by the Issuer or any Restricted Subsidiary; and (l) Liens on and pledges of Capital Stock of any Unrestricted Subsidiary securing any Indebtedness of such Unrestricted Subsidiary. "Preferred Stock" means, with respect to any person, any and all shares, interests, participations or other equivalents (however designated) of such person's preferred or preference stock whether now outstanding, or issued after the Issue Date, and including, without limitation, all classes and series of preferred or preference stock of such person. "refinancing" has the meaning set forth in clause (f) of the definition of "Permitted Indebtedness." "Restricted Payment" means any of the following: (i) the declaration or payment of any dividend or any other distribution on any Capital Stock of the Issuer or any Restricted Subsidiary or any other payment made to the direct or indirect holders (in their capacities as such) of Capital Stock of the Issuer or any Restricted Subsidiary (other than any dividends, distributions or payments made to the Issuer or any Restricted Subsidiary and dividends or distributions payable solely in Capital Stock (other than Disqualified Stock) of the Issuer or in options, warrants or other rights to purchase Capital Stock (other than Disqualified Stock) of the Issuer); (ii) the purchase, redemption or other acquisition or retirement for value of any Capital Stock of the Issuer or any Restricted Subsidiary (other than any such Capital Stock owned by the Issuer or a Restricted Subsidiary); (iii) the purchase, redemption, defeasance or other acquisition or retirement for value, or the making of any principal payment on, prior to any scheduled repayment, scheduled sinking fund payment or scheduled maturity, of any Subordinated Indebtedness (other than any Subordinated Indebtedness held by a Wholly Owned Restricted Subsidiary); or (iv) the making by the Issuer or any Restricted Subsidiary of any Investment (other than a Permitted Investment) in any person (other than in the Issuer, any Restricted Subsidiary or a person that becomes a Restricted Subsidiary, or is merged with or into or consolidated with the Issuer or a Restricted Subsidiary (provided the issuer or a Restricted Subsidiary is the survivor)) as a result of or in connection with such Investment. "Restricted Subsidiary" means any Subsidiary of the Issuer that has not been designated by the Board, by a Board Resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in compliance with the covenant described under "--Certain Covenants--Limitation on Designations of Unrestricted Subsidiaries." Any such designation may be revoked by a Board Resolution delivered to the Trustee, subject to the provisions of such covenant. "Revocation" has the meaning set forth under "--Certain Covenants-- Limitation on Designations of Unrestricted Subsidiaries." "S&P" means Standard & Poor's Rating Services, a division of The McGraw-Hill Companies (and any successor). "Sale/Leaseback Transaction" of any person means an arrangement with any lender or investor or to which such lender or investor is a party providing for the leasing by such person of any property or assets of such person which has been or is being sold or transferred by such person after its acquisition thereof or the completion of construction or commencement of operations thereof to such lender or investor or to any other person to whom funds have been or are to be advanced by such lender or investor on the security of such property or asset. "Strategic Equity Investor" means any person that, as of the date of determination, has a Market Capitalization or Consolidated Net Worth of at least $2.0 billion and that is principally engaged in the communications, entertainment or electronics business or any other business related to the Digital Network Business. 101 "Subordinated Indebtedness" means any Indebtedness of the Issuer or any Guarantor which is expressly subordinated in right of payment to any other Indebtedness of the Issuer or such Guarantor. "Subsidiary" means, with respect to any person, (i) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors shall at the time be owned, directly or indirectly, by such person, or (ii) any other person of which at least a majority of voting interest is at the time, directly or indirectly, owned by such person. "Total Consolidated Indebtedness" means, at any date of determination, an amount equal to the aggregate amount of all Indebtedness of the Issuer and the Restricted Subsidiaries outstanding as of the date of determination. "Total Incremental Equity" means, at any time of determination, the sum of, without duplication, (i) the aggregate cash proceeds received by the Issuer from capital contributions in respect of existing Capital Stock (other than Disqualified Stock) or the issuance and sale of Capital Stock (other than Disqualified Stock but including Capital Stock issued upon the conversion of convertible Indebtedness or from the exercise of options, warrants or rights to purchase Capital Stock (other than Disqualified Stock)) subsequent to the Issue Date, other than to a Subsidiary of the Issuer, plus (ii) the aggregate cash proceeds received by the Issuer or any Restricted Subsidiary from the sale, disposition or repayment (in whole or in part) of any Investment that is made after the Issue Date and that constitutes a Restricted Payment that has been deducted from Total Incremental Equity pursuant to clause (iv) below in an amount equal to the lesser of (a) the return of capital with respect to the applicable portion of such Investment and (b) the cost of the applicable portion of such Investment, in either case, less the cost of the disposition of such Investment, plus (iii) the value (determined at the time of issuance) of any Capital Stock (other than Disqualifed Stock) of the Issuer issued as consideration for the acquisition of Capital Stock or assets of any other person (other than a Subsidiary or any Affiliate of the Issuer or any Subsidiary) engaged in the Digital Network Business; provided, the issuance of the first 2,500,000 shares of Common Stock (as adjusted for subdivisions, combinations or reclassifications subsequent to the Issue Date) by the Issuer to the stockholders of 4-Sight in connection with the Issuer's acquisition of 4-Sight shall be excluded from this clause (iii), minus (iv) the aggregate amount of all Restricted Payments declared or made (including by way of a Designation) on and after the Issue Date. "Unrestricted Subsidiary" means any Subsidiary of the Issuer designated as such pursuant to and in compliance with the covenant described under "-- Certain Covenants--Limitation on Designations of Unrestricted Subsidiaries." Any such designation may be revoked by a Board Resolution delivered to the Trustee, subject to the provisions of such covenant. "U.S. Government Securities" means securities that are direct obligations of the United States of America for the payment of which its full faith and credit is pledged. "Voting Stock" means, with respect to any person, the Capital Stock of any class or kind ordinarily having the power to vote for the election of directors or other members of the governing body of such person. "voting power" means with respect to the Capital Stock of any person, the relative voting power in any general election of directors or other members of the governing body of such person. "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of which 100% of the outstanding Capital Stock is owned by the Issuer or another Wholly Owned Restricted Subsidiary. For the purposes of this definition, any directors' qualifying shares or investments by foreign nationals mandated by applicable law shall be disregarded in determining the ownership of a Restricted Subsidiary. "WorldCom" means WorldCom Inc., a Georgia corporation. 102 NOTE REGISTRATION RIGHTS The Company entered into the Registration Rights Agreement with the Initial Purchasers pursuant to which the Company agreed to file with the Commission the Exchange Offer Registration Statement on an appropriate form under the Securities Act with respect to an offer to exchange the Original Notes for the Exchange Notes. Upon the effectiveness of the Exchange Offer Registration Statement, the Company will offer to the holders of Original Notes who are able to make certain representations the opportunity to exchange their Original Notes for Exchange Notes. If (i) the Company is not permitted to file the Exchange Offer Registration Statement or to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy, (ii) the Exchange Offer is not for any other reason consummated within 180 days after the Issue Date, (iii) any holder of Original Notes notifies the Company within a specified time period that (a) due to a change in law or policy it is not entitled to participate in the Exchange Offer, (b) due to a change in law or policy it may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and (x) the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such holder and (y) such prospectus is not promptly amended or modified in order to be suitable for use in connection with such resales for such holder and all similarly situated holders or (c) it is a broker-dealer and owns Original Notes acquired directly from the Company or an affiliate of the Company or (iv) the holders of a majority of the Original Notes may not resell the Exchange Notes acquired by them in the Exchange Offer to the public without restriction under the Securities Act and without restriction under applicable blue sky or state securities laws, the Company will file with the Commission the Shelf Registration Statement to cover resales of the Transfer Restricted Notes (as defined below) by the holders thereof. The Company agreed it will use its best efforts to cause the applicable registration statement to be declared effective as promptly as possible by the Commission. For purposes of the foregoing, "Transfer Restricted Notes" means each Original Note until (i) the date on which such Original Note has been exchanged by a person other than a broker-dealer for an Exchange Note in the Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of an Original Note for an Exchange Note, the date on which such Exchange Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Original Note has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement, (iv) the date on which such Original Note is distributed to the public pursuant to Rule 144(k) under the Securities Act (or any similar provision then in force, but not Rule 144A under the Securities Act), (v) such Original Note shall have been otherwise transferred by the holder thereof and a new Note not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of such Note shall not require registration or qualification under the Securities Act or any similar state law then in force or (vi) such Note ceases to be outstanding. Under existing Commission interpretations, the Exchange Notes would, in general, be freely transferable after the Exchange Offer without further registration under the Securities Act; provided that in the case of broker- dealers participating in the Exchange Offer, a prospectus meeting the requirements of the Securities Act must be delivered upon resale by such broker-dealers in connection with resales of the Exchange Notes. The Company has agreed, for period of 180 days after consummation of the Exchange Offer, to make available a prospectus meeting the requirements of the Securities Act to any such broker-dealer for use in connection with any resale of any Exchange Notes acquired in the Exchange Offer. A broker-dealer which delivers such a prospectus to purchasers in connection with such resales will be subject to certain of the civil liability provisions under the Securities Act and will be bound by the provisions of the Registration Rights Agreement (including certain indemnification rights and obligations). Each holder of Original Notes that wishes to exchange such Original Notes for Exchange Notes in the Exchange Offer will be required to make certain representations, including representations that (i) any Exchange Notes to be received by it will be acquired in the ordinary course of its business, (ii) it has no arrangement with any person to participate in the distribution of the Exchange Notes and (iii) it is not an "affiliate," as defined in Rule 405 of the Securities Act, of the Company, or if it is an affiliate, it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. 103 The Registration Rights Agreement provides that: (i) unless the Exchange Offer would not be permitted by applicable law or Commission policy, the Company will file the Exchange Offer Registration Statement with the Commission on or prior to the 90th day after the Issue Date, (ii) unless the Exchange Offer would not be permitted by applicable law or Commission policy, the Company will use its best efforts to have the Exchange Offer Registration Statement declared effective by the Commission on or prior to the 150th day after the Issue Date (the "Target Effectiveness Date"), (iii) unless the Exchange Offer would not be permitted by applicable law or Commission policy, the Company will commence the Exchange Offer and use its best efforts to issue, on or prior to the date which is 30 days after the date on which the Exchange Offer Registration Statement was declared effective by the Commission, Exchange Notes in Exchange for all Original Notes tendered prior thereto in the Exchange Offer and (iv) if obligated to file the Shelf Registration Statement, the Issuer will use its best efforts to file prior to the later of (a) the 90th day after the Issue Date or (b) the 30th day after such filing obligation arises and will use its best efforts to cause the Shelf Registration Statement to be declared effective by the Commission on or prior to the 60th day after such obligation arises; provided that if the Issuer has not consummated the Exchange Offer within the date which is 180 days after the Issue Date, then the Company will file the Shelf Registration Statement with the Commission on or prior to the 30th day after such date. The Company shall use its best efforts to keep such Shelf Registration Statement continuously effective, supplemented and amended until the earlier of (i) the second anniversary of the effective date of the Shelf Registration Statement and (ii) such time as all of the Transfer Restricted Notes covered by the Shelf Registration Statement have been sold thereunder or otherwise cease to be Transfer Restricted Notes. If (i) the Company fails to file any of the registration statements required by the Registration Rights Agreement on or before the date specified for such filing, (ii) any of such registration statements is not declared effective by the Commission on or prior to the Target Effectiveness Date (subject to certain limited exceptions), (iii) the Company fails to consummate the Exchange Offer within 30 days of the Target Effectiveness Date with respect to the Exchange Offer Registration Statement, or (iv) the Shelf Registration Statement or the Exchange Offer Registration Statement is declared effective but thereafter, subject to certain limited exceptions, ceases to be effective or usable in connection with the Exchange Offer or resales of Transfer Restricted Notes, as the case may be, during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (i) through (iv) above, a "Registration Default"), then the Company shall pay as liquidated damages interest on the Transfer Restricted Notes as to which any Registration Default exists. If a Registration Default exists with respect to Transfer Restricted Notes, the Company will, with respect to the first 90-day period (or portion thereof) while such Registration Default is continuing immediately following the occurrence of such Registration Default, make cash payments at a rate of .50% per annum multiplied by the Accreted Value of the Transfer Restricted Notes as of the date such payment is required to be made. The rate of such cash payment shall increase by an additional .50% per annum at the beginning of each subsequent 90-day period (or portion thereof) while such Registration Default is continuing until such Registration Default is cured, up to a maximum rate of 1.5% per annum. Following the cure of all Registration Defaults, the making of cash payments with respect to the Notes will cease and the interest rate on the Notes will revert to zero. 104 BOOK-ENTRY; DELIVERY AND FORM Except as set forth below, the Exchange Notes will be registered in book- entry form and will be represented by a single Global Exchange Note in definitive, fully registered form without interest coupons and will be deposited with the Trustee as custodian for DTC and registered in the name of Cede & Co. or such other nominee as DTC may designate. Beneficial interests in the Global Exchange Security will be shown on, and transfers thereon will be effected only through, records maintained by DTC and its direct and indirect participants, and any such interest may not be exchanged for Notes in certificated form except in the circumstances described below. DTC has advised the Issuer as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). Upon the issuance of the Global Exchange Note, DTC or its custodian will credit, on its internal system, the respective principal amount of the applicable Exchange Note represented by such Global Exchange Note to the accounts of persons who have accounts with DTC. Ownership of beneficial interests in the Global Securities will be limited to persons who have accounts with DTC ("participants") or persons who hold interests through participants. Ownership of beneficial interests in the Global Exchange Note will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants). The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definative form. Such limits and laws may impair the ability to transfer or pledge beneficial interest in each such Global Exchange Note. So long as DTC or its nominee is the registered owner or holder of a Global Exchange Note, DTC or such nominee, as the case may be, will be considered the sole record owner or holder of the Exchange Note represented by such Global Exchange Note for all purposes under the Indenture and the Notes. No beneficial owner of an interest in the Global Exchange Note will be able to transfer that interest except in accordance with DTC's applicable procedures in addition to those provided for under the Indenture. Payments in respect of the Global Exchange Note will be made to DTC or its nominee, as the case may be, as the registered owner thereof. None of the Issuer, the Trustee or any paying agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Exchange Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Company expects that DTC or its nominee, upon receipt of any payment in respect of the Global Exchange Note, will credit participants' accounts with payments in amounts proportionate to their respective beneficial ownership interests in such Global Exchange Note, as shown on the records of DTC or its nominee. The Company also expects that payments by participants to owners of beneficial interests in such Global Exchange Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. 105 Transfers between participants in DTC will be effected in the ordinary way in accordance with DTC rules. If a holder requires physical delivery of Certificated Notes for any reason, including selling Units, Notes or Warrants to persons in states which require delivery of such Notes or pledging such Notes, such holder must transfer its interest in the Global Exchange Note, in accordance with the normal procedures of DTC and the procedures set forth in the Indenture. DTC has advised the Company that DTC will take any action permitted to be taken by a holder of Notes only at the direction of one or more participants to whose account the DTC interests in the Global Exchange Notes are credited and only in respect of such portion of the aggregate amount of Exchange Notes as to which such participant or participants has or have given such direction. However, if there is an Event of Default under the Indenture, DTC will exchange the applicable Global Exchange Notes for Certificated Securities, which it will distribute to its participants. Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in Global Exchange Notes among participants of DTC, it is under no obligation to perform such procedures, and such procedures may be discontinued at any time. Neither of the Issuer or the Trustee will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. Subject to certain conditions, any person having a beneficial interest in a Global Exchange Note may, upon request to the Trustee, exchange such beneficial interest for Notes in the form of Certificated Exchange Notes. Upon any such issuance, the Trustee is required to register such Certificated Exchange Notes in the name of, and cause the same to be delivered to, such person or persons (or the nominee of any thereof). In addition, if DTC is at any time unwilling or unable to continue as a depositary for the Global Notes and a successor depositary is not appointed by the Issuer within 90 days, the Issuer will issue Certificated Exchange Notes in exchange for the Global Exchange Notes. 106 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following discussion is a summary of the material United States federal income tax considerations relevant to the exchange of Original Notes for Exchange Notes pursuant to the Exchange Offer and the ownership and disposition of Exchange Notes by holders who acquire the Exchange Notes pursuant to the Exchange Offer, but does not purport to be a complete analysis of all potential tax effects. The discussion is based upon the Internal Revenue Code of 1986, as amended (the "Code"), U.S. Treasury Regulations, Internal Revenue Service ("IRS") rulings and pronouncements and judicial decisions all in effect as of the date hereof, all of which are subject to change at any time, and any such change may be applied retroactively in a manner that could adversely affect a holder of the Notes. The discussion does not address all of the U.S. federal income tax consequences that may be relevant to a holder in light of such holder's particular circumstances or to holders subject to special rules, such as certain financial institutions, insurance companies, dealers in securities, tax-exempt organizations and persons holding the Notes as part of a "straddle," "hedge" or "conversion transaction." In addition, this discussion is limited to persons purchasing the Original Notes at the issue price. Moreover, the effect of any applicable state, local or foreign tax laws is not discussed. The discussion deals only with Notes held as "capital assets" within the meaning of Section 1221 of the Code. As used herein, "U.S. holder" means a beneficial owner of the Exchange Notes who or that (i) is a citizen or resident of the United States, (ii) is a corporation, partnership or other entity created or organized in or under the laws of the United States or political subdivision thereof, (iii) is an estate the income of which is subject to U.S. federal income taxation regardless of its source, (iv) is a trust if (A) a U.S. court is able to exercise primary supervision over the administration of the trust and (B) one or more U.S. persons have authority to control all substantial decisions of the trust, or (v) is otherwise subject to U.S. federal income tax on a net income basis in respect of the Notes. As used herein, a "non-U.S. holder" means a holder who or that is not a U.S. holder. The Company has not sought and will not seek any rulings from the IRS with respect to the position of the Company discussed below. There can be no assurance that the IRS will not take a different position concerning the tax consequences of the exchange of Original Notes for Exchange Notes and the ownership or disposition of the Exchange Notes by holders who acquire the Exchange Notes pursuant to the Exchange Offer or that any such position would not be sustained. PROSPECTIVE HOLDERS OF EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, INCLUDING GIFT AND ESTATE TAX LAWS. THE EXCHANGE OFFER The Exchange of Original Notes for Exchange Notes pursuant to the Exchange Offer will not be treated as an exchange or other taxable event for United States federal income tax purposes because, under the Regulations, the Exchange Notes do not differ materially in kind or extent from the Original Notes. Rather, the Exchange Notes received by a holder will be treated as a continuation of the Original Notes in the hands of such holder. As a result, there will be no United States federal income tax consequences to holders who exchange Original Notes for New Notes pursuant to the Exchange Offer and any such holder will have the same tax basis and holding period in the Exchange Notes as it had in the Original Notes immediately before the exchange. U.S. HOLDERS The Units The purchase of a Unit consisting of a Note and Warrants will be treated as the purchase of an "investment unit" for federal income tax purposes. The "issue price" of the Units will be the first price at which a substantial amount of the Units is sold to the public (excluding sales to bond houses, brokers, or similar persons or 107 organizations acting in the capacity of underwriters or wholesalers). The aggregate issue price of the Unit must be allocated among the Note and the Warrants based on their relative fair market values on the date of issuance of the Unit to determine the issue price of each of the securities. The Company believes that the aggregate issue price of each Unit should be allocated $114,944,000 to the Notes and $10,057,000 to the Warrants, which amounts are based on the instruments' anticipated relative fair market value at the time of issuance. Although the Company's allocation is not binding on the IRS, a U.S. holder of a Unit must use the Company's allocation unless the U.S. holder discloses on its federal income tax return for the year in which the Unit was acquired that it plans to use an allocation that is inconsistent with the Company's allocation. A U.S. holder's initial tax basis in each security will be the issue price allocated thereto. The Notes Original Issue Discount. Because the Notes were issued at a discount from their "stated redemption price at maturity," the Notes have original issue discount ("OID") for federal income tax purposes. A U.S. holder will be required to include OID in income periodically over the term of a Note before receipt of the cash or other payment attributable to such income, regardless of the U.S. holder's method of tax accounting. For federal income tax purposes, OID on a Note will be the excess of the "stated redemption price at maturity" of the Note over its "issue price." The "stated redemption price at maturity" of a Note is the sum of all payments required to be made on such Note, whether denominated as principal or interest, other than payments of "qualified stated interest." "Qualified stated interest" is stated interest that is unconditionally payable at least annually at a single fixed rate that appropriately takes into account the length of the interval between payments. Prior to March 1, 2002 there will be no payment of interest on the Notes. Therefore, none of the interest payments on the Notes will constitute qualified stated interest and all such payments will be included in the Notes, stated redemption price at maturity. Therefore, each Note will bear OID in an amount equal to the excess of (i) the sum of its principal amount and all stated interest payments over (ii) the issue price. The amount of OID required to be included in a U.S. holder's gross income for any taxable year is the sum of the "daily portions" of OID with respect to the Note for each day during the taxable year or portion of a taxable year during which such U.S. holder holds the Note. The daily portion is determined by allocating to each day of any "accrual period" within a taxable year a pro rata portion of an amount equal to the "adjusted issue price" of the Note at the beginning of the accrual period multiplied by the "yield to maturity" of the Note. Accrual periods with respect to a Note may be of any length selected by the holder and may vary in length over the term of the Note as long as (i) no accrual period is longer than one year and (ii) each scheduled payment of interest or principal on the Note occurs on either the first or final day of an accrual period. The "adjusted issue price" of a Note at the beginning of any accrual period is the original issue price of the Note increased by the amount of OID previously includible in the gross income of the U.S. holder, and decreased by any payments (including interest that is not qualified stated interest) previously made on the Note. The "yield to maturity" is the interest rate, expressed as a constant annual interest rate, that when used in computing the present value of all payments of principal and interest to be paid in connection with a Note produces an amount equal to the issue price of the Note. Because the yield to maturity with respect to the Notes will exceed the sum of the "applicable federal rate" plus five percentage points, the Notes will be treated as applicable high yield discount obligations ("AHYDOs") under the Code. Accordingly, no deduction will be allowed to the Company for the "disqualified portion" of the OID, and the remainder of the OID will be deductible only when paid. The "disqualified portion" of the OID will generally be the OID relating to that portion of the Notes' yield to maturity that exceeds the "applicable federal rate" plus six percentage points. Additionally, the "disqualified portion" of the OID may be treated as a dividend for purposes of the "dividend received deduction" to the extent that the OID would have been a dividend if distributed with respect to the Company's stock. Holders are advised to consult their tax advisors regarding the applicability and operation of the AHYDO rules to their investment in the Notes. 108 Sale or Retirement of a Note. A U.S. holder of a Note will recognize gain or loss upon the sale, retirement, redemption or other taxable disposition of such Note in an amount equal to the difference between (a) the amount of cash and the fair market value of other property received in exchange therefor (other than amounts attributable to accrued but unpaid stated interest) and (b) the U.S. holder's adjusted tax basis in such Note. Any gain or loss recognized will generally be capital gain or loss. A non-corporate U.S. holder is generally subject to a maximum capital gains rate of 28% for Notes held for more than one year and a maximum capital gains rate of 20% for Notes held for more than eighteen months. A U.S. holder's tax basis in a Note will generally be equal to the issue price of such Note, increased by the amount of OID, if any, included in gross income prior to the date of disposition, and decreased by the amount of any payment on such Note other than stated interest prior to disposition. U.S. holders should be aware that the resale of the Notes may be affected by the "market discount" rules of the Code, under which a purchaser of a Note acquiring the Note at a market discount generally would be required to include as ordinary income a portion of the gain realized upon the disposition or retirement of such Note, to the extent of the market discount that has accrued but has not been included in income while such Note was held by such purchaser. NON-U.S. HOLDERS U.S. Withholding Tax Interest or redemption proceeds paid to non-U.S. holders of the Notes will not be subject to U.S. withholding tax, provided that (i) the non-U.S. Holder does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company, (ii) the non-U.S. Holder is not (a) a controlled foreign corporation as to the United States that is related to the Company through stock ownership or (b) a bank that received the Note on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business, and (iii) the beneficial owner of the Note provides a statement signed under penalties of perjury that includes its name and address and certifies that it is not a U.S. person in compliance with applicable requirements or an exemption is otherwise established. If these requirements cannot be met, a non-U.S. holder will be subject to U.S. withholding tax at a rate of 30% (or lower treaty rate, if applicable) on interest payments. Although U.S. tax will also be imposed against OID on the Notes prior to payment, such tax will only be withheld from stated interest payments on the Notes. However, such additional withholding may result in U.S. withholding tax on stated interest payments exceeding 30%. Recently promulgated Treasury Regulations (the "New Regulations") regarding U.S. withholding tax and information reporting and backup withholding (discussed below) will apply to payments made after December 31, 1999. The New Regulations provide alternative methods for satisfying the certification requirements discussed in clause (iii) above and clarify and modify reliance standards. The New Regulations also address certain issues relating to intermediary certification procedures designed to simplify compliance by withholding agents. Non-U.S. holders should consult their own tax advisors regarding the effect of the New Regulations. In general, any gain realized by any non-U.S. Holder upon the sale, exchange or redemption of a Note will not be subject to United States withholding tax. However, such gain will be subject to U.S. withholding tax if (i) a non-U.S. holder is an individual and is present in the United States for a total of 183 days or more during the taxable year in which the gain is realized, or (ii) such gain is effectively connected with a U.S. trade or business. INFORMATION REPORTING AND BACKUP WITHHOLDING Certain non-corporate U.S. persons may be subject to backup withholding at a rate of 31% on payments of principal and interest (including payments of OID) on the Notes and the proceeds from a disposition of the Notes. Backup withholding will only be imposed where the holder (i) fails to furnish its taxpayer identification number ("TIN"), which, for an individual, would ordinarily be his or her social security number, (ii) furnishes an 109 incorrect TIN, (iii) is notified by the IRS that it has failed to properly report payments of interest or dividends, or (iv) under certain circumstances, fails to certify, under penalties of perjury, that it has furnished a correct TIN and has not been notified by the IRS that it is subject to backup withholding. Holders of the Notes should consult their own tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption, if applicable. However, principal and interest (including OID) paid with respect to a Note and received by a non-U.S. holder will not be subject to information reporting or backup withholding if the payor has received appropriate certification statements and provided that the payor does not have actual knowledge that the holder is a U.S. person. 110 PLAN OF DISTRIBUTION Based on interpretations by the Staff set forth in no-action letters issued to third parties, the Company believes that Exchange Notes issued pursuant to the Exchange Offer in exchange for the Original Notes may be offered for resale, resold and otherwise transferred by Holders thereof (other than any Holder which is (i) an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act, (ii) a broker-dealer who acquired Original Notes directly from the Company or (iii) broker-dealers who acquired Original Notes as a result of market-making or other trading activities) without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such Exchange Notes are acquired in the ordinary course of such Holders' business, and such Holders are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of such Exchange Notes; provided that broker- dealers ("Participating Broker-Dealers") receiving Exchange Notes in the Exchange Offer will be subject to a prospectus delivery requirement with respect to resales of such Exchange Notes. To date, the Staff has taken the position that Participating Broker-Dealers may fulfill their prospectus delivery requirements with respect to transactions involving an exchange of securities such as the exchange pursuant to the Exchange Offer (other than a resale of an unsold allotment from the sale of the Original Notes to an Initial Purchaser) with the prospectus contained in the Registration Statement. Pursuant to the Registration Rights Agreement, the Company has agreed to permit Participating Broker-Dealers and other persons, if any, subject to similar prospectus delivery requirements to use this Prospectus in connection with the resale of such Exchange Notes. The Company has agreed that they will make this Prospectus, and any amendment or supplement to this Prospectus, available to any broker-dealer that reasonably requests such documents in the Letter of Transmittal. Each Holder of the Original Notes who wishes to exchange its Original Notes for Exchange Notes in the Exchange Offer will be required to make certain representations to the Company as set forth in "The Exchange Offer--Terms and Conditions of the Letter of Transmittal." In addition, each Holder who is a broker-dealer and who receives Exchange Notes for its own account in exchange for Original Notes that were acquired by it as a result of market-making activities or other trading activities, will be required to acknowledge that it will deliver a prospectus in connection with any resale by it of such Exchange Notes. The Company will not receive any proceeds from any sale of Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The Company has agreed to pay all expenses incidental to the Exchange Offer other than commissions and concessions of any brokers or dealers and will indemnify Holders of the Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act, as set forth in the Registration Rights Agreement. 111 LEGAL MATTERS The validity of the Exchange Notes will be passed upon for the Company by Willkie Farr & Gallagher, New York, New York. EXPERTS The consolidated financial statements of WAM!NET Inc. as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997, included in this Prospectus and Registration Statement of the Company, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of 4-Sight Limited as of August 31, 1996, September 30, 1996 and September 30, 1997 and for the year ended August 31, 1996, the month ended September 30, 1996 and the year ended September 30, 1997, included in the Prospectus and Registration Statement of WAM!NET Inc., have been audited by Ernst & Young, chartered accountants, independent auditors, as set forth in their report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. With respect to 4-Sight's unaudited consolidated financial statements at December 31, 1997 and for twelve months then ended included in this Prospectus, Ernst & Young, chartered accountants, have reported that they have compiled such financial statements in accordance with statements on standards for accounting and review services. However, their separate report, included herein, states that they did not audit or review such financial statements and they do not express an opinion or any other form of assurance on them. Accordingly, the degree of reliance on their report on such information should be restricted considering the limited nature of the procedures applied. Ernst & Young, chartered accountants, are not subject to the liability provisions of Section 11 of the Securities Act for their report on the unaudited financial statements because that report is not a "report" or a "part" of the Registration Statement prepared or certified by them within the meaning of Sections 7 and 11 of the Securities Act. 112 INDEX TO FINANCIAL STATEMENTS
PAGE ---- WAM!NET INC. Report of Independent Auditors........................................... F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited).................................................... F-3 Consolidated Statements of Operations for the three years in the period ended December 31, 1997 and for the three months in the periods ended March 31, 1997 and 1998 (unaudited)..................................... F-5 Consolidated Statements of Shareholders' Deficit as of December 31, 1997 and as of March 31, 1998 (unaudited).................................... F-6 Consolidated Statements of Cash Flows for the three years in the period ended December 31, 1997 and for the three months in the periods ended March 31, 1997 and 1998 (unaudited)..................................... F-7 Notes to Consolidated Financial Statements............................... F-9 4-SIGHT LIMITED Report of Independent Auditors........................................... F-21 Consolidated Balance Sheets as of August 31, 1996, September 30, 1996 and September 30, 1997...................................................... F-22 Consolidated Statements of Operations for the year ended August 31, 1996, the month ended September 30, 1996 and the year ended September 30, 1997.................................................................... F-23 Consolidated Statement of Shareholders' Equity for the year ended August 31, 1996, the month ended September 30, 1996 and the year ended September 30, 1997...................................................... F-24 Consolidated Statements of Cash Flows for the year ended August 31, 1996, the month ended September 30, 1996 and the year ended September 30, 1997.................................................................... F-25 Notes to Consolidated Financial Statements............................... F-26 Accountant's Compilation Report.......................................... F-33 Consolidated Balance Sheet as of December 31, 1997 (unaudited)........... F-34 Consolidated Statement of Operations for the twelve months ended December 31, 1997 (unaudited).................................................... F-35
F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors WAM!NET Inc. We have audited the accompanying consolidated balance sheets of WAM!NET Inc. (formerly known as NetCo Communications Corporation) as of December 31, 1996 and 1997, and the related consolidated statements of operations, shareholders' deficit and cash flows for each of the years in the three year period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Since the date of completion of our audits of the accompanying consolidated financial statements and the initial issuance of our report thereon dated February 9, 1998, which report contained an explanatory paragraph regarding the Company's ability to continue as a going concern, the Company, as discussed in Note 2, has completed an issuance of Senior Discount Notes resulting in net proceeds of $120,622,093. Therefore, the conditions that raised substantial doubt about whether the Company will continue as a going concern no longer exist. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of WAM!NET Inc. at December 31, 1996 and 1997, and the consolidated results of its operations and its cash flows for each of the years in the three year period ended December 31, 1997 in conformity with generally accepted accounting principles. Ernst & Young LLP Minneapolis, Minnesota February 9, 1998, except for Note 2, as to which date is March 12, 1998 F-2 WAM!NET INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, --------------- MARCH 31, 1996 1997 1998 ------- ------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........................ $14,444 $ 274 $ 66,760 Investments...................................... 1,000 -- -- Accounts receivable, net of allowance of $0, $10, and $10, respectively........................... 71 459 3,493 Inventory........................................ -- -- 940 Prepaid expenses and other current assets........ 139 554 765 ------- ------- -------- Total current assets........................... 15,654 1,287 71,958 Property and equipment: Network equipment................................ 3,072 15,618 22,296 Other support equipment.......................... 1,210 5,242 8,183 Furniture and fixtures........................... 384 1,078 3,052 Leasehold improvements........................... 228 259 266 ------- ------- -------- 4,894 22,197 33,797 Accumulated depreciation......................... 478 2,877 4,403 ------- ------- -------- 4,416 19,320 29,394 Goodwill, net of accumulated amortization of $0, $6, and $762 respectively....................... -- 479 32,446 Deferred Charges................................. -- -- 3,972 ------- ------- -------- Total assets................................... $20,070 $21,086 $137,770 ======= ======= ========
F-3 WAM!NET INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ----------------- MARCH 31, 1996 1997 1998 ------- -------- ----------- (UNAUDITED) LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable.......................... $ 628 $ 2,460 $ 3,805 Accrued salaries and wages................ 100 360 369 Accrued expenses.......................... 552 2,159 3,287 Bridge financing.......................... 1,075 -- -- Current portion of equipment financing and obligations under capitalized leases..... 179 3,129 3,541 Accrued taxes payable..................... -- -- 1,147 ------- -------- -------- Total current liabilities............... 2,534 8,108 12,149 Long-term debt: Subordinated notes payable................ 19,219 21,784 22,368 Line of credit............................ -- 14,431 Equipment financing....................... -- 6,434 6,883 13.25% Senior Discounted Notes............ -- -- 110,686 Redeemable Preferred Stock, Class A, $10.00 par value: Authorized, issued and outstanding shares--100,000.......................... 1,000 1,000 1,000 Shareholders' deficit: Undesignated shares, $.01 par value-- 9,900,000 Common Stock, $.01 par value: Authorized shares--90,000,000 Issued and outstanding shares-- 6,478,950, 6,699,740, and 9,265,530 at December 31, 1996 and 1997 and March 31, 1998............................... 65 67 93 Additional paid-in capital.............. 6,125 11,771 53,712 Accumulated deficit..................... (8,873) (42,509) (69,192) Cumulative foreign currency translation adjustjment............................ -- -- 71 ------- -------- -------- Total shareholders' deficit............. (2,683) (30,671) (15,316) ------- -------- -------- Total liabilities and shareholders' deficit................................ $20,070 $ 21,086 $137,770 ======= ======== ========
See accompanying notes. F-4 WAM!NET INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------- -------------------- 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- (UNAUDITED) Revenues: WAM!NET revenues...... $ 20 $ 110 $ 1,628 $ 117 $ 1,320 Less rebates.......... -- -- (150) -- (271) --------- --------- --------- --------- --------- Net WAM!NET user fees... 20 110 1,478 117 1,049 Software and hardware sales.................. -- -- -- -- 822 Other service fees...... 160 169 77 5 9 --------- --------- --------- --------- --------- Total revenues...... 180 279 1,555 122 1,880 Operating expenses: Network communication fees................. 46 816 7,364 863 3,152 Cost of software and hardware............. -- -- -- 261 Network operations.... 539 1,109 7,478 849 3,259 Sales and marketing... 94 2,054 9,207 1,229 2,352 General and administrative....... 727 2,610 4,320 977 14,467 Depreciation and amortization......... 31 447 2,668 287 1,921 --------- --------- --------- --------- --------- 1,437 7,036 31,037 4,205 25,412 --------- --------- --------- --------- --------- Loss from operations.... (1,257) (6,757) (29,482) (4,083) (23,532) Other income (expense): Interest income....... -- 64 202 150 293 Interest (expense).... (20) (903) (4,356) 778 3,444 --------- --------- --------- --------- --------- Net loss................ $ (1,277) $ (7,596) $( 33,636) $ (4,711) $ (26,683) Less preferred divi- dends................ (-- ) (-- ) (70) (18) (18) --------- --------- --------- --------- --------- Net loss applicable to common stock........... $ (1,277) $ (7,596) $ (33,706) $ (4,729) $ (26,701) ========= ========= ========= ========= ========= Net loss applicable per common share........... $ (.24) $ (1.18) $ (5.19) $ (0.83) $ (3.65) ========= ========= ========= ========= ========= Weighted average number of common shares outstanding............ 5,263,535 6,445,785 6,496,345 5,700,005 7,305,734 ========= ========= ========= ========= =========
See accompanying notes. F-5 WAM!NET INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (IN THOUSANDS)
CUMULATIVE FOREIGN COMMON STOCK ADDITIONAL COMMON CURRENCY ------------- PAID-IN ACCUMULATED STOCK TRANSLATION DESCRIPTION ISSUED AMOUNT CAPITAL DEFICIT SUBSCRIPTION ADJUSTMENT TOTAL ----------- ------ ------ ---------- ----------- ------------ ----------- -------- Balance at December 31, 1994................... 4,500 $ 44 $ (35) $ -- $ (9) $ -- Payments received on stock subscriptions in May 1995.......... -- -- -- -- 9 9 Issuance of Common Stock upon debt conversion in May, conversion price of $.38 per share....... 265 3 97 -- -- 100 Subscription for sale of Common Stock in June at $.45 per share................ 1,650 17 726 -- (743) -- Payments received on stock subscriptions.. -- -- -- -- 723 723 Value of warrants issued in connection with Notes Payable in November............. -- -- 7 -- -- 7 Value of warrants issued in connection with Bridge Financing in December.......... -- -- 45 -- -- 45 Value of warrants issued to a consultant for services performed in December............. -- -- 23 -- -- 23 Net loss.............. -- -- -- (1,277) -- (1,277) ------ ----- ------- -------- ----- -------- Balance at December 31, 1995................... 6,415 64 863 (1,277) (20) (370) Payments received on stock subscription... -- -- -- -- 20 20 Value of warrants issued in connection with Bridge Financing in July.............. -- -- 121 -- -- 121 Value of warrants issued in connection with Subordinated Notes in March, June and December......... -- -- 5,040 -- -- 5,040 Value of warrants issued for services rendered............. -- -- 15 -- -- 15 Value of warrants issued in connection with Equipment Lease................ -- -- 14 -- -- 14 Issuance of Common Stock upon debt conversion in July, conversion price of $1.90 per share...... 65 1 24 -- -- 25 Payments received on sale of stock warrants............. -- -- 48 -- -- 48 Net loss.............. -- -- -- (7,596) -- (7,596) ------ ----- ------- -------- ----- -------- Balance at December 31, 1996................... 6,480 65 6,125 (8,873) -- (2,683) Accumulated and unpaid dividends in connection with Preferred Stock...... -- -- (70) -- -- (70) Amortization of stock options.............. -- -- 426 -- -- 426 Value of warrants issued in connection with Line of Credit in September......... -- -- 4,766 -- -- 4,766 Issuance of Common Stock upon merger with FreeMail........ 125 1 487 -- -- 488 Issuance of Common Stock upon debt conversion in December, conversion of $1.90 per share... 65 1 24 -- -- 25 Exercise of stock options.............. 30 -- 13 -- -- 13 Net loss.............. -- -- -- (33,636) -- (33,636) ------ ----- ------- -------- ----- -------- Balance at December 31, 1997................... 6,700 67 11,771 (42,509) -- (30,671) Accumulated and unpaid dividends in connection with Preferred Stock...... -- -- (18) -- -- (18) Amortization of stock options.............. -- -- 11,913 -- -- 11,913 Value of warrants issued in connection with Senior Discounted Notes..... -- -- 10,047 -- -- 10,047 Issuance of Common Stock upon merger with 4-Sight......... 2,500 25 19,975 -- -- 20,000 Issuance of Common Stock upon debt conversion .......... 65 1 24 -- -- 25 Net loss.............. -- -- -- (26,683) -- (26,683) Foreign currency translation adjustment........... -- -- -- -- 71 71 ------ ----- ------- -------- ----- --- -------- Balance at March 31, 1998 (unaudited)....... $9,265 $ 93 $53,712 $(69,192) $ -- $71 $(15,316) ====== ===== ======= ======== ===== === ========
See accompanying notes. F-6 WAM!NET INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------- ------------------- 1995 1996 1997 1997 1998 ------- ------- -------- --------- --------- (UNAUDITED) OPERATING ACTIVITIES Net loss..................... $(1,277) $(7,596) $(33,636) $ (4,711) $ (26,683) Adjustments to reconcile net loss to net cash used in operating activities: Noncash interest expense related to warrants....... 7 306 1,624 307 2,274 Capitalized financing costs..................... -- -- -- (1,824) Value of stock options issued to employees and consultants............... 23 15 426 -- 11,914 Foreign currency translation adjustment.... -- -- -- 33 Depreciation and amortization.............. 31 447 2,668 287 2,024 Loss on disposal of property and equipment.... -- -- 797 -- Changes in operating assets and liabilities: Accounts receivable...... (57) (14) (386) (32) 633 Inventory................ -- -- -- 399 Prepaid expenses and other current assets.... (20) (111) (415) (17) (211) Accounts payable......... 290 338 1,832 905 439 Income taxes............. -- -- -- 251 Accrued expenses......... 256 397 3,173 (84) 1,008 ------- ------- -------- -------- --------- Net cash used in operating activities.................. (747) (6,218) (23,917) (3,345) (9,743) INVESTING ACTIVITIES Purchases of property and equipment................... (657) (4,244) (16,599) (3,904) (10,143) Purchase of investments...... -- (1,000) -- -- (20,253) Purchase of 4-Sight.......... -- Proceeds from sale of investments................. -- -- 1,000 1,000 -- ------- ------- -------- -------- --------- Net cash used in investing activities.................. (657) (5,244) (15,599) (2,904) (30,396) FINANCING ACTIVITIES Proceeds from sale of common stock....................... 732 20 -- -- -- Proceeds from sale of common stock warrants.............. -- 48 -- -- -- Proceeds from sale of preferred stock............. -- 1,000 -- -- -- Proceeds from subordinated notes payable............... 500 24,000 -- -- -- Proceeds from 13.25% Senior Discounted Notes............ -- -- -- -- 120,626 Proceeds from line of credit...................... -- -- 18,800 -- 5,203 Payment of subordinated notes payable..................... -- (250) -- -- -- Payments on line of credit... -- -- -- -- (24,003) Proceeds from bridge financing................... 1,500 4,100 10,000 -- -- Proceeds from equipment financing................... -- 245 8,158 -- 1,809 Payments on bridge financing................... -- (4,525) (11,075) (1,075) (948) Payments on equipment financing................... -- (60) (537) (21) -- ------- ------- -------- -------- --------- Net cash provided by (used in) financing activities.... 2,732 24,578 25,346 (1,096) 102,687 ------- ------- -------- -------- --------- (Decrease) increase in cash and cash equivalents........ 1,328 13,116 (14,170) (7,345) 62,548 Cash and cash equivalents at beginning of period......... -- 1,328 14,444 14,444 4,212 ------- ------- -------- -------- --------- Cash and cash equivalents at end of period............... $ 1,328 $14,444 $ 274 $ 7,099 $ 66,760 ======= ======= ======== ======== =========
See accompanying notes. F-7 WAM!NET INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------- ------------------- 1995 1996 1997 1997 1998 ------- -------- -------- ------------------- (UNAUDITED) SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES Value of interest cost assigned to warrants................... $ -- $ 5,176 $ 4,766 $ -- $ -- Equipment financed through equipment financing........... -- -- 1,764 -- -- Conversion of accrued interest to subordinated debt.......... -- -- 1,363 366 585 Issuance of common stock relating to acquisition....... -- -- 488 -- 20,000 Warrant valuation reclassed to deferred charges from line of credit........................ -- -- -- -- 4,104 Accumulated and unpaid dividends..................... -- -- 70 18 18 Cashless exercise of stock options....................... -- -- 13 -- Conversion of convertible subordinated debenture for common stock.................. 100 25 25 25 Equipment financed through capital leases................ -- 239 -- -- SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid for interest......... -- 358 1,208 283 677
See accompanying notes. F-8 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED MARCH 31, 1998) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. SIGNIFICANT ACCOUNTING POLICIES Description of Business WAM!NET Inc. (formerly known as NetCo Communications Corporation), (the "Company") provides a managed, high speed digital data delivery network service that integrates the Company's industry-specific work flow applications with high speed computer and telephony technologies. The Company offers digital data delivery service designed to provide its subscribers with the rapid, secure, accurate and reliable transportation and management of information. In late 1997, the Company no longer considered itself in the development stage. The Company was incorporated in Minnesota on September 19, 1994. The Company was inactive from September 19, 1994 (inception) through December 31, 1994. Substantial Ownership Through its ownership of debt and equity securities of the Company, as well as its designation of a majority of the directors of the Board of Directors of the Company, WorldCom Inc. ("WorldCom") has the potential to exercise considerable influence and control over the affairs of the Company. In addition, WorldCom and its affiliates are non-exclusive suppliers of telecommunication and other services to the Company. Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: FreeMail, Inc. and NetCo Communications Corporation of Canada, Inc. All intercompany transactions have been eliminated. Revenue Recognition Revenues from user fees are recorded as revenue in the period the service is provided to the customer. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Investments classified as cash equivalents consist of high grade commercial paper (A1/P1), certificates of deposits and United States Treasury Bills. Investments Investments at December 31, 1996 consist of certificates of deposits which are classified as available for sale. The cost of investments approximates fair value. Property and Equipment Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful life of four to seven years. Goodwill The excess of the cost over the fair value of the net assets acquired is amortized on a straight-line basis over three years. The Company periodically reviews the recoverability of goodwill based on estimated future cash flows from the related operations. F-9 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED MARCH 31, 1998) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impairment of Long-Lived Assets The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Income Taxes Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between the financial reporting and tax bases of assets and liabilities. Research and Development Research and development costs are charged to operations in the year incurred. These costs for 1995, 1996 and 1997 were $539, $1,109 and $3,364, respectively. Foreign Currency Translation and Transactions The Company's Canadian subsidiary's functional currency is considered to be its local currency. The effect of the cumulative translation adjustment for the fiscal year ended December 31, 1997 is not material and has not been separately disclosed in the Company's financial statements. Stock Split In February, 1998, the Board of Directors declared a five-for-one Common Stock split effected in the form of a stock dividend. The number of shares, options and warrants and the conversion price and exercise price per share have been adjusted to reflect this stock split on a retroactive basis. Net Loss Per Common Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share (Statement 128). Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to fully diluted earnings per share under the previous rules. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. Diluted earnings per share is not presented as the effect of outstanding options and warrants are antidilutive. Interim Financial Information The accompanying consolidated financial statements as of March 31, 1998 and for the three month periods ended March 31, 1997 and 1998 are unaudited. In the opinion of the management of the Company, these consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments necessary for a firm presentation of the consolidated financial statements. The results of operations for the three month period ended March 31, 1998 are not necessarily indicative of the results that may be expected. F-10 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED MARCH 31, 1998) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Reclassification Certain amounts presented in the December 31, 1996 financial statements have been reclassified to conform with the December 31, 1997 presentation. 2. CONTINUED EXISTENCE On March 5, 1998, the Company sold 208,530 Units consisting of 13 1/4% Senior Discount Notes due 2005 and warrants to purchase a total of 1,257,436 shares of common stock. Each Unit consists of $1,000 principal amount at maturity of 13 1/4% Senior Discount Note and three warrants. Each warrant entitles the holder to purchase 2.01 shares of common stock at an exercise price of $.01 per share. The sale of the Units resulted in net proceeds to the Company of $120,622,093. Prior to the sale of the Units, there was substantial doubt about the Company's ability to continue as a going concern. With the completion of the Unit offering, the Company believes that it has a sufficient cash on hand to satisfy its cash requirements for at least the next twelve months. 3. LONG-TERM DEBT Equipment financing notes payable consist of the following:
DECEMBER 31, ------------- 1996 1997 ------ ------ FINOVA Technology Finance; installment note; monthly payments of $43 and an additional final installment of $242 including interest imputed at 13.44%; secured by equipment; due April 2001........................................................ $ -- $1,518 FINOVA Technology Finance; installment note; monthly payments of $91 and an additional final installment of $509 including interest imputed at 13.35%; secured by equipment; due May 2001........................................................ -- 3,248 Transamerica Business Credit; installment note; monthly payments of $46 and an additional final installment of $207 including interest imputed at 13.53%; secured by equipment; due May 2001................................................ -- 1,606 Transamerica Business Credit; installment note; monthly payments of $42 and an additional final installment of $187 including interest imputed at 13.43%; secured by equipment; due May 2001................................................ -- 1,457 Leasetec Corporation; installment note; monthly payments of $47 including interest imputed at 13.50%; unsecured; due December 1998............................................... -- 521 Leasetec Corporation; installment note; monthly payments of $83 including interest imputed at 13.50%; unsecured; due April 1999.................................................. -- 1,123 ------ ------ -- 9,473 Less current portion......................................... -- 3,039 ------ ------ $ -- $6,434 ====== ======
F-11 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED MARCH 31, 1998) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) LONG-TERM DEBT (CONTINUED) Subsequent to December 31, 1997 the Company entered into a $1,469 installment note with Transamerica Business Credit. Maturities of notes payable as of December 31, 1997 are as follows: 1998............................................ $3,039 1999............................................ 2,284 2000............................................ 2,242 2001............................................ 1,908 ------ $9,473 ======
LINE OF CREDIT AGREEMENT In September 1997, the Company entered into a three year $25,000 line of credit agreement with a bank. The line of credit is guaranteed by WorldCom and the Company must obtain WorldCom's consent prior to each borrowing under the line. At December 31, 1997, the amount outstanding on the line of credit was $18,800. The line of credit has both Eurodollar and Floating Rate advances. The Eurodollar and Floating Rate accrue interest at 55 basis points above LIBOR (6.27% at December 31, 1997) and prime (8.50% at December 31, 1997), respectively. Interest on the LIBOR borrowings is payable upon maturity and the prime borrowings is payable quarterly. Subsequent to year end the Company increased the borrowings on the line of credit by $3,187. In connection with WorldCom's guarantee of the line of credit agreement, the Company issued Class A warrants to purchase 8,396,170 common shares and Class B Warrants to purchase 14,204,835 common shares at an initial exercise price of $3.90 per share. The Class A warrants are immediately exercisable and expire on December 31, 2000. The Class A warrants were deemed to have a value of $4,766 which will be amortized as interest expense over the life of the agreement. Amortization of the warrants for the year ended December 31, 1997 was $397. The unamortized value of the warrants has been reflected in the financial statements as a reduction of the outstanding amount owed under the line of credit. The Class B warrants are exercisable based on a calculation that factors the outstanding balance and repayments made on the line of credit during the final twelve months of the agreement. The Class B warrants expire on December 31, 2000. It is Management's intention to fully repay the credit facility before the final twelve months of the agreement with funds received in a proposed Rule 144A private placement by the end of the first quarter 1998. The Class B warrants were deemed to have no value based on Management's intentions and the unpredictability of the factors used to calculate the number of warrants exercisable. 4. BRIDGE FINANCING On December 29, 1995, the Company entered into a bridge financing agreement (Bridge Loan) which provides funding up to $1,600. The Bridge Loan accrued interest at 10% per annum and was payable on the earlier of December 31, 1996 or the date of closing of a qualifying preferred stock financing. In connection with the financing, the Company granted warrants to purchase 1,600,000 shares of common stock at $1.00 per share. The warrants were deemed to have a value of $109 which was recorded as interest expense over the life of the Bridge Loan. Additionally, the Company granted the placement agent warrants to purchase 160,000 shares of Common Stock at $1.00 per share exercisable over five years. F-12 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED MARCH 31, 1998) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) BRIDGE FINANCING (CONTINUED) On March 19, 1996, the Company issued a total of $1,000 of subordinated notes. The subordinated notes accrued interest at 10% per annum and were payable on the earlier of December 31, 1996 or the date of closing of a qualifying financing transaction. In connection with the issuance of the notes, the Company granted warrants to purchase 1,000,000 shares of common stock at $1.50 per share. The warrants were deemed to have a value of $57 which was recorded as interest expense over the life of the subordinated notes. Additionally, the Company granted the placement agent warrants to purchase 100,000 shares of common stock at $1.50 per share. On June 24, 1996, the Company issued $3,000 of subordinated notes. The subordinated notes accrued interest at 10% per annum and were payable on the earlier of December 31, 1996 or the date of closing of a qualifying financing transaction. In connection with the subordinated notes, the Company sold for a price of $.01 each Common Stock warrants to purchase 3,000,000 shares of common stock at $1.50 per share. The warrants to purchase 3,000,000 shares of common stock were deemed to have a value of $120 which was recorded as interest expense over the life of the subordinated notes. Additionally, the Company granted the placement agent warrants to purchase 300,000 shares of common stock at $1.50 per share. On June 30, 1997, the Company entered into a promissory note agreement with WorldCom which provided funding up to $10,000. The Company was advanced $10,000 on the promissory note. The promissory note accrued interest at 12% per annum and was paid in full as of December 31, 1997. 5. SUBORDINATED NOTES PAYABLE In March through May of 1995, the Company issued a total of $250 of convertible subordinated notes which are due December 31, 1999. Interest on the notes accrues at an annual rate of 8%, payable semi-annually. The Company may redeem the notes at any time commencing January 1, 1997, upon notice to the holders at 110% of the face amount of the notes plus interest. The holder has the right to convert the unpaid principal amount of the notes into shares of common stock at a conversion price of $.38 per share. On May 24, 1995, $100 of the notes were converted into 263,160 shares of common stock at the conversion price of $.38 per share. On July 3, 1996, $25 of the notes were converted into 65,790 shares of common stock at the conversion price of $.38 per share. On December 31, 1997, $25 of the notes were converted into 65,790 shares of common stock at the conversion price of $.38 per share. In September 1996, the Company issued to WorldCom a $5,000 convertible subordinated note which is due September 30, 1999. Interest on the note accrues at an annual rate of 10%, payable semi-annually, commencing with the first payment on March 30, 1997. The Company may redeem the note at any time commencing January 1, 1998, upon notice to the holder's at the outstanding principal amount of the note plus interest. The holder has the right to convert the principal amount of the note into shares of common stock at a conversion price of $1.00 per share. In November 1996, the Company entered into a Redeemable Preferred Stock, Subordinated Note and Common Stock Warrant Purchase Agreement ("Investment Agreement") with WorldCom. Pursuant to the agreement, the Company sold 100,000 shares of Class A Preferred Shares, $10.00 par value. The preferred shares are required to be redeemed on December 31, 1999 at a price of $10.00 per share plus an amount equal to all accumulated and unpaid dividends. Dividends are payable at the rate of 7% ($.175 per quarter per share) and shall start to cumulate on January 1, 1997, whether or not earned. Cumulated dividends on the preferred stock F-13 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED MARCH 31, 1998) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SUBORDINATED NOTES PAYABLE (CONTINUED) were $70 at December 31, 1997. The Class A Preferred Shares also carry voting rights equal to Common Shares and possess special voting rights that entitle the holder to elect a majority of the Directors. Under the Subordinated Note Agreement, the Company has available an aggregate amount of $28,500. The Company has the option to issue additional notes not more frequently than once each quarter, commencing with the calendar quarter ending March 31, 1997. The note accrues interest at 7% per annum, is payable semi-annually and is due December 31, 2003. During 1997, $1,363 of accrued interest was converted into additional subordinated notes. The amount outstanding on the subordinated note agreement was $19,000 and $20,363 at December 31, 1996 and December 31, 1997, respectively. In connection with the Investment Agreement, the Company sold for a price of $0.01 each, Common Stock Warrants entitling WorldCom to purchase 20,787,500 shares of common stock at an initial exercise price of $.96 per share. The warrants are immediately exercisable and expire on December 31, 2000. The warrants have an appraised value of $4,906 which will be amortized as interest expense over the life of the warrant agreement. Amortization of the warrants for the year ended December 31, 1997 was $1,227. The unamortized value of the warrants has been reflected as a reduction of the subordinated note. The initial exercise price of $.96 per share increased to $.98 per share on March 31, 1997, and shall thereafter increase by an amount of $.016 per share on the last day of each calendar quarter during the term of the warrant, commencing with the calendar quarter ending June 30, 1997. The exercise price was $1.03 per share on December 31, 1997. The carrying amounts of the Company's debt instruments in the balance sheets at December 31, 1996 and 1997 approximate fair value. 6. COMMITMENTS AND CONTINGENCIES The Company enters into various term contracts with suppliers of telecommunications services for the purpose of receiving discounts off the standard service offerings. Some of these contracts will result in termination liabilities if the contract is terminated prior to the expiration date of the contract. The termination liabilities are generally based upon the minimum monthly dollar amount committed to the vendor multiplied by a termination liability percentage, multiplied by the number of months remaining in the contract. Total data communications expense under telecommunication contracts was $46, $816 and $7,364 for the years ended December 31, 1995, 1996 and 1997, respectively. The Company's data communications expense under telecommunication contracts with WorldCom was $0, $2 and $1,375 for the years ended December 31, 1995, 1996 and 1997, respectively. Guaranteed monthly usage levels of data communications with certain of the Company's telecommunication vendors and WorldCom at December 31, 1997 aggregate to the following annual amounts:
GUARANTEED USAGE GUARANTEED USAGE (ALL VENDORS) (WORLDCOM) ---------------- ---------------- 1998.................................... $ 4,255 $3,080 1999.................................... 3,741 3,000 2000.................................... 2,204 1,750 2001.................................... 194 -- 2002.................................... 138 -- ------- ------ $10,532 $7,831 ======= ======
F-14 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED MARCH 31, 1998) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) COMMITMENTS AND CONTINGENCIES (CONTINUED) The termination contingency of data communications with certain of the Company's telecommunication vendors and WorldCom at December 31, 1997 aggregate to the following annual amounts:
TERMINATION CONTINGENCY TERMINATION (ALL CONTINGENCY VENDORS) (WORLDCOM) ----------- ----------- 1997.............................................. $4,645 $2,916 1998.............................................. 1,783 929 1999.............................................. 682 350 2000.............................................. 54 -- 2001.............................................. 65 -- ------ ------ $7,229 $4,195 ====== ======
The Company also has operating leases for its office space. Operating expenses including maintenance, utilities, real estate taxes and insurance are paid by the Company. Total rent expense under operating leases was $47, $208 and $592 for the years ended December 31, 1995, 1996 and 1997, respectively. Future minimum lease obligations in excess of one year as of December 31, 1997 are as follows:
1998............................................................... $ 798 1999............................................................... 743 2000............................................................... 529 2001............................................................... 461 2002............................................................... 461 Thereafter......................................................... 1,345 ------ $4,337 ======
During 1996, the Company entered into a sale-leaseback agreement for equipment. The total lease obligation is $239 which is to be paid over a thirty month period. In connection with this lease financing, the leasing company was granted warrants to purchase 45,000 shares of common stock at $1.50 per share. The warrants were deemed to have a value of $14 which will be recorded as interest expense over the life of the agreement. The minimum future obligation on the capital lease is $90. The entire balance is classified as current. 7. INCOME TAXES At December 31, 1997, the Company had net operating loss carryforwards of approximately $41,292. These carryforwards are available to offset future taxable income through 2012 and are subject to the limitations of Internal Revenue Code Section 382 resulting from changes in ownership. F-15 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED MARCH 31, 1998) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME TAXES (CONTINUED) Components of deferred tax assets are as follows:
DECEMBER 31, ----------------- 1996 1997 ------- -------- Deferred assets: Net operating loss.......................................... $ 3,525 $ 15,691 Warrant amortization........................................ -- 619 Other....................................................... -- 238 ------- -------- Subtotal..................................................... 3,525 16,548 Deferred liability: Depreciation and amortization............................... (39) (562) ------- -------- Net deferred income tax assets.............................. 3,486 15,986 Valuation allowance......................................... (3,486) (15,986) ------- -------- Net deferred income taxes.................................... $ -- $ -- ======= ========
8. CAPITAL STOCK In February 1998, the Company amended the Articles of Incorporation to increase its authorized capital from 20,000,000 shares to 100,000,000 shares, 90,000,000 of which shall be classified as common shares, 100,000 of which shall be Class A preferred shares and 9,900,000 of which shall be undesignated shares. 9. STOCK OPTIONS AND WARRANTS In September 1994, the Company adopted an Incentive Stock Option Plan that includes incentive stock options to be granted to certain eligible employees and non-employee directors of the Company. The Company has authorized the grant of options to management personnel for up to 22,071,400 shares and up to 4,725,000 of the Company's common stock under the plan and outside the plan, respectively. A majority of the options granted have 10 year terms and vest and become fully exercisable at the end of 3 years of continued employment. In November 1996, the Chief Executive Officer and Chief Technology Officer were each granted options to purchase 2,000,000 shares of common stock at an exercise price of $.96. These options vest in incremental amounts based on the number of installed customer sites and remain exercisable until December 31, 2007. In 1997, the Company recorded $297 in compensation relating to these option grants. Subsequent to year end, the Board of Directors agreed to amend the stock option agreements whereas the shares are fully vested effective January 3, 1998. The amendment constitutes a repricing and accordingly the Company will record $11,405 as compensation expense in January 1998. During 1997, the Company granted non-plan options to various consultants to purchase 347,500 shares of the Company's common stock at an exercise price of $.96 per share. The options were deemed to have a value of $92 and was recognized as compensation expense. Subsequent to December 31, 1997, the Company granted to employees options to purchase a total of 656,250 shares of common stock at an exercise price of $3.90 per share. Additionally, the Company granted options to purchase a total of 400,000 shares at an exercise price of $3.90 per share to two consultants. F-16 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED MARCH 31, 1998) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STOCK OPTIONS AND WARRANTS (CONTINUED) Option activity is summarized as follows:
WEIGHTED SHARES AVERAGE AVAILABLE OPTIONS OUTSTANDING EXERCISE FOR GRANT --------------------- PRICE UNDER PLAN PLAN NON-PLAN PER SHARE ---------- ---------- --------- --------- Establishment of 1994 Stock Option Plan............................. 500,000 -- -- $ -- Additional shares reserved for is- suance........................... 2,500,000 -- -- -- Granted........................... (532,500) 32,500 377,500 .45 ---------- ---------- --------- Balance at December 31, 1995...... 2,467,500 532,500 377,500 .45 Additional shares reserved for issuance......................... 4,071,400 -- -- Granted........................... (2,992,800) 2,992,800 4,000,000 1.09 Canceled.......................... 1,646,400 (1,646,400) -- 1.48 ---------- ---------- --------- Balance at December 31, 1996...... 5,192,500 1,878,900 4,377,500 .90 Additional shares reserved for issuance......................... 15,000,000 -- -- Granted........................... (3,131,250) 3,131,250 347,500 1.38 Canceled.......................... 257,750 (257,750) -- .86 Exercised......................... -- (30,000) -- .45 ---------- ---------- --------- Balance at December 31, 1997...... 17,319,000 4,722,400 4,725,000 1.09 ========== ========== =========
The following table summarizes information about the stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- -------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - -------------- ----------- ---------------- -------------- ----------- -------------- $.45 730,000 7.2 years $ .45 715,000 $.45 .96 8,454,900 9.1 years .96 1,366,795 .96 3.90 262,500 9.8 years 3.90 0 -- --------- --------- .45- 3.90 9,447,400 9.0 years 1.11 2,081,795 .79
The Company has shares exercisable within the plan of 440,000 and 1,167,795 at December 31, 1996 and 1997, respectively, at a weighted average exercise price of $.53 and $.81 per share, respectively. The Company also has shares exercisable outside the plan of 576,500 and 914,000 at December 31, 1996 and 1997, respectively, at a weighted average exercise price of $.64 and $.76 per share, respectively. The fair value of options granted within the plan in 1995, 1996 and 1997 was $.12, $.27 and $.34 per share, respectively. The fair value of options granted outside the plan in 1995, 1996 and 1997 was $.12, $.27 and $.27 per share. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation" (Statement 123), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. F-17 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED MARCH 31, 1998) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STOCK OPTIONS AND WARRANTS (CONTINUED) Pro forma information regarding net loss and loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a minimum value option pricing model with the following weighted-average assumptions for 1995, 1996 and 1997: risk-free interest rate of 6.5%; dividend yield of 0% and a weighed-average expected life of the option of 5 years. The minimum value option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1995 1996 1997 ------- ------- -------- Net loss as reported............................ $(1,277) $(7,596) $(33,636) Pro forma net loss.............................. (1,408) (7,763) (34,168) Net loss per common share as reported........... (.24) (1.18) (5.18) Pro forma net loss per common share............. (.27) (1.20) (5.26)
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 1996, the Company granted a consultant warrants to purchase 150,000 shares of common stock at an exercise price of $.60 per share for services provided. The warrants are immediately exercisable and expire November 17, 2002. The warrants were valued at $15 and were charged to expense. The following is a table of the warrants to purchase shares of the Company's Common Stock:
WARRANTS EXERCISE PRICE EXPIRATION OUTSTANDING EXERCISABLE PER SHARE DATE ----------- ----------- -------------- ---------- Balance at December 31, 1994 Granted: Note payable............ 416,665 416,665 $ .60 2000 Bridge Loan #1.......... 1,760,000 1,760,000 1.00 2000 ---------- ---------- ---------- Balance at December 31, 1995....................... 2,176,665 2,176,665 .60-1.00 Granted: Consulting Service...... 150,000 150,000 .60 2002 Bridge Loan #2.......... 1,100,000 1,100,000 1.50 2003 Bridge Loan #3.......... 3,300,000 3,300,000 1.50 2003 Lease Financing......... 45,000 45,000 1.50 2003 7% Subordinated Notes... 20,787,500 20,787,500 1.03 2000 ---------- ---------- ---------- Balance at December 31, 1996....................... 27,559,165 27,559,165 .60-1.50 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 ========== ========== ==========
F-18 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED MARCH 31, 1998) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 10. EMPLOYMENT AGREEMENTS In November 1996, the Company entered into Employment Agreements with its President and Chief Executive Officer and its Chief Technology Officer. The agreements provide for an annual base salary and a bonus and other compensation as may be established from time to time by the Board of Directors. As part of the agreements, the employees were each granted options to purchase 2,000,000 shares of common stock at an exercise price of $.96. The agreements contain provisions providing for the maintenance of confidentiality of proprietary information of the Company and a two-year non-competition clause in the event of termination of employment. The agreements may be terminated by either parties for any reason at any time. If, however, the employees are terminated by the Company without cause, the Company must pay salary to the employees equal to the employees' then base salary for two years. 11. SAVINGS AND RETIREMENT PLAN The Company has a savings and retirement plan covering all eligible employees. The plan was adopted pursuant to 401(k) of the Internal Revenue Code. Contributions to the plan are discretionary for the employees. The Company does not make contributions to the plan. 12. ACQUISITION In December 1997, the Company acquired the outstanding common stock of FreeMail, Inc. (FreeMail). The results of operations of the acquired business are included in the accompanying financial statements since the date of acquisition. The Company issued 125,000 shares of common stock, with a fair value of $488, as consideration in connection with the acquisition. The Company will pay a quarterly payment to the former shareholders of FreeMail as additional contingent consideration equal to five percent of the gross collected revenue derived by the Company from certain identified FreeMail products. The total amounts of the quarterly payments shall not exceed $3,013. As of December 31, 1997, the Company did not record a liability relating to the FreeMail revenue since no revenue was collected. The acquisition was accounted for as a purchase. The inclusion of the FreeMail operating results for periods prior to the date of acquisition would not have materially affected results of operations. 13. RELATED PARTY TRANSACTIONS The Company's corporate in-house counsel owns 250,000 shares, and has been granted warrants and options to purchase 450,000 shares of Company common stock. During the years ended December 31, 1995, 1996 and 1997, the Company incurred legal fees and expenses of approximately $0, $102 and $128, respectively, to such counsel for services rendered in connection with litigation and for general legal services. The Company's corporate counsel is Larkin, Hoffman, Daly & Lindgren, Ltd. One of the partners of this firm is the father of the Company's President and Chief Executive Officer and owns 250,000 shares of common stock of the Company and has been granted an option to purchase 200,000 shares of the Company's common stock. Additionally, Mr. Hoffman, a partner of this firm, is a director of the Company and has been granted an option to purchase 75,000 shares of the Company's common stock. During the years ended December 31, 1995, 1996 and 1997, the Company incurred legal fees and expenses of approximately $0, $75 and $157, respectively, to such counsel for services rendered in connection with litigation and for general legal services. F-19 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED MARCH 31, 1998) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 13. RELATED PARTY TRANSACTIONS (CONTINUED) The Company's marketing services were performed by Kauffman Marketing Group, Inc. from November 1995 to December 1997. The former President of Kauffman Marketing Group, Inc. joined the Company as the Vice President of Strategic Marketing & Communications in December 1997. During the years ended December 31, 1995, 1996 and 1997, the Company incurred marketing expenses of approximately $0, $318 and $1,634, respectively, to such firm for strategic positioning and outside marketing services. Management believes the fees paid for all the above services rendered to the Company were on terms at least as favorable to the Company as could have been obtained from an unrelated party. 14. MAJOR CUSTOMERS In 1996 two customers accounted for 80%, in aggregate, of net sales. In 1997 three customers accounted for 24%, in aggregate, of net sales. 15. CONTINGENCY The Company is engaged in certain legal proceedings and claims arising in the ordinary course of its business. The ultimate liabilities, if any, which may result from these or other pending or threatened legal actions against the Company cannot be determined at this time. However, it is the opinion of management that facts known at the present time do not indicate that there is a probability that such litigation with have a material effect on the financial position of the Company. 16. SUBSEQUENT EVENT (UNAUDITED) On March 13, 1998, the Company purchased all of the outstanding capital stock of 4-Sight Limited, a private limited company organized under the laws of the United Kingdom ("4-Sight"), for $20 million in cash plus related acquisition expenses of $500 and 2,500,000 shares of the Company's common stock valued at $20,000. In addition, the former shareholders of 4-Sight will be entitled to receive up to an additional 750,000 shares of the Company's common stock in the event certain sales objectives are met over the next three years. The acquisition was accounted for under the purchase method of accounting and, accordingly, the operating results of 4-Sight have been included in the consolidated operating results since the date of acquisition. On acquisition, approximately $31,928 of goodwill was recorded, which is being amortized on a straight-line basis over 5 years. The following table shows the pro forma consolidated results of operations as if 4-Sight had been acquired as of the beginning of the periods presented:
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, 1997 1998 ------------ ------------ UNAUDITED Revenues.............................................. $ 20,833 $ 5,363 Net loss.............................................. $(37,942) $(26,725) Net loss per share.................................... $ (4.22) $ (3.66)
The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the entire periods presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might be achieved from combined operations. F-20 REPORT OF INDEPENDENT AUDITORS The Board of Directors 4-Sight Limited We have audited the accompanying consolidated balance sheets of 4-Sight Limited as at August 31, 1996, September 30, 1996 and September 30, 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the year ended August 31, 1996, the month ended September 30, 1996 and the year ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with United Kingdom auditing standards which do not differ in any significant respect from those generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of 4-Sight Limited at August 31, 1996, September 30, 1996 and September 30, 1997, and the consolidated results of its operations and its cash flows for the year ended August 31, 1996, the month ended September 30, 1996 and the year ended September 30, 1997 in conformity with accounting principles generally accepted in the United States. Ernst & Young Chartered Accountants Southampton, England May 28, 1998 F-21 4-SIGHT LIMITED CONSOLIDATED BALANCE SHEETS (US DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
AUGUST 31, SEPTEMBER 30, SEPTEMBER 30, 1996 1996 1997 ---------- ------------- ------------- ASSETS Current assets: Cash and cash equivalents............. $1,290 $ 439 $ 3,986 Accounts receivable, less allowance of $100 as of August 31, 1996; $116 as of September 30, 1996; $101 as of September 30, 1997 for doubtful accounts............................. 2,237 2,133 2,717 Recoverable taxes..................... 48 98 -- Other current assets.................. 226 219 100 Inventories--finished goods........... 935 983 1,152 Prepaid expenses...................... 247 175 377 ------ ------- ------- Total current assets................ 4,983 4,047 8,332 ------ ------- ------- Property and equipment: Land and buildings.................... 585 587 604 Fixtures and equipment................ 1,341 1,433 1,990 Motor vehicles........................ 19 19 63 ------ ------- ------- 1,945 2,039 2,657 Accumulated depreciation.............. 584 614 1,073 ------ ------- ------- 1,361 1,425 1,584 ------ ------- ------- Goodwill, net of accumulated amortization--August 31, 1996--$19; September 30 1996--$28; September 30, 1997--$167 ............................ 552 545 503 ------ ------- ------- Other assets: Deferred tax.......................... 31 32 54 ------ ------- ------- Total assets........................ $6,927 $ 6,049 $10,473 ====== ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable...................... $1,119 $ 848 $ 859 Other taxes and social security costs................................ 244 109 582 Other accounts payable................ 2,079 1,655 609 Income taxes payable.................. 695 686 506 Current portion of long-term debt and capital lease obligations............ 55 54 71 ------ ------- ------- Total current liabilities........... 4,192 3,352 2,627 Long-term, debt less current portion.... 170 166 108 Capital lease obligations less current portion.............................. -- -- 27 Redeemable preferred ordinary shares of $.015 each............................. -- -- 5,157 ------ ------- ------- Total liabilities................... 4,362 3,518 7,919 ------ ------- ------- Shareholders' equity: Ordinary shares of 1p each Authorized shares--1,000,000,000 as of August 31, 1996 and September 30, 1996; 985,374,550 as of September 30, 1997................. Issued and outstanding shares-- 50,000,000 as of August 31, 1996 and September 30, 1996; 55,000,000 as of September 30, 1997........... 781 783 886 Retained earnings..................... 1,769 1,713 1,589 Translation adjustment................ 15 35 79 ------ ------- ------- Total shareholders' equity.......... 2,565 2,531 2,554 ------ ------- ------- Total liabilities and shareholder's equity............................. $6,927 $ 6,049 $10,473 ====== ======= =======
See accompanying notes. F-22 4-SIGHT LIMITED CONSOLIDATED STATEMENTS OF OPERATIONS (US DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED MONTH ENDED YEAR ENDED AUGUST 31, 1996 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 --------------- ------------------ ------------------ Net revenues............. $ 11,446 $ 1,065 $ 18,264 Cost of revenues......... 3,466 324 5,010 ---------- ---------- ---------- Gross profit............. 7,980 741 13,254 ---------- ---------- ---------- Operating expenses:...... Sales and distribu- tion.................. 2,173 381 5,750 General and administra- tive.................. 3,741 419 5,057 ---------- ---------- ---------- Total operating ex- penses.............. 5,914 800 10,807 ---------- ---------- ---------- Operating income (loss).. 2,066 (59) 2,447 Other income (expense): Interest income........ 66 0 112 Interest (expense)..... (48) (9) (55) ---------- ---------- ---------- Profit (loss) before in- come taxes.............. 2,084 (68) 2,504 Income tax charge........ (606) 7 (916) ---------- ---------- ---------- Net income (loss)........ $ 1,478 $ (61) $ 1,588 ========== ========== ========== Net income per ordinary share................... $ 0.0286 $ (0.0012) $ 0.0287 ========== ========== ========== Weighted average number of ordinary shares outstanding............. 51,637,493 52,777,120 55,343,266 ========== ========== ==========
See accompanying notes. F-23 4-SIGHT LIMITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (US DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) SHARE CAPITAL
ORDINARY ORDINARY SHARES SHARES OF OF 1P 1P EACH EACH ------------- -------- NUMBER AMOUNT AUTHORIZED At September 1, 1995................................ 1,000,000,000 $15,515 Translation adjustment.............................. -- 97 ------------- ------- At August 31, 1996.................................. 1,000,000,000 15,612 Translation adjustment.............................. -- 41 ------------- ------- At September 30, 1996............................... 1,000,000,000 15,653 Division of share capital........................... (14,625,450) (236) Translation adjustment.............................. -- 464 ------------- ------- At September 30, 1997............................... 985,374,550 $15,881 ============= ======= ISSUED At September 1, 1995................................ 124,990 $ 2 Bonus issue of shares............................... 49,875,010 779 ------------- ------- At August 31, 1996.................................. 50,000,000 781 Translation adjustment.............................. -- 2 ------------- ------- At September 30, 1996............................... 50,000,000 783 Issued during the period............................ 5,000,000 80 Translation adjustment.............................. -- 23 ------------- ------- At September 30, 1997............................... 55,000,000 $ 886 ============= =======
On March 12, 1997 the share capital of the Company was divided into ordinary shares and preferred ordinary shares. SHAREHOLDERS' EQUITY
SHARE RETAINED TRANSLATION CAPITAL EARNINGS ADJUSTMENT TOTAL ------- -------- ----------- ------- At September 1, 1995................. $ 2 $ 1,289 $-- $ 1,291 Bonus issue of shares................ 779 (779) -- -- Net income........................... -- 1,478 -- 1,478 Dividend............................. -- (193) -- (193) Translation adjustment............... -- (26) 15 (11) ---- ------- ---- ------- At August 31, 1996................... 781 1,769 15 2,565 Net income (loss).................... -- (61) -- (61) Translation adjustment............... 2 5 20 27 ---- ------- ---- ------- At September 30, 1996................ 783 1,713 35 2,531 Issue of shares...................... 80 -- -- 80 Cost of share issue.................. -- (89) -- (89) Net income........................... -- 1,588 -- 1,588 Dividend............................. -- (1,630) -- (1,630) Translation adjustment............... 23 7 44 74 ---- ------- ---- ------- At September 30, 1997................ $886 $ 1,589 $ 79 $ 2,554 ==== ======= ==== =======
See accompanying notes. F-24 4-SIGHT LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (US DOLLARS IN THOUSANDS)
YEAR ENDED MONTH ENDED YEAR ENDED AUGUST 31, 1996 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 --------------- ------------------ ------------------ OPERATING ACTIVITIES Net income (loss)........ $1,478 $ (61) $1,588 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation........... 287 30 467 Profit on disposal of fixed assets.......... -- -- (3) Amortization of goodwill.............. 19 9 136 Profit from interest in associated undertaking........... (100) -- -- Changes in operating assets and liabilities: Accounts receivable.... (720) 111 (519) Other current assets... (232) (45) 207 Inventories............ (195) (45) (142) Prepaid expenses....... (159) 73 (195) Accounts payable....... 584 (274) (23) Other taxes and social security costs........ (126) (135) 465 Other accounts payable............... (476) (431) (1,108) Income taxes payable... 30 (11) (200) Effects of exchange rate changes.......... (10) 20 34 ------ ----- ------ Net cash provided by (used in) operating activities.............. 380 (759) 707 ------ ----- ------ INVESTING ACTIVITIES Capital expenditures..... (465) (87) (545) Investment in subsidiary.............. 138 -- -- Receipts from sales of tangible fixed assets... -- -- 3 ------ ----- ------ Net cash used in investing activities.... (327) (87) (540) ------ ----- ------ FINANCING ACTIVITIES Proceeds from sale of preferred stock......... -- -- 5,157 Share issue costs........ -- -- (89) Long-term debt (including current portion)........ (54) (5) (55) Payment of capital leases.................. -- -- (3) Equity dividend paid..... (195) -- (1,630) ------ ----- ------ Net cash provided by (used in) financing activities.............. (249) (5) 3,380 ------ ----- ------ Net increase in cash and cash equivalents........ (196) (851) 3,547 Cash and cash equivalents at beginning of period.. 1,486 1,290 439 ------ ----- ------ Cash and cash equivalents at end of period........ $1,290 $ 439 $3,986 ====== ===== ====== Interest paid during the period.................. $ 48 $ 9 $ 55 ====== ===== ====== Tax paid during the period.................. $ 620 $ -- $1,093 ====== ===== ====== SIGNIFICANT NON-CASH TRANSACTIONS Acquisition of equipment under capital lease..... $ -- $ -- $ 45 ====== ===== ====== Issue of ordinary shares to acquire non-voting stock in subsidiary undertaking............. $ -- $ -- $ 80 ====== ===== ======
See accompanying notes. F-25 4-SIGHT LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US DOLLARS IN THOUSANDS) 1. SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS 4-Sight Limited ( the "Company") was incorporated in England and Wales in April 1993. The Company's principal activity is the development, marketing and worldwide distribution of computer software applications. PRINCIPLES OF CONSOLIDATION The consolidated financial statements, which are prepared under United States generally accepted accounting principles, include the financial statements of the Company and all its subsidiaries (together, the "Group"). All inter-company accounts and transactions have been eliminated. ESTIMATES The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that the estimates are reasonable. GOODWILL Purchased goodwill is capitalized and amortized over its estimated useful life. CASH AND CASH EQUIVALENTS Cash and cash equivalents represent cash and short-term deposits with maturities of less than three months at inception. INVENTORIES Inventories are stated at the lower of cost, determined on the basis of the first in, first out method, and market value. PROPERTY AND EQUIPMENT Property and equipment is carried at cost. Depreciation is charged on a straight-line basis over the expected useful lives of the assets. Depreciation is provided at the following annual rates: Long leasehold buildings..............................2% Fixtures and equipment............................. 25% Motor vehicles..................................... 25%
NET REVENUES Net revenues represent the net invoiced value of goods and services excluding value added tax. Goods are invoiced on shipment. The net revenues and operating profits are attributable to the main activity of the Group. RESEARCH AND DEVELOPMENT Expenditure on research and development is written off as incurred. F-26 4-SIGHT LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (US DOLLARS IN THOUSANDS) LEASES The cost of assets held under capital leases is capitalised within the appropriate fixed asset category and depreciation is provided in accordance with the accounting policy for the category of asset concerned. The interest cost is charged over the term of the lease and the capital element of future lease payments is shown on the balance sheet in liabilities as capital lease obligations. The cost of operating leases is charged to income as incurred. FOREIGN CURRENCY TRANSLATION The functional currency is UK sterling. Transactions in non-functional currencies are recorded at the rates ruling at the date of the transactions. Gains and losses resulting from non- functional currency translations, and the re-measurement of non-functional currency balances are included in the determination of net income in the period in which they occur, in accordance with the requirements of Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation". The financial statements of overseas subsidiaries are translated at the rate of exchange ruling at the balance sheet date, and the resulting translation adjustment is shown as a separate component of shareholders' equity. EARNINGS PER SHARE Earnings per share are computed using the weighted average number of ordinary shares outstanding during the period, applying the treasury stock method. INCOME TAXES The Group accounts for income taxes by the liability method. Deferred income taxes are provided for on all temporary differences between financial reporting and tax bases of assets and liabilities. 2. LONG-TERM DEBT The aggregate amount of bank loans (secured) was as follows:
AUGUST 31, SEPTEMBER 30, SEPTEMBER 30, 1996 1996 1997 ---------- ------------- ------------- Bank loan accounts: Current por- tion of long-term loan........... $ 55 $ 54 $ 56 Long-term loan............ 170 166 108 ---- ---- ---- $225 $220 $164 ==== ==== ====
The bank loan is collateralized by a fixed charge over the long leasehold property. The loan is repayable over 5 years from November 21, 1994 by monthly instalments. Interest is charged at 10% per annum. F-27 4-SIGHT LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (US DOLLARS IN THOUSANDS) 3. INCOME TAXES Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Group's deferred tax liabilities and assets are as follows:
AUGUST 31, 1996 SEPT 30, 1996 SEPT. 30, 1997 --------------- ------------- -------------- Deferred tax assets: Book over tax depreciation............. $31 $32 $ 54 Overseas operating losses carried forward.......... 23 43 89 --- --- ---- 54 75 143 Less: valuation allowance... 23 43 89 --- --- ---- Net deferred tax assets..... $31 $32 $ 54 === === ====
There is no time limit for the utilization of the operating losses carried forward totalling $75 as of August 31, 1996, $140 as of September 30, 1996 and $288 as of September 30, 1997 which are specific to certain companies and cannot be relieved against profits in other Group companies. For financial reporting purposes, earnings (loss) before income taxes includes the following components:
AUGUST 31, 1996 SEPT. 30, 1996 SEPT. 30, 1997 --------------- -------------- -------------- United Kingdom............... $1,945 $ (3) $2,973 United States................ 139 (65) (469) ------ ---- ------ $2,084 $(68) $2,504 ====== ==== ======
Significant components of the provision for income taxes are as follows:
AUGUST 31, 1996 SEPT. 30, 1996 SEPT. 30, 1997 --------------- -------------- -------------- Current: United Kingdom.... $637 $(7) $910 Overseas............ 6 -- 15 Adjustment in respect of prior years............... (6) -- 13 Increase in net deferred tax assets................ (31) -- (22) ---- --- ---- $606 $(7) $916 ==== === ====
The reconciliation of income tax computed at the UK statutory tax rate to the effective rate is:
AUGUST 31, 1996 SEPT. 30, 1996 SEPT. 30, 1997 ----------------- ----------------- ---------------- AMOUNT % AMOUNT % AMOUNT % ----------------- --------- ------- ---------------- Statutory rate.......... $ 688 33.0 $ (22) 33.0 $ 801 32.0 Unrelieveable overseas tax losses............. -- -- 9 (13.7) 89 3.6 Adjustment to previous year................... (6) (0.3) -- -- 13 0.5 Utilization of overseas tax losses............. (46) (2.2) -- -- -- -- Other sundry items...... (30) (1.4) 6 (9.0) 13 0.5 ------- ------- ------- ------- ------- ------- $ 606 29.1 $ (7) 10.3 $ 916 36.6 ======= ======= ======= ======= ======= =======
F-28 4-SIGHT LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (US DOLLARS IN THOUSANDS) 4. LEASE COMMITMENTS OPERATING AND CAPITAL AGREEMENTS The future minimum rental payments under capital leases and non-cancellable operating leases at August 31, 1996, September 30, 1996 and September 30, 1997 are:
AUGUST 31, 1996 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 ----------------- --------------------- ---------------------- OPERATING CAPITAL OPERATING CAPITAL OPERATING CAPITAL LEASES LEASES LEASES LEASES LEASES LEASES --------- ------- ---------- --------- ---------- --------- 1998.................... $ 69 $ -- $ 69 $ -- $ 18 $ 18 1999.................... 21 -- 21 -- 12 18 2000.................... -- -- -- -- 11 13 2001.................... -- -- -- -- 3 -- 2002.................... -- -- -- -- -- -- ---- ----- -------- --------- --------- --------- $ 90 -- $ 90 -- $ 44 49 ==== ======== ========= Less: amount representing interest.. -- -- (7) ----- --------- --------- Present value of minimum lease payments......... -- -- 42 Less: current portion... -- -- (15) ----- --------- --------- $ -- $ -- $ 27 ===== ========= =========
5. REDEEMABLE PREFERRED ORDINARY SHARES The preferred ordinary shares entitle the holders to the following rights: (i) the preferred ordinary shares rank pari passu in all respects as to dividend with the ordinary shares; (ii) the preferred ordinary shares rank in priority to all other shareholders in the event of the winding up of the company; (iii) the holders of the preferred ordinary shares are entitled to attend and vote at general meetings of the company. (iv) the preferred ordinary shares can, at the option of the shareholders, be redeemed for an amount of $5,157 at any time after October 1, 2004 over three years in equal installments. F-29 4-SIGHT LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (US DOLLARS IN THOUSANDS) 6. SEGMENT INFORMATION, EXPORT SALES AND MAJOR CUSTOMERS The Group currently operates in one principal industry segment. The Group's sales were divided by geographical location as follows:
BY DESTINATION BY ORIGIN BY DESTINATION BY ORIGIN BY DESTINATION BY ORIGIN AUGUST 30, AUGUST 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1996 1996 1996 1996 1997 1997 -------------- ------------- -------------- ------------- -------------- ------------- United Kingdom.......... $ 8,411 $10,649 $ 565 $ 660 $10,177 $13,687 United States........... 797 797 405 405 4,577 4,577 Rest of Europe.......... 1,218 -- 69 -- 1,903 -- Rest of World........... 1,020 -- 26 -- 1,607 -- ------- ------- ------- ------ ------- ------- $11,446 $11,446 $ 1,065 $1,065 $18,264 $18,264 ======= ======= ======= ====== ======= ======= Total assets by reporting entity: AUGUST 30, SEPTEMBER 30, SEPTEMBER 30, 1996 1996 1997 -------------- ------------- ------------- United Kingdom.......... $ 5,396 $ 4,395 $ 7,919 United States........... 1,483 1,593 2,496 Germany................. 48 61 58 ------- ------- ------- $ 6,927 $ 6,049 $10,473 ======= ======= =======
7. PROPERTY, PLANT AND EQUIPMENT
AUGUST 31, 1996 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 -------------------------- -------------------------- -------------------------- COST DEPRECIATION NET COST DEPRECIATION NET COST DEPRECIATION NET ------ ------------ ------ ------ ------------ ------ ------ ------------ ------ Long leasehold property............... $ 585 $ 24 $ 561 $ 587 $ 25 $ 562 $ 604 $ 39 $ 565 Fixtures and equipment.. 1,341 541 800 1,433 570 863 1,990 1,029 961 Motor vehicles.......... 19 19 -- 19 19 -- 63 5 58 ------ ---- ------ ------ ---- ------ ------ ------ ------ $1,945 $584 $1,361 $2,039 $614 $1,425 $2,657 $1,073 $1,584 ====== ==== ====== ====== ==== ====== ====== ====== ======
The net book value of motor vehicles at September 30, 1997 includes $46 in respect of assets held under capital leases. 8. OPERATING INCOME Operating income is stated after charging:
YEAR ENDED MONTH ENDED YEAR ENDED AUGUST 31, SEPTEMBER 30, SEPTEMBER 30, 1996 1996 1997 ---------- ------------- ------------- Depreciation of owned fixed assets..... $ 284 $30 $ 462 Depreciation of assets held under finance leases........................ -- -- 5 Amortization and write-off of goodwill.............................. 48 9 136 Research and development............... 1,015 89 1,035
F-30 4-SIGHT LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (US DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 9. COMPANIES ACT 1985 These financial statements are not the Company's statutory accounts within the meaning of section 240 of the Companies Act 1985 of Great Britain. The Company's statutory accounts are prepared in accordance with accounting principles generally accepted in the UK in compliance with the Companies Act 1985 and are prepared in sterling. Statutory accounts for the year ended August 31, 1996 and the thirteen month period ended September 30, 1997, on which the auditors have given unqualified audit reports, have been delivered to the Registrar of Companies for England and Wales. 10. EMPLOYEE PROFIT-SHARING AND OPTION PLANS The Company has adopted two share option schemes as follows. The employee share option scheme was established on March 19, 1996. The grant of options under the scheme is discretionary and dependant on the Board being satisfied that the grant is merited by the individual in the light of personal performance and contribution to the business. The executive share option scheme covers senior executives within the group. The grant of options under the scheme is discretionary and dependant on the Board being satisfied that the grant is merited by the individual in the light of personal performance and future contributions to the business. A summary of the options outstanding under the schemes is as follows:
WEIGHTED WEIGHTED RANGE OF AVERAGE AVERAGE EXERCISE NUMBER REMAINING EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EMPLOYEE SCHEME -------- ----------- ---------------- -------- Granted on March 19, 1996... $.15 2,627,332 5 years $.15 Lapsed...................... .15 (46,612) --------- Outstanding at August 31, 1996....................... .15 2,580,720 5 years .15 Lapsed...................... -- --------- Outstanding at Sept 30, 1996....................... 2,580,720 5 years .15 Lapsed...................... (150,621) --------- Outstanding at Sept. 30, 1997....................... .15 2,430,099 5 years .15 ========= EXECUTIVE SCHEME Granted on March 19, 1996... .15 995,000 5 years .15 Lapsed...................... -- --------- Outstanding at August 31, 1996....................... .15 995,000 5 years .15 Lapsed...................... -- --------- Outstanding at Sept 30, 1996....................... 995,000 5 years .15 Lapsed...................... -- --------- Outstanding at Sept. 30, 1997....................... .15 995,000 5 years .15 =========
None of the options were exercisable as at September 30, 1997. The Company accounts for options granted under these plans in accordance with APB No. 25. Each stock option has an exercise price equal to or above the market value on the date of grant and accordingly no F-31 4-SIGHT LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (US DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) compensation expense is recorded for any stock option grants. No options were granted during the period to September 30, 1997. The weighted average fair value of options granted at market price in the year ended August 31, 1996 was 4.5p ($0.07). The determination of the fair value of the stock options granted in 1996 was calculated using the Black Scholes method based on (i) risk-free interest rates of 5.4%, (ii) expected option lives of 6 years and (iii) dividend yield of 0%. Had the fair value based method of SFAS 123 been used in accounting for stock options the consolidated results of operations of the Company would not differ materially from the consolidated results as reported. F-32 ACCOUNTANT'S COMPILATION REPORT The Board of Directors 4-Sight Limited We have compiled the accompanying balance sheet of 4-Sight Limited as of December 31, 1997, and the related statement of operations for the twelve months ended December 31, 1997, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them. Management has elected to omit substantially all of the disclosures and the statements of shareholders' equity and cash flows required by generally accepted accounting principles. If the omitted disclosures were included in the financial statements, they might influence the user's conclusions about the Company's financial position, results of operations, and cash flows. Accordingly, these financial statements are not designed for those who are not informed about such matters. Ernst & Young Chartered Accountants Southampton, England February 20, 1998 F-33 4-SIGHT LIMITED CONSOLIDATED BALANCE SHEET (US DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1997 ----------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.................................. $ 4,253 Accounts receivable, prepaid expenses and other current assets.................................................... 3,593 Inventories--finished goods................................ 1,313 ------- Total current assets..................................... 9,159 Property and equipment: Net of accumulated depreciation............................ 1,684 Goodwill, net of accumulated amortization.................... 485 Other assets: Deferred tax............................................... 54 ------- Total assets............................................. $11,382 ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable........................................... $ 800 Other taxes and social security costs...................... 202 Other accounts payable..................................... 728 Income taxes payable....................................... 899 Current portion of long-term debt.......................... 238 ------- Total current liabilities................................ 2,867 Long-term debt less current portion.......................... 94 Redeemable preferred ordinary shares of 1p each.............. 5,256 ------- Total liabilities........................................ 8,217 ------- Shareholders' equity: Ordinary shares of 1p each Authorized shares--985,374,550........................... Issued and outstanding shares--55,000,000................ 903 Retained earnings.......................................... 2,276 Translation adjustment..................................... (14) ------- Total shareholders' equity............................... 3,165 ------- Total liabilities and shareholder's equity............... $11,382 =======
F-34 4-SIGHT LIMITED CONSOLIDATED STATEMENT OF OPERATIONS (US DOLLARS IN THOUSANDS)
12 MONTHS ENDED DECEMBER 31, 1997 ----------------- (UNAUDITED) Net revenues.................................................. $19,278 Cost of revenues.............................................. 5,013 ------- Gross profit.................................................. 14,265 Operating expenses: Sales and distribution...................................... 5,989 General and administrative.................................. 5,029 ------- Total operating expenses...................................... 11,018 Operating income.............................................. 3,247 Other income (expense): Interest income............................................. 168 Interest expense............................................ (28) ------- Profit before income taxes.................................... 3,387 Income tax charge............................................. (1,278) ------- Net income.................................................... $ 2,109 =======
F-35 GLOSSARY The following terms are used in this Offering Memorandum. Address A point of origin or selected destination on an electric circuit, such as a telephone number or an e-mail address. ADSL Asymmetrical Digital Subscribers Line. A technology designed for conventional copper wire connections which provides a 1.5- 8 Mbps downstream data transfer rates, and 16-640 Kbps upstream data transfer rates. The speed of the connection is limited by the distance the signal must travel. Architecture The overall design of a computer system, including how the components are connected both physically and functionally. ATM Asynchronous transfer mode. A communications protocol that divides digital data into small packets of fixed length (53 byte cells) that facilitates high speed switching. Bandwidth The number of bits of information which can move through a communications medium in a given amount of time; the capacity of a telecommunications circuit/network to carry voice, data and video information. Typically measured in Kbps and Mbps. Bandwidth from public networks is typically available to business and residential end-users in increments from 56 Kbps to T-3. Binary A numbering system in base two, which uses only the digits 0 and 1. The first three binary numbers are 01, 10, and 11. Bit A contraction of "binary digit." It is the smallest piece of information in a digital system, a 0 or 1. bps Bits per second. The speed at which a modem can transmit bits over a telephone line. Standard telephone modems currently operate at levels of 9,600 bps, 14,400 bps, 28,800 bps, 33,300 bps and 56,000 bps. Bug An error in hardware or software that prevents it from operating properly. Browser Software used to view information on the Internet. Byte A basic unit of computer information, usually composed of 8 bits. A kilobyte (KB) equals 1,024 bytes. A megabyte (MB) equals 1,024KB. A gigabyte (GB) equals 1,024MB, or more than one billion bytes. CD-ROM Compact Disk-Read Only Memory. A laser disk that stores digital information that cannot be changed. CIS Customer Information System. Software a customer uses to track transactions or billing information. DS1 The bandwidth of a telephone line capable of transmitting approximately 11 megabits per minute. Also referred to as "T1." DS3 The bandwidth of a telephone line capable of transmitting approximately 337 megabits per minute. Also referred to as "T3." Database An organized collection of information or data in digital form that is readable by a computer, and may include text, numbers, images, sounds and video or film clips. Digital Composed of, or employing, discrete binary representations of information. A-1 Distribution- Hub A local distribution hub developed by the Company as part of the WAMINET Service. Firewall A system placed between networks that filters data passing through it and prevents unauthorized traffic, thereby enhancing the security of the network. Frame Relay A system like ATM that divides digital data into small packets and routes the packets over a circuit. GUI Graphical User Interface. A program that allows a user to operate a computer by selecting and activating graphic symbols (icons) on the computer display screen, generally by using a mouse, without having to type instructions on the computer keyboard. Hub A sophisticated computer that is capable of converting protocols, changing transmissions speeds, and routing data to a variety of nodes. Icon A graphic symbol appearing on a computer screen that represents a foundation, object or program and may be chosen and activated by a graphic user interface. Interface The boundary where different computer media or devices are connected. Internet A global collection of interconnected computer networks which uses the Internet protocol suite. ISDN Integrated Services Digital Network. A larger bandwidth digital telephone services as distinguished from standard, smaller bandwidth, analog telephone service. DS1 and DS3 are both ISDN services. Kbps Kilobits per second. A transmission rate. One kilobit equals 1,024 bits of information. LAN Local Area Network. A computer network that is principally contained inside one building or complex and is primarily connected by direct wires. Laser Disk A small disk on which digital data are stored as minute pits or bumps, and which is read by a laser beam. Common examples are the audio compact disc and the CD-ROM. A 5.25 inch laser disk is typically capable of storing 680 megabytes. Mbps Megabits per second. A transmission rate. One megabit equals 1,024 kilobits. Menu A list of routine command options that appears on a screen in an interactive program with a graphic user interface. Modem A device that converts digital data into electrical impulses for transmission over telephone lines. Network The interconnection of many individual computers allowing access to central databases and communication between computers. Networks serve as thoroughfares over which data are transported. NAD Network Access Device. A programmed equipment module developed by the Company that is leased to its customers and serves as the interface between the customer's own computers and the WAM!NET Service. NOC Network Operations Center. A regional distribution hub developed by the Company as part of the WAM!NET Service. A-2 Nodes Systems or devices, such as computers, terminals, or communication units, that are connected to a LAN or other circuit and that have discrete electronic addresses. On-line Commercial information services that offer a computer user Service access to a specified slate of information, entertainment, and communications menus on what appears to be a single system. Pre-press The various steps involved in the preparation and combination of text, graphic design, graphics, color separations, photo retouching, page assembly, printing plate layout, and image setting that are performed before printing. Protocol The rules or procedures that control how data are organized and transmitted from one computer to another. ROC Regional operations center. Router A device that uses multiple protocols to link networks and to locate a node on a network. T1 See DS1. T3 See DS3. A-3 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [Logo] WAM!NET Inc. All tendered Original Notes, executed Letters of Transmittal, and other related documents should be directed to the Exchange Agent. Requests for assistance and for additional copies of the Prospectus, the Letter of Transmittal and other related documents should be directed to the Exchange Agent. The Exchange Agent for the Exchange Offer is U.S. BANK TRUST NATIONAL ASSOCIATION (f/k/a First Trust National Association) By Facsimile: (612) 244-1145 Attention: Specialized Finance Confirm by telephone: (612) 244-0444 By Registered or Certified Mail: U.S. Bank Trust National Association 180 East 5th Street St. Paul, Minnesota 55101 Attention: Specialized Finance, 4th Floor By Hand/Overnight Courier: U.S. Bank Trust National Association 180 East 5th Street St. Paul, Minnesota 55101 Attention: Specialized Finance, 4th Floor or U.S. Bank Trust New York 100 Wall Street Bond Window, 20th Floor New York, New York 10005 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 302A.521 of the Minnesota Business Corporation Act generally provides for the indemnification of directors, officers and employees of a corporation made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person against judgments, penalties and fines (including attorneys' fees and disbursements) where such person, among other things, has not been indemnified by another organization, acted in good faith, received no improper personal benefit, and with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Section 9.3 of the Company's Amended and Restated Articles of Incorporation provide: 9.3 Indemnification. A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for (i) liability based on a breach of the duty of loyalty to the Corporation or the shareholders (ii) liability for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) liability under Minnesota Statutes Section 302A.559 or 80A.23; or (iv) liability for any transaction from which the director derived an improper personal benefit. If Chapter 302A, the Minnesota Business Corporation Act, is hereafter amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended Chapter 302A, the Minnesota Business Corporation Act. Any repeal or modification of this Section 9.3 by the shareholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation at the time of such repeal or modification. Section 9.01 of the Company's By-Laws provides: Section 9.01. The corporation shall indemnify all officers and directors of the corporation, for such expenses and liabilities, in such manner, under such circumstances and to such extent as permitted by Minnesota Business Corporation Act section 302A.521, as now enacted or hereafter amended. Unless otherwise approved by the board of directors, the corporation shall not indemnify any employee of the corporation who is not otherwise entitled to indemnification pursuant to the prior sentence of this section 9.01. The Company maintains an insurance policy providing for indemnification of its officers, directors and certain other persons against liabilities and expenses incurred by any of them in certain stated proceedings and under certain stated conditions. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits 2.1 Agreement for the Sale and Purchase of the entire issued share capital of 4-Sight Limited dated February 11, 1998, among the Company, WAM!NET (UK) Limited and the Selling Shareholders listed therein. 3.1 Amended and Restated Articles of Incorporation of the Company. 3.2 By-Laws of the Company. 4.1 Indenture dated as of March 5, 1998, between the Company, as Issuer, and First Trust National Association, as Trustee. 4.2(a) Certificate for the Rule 144A Original Notes ($200,000,000). 4.2(b) Certificate for the Rule 144A Original Notes ($8,030,000). 4.3 Certificate for the Regulation S Original Notes. 4.4 Certificate for the Rule 144A Warrants. 4.5 Certificate for the Regulation S Warrants. 4.6(a) Rule 144A Unit Certificate. (200,000 Units) 4.6(b) Rule 144A Unit Certificate. (8,030 Units)
II-1 4.7 Certificate for the Regulation S Units. 4.8 Form of Certificate for the Exchange Notes (included in Exhibit 4.1 hereto). 4.9 Common Stock Certificate. 4.10 Registration Rights Agreement, dated March 5, 1998, among the Company and Merrill Lynch Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. 4.11 Common Stock Registration Rights Agreement, dated as of March 5, 1998, among the Company, WorldCom Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. 4.12 Warrant Agreement, dated as of March 5, 1998, by and between the Company and First Trust National Association, as Warrant Agent, to purchase common stock of the Company. 5 Opinion of Willkie Farr & Gallagher.* 8 Opinion of Willkie Farr & Gallagher with respect to certain tax matters.* 10.1 Credit Agreement among the Company, the Lending Institutions party thereto, as Lenders, The First National Bank of Chicago, as Agent, dated as of September 26, 1997. 10.2 Ten Percent Convertible Note Purchase Agreement between the Company and WorldCom Inc. dated September 12, 1996 ($5,000,000 Note). 10.3 Preferred Stock, Subordinated Note and Warrant Purchase Agreement between the Company and WorldCom Inc. dated November 14, 1996. 10.4 $28,500,000 Seven Percent Subordinated Note due December 31, 2003, payable to WorldCom Inc. 10.5 Certificate Representing 100,000 Shares of Class A Preferred Stock of the Company issued to WorldCom Inc. 10.6 Warrants to purchase 4,157,500 Shares of Common Stock of the Company exercisable on or before December 31, 2000, issued to WorldCom Inc. 10.7 Right of Refusal Agreement Among WorldCom Inc., Edward Driscoll III and Alan L. Witters dated December 16, 1996. 10.8 Guaranty Agreement dated September 26, 1997, by and between the Company and WorldCom Inc. 10.9 Certificate for 1,679,234 Class A Warrants and 2,840,967 Class B Warrants to purchase Common Stock of the Company, issued to WorldCom Inc. 10.10 Sublease dated September 24, 1997 between the Company and 1250895 Ontario Limited, relating to the property located at 6100 110th Street West, Bloomington, Minnesota. 10.11 Service Provision Agreement dated as of July 18, 1997, by and between the Company and Time Inc.* 10.12 Standby Agreement dated as of July 19, 1997 by and between WorldCom Inc. and Time Inc.* 10.13 Employment Agreement dated as of November 14, 1996, by and between the Company and Edward J. Driscoll III. 10.14 Employment Agreement dated as of November 14, 1996, by and between the Company and Allen Witters. 10.15 Employment Agreement dated as of April 16, 1996, by and between the Company and James R. Clancy. 10.16 Employment Agreement dated as of May 10, 1995, as amended, by and between the Company and Mark Marlow. 10.17 Intentionally omitted.
II-2 10.18 1994 Stock Option Plan. 10.19 Amended and Restated 1994 Stock Option Plan. 10.20 1998 Combined Stock Option Plan. 12 Statement re Computation of Ratios. 15 Acknowledgment of Ernst & Young, chartered accountants, regarding unaudited interim financial information. 21 List of Subsidiaries of the Company.* 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Ernst & Young, chartered accountants. 23.3 Consent of Willkie Farr & Gallagher (included in their opinions filed as Exhibit 5 and Exhibit 8 hereto). 24 Power of Attorney (included on the signature page hereto). 25 Statement on Form T-1 of Eligibility of Trustee. 27 Financial Data Schedule. 99.1 Form of Letter of Transmittal. 99.2 Form of Notice of Guaranteed Delivery. 99.3 Form of Letter to Clients. 99.4 Form of Letter to Nominees.
*To be filed by amendment. (b) Financial Statement Schedules: All schedules have been omitted because they are not applicable or not required or the required information is included in the financial statements or notes thereto. ITEM 22. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions, described under Item 20 above, or otherwise, the Registrant has been advised that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt II-3 of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned Registrans hereby undertakes to supply by means of a post- effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this Registration Statement when it became effective. II-4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF MINNEAPOLIS, STATE OF MINNESOTA, ON THE 27TH DAY OF MAY, 1998. WAM!NET Inc. /s/ Edward J. Driscoll III By: _________________________________ NAME: EDWARD J. DRISCOLL IIITITLE: CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER, PRESIDENT AND TREASURER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each officer and director of WAM!NET Inc. whose signature appears below constitutes and appoints Edward J. Driscoll III and Mark Marlow, and each of them, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary fully to all intents and purposes as he might or could do in person thereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE --------- ----- ---- /s/ Edward J. Driscoll III Chairman of the May 27, 1998 - ------------------------------------- Board, Chief EDWARD J. DRISCOLL III Executive Officer, President and Treasurer (principal executive and financial officer) /s/ Charles T. Cannada Director May 27, 1998 - ------------------------------------- CHARLES T. CANNADA /s/ Robert L. Hoffman Director May 27, 1998 - ------------------------------------- ROBERT L. HOFFMAN II-5 SIGNATURE TITLE DATE --------- ----- ---- /s/ Curtis G. Gray Director May 27, 1998 - ------------------------------------- CURTIS G. GRAY /s/ K. William Grothe, Jr. Director May 27, 1998 - ------------------------------------- K. WILLIAM GROTHE, JR. /s/ Mark Marlow Director of Finance May 27, 1998 - ------------------------------------- (principal MARK MARLOW accounting officer) II-6 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE ------- ----------- ---- 2.1 Agreement for the Sale and Purchase of the entire issued share capital of 4-Sight Limited dated February 11, 1998, among the Company, WAM!NET (UK) Limited and the Selling Shareholders listed therein. 3.1 Amended and Restated Articles of Incorporation of the Company. 3.2 By-Laws of the Company. 4.1 Indenture dated as of March 5, 1998, between the Company, as Issuer, and First Trust National Association, as Trustee. 4.2(a) Certificate for the Rule 144A Original Notes ($200,000,000). 4.2(b) Certificate for the Rule 144A Original Notes ($8,030,000). 4.3 Certificate for the Regulation S Original Notes. 4.4 Certificate for the Rule 144A Warrants. 4.5 Certificate for the Regulation S Warrants. 4.6(a) Rule 144A Unit Certificate. (200,000 Units) 4.6(b) Rule 144A Unit Certificate. (8,030 Units) 4.7 Certificate for the Regulation S Units. 4.8 Form of Certificate for the Exchange Notes (included in Exhibit 4.1 hereto). 4.9 Common Stock Certificate. 4.10 Registration Rights Agreement, dated March 5, 1998, among the Company and Merrill Lynch Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. 4.11 Common Stock Registration Rights Agreement, dated as of March 5, 1998, among the Company, WorldCom Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. 4.12 Warrant Agreement, dated as of March 5, 1998, by and between the Company and First Trust National Association, as Warrant Agent, to purchase common stock of the Company. 5 Opinion of Willkie Farr & Gallagher.* 8 Opinion of Willkie Farr & Gallagher with respect to certain tax matters.* 10.1 Credit Agreement among the Company, the Lending Institutions party thereto, as Lenders, The First National Bank of Chicago, as Agent, dated as of September 26, 1997. 10.2 Ten Percent Convertible Note Purchase Agreement between the Company and WorldCom Inc. dated September 12, 1996 ($5,000,000 Note). 10.3 Preferred Stock, Subordinated Note and Warrant Purchase Agreement between the Company and WorldCom Inc. dated November 14, 1996. 10.4 $28,500,000 Seven Percent Subordinated Note due December 31, 2003, payable to WorldCom Inc. 10.5 Certificate Representing 100,000 Shares of Class A Preferred Stock of the Company issued to WorldCom Inc. 10.6 Warrants to purchase 4,157,500 Shares of Common Stock of the Company exercisable on or before December 31, 2000, issued to WorldCom Inc. 10.7 Right of Refusal Agreement Among WorldCom Inc., Edward Driscoll III and Alan L. Witters dated December 16, 1996. 10.8 Guaranty Agreement dated September 26, 1997, by and between the Company and WorldCom Inc. 10.9 Certificate for 1,679,234 Class A Warrants and 2,840,967 Class B Warrants to purchase Common Stock of the Company, issued to WorldCom Inc. 10.10 Sublease dated September 24, 1997 between the Company and 1250895 Ontario Limited, relating to the property located at 6100 110th Street West, Bloomington, Minnesota.
EXHIBIT NUMBER DESCRIPTION PAGE ------- ----------- ---- 10.11 Service Provision Agreement dated as of July 18, 1997, by and between the Company and Time Inc.* 10.12 Standby Agreement dated as of July 19, 1997 by and between WorldCom Inc. and Time Inc.* 10.13 Employment Agreement dated as of November 14, 1996, by and between the Company and Edward J. Driscoll III. 10.14 Employment Agreement dated as of November 14, 1996, by and between the Company and Allen Witters. 10.15 Employment Agreement dated as of April 16, 1996, by and between the Company and James R. Clancy. 10.16 Employment Agreement dated as of May 10, 1995, as amended, by and between the Company and Mark Marlow. 10.17 Intentionally omitted. 10.18 1994 Stock Option Plan. 10.19 Amended and Restated 1994 Stock Option Plan. 10.20 1998 Combined Stock Option Plan. 12 Statement re Computation of Ratios. 15 Acknowledgment of Ernst & Young, chartered accountants, regarding unaudited interim financial information. 21 List of Subsidiaries of the Company.* 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Ernst & Young, chartered accountants. 23.3 Consent of Willkie Farr & Gallagher (included in their opinions filed as Exhibit 5 and Exhibit 8 hereto). 24 Power of Attorney (included on the signature page hereto). 25 Statement on Form T-1 of Eligibility of Trustee. 27 Financial Data Schedule. 99.1 Form of Letter of Transmittal. 99.2 Form of Notice of Guaranteed Delivery. 99.3 Form of Letter to Clients. 99.4 Form of Letter to Nominees.
- -------- *To be filed by amendment. EX-2.1 2 PURCHASE AGREEMENT DATED 11 FEBRUARY 1998 ---------------------- (1) DAVID ANTHONY TOWNEND AND OTHERS (2) WAM!NET (UK) LIMITED (3) WAM!NET INC. ________________________________________________________________________________ AGREEMENT FOR THE SALE AND PURCHASE OF THE ENTIRE ISSUED SHARE CAPITAL OF 4-SIGHT LIMITED ________________________________________________________________________________ [LOGO APPEARS HERE] Charles Russell 8-10 New Fetter Lane London EC4A 1RS Ref: MACM/26893/1
I N D E X --------- PAGE NO. 1. DEFINITIONS......................................................... 1 ----------- 2. INTERPRETATION...................................................... 8 -------------- 3. SALE OF SHARES...................................................... 10 -------------- 4. CONDITIONS.......................................................... 10 ---------- 5. INITIAL CONSIDERATION............................................... 11 --------------------- 6. DEFERRED CONSIDERATION.............................................. 12 ---------------------- 7. COMPLETION.......................................................... 14 ---------- 8. WARRANTIES.......................................................... 18 ---------- 9. WARRANTORS' LIMITATIONS OF LIABILITY................................ 20 ------------------------------------ 10. PURCHASER'S REMEDIES................................................ 20 -------------------- 11. PURCHASER WARRANTIES................................................ 22 -------------------- 12. PURCHASER'S LIMITATIONS OF LIABILITY................................ 22 ------------------------------------ 13. VENDORS' REMEDIES................................................... 22 ----------------- 14. ACTIONS PENDING COMPLETION.......................................... 23 -------------------------- 15. RESTRICTIVE COVENANTS............................................... 25 --------------------- 16. GUARANTEE........................................................... 27 --------- 17. ANNOUNCEMENTS AND CONFIDENTIALITY................................... 28 --------------------------------- 18. REGISTRATION RIGHTS................................................. 29 ------------------- 19. FURTHER ASSURANCE................................................... 32 ----------------- 20. WAIVER AND RELEASE.................................................. 32 ------------------ 21. ENTIRE AGREEMENT AND VARIATIONS..................................... 32 ------------------------------- 22. COSTS............................................................... 33 ----- 23. COUNTERPARTS........................................................ 33 ------------ 24. ASSIGNMENT.......................................................... 33 ---------- 25. MISCELLANEOUS....................................................... 34 ------------- 26. NOTICES............................................................. 34 ------- 27. LAWS AND JURISDICTION............................................... 35 --------------------- THE FIRST SCHEDULE.................................................. 36 ------------------ THE VENDORS......................................................... 36 ----------- THE SECOND SCHEDULE................................................. 38 ------------------- PART 1.............................................................. 38 ------ THE COMPANY......................................................... 38 ----------- PART 2.............................................................. 39 ------ THE SUBSIDIARIES.................................................... 39 ---------------- THE THIRD SCHEDULE.................................................. 43 ------------------ INTELLECTUAL PROPERTY RIGHTS........................................ 43 ---------------------------- THE FOURTH SCHEDULE................................................. 44 ------------------- THE PENSION SCHEME.................................................. 44 ------------------ THE FIFTH SCHEDULE.................................................. 45 ------------------ THE PROPERTIES...................................................... 45 -------------- THE SIXTH SCHEDULE.................................................. 46 ------------------ THE TAX DEED........................................................ 46 ------------ THE FIRST SCHEDULE.................................................. 60 ------------------
THE COVENANTORS..................................................... 60 --------------- THE SECOND SCHEDULE................................................. 61 ------------------- THE COMPANIES....................................................... 61 ------------- THE SEVENTH SCHEDULE................................................ 62 -------------------- PART I.............................................................. 62 ------ THE VENDOR WARRANTIES............................................... 62 --------------------- PART II............................................................. 102 ------- THE PURCHASER WARRANTIES............................................ 102 ------------------------ THE EIGHTH SCHEDULE................................................. 106 ------------------- LIMITATIONS OF LIABILITY............................................ 106 ------------------------ PART I.............................................................. 106 ------ PART II............................................................. 110 -------
THIS AGREEMENT is made 1998 - -------------- BETWEEN:- - ------- (1) THE SEVERAL PERSONS whose names and addresses are set out in columns 1 and ------------------- 2 respectively of Parts 1 and 2 of the First Schedule ("the Vendors"); (2) WAM!NET (UK) LIMITED (company number 3469851) which is registered in -------------------- England and whose registered office is at 8-10 New Fetter Lane, London EC4A 1RS ("the Purchaser"); and (3) WAM!NET INC. which is incorporated in the State of Minnesota whose ------------ principal place of business is at 6100 West 110 Street, Minneapolis, Minnesota 55438, U.S.A. ("WAM!NET"). WHEREAS:- - ------- (A) 4-Sight Limited ("the Company") is a private limited company incorporated in England further information about which is contained in Part 1 of the Second Schedule. (B) The Vendors have full title guarantee, or are otherwise able to procure the transfer, free from all liens, charges and encumbrances, of all the issued shares in the capital of the Company in the numbers set opposite their names in column 3 of the First Schedule. (C) The Vendors have agreed to sell and the Purchaser and WAM!NET have agreed to purchase all of the issued shares in the capital of the Company subject to and on the terms and conditions set forth herein. NOW IT IS HEREBY AGREED as follows:- - ----------------------- 1. DEFINITIONS ----------- In this Agreement the following expressions shall have the following meanings unless the context requires otherwise:- "the Audited Accounts" the audited consolidated balance sheet of the Company and the Subsidiaries made up as at the Balance Sheet Date and the audited consolidated profit and loss account of the Company and the Subsidiaries for the financial year ended on that 1 date, and the notes, directors' report and auditor's report which are annexed thereto (a true and complete copy of which is attached to the Disclosure Letter); "the Balance Sheet Date" 30 September 1997; "business day" a day other than a Saturday or Sunday or public holiday in England and Wales or, if a payment is to be made in US dollars, other than a day on which banking institutions in New York are authorised or obliged by law or executive order to close; "CAA 1990" the Capital Allowances Act 1990; "the Companies Acts" statutes for the time being regulating the activities of companies in the United Kingdom; "Completion" completion of the sale and purchase of the Shares in accordance with the provisions of Clause 7; "the Completion Date" the date upon which Completion takes place; "the Conditions" the conditions referred to in Clause 4; "the Consideration" the consideration for the sale and purchase of the Shares as set forth in Clauses 5 and 6; "Consideration Shares" shares of common stock, par value of U.S.$ 0.01 per share, in the capital of WAM!NET credited as fully paid and non-assessable and to be issued pursuant to Clauses 5 and 6; "the Disclosure Letter" a letter of even date herewith from the Warrantors to the Purchaser 2 disclosing certain exceptions to the Vendor Warranties; "Environmental Law" all laws, regulations, directives, treaties, codes of practice, circulars, notices, guidance notes and the like (whether of the United Kingdom or elsewhere) concerning the protection of or harm to the Environment or to health of humans, animals or plants; "Environmental Licence" any permit, licence, authorisation, consent or other approval required by any Environmental Law; "FRS's" financial reporting standards issued or adopted by the Accounting Standards Board; "Intellectual Property" all inventions (whether patentable or not), patents, utility models, designs (both registered and unregistered and including rights in semiconductor topographies), copyright, trade and service marks (both registered and unregistered) together with all:- (a) rights to the grant of and applications for the same; (b) corresponding applications, re-issues, extensions, divisions and continuations of the aforesaid; and (c) supplementary protection certificates in respect of patents; and all similar or analogous rights throughout the world for the full term thereof; 3 "Intellectual Property Rights" rights in all Intellectual Property which is listed in the Third Schedule; "Investor Vendors" Geocapital IV LP, 3i Group Plc and Media Tec Investments Limited; "the Management Accounts" the unaudited consolidated management accounts of the Company and the Subsidiaries for the period from the Balance Sheet Date to the Management Accounts Date (a true and complete copy of which is attached to the Disclosure Letter); "the Management Accounts Date" 31 December 1997; "Material Breach" (i) in relation to the Vendor Warranties, an event (save where the Purchaser has consented in writing to any such event), fact or circumstance having occurred which renders materially untrue, inaccurate or misleading any of the Vendor Warranties given on the date of this Agreement or which would render materially untrue, inaccurate or misleading any of the Vendor Warranties if they were repeated immediately prior to Completion and which in either case (assuming for these purposes (but not otherwise) and if applicable that the Vendor Warranties were to be repeated on Completion) would give rise to the Purchaser being entitled to make a Relevant Claim (if quantifiable) for an amount in excess of US$500,000 and, if not quantifiable, is in respect of a matter which has an adverse material effect on the value of the Shares having regard to the Company's and the Subsidiaries' business and financial condition, taken as a whole; and 4 (ii) in relation to the Purchaser Warranties, an event (save where the Vendors have consented in writing to any such event), fact or circumstance having occurred which renders materially untrue, inaccurate or misleading any of the Purchaser Warranties given on the date of this Agreement or which would render materially untrue, inaccurate or misleading any of the Purchaser Warranties if they were repeated immediately prior to Completion and which in either case (assuming for these purposes (but not otherwise) and if applicable that the Purchaser Warranties were to be repeated on Completion) would give rise to the Vendors being entitled to make a Relevant Claim (if quantifiable) for an amount in excess of US$500,000 and, if not quantifiable, is in respect of a matter which has an adverse material effect on the value of the Consideration Shares having regard to the rights attached to the shares in WAM!NET which are held by Edward Driscoll III and Allen Witters; "Millennium Compliant" the ability to process accurately all date information (without any change in operations or in procedures) whether before, during or after 1st January 2000, including but not limited to accepting, storing, retrieving and processing date input, providing accurate date output and performing accurate calculations involving dates or portions of dates in each case in a way which does not create any ambiguity as to century; 5 "Opinion Letter" a letter to be dated as of Completion in the agreed terms to the Vendors from Larkin, Hoffman, Daly & Lindgren Ltd (US counsel to WAM!NET); "Options" options to subscribe for ordinary shares in the capital of the Company, granted to the Optionholders by the Company pursuant to the 4-Sight plc Executive Share Option Scheme and the 4-Sight plc Employee Share Option Scheme; "Option Assignments" deeds of sale and assignment in the agreed terms under which the Optionholders will sell and assign the Options to the Purchaser; "Optionholders" those persons holding Options and listed in the list in the agreed terms and marked "A"; "Option Payment" the sum of US$944,755; "the Properties" the properties short particulars of which are set out in the Fifth Schedule; "the Purchaser's Disclosure a letter of even date herewith from the Letter" Purchaser and WAM!NET to the Vendors disclosing certain exceptions to the Purchaser Warranties; "the Purchaser's Group" the Purchaser and/or WAM!NET and/or any subsidiary of the Purchaser or of WAM!NET; "the Purchaser's Solicitors" Charles Russell of 8-10 New Fetter Lane, London EC4A 1RS; 6 "the Purchaser Warranties" the statements contained in Part II of the Seventh Schedule; "Relevant Claim" a claim under the Purchaser Warranties or, as the case may be, the Vendor Warranties and/or of the Tax Deed; "the Service Agreements" the service agreements to be entered into between the Company and each of Andrew Steven Baird, Lyndon David Stickley, David Anthony Townend and Yorick Phoenix, such service agreements to be in the agreed terms and marked "B"; "the Shares" all of the issued shares in the capital of the Company; "SSAP's" statements of standard accounting practice issued or adopted by the Accounting Standards Board; "the Subsidiaries" the companies particulars of which are set out in Part 2 of the Second Schedule; "the Tax Deed" the deed in the form set out in the Sixth Schedule; "Taxation" all forms of taxation, duties, imposts, levies and rates whenever imposed and whether of the United Kingdom or elsewhere and in particular (but without prejudice to the generality of the foregoing) including income tax, withholding taxes, corporation tax, capital gains tax, capital transfer tax, inheritance tax, value added tax, customs duties, excise duties, stamp duty, stamp duty reserve tax, capital duty, national insurance contributions, social security or other similar contributions and generally any 7 other taxes, duties, imposts, levies or other amounts (whether of a like nature or not) and any interest, penalty or fine in connection therewith; "Tax Authority" any local, municipal, governmental, state, federal, or other fiscal, revenue, customs or excise authority, body or official anywhere in the world entitled to enforce or collect Taxation, including without limitation, the UK Inland Revenue and HM Customs and Excise; "the Taxes Act 1988" the Income and Corporation Taxes Act 1988; "TCGA 1992" the Taxation of Chargeable Gains Act 1992; "VATA 1994" the Value Added Tax Act 1994; "the Vendor Warranties" the statements contained in Part I of the Seventh Schedule; "the Vendors' Solicitors" Faegre Benson Hobson Audley, 7 Pilgrim Street, London EC4V 6DR; "the Warrantors" Andrew Steven Baird, Lyndon David Stickley, David Anthony Townend and Yorick Phoenix. 2. INTERPRETATION -------------- In this Agreement where the context so admits:- 2.1 references to statutory provisions shall be construed as references to those provisions as amended or re-enacted or as their application is modified by other provisions (whether before or after the date hereof) from time to time and shall include references to any provisions of which they are re-enactments (whether with or without modification) but shall exclude any new provisions enacted after the date hereof to the extent that any such provisions alter the law as at the date hereof; 8 2.2 references to Clauses and Schedules are references to Clauses hereof and Schedules hereto; references to sub-clauses are, unless otherwise stated, references to sub-clauses of the Clause in which such references appear; references to paragraphs, are, unless otherwise stated, to paragraphs in the Schedule hereto in which such references appear; references to sub-paragraphs are, unless otherwise stated, to sub-paragraphs of the paragraph in which such references appear; and references to this Agreement include the Schedules; 2.3 the plural includes the singular (and vice versa) and the masculine includes the feminine; 2.4 the headings in this Agreement are for convenience only and shall not affect the interpretation hereof; 2.5 save as otherwise provided in the first paragraph of paragraph 8 of Part I of the Seventh Schedule (Taxation Matters), the expression "the Company" when used in Part I of the Seventh Schedule (other than in paragraphs 3(1) to 3(5) and 7(8)(d) inclusive of Part I of the Seventh Schedule) shall be deemed to mean each of the Subsidiaries and the Company so that the Vendor Warranties (other than the Vendor Warranties in such paragraphs) shall apply to each of the Subsidiaries as well as to the Company; 2.6 if any Vendor Warranty is qualified by the expression "so far as the Vendor Warrantors are aware" or any similar expression, the Vendor Warrantors shall be deemed to have made reasonable enquiry in respect of the subject matter of the Vendor Warranty; 2.7 if any Purchaser Warranty is qualified by the expression "so far as WAM!NET is aware" or any similar expression, WAM!NET shall be deemed to have made reasonable enquiry in respect of the subject matter of the Purchaser Warranty; 2.8 the words "subsidiary" and "holding company" shall have the meanings given to them by the Companies Act 1985 as amended by the Companies Act 1989; 2.9 the word "Environment" shall have the meaning given to it in s.1(2) of the Environmental Protection Act 1990; 9 2.10 any reference to a document being "in agreed terms" is to a document in terms which have been agreed by the parties or on their behalf by their respective Solicitors; 2.11 save as expressly provided to the contrary in this Agreement, all warranties, covenants, agreements and obligations given or entered into in this Agreement or in the Tax Deed by more than one person are given or entered into jointly and severally. 3. SALE OF SHARES -------------- 3.1 The Vendors severally shall sell with full title guarantee and the Purchaser and WAM!NET shall purchase with effect from the Completion Date the Shares free from all charges, liens, encumbrances, options, equities and third party rights of any nature whatsoever and together with all rights attaching or accruing thereto and in respect of each individual Vendor the number of Shares set opposite his/its name in column 3 of the First Schedule. 3.2 The Vendors (for themselves and on behalf of their nominees) hereby severally waive all rights of pre-emption over any of the Shares conferred either by the articles of association of the Company or in any other way. 3.3 Neither the Purchaser nor WAM!NET shall be obliged to complete the purchase of any of the Shares unless the purchase of all the Shares is completed simultaneously. 4. CONDITIONS ---------- 4.1 This Agreement shall be conditional in all respects upon:- 4.1.1 the Commissioners of Inland Revenue notifying the Vendors to the effect that they are satisfied that the sale and purchase of the Shares will be such that no notice under section 703(3) of the Taxes Act 1988 ought to be given in respect of them in such circumstances that the provisions of section 707(2) of the Taxes Act 1988 will not apply to any such notification; 4.1.2 the Commissioners of Inland Revenue notifying the Vendors to the effect that they are satisfied that the exchange of shares provided for by this Agreement will be effected for bona fide commercial reasons and will not form part of any such scheme or arrangements as are mentioned in section 137(1) TCGA 1992; 4.1.3 there having been no Material Breach of any Vendor Warranty; 10 4.1.4 there having been no Material Breach of any Purchaser Warranty; 4.1.5 the receipt by the Vendors' Solicitors of a certificate signed by a duly authorised officer of WAM!NET to the effect that WAM!NET has obtained financing of not less than US$125 million available, inter alia, for the acquisition of the Shares and operation of the Company's business after Completion, on terms and conditions satisfactory to WAM!NET at its sole discretion; and 4.1.6 each of the Optionholders having irrevocably sold and assigned all his rights under or in connection with the Options to the Purchaser in accordance with the terms of the Option Assignments and resolutions of the Optionholders and ordinary resolutions of the Vendors (in their capacity as shareholders in the Company) in each case in terms reasonably satisfactory to the Purchaser having been passed (PROVIDED THAT the Warrantors shall (a) procure that offers to the Optionholders are made by the Company for such rights and (b) use their reasonable endeavours to procure that such resolutions and ordinary resolutions are passed in each case within 3 days after receipt by the Vendor's Solicitors of the certificate referred to in sub-clause 4.1.5). 4.2 The Warrantors shall use their reasonable endeavours to procure satisfaction of the Conditions set out in sub-clauses 4.1.1, 4.1.2, 4.1.3 and 4.1.6. 4.3 The Purchaser and WAM!NET shall use their reasonable endeavours to procure satisfaction of the Conditions set out in sub-clauses 4.1.4 and 4.1.5. 4.4 In the event that the above Conditions are not satisfied or waived by all the parties on or before 31 March 1998 this Agreement shall lapse and shall be null and void and no party shall have liability to any other under this Agreement (other than pursuant to sub-clauses 4.2, 4.3, 10.2 and Clause 17). 5. INITIAL CONSIDERATION --------------------- 5.1 Save as deemed reduced herein, the consideration for the sale and purchase of the Shares shall be:- 5.1.1 in respect of the Shares to be purchased by the Purchaser, the cash sum of US$19,055,245; 11 5.1.2 in respect of the Shares to be purchased by WAM!NET, the issue by WAM!NET of 500,000 Consideration Shares (appropriately adjusted to reflect stock splits, stock dividends, reorganisations, consolidations and similar changes); and 5.1.3 in respect of the Shares to be purchased by WAM!NET, the further consideration referred to in Clause 6. 5.2 The cash sum referred to in sub-clause 5.1.1 shall be divisible among the Vendors as set opposite each Vendor's name in column 4 of the First Schedule and paid on Completion to the Vendors' Solicitors. 5.3 Each Vendor shall have issued to him by WAM!NET at Completion such number of Consideration Shares referred to in sub-clause 5.1.2 as are opposite his name in column 5 of the First Schedule. 5.4 The Vendors' Solicitors are authorised to receive on behalf of the Vendors the cash sum referred to in sub-clause 5.1.1 and share certificates for the Consideration Shares to be issued in accordance with sub-clause 5.1.2; payment of the cash sum referred to in sub-clause 5.1.1 to the Vendors' Solicitors shall be a good discharge to the Purchaser of its obligations under sub-clause 5.2 and delivery to the Vendors' Solicitors of share certificates of such number of Consideration Shares as are set opposite each Vendor's name in column 5 of Part 1 or Part 2 (as the case may be) of the First Schedule shall be a good discharge to WAM!NET of its obligations under sub-clause 5.3. 6. DEFERRED CONSIDERATION ---------------------- 6.1 The further consideration for the sale and purchase of the Shares shall be the issue by WAM!NET of 150,000 Consideration Shares (appropriately adjusted to reflect stock splits, stock dividends, reorganisations, consolidations and similar changes) subject to and in accordance with the following provisions of this Clause 6. 6.2 WAM!NET will issue further Consideration Shares to the Vendors (in the relevant percentages set out in column 6 of the First Schedule) as follows:- 6.2.1 125,000 Consideration Shares if the cumulative Non-US/Canada Revenues (as hereinafter defined) in the period of 3 years from the Completion Date equal or exceed US $50,000,000; and 12 6.2.2 a further 25,000 Consideration Shares if the cumulative Non- US/Canada Revenues in the period of 3 years from the Completion Date equal or exceed US$70,000,000. 6.3 For the purpose of the foregoing, "Non-US/Canada Revenues" shall mean the revenues attributable to customer sites located outside the USA and Canada and receivable by any member of the Purchaser's Group (including after Completion, the Company and the Subsidiaries). 6.4 Within 20 business days after the end of each three month period (the first such period to begin on the Completion Date and end on the last day of the second month after the month in which Completion occurs) during the 3 years referred to above, WAM!NET shall prepare and deliver to the Vendors a certificate (signed by an authorised officer of the WAM!NET) setting out the cumulative Non-US/Canada Revenues as at the end of such 3 month period, together with reasonable supporting documentation. 6.5 In the event the Vendors shall dispute any certificate delivered by WAM!NET pursuant to sub-clause 6.4, they shall notify WAM!NET accordingly in writing within 20 business days after the date of such certificate. In the event that the Vendors do not dispute the certificate within 20 business days of the date of such certificate, such certificate shall be deemed approved. 6.6 In the event that any dispute regarding any such certificate shall not be resolved within 30 business days after the date of such certificate, the matter shall be submitted for determination by an independent certified public accountant (not employed or otherwise connected, within the meaning of Section 839 of the Taxes Act 1988, to any parties hereto), acting as expert and not as arbitrator, agreed between WAM!NET and the Vendors (failing which by the President for the time being of the Minnesota Society of Certified Public Accountants). Such determination shall be final and binding on all concerned. The fees of such accountant shall be borne equally between WAM!NET on the one hand and the Vendors on the other. 6.7 Each of the Purchaser and WAM!NET (on behalf of itself and the Purchaser's Group) undertakes with the Vendors that it will procure that the businesses of the Purchaser's Group are conducted in good faith and in a way which is not calculated or intended adversely to affect the value to the Vendors of their contingent right to receive the deferred consideration or any part thereof pursuant to this Clause 6, or the ability of WAM!NET to satisfy the same and further undertakes to the Vendors, 13 but without prejudice to the generality of the foregoing, that until the third anniversary of the Completion Date each of them:- 6.7.1 shall not enter into or require or cause or permit any member of the Purchaser's Group to enter into: (a) any artificial transaction which reduces or defers the level of Non US/Canada Revenues; or (b) any other transaction where either:- (aa) the principal purpose of entering into that transaction is to reduce or defer the level of Non-US/Canada Revenues; or (bb) the effect of entering into that transaction is to reduce or defer the level of Non-US/Canada Revenues and such transaction is not entered into in good faith in the best interests of the Purchaser's Group; and 6.7.2 shall procure that the business and affairs of the Purchaser's Group shall continue to be conducted on an arms' length basis for the purpose of ensuring (so far as it is reasonably possible so to do) that the level of Non-US/Canada Revenues is not distorted or reduced. 6.8 The issue of further Consideration Shares, if any, pursuant to this Clause 6 shall be made within 14 business days of the next meeting of the board of directors of WAM!NET to be held (and which shall be held as soon as reasonably practicable) after the determination (pursuant to sub-clause 6.4, 6.5 or 6.6, as appropriate) that the relevant target for Non-US/Canada Revenue has been met. 7. COMPLETION ---------- 7.1 Completion shall take place at the office of the Vendors' Solicitors on or before the third business day following the date on which the last Condition shall have been satisfied or waived or at such other place or on such other date as may be agreed between the Purchaser and the Vendors' Solicitors on behalf of the Vendors, whereupon:- 7.1.1 the Warrantors shall severally deliver to the Purchaser:- 14 7.1.1.1 a certificate in the agreed terms duly signed by each of them confirming that, inter alia, the Vendor Warranties are, save as therein set out, true, accurate and complete in all respects as at Completion and the provisions of Clause 14 have been complied with and dated as of Completion; 7.1.1.2 duly executed transfers of the Shares by the registered holders thereof in favour of the Purchaser or its nominees together with the relative share certificates; 7.1.1.3 the Tax Deed duly executed by the Warrantors as the parties referred to therein as the Covenantors; 7.1.1.4 the resignation executed as a deed of S J Clearman as director of the Company in which he shall acknowledge in agreed terms that he has no claims against the Company for compensation for loss of office or otherwise howsoever; 7.1.1.5 all the statutory and other books of the Company and of the Subsidiaries together with their certificates of incorporation and common seals; 7.1.1.6 at the Properties, the deeds and documents constituting title to the Properties insofar as they are in the possession of or under the control of the Warrantors or the Company or the Subsidiaries or any of them; 7.1.1.7 irrevocable powers of attorney in agreed terms executed by each Vendor in favour of the Purchaser to enable the Purchaser (pending registration of the transfers referred to in sub-clause 7.1.1.2) to exercise all voting and other rights attaching to the Shares and to appoint proxies for this purpose; 7.1.1.8 the Service Agreements duly executed by each of Andrew Steven Baird, Lyndon David 15 Stickley, David Anthony Townend and Yorick Phoenix (in the case of the relevant Service Agreement in which the relevant person is named as a party); 7.1.1.9 a letter in agreed terms from each of the Vendors in which it or he confirms that there are no monies owed to it or him by the Company or any of the Subsidiaries other than, in the case of those Vendors who are employees of the Company or a Subsidiary, customary accrued expenses and unpaid salary in respect of the period from the beginning of the month in which Completion takes place to the Completion Date; 7.1.1.10 a certified copy of a deed of termination and release in respect of the Subscription and Shareholders' Agreement dated 12 March 1997 in the agreed terms duly executed by or on behalf of each of the parties thereto; 7.1.1.11 Option Assignments duly executed by or on behalf of each of the Optionholders with the name of the Purchaser entered as the Purchaser of the Options; and 7.1.1.12 Letters of Investment Intent (in the agreed terms) duly executed by each Vendor; 7.1.2 the Warrantors shall procure that a board meeting (in the agreed terms) of the Company (as the same may be required for effecting the following) shall be held at which it shall be resolved that:- 7.1.2.1 the transfers in respect of the Shares be approved for registration and that share certificates in respect thereof be executed as deeds and delivered to the Purchaser and WAM!NET subject only to the said transfers being duly stamped; 7.1.2.2 the resignations of the person whose name is set out in sub-clause 7.1.1.4 be tabled and approved; 16 7.1.2.3 Edward J. Driscoll III and James R. Clancy shall be appointed directors of the Company; 7.1.2.4 the Service Agreements be approved; 7.1.3 against compliance with the foregoing provisions, WAM!NET or, as the case may be, the Purchaser shall:- 7.1.3.1 deliver to the Vendors' Solicitors a certificate in the agreed terms signed by a duly authorised officer of WAM!NET confirming that, inter alia, the Purchaser Warranties are, save as therein set out, true, accurate and complete in all respects as at Completion and dated as of Completion; 7.1.3.2 deliver to the Vendors' Solicitors certificates for 500,000 Consideration Shares; 7.1.3.3 deliver to the Vendors' Solicitors a certified copy of a Board Resolution of WAM!NET in the agreed terms (authorising and issuing to the Vendors the Consideration Shares referred to in sub-clause 5.1.2 and authorising and reserving to the Vendors the Consideration Shares referred to in Clause 6); 7.1.3.4 deliver to the Vendors' Solicitors the Opinion Letter; 7.1.3.5 deliver to the Vendors' Solicitors a counterpart of the Tax Deed, duly executed by the Purchaser and WAM!NET; 7.1.3.6 deliver to the Vendors' Solicitors counterparts of the Service Agreements, duly executed by the Company; 7.1.3.7 deliver to the Vendors' Solicitors counterparts of the Letters of Investment Intent (in the agreed terms) duly executed by WAM!NET; 7.1.3.8 telegraphically transfer such sum as will ensure that the net sum of US$20,000,000 (being the cash sum of US $19,055,245 referred to in sub-clause 5.1.1 and the Option Payment) is credited to the Vendors' Solicitors account or accounts (details of which are 17 to be notified to the Purchaser's Solicitors prior to Completion). 7.2 If in any respect the obligations of the Warrantors under sub-clauses 7.1.1 and 7.1.2 are not complied with on the date set for Completion, the Purchaser and WAM!NET may:- 7.2.1 defer Completion to a date not more than 28 days after that date (in which case this sub-clause 7.2, apart from this sub-clause 7.2.1, will apply in respect of the date to which Completion is deferred); or 7.2.2 proceed to Completion as far as practicable (but not including completion of the purchase of some only of the Shares); or 7.2.3 (without prejudice to their rights and remedies in respect of such non-compliance) rescind this Agreement. 7.3 If in any respect the obligations of the Purchaser and WAM!NET under sub- clause 7.1.3 are not complied with on the date set for Completion, the Vendors may:- 7.3.1 defer Completion to a date not more than 28 days after that date (in which case this sub-clause 7.3, apart from this sub-clause 7.3.1, will apply in respect of the date to which Completion is deferred); or 7.3.2 proceed to Completion as far as practicable (but not including completion of the sale of some only of the Shares); or 7.3.3 (without prejudice to their rights and remedies in respect of such non-compliance) rescind this Agreement. 8. WARRANTIES ---------- 8.1 The Warrantors hereby jointly and severally warrant to the Purchaser and WAM!NET that subject to Clause 9 and save as fairly disclosed in the Disclosure Letter the Vendor Warranties are at the date hereof true, accurate and complete in all respects. 8.2 The Warrantors jointly and severally undertake to forthwith disclose in writing to the Purchaser any matter or thing which may become known to them after the date hereof and prior to Completion which is inconsistent with any of the Vendor Warranties. 18 8.3 Each of the Vendors (but excluding the Investor Vendors as regards sub- clause 8.3.6) hereby warrants severally to the Purchaser and WAM!NET that:- 8.3.1 he has full power and authority to enter into and perform this Agreement and each other document to be exercised and delivered by him at Completion other than the Tax Deed (collectively, "the Completion Agreements"); 8.3.2 the Completion Agreements, when executed, will constitute valid and binding obligations upon him in accordance with their terms; 8.3.3 the execution and delivery of and performance by him of his obligations under the Completion Agreements and the transactions contemplated thereby will not result in a breach of any provision of the memorandum and articles of association or other constitutional documents of such Vendor or a breach of any order, judgment or decree of any court to which he is a party or by which he is bound; 8.3.4 he is entitled to sell and transfer to the Purchaser the Shares set opposite his name in column 3 of the First Schedule on the terms of this Agreement with full title guarantee and without the consent of any third party; 8.3.5 no person has the right (whether exercisable now or in the future and whether contingent or not but excluding the pre-emption rights which have been waived by the Vendors under sub-clause 3.2) to call for the sale or transfer of any of the Shares set opposite his name in column 3 of the First Schedule under any option or other agreement (including conversion rights and save as aforementioned and pre-emption rights) and there are no claims, charges, liens, equities or encumbrances on such Share(s); 8.3.6 the execution and delivery of and performance by him of his obligation under the Completion Agreements and the transactions contemplated thereby will not result in a breach of any provision of the memorandum and articles of association of the Company. 8.4 It is acknowledged and agreed by each of the parties hereto that the Warranties contained in sub-clause 8.3 are the only warranties (other than warranties as to title to their respective holdings in any of the Shares) given by the Investor Vendors and, for the avoidance of doubt, the Investor Vendors shall have no liabilities in respect of any of the matters 19 warranted by the Warrantors whether under sub-clause 8.1 or Part 1 of the Seventh Schedule or otherwise. 8.5 Each of the Warrantors hereby warrants severally to the Purchaser and WAM!NET that:- 8.5.1 he has full power and authority to enter into and perform the Tax Deed; 8.5.2 the Tax Deed, when executed, will constitute valid and binding obligations upon him in accordance with its terms; 8.5.3 the execution and delivery of and performance by him of his obligations under the Tax Deed and the transactions contemplated thereby will not result in a breach of any provision of the memorandum and articles of association or other constitutional documents of the Company or, if appropriate, such Warrantor or a breach of any order, judgment or decree of any court to which he is a party or by which he is bound. 8.6 Any amount payable hereunder by virtue of a breach of any of the warranties or undertakings in sub-clauses 8.1, 8.2, 8.3, 8.4 or 8.5 shall be deemed to be a reduction in the amount of the Consideration received by the Investor Vendors or Warrantors (as the case may be) for the Shares. 9. WARRANTORS' LIMITATIONS OF LIABILITY ------------------------------------ 9.1 The provisions of Part I of the Eighth Schedule shall, subject to sub- clause 9.2, operate to limit the liability of the Warrantors under or in connection with the Vendor Warranties and under or in connection with the Tax Deed. 9.2 The provisions of paragraphs 1 to 5 (inclusive) of Part I of the Eighth Schedule shall not operate to limit the liability of the Warrantors under or in connection with the Vendor Warranties or under or in connection with the Tax Deed (and the provisions of such paragraphs shall not apply) where the liability in question arises as a result of fraud on the part of any of the Warrantors, or where the liability in question relates to a matter which has been deliberately concealed or withheld by any of the Warrantors. 10. PURCHASER'S REMEDIES -------------------- 20 10.1 The Warrantors hereby jointly and severally agree with the Purchaser and WAM!NET that in the event of any breach of the Vendor Warranties and subject always to sub-clause 9.1 and Part 1 of the Eighth Schedule, they will pay to the Purchaser or WAM!NET on demand:- 10.1.1 the amount necessary to put the Company and the Subsidiaries into the position which would have existed if the Vendor Warranties had not been so breached; and 10.1.2 all reasonable costs and expenses (including legal costs on an indemnity basis) incurred by the Purchaser, WAM!NET or the Company or any of the Subsidiaries as a result of such breach. The rights of the Purchaser and WAM!NET referred to in this sub-clause 10.1 shall not restrict any of the rights of the Purchaser and WAM!NET or the ability of the Purchaser and WAM!NET to claim damages on any basis available to them in the event of any breach of the Vendor Warranties. 10.2 The Warrantors hereby jointly and severally agree with the Purchaser and WAM!NET (and subject always to sub-clause 9.1 and Part 1 of the Eighth Schedule) to indemnify and keep indemnified each of the Purchaser and WAM!NET (for themselves and as trustees for the Company and its Subsidiaries) against any costs, damages, losses and liabilities (including, without limitation, any liability to Taxation) suffered or incurred by the Purchaser, WAM!NET, the Company or any Subsidiary by reason of the implementation of the arrangements contemplated by the Option Assignments, including without limitation the offers made to the Optionholders and payments thereto. If any payment hereunder is subject to Taxation in the hands of the recipient, such further payment shall be made as is necessary to ensure that the recipient is put in the same position as if no such Taxation had been due. 10.3 The Purchaser and WAM!NET may at any time prior to Completion (without any liability on their part) rescind this Agreement by notice in writing to the Vendors to that effect as soon as reasonably practicable after the Purchaser or WAM!NET becomes aware of any Material Breach of any Vendor Warranties. 10.4 The rights, including any such right of rescission conferred on the Purchaser and WAM!NET by this Clause, shall be in addition to and without prejudice to all other rights and remedies available to the Purchaser and WAM!NET. 21 10.5 The Purchaser and WAM!NET may release or compromise the liability of any of the Warrantors hereunder or grant to any Warrantor time or other indulgence without affecting the liability of any other Warrantor hereunder. 10.6 No failure to exercise, and no delay in exercising on the part of the Purchaser and WAM!NET any right or remedy in respect of any Vendor Warranty shall operate as a waiver of such right, remedy or Vendor Warranty nor shall a single or partial exercise of such right or remedy preclude the exercise of such or any other right or remedy. 10.7 The Warrantors hereby agree with the Purchaser and WAM!NET (for themselves and as trustees of the Company and the Subsidiaries) to waive any right which they may have in respect of any misrepresentation, inaccuracy or omission in or from any information or advice supplied or given by the Company or the Subsidiaries or any of their officers and employees or professional advisers in enabling the Warrantors to give the Vendor Warranties and the Warrantors and their professional advisers to prepare the Disclosure Letter. 11. PURCHASER WARRANTIES -------------------- 11.1 WAM!NET and the Purchaser hereby jointly and severally warrant to the Vendors that:- 11.1.1 the Purchaser Warranties are at the date hereof true, accurate and complete in all respects; and 11.1.2 they will forthwith disclose in writing to the Vendors any matter or thing which may become known to them after the date hereof and prior to Completion which is inconsistent with any of the Purchaser Warranties. 12. PURCHASER'S LIMITATIONS OF LIABILITY ------------------------------------ 12.1 The provisions of Part II of the Eighth Schedule shall, subject to sub- clause 12.2 operate to limit the liability of the Purchaser and WAM!NET under or in connection with the Purchaser Warranties. 12.2 The provisions of paragraphs 1 to 4 (inclusive) of Part II of the Eighth Schedule shall not operate to limit the liability of the Purchaser (and the provisions of such paragraphs shall not apply) under or in connection with any of the Purchaser Warranties where the liability in question arises as a result of fraud on the part of the Purchaser or WAM!NET or where 22 the liability in question relates to the matter which has been deliberately concealed or withheld by the Purchaser or WAM!NET. 13. VENDORS' REMEDIES ----------------- 13.1 The Purchaser and WAM!NET hereby jointly and severally agree with the Vendors that in the event of any breach of the Purchaser Warranties and subject always to sub-clause 12.1 and Part II of the Eighth Schedule, they will pay to the Vendors on demand:- 13.1.1 the amount necessary to put the Vendors into the position which would have existed if the Purchaser Warranties had not been so breached; and 13.1.2 all reasonable costs and expenses (including legal costs on an indemnity basis) incurred by the Vendors as a result of such breach; The rights of the Vendors referred to in this sub-clause 13.1 shall not restrict any of the rights of the Vendors or the ability of the Vendors to claim damages on any basis available to them in the event of any breach of the Purchaser Warranties. 13.2 The Vendors may at any time prior to Completion (without any liability on their part) rescind this Agreement by notice in writing to the Purchaser and WAM!NET to that effect as soon as reasonably practicable after the Vendors become aware of any Material Breach of any Purchaser Warranties. 13.3 The rights including any such right of rescission conferred on the Vendors by this Clause shall be in addition to and without prejudice to all other rights and remedies available to the Vendors. 13.4 The Vendors may release or compromise the liability of the Purchaser or WAM!NET hereunder or grant to either of them time or other indulgence without affecting the liability of the other. 13.5 No failure to exercise, and no delay in exercising on the part of the Vendors any right or remedy in respect of any Purchaser Warranty shall operate as a waiver or such right, remedy or Purchaser Warranty nor shall a single or partial exercise of such right or remedy preclude the exercise of such or any other right or remedy. 14. ACTIONS PENDING COMPLETION -------------------------- 23 The Warrantors undertake to the Purchaser that, in the period from the date of this Agreement to Completion, the Company and each of the Subsidiaries shall (except with the prior written consent of the Purchaser) which consent shall not be unreasonably withheld or delayed:- 14.1 continue its business in the ordinary and usual course and so as to maintain the same as a going concern; 14.2 not enter into any contract, transaction or arrangements with the Vendors or any person connected (as such term is defined in section 839 of the Taxes Act 1988) with the Vendors (other than in respect of the payment of any remuneration properly accrued due or repayment of business or other expenses properly incurred); 14.3 save for any increases to which any director or employee is contractually entitled or which are made pursuant to any review policy currently in force and which are disclosed in the Disclosure Letter not increase or agree to increase the remuneration (including, without limitation, pension contributions, bonuses, commissions and benefits in kind) of its directors or employees (other than minor increases which the Warrantors shall notify to the Purchaser as soon as reasonably possible) or provide or agree to provide any gratuitous payment or benefit in excess of (Pounds)5,000 to any such person or any of their dependants and no employees (other than casual employees or employees whose remuneration does not exceed (Pounds)30,000 per annum) shall be engaged or dismissed or have their terms of employment altered in the case of the Warrantors, in any respect and, in the case of any other employee, in any material respect; 14.4 not amend or discontinue any of the Pension Schemes or communicate to any employee any plan, proposal or intention to amend, discontinue or exercise any discretion in relation to any of the Pension Schemes; 14.5 not acquire or agree to acquire (other than the proposed acquisition of a new accounting and administration system and the proposed lease of the "Midland Bank building" in Bournemouth, on the terms details of which are set out in the Disclosure Letter) or dispose or agree to dispose of any material asset (other than in the normal course of business) or enter into any contract or arrangement involving expenditure or liabilities in excess of (Pounds)50,000; 14.6 not make any payments out of any bank or deposit account exceeding in aggregate (Pounds)50,000 (except for payments in the normal course of business); 24 14.7 not create or agree to create any further security over or encumber or agree to encumber any of its assets or redeem or agree to redeem any existing security or give or agree to give any guarantees or indemnities; 14.8 not alter or agree to alter the terms of any existing borrowing facilities or arrange additional borrowing facilities or incur other indebtedness for borrowed money (other than pursuant to any existing borrowing facilities); 14.9 not alter or agree to alter or terminate or agree to terminate any agreement to which it is a party (and which involves expenditure of more than (Pounds)50,000 in total) or enter into any unusual or abnormal contract or commitment save for the proposed acquisition of a new accounting and administration system and the proposed lease of the "Midland Bank building" in Bournemouth, on the terms details of which are set out in the Disclosure Letter; 14.10 enter into (save as a defendant, having given prompt written notice thereof to the Purchaser) any litigation or arbitration proceedings (other than routine debt collection or as disclosed in the Disclosure Letter); 14.11 not declare, pay or make any dividend or other distribution of capital within the meaning of the Taxes Act 1988 nor redeem or purchase any of its shares; 14.12 not create, allot or issue any share or loan capital or other securities or acquire any shares or other interest in any other company; 14.13 not pass any resolution in general meeting other than to re-register the Company as a private limited company; 14.14 continue its insurance policies and do nothing to render such policies void or voidable; 14.15 make any change in any method or practice of accounting except for any such change required by reason of law or regulation; and 14.16 give all reasonable co-operation to the Purchaser (where applicable at the Purchaser's expense) so as to ensure a smooth, orderly and efficient continuation of management of the Company and the Subsidiaries after Completion. 15. RESTRICTIVE COVENANTS --------------------- 25 15.1 Each of the Warrantors hereby undertakes severally with the Purchaser that he will not whether directly or indirectly or whether on his own account or for the account of any other person, firm or company, or as agent, director, partner, manager, employee, consultant or shareholder of or in any other person, firm or company:- 15.1.1 during the period from the date hereof to two years and six months after the Completion Date carry on or be engaged or concerned or interested in any business which is directly or indirectly in competition with any business of the Company or any of the Subsidiaries carried on at the date of this Agreement in such countries in which such business is carried on at the date of this Agreement (any such business being referred in this Clause 15 to as a "Restricted Business"); 15.1.2 during the period from the date hereof to two years and six months after the Completion Date seek in competition with any Restricted Business to procure orders from, or do business with, any person firm or company who has been a customer of the Company or any of the Subsidiaries at any time during the period of twelve months prior to the Completion Date; or 15.1.3 during the period from the date hereof to two years and six months after the Completion Date, solicit or endeavour to entice away from or discourage from being employed by the Company or any of the Subsidiaries, any person who is at the date hereof an employee of the Company or any of the Subsidiaries or whom any of such companies may at the date hereof have agreed to engage as an employee; or 15.1.4 during the period from the date hereof to two years and six months after the Completion Date, attempt to employ or negotiate or arrange the employment of or engagement by any other person of, any person who is at the date hereof or, at the Completion Date shall be an employee of the Company or any of the Subsidiaries or whom any of such companies may at the date hereof have agreed to engage as an employee. 15.2 It is agreed by the parties that, whilst the restrictions set out in sub- clause 15.1 are considered fair and reasonable, if it should be found that any of the restrictions be void as going beyond what is fair and reasonable in all the circumstances and if by deleting part of the wording it would not be 26 void, then such deletions shall be made as shall render sub-clause 15.1 valid and enforceable. 15.3 None of the restrictions in sub-clause 15.1.1 shall be deemed to restrict or prevent any of the Warrantors from being interested in any business solely as the owner for investment of securities dealt in on a recognised stock exchange or the NASDAQ Stock Market and not exceeding 5 per cent in nominal value of the securities of that class or as the owners of the Consideration Shares or as officers or employees of the Purchaser's Group. 15.4 The restrictions contained in sub-clause 15.1 shall not take effect until the day after particulars of this Agreement has been duly furnished to the Director General of Fair Trading pursuant to Section 24 Restrictive Trade Practices Act 1976 (unless such restrictions shall take effect without the need for such furnishing in which case such restrictions shall take effect from Completion). 16. GUARANTEE --------- 16.1 In consideration of the undertaking by the Vendors to pay WAM!NET the sum of (Pounds)1 upon written request by WAM!NET, WAM!NET irrevocably and unconditionally guarantees to the Vendors the due and punctual performance of each obligation of the Purchaser whether to be performed before on or after Completion contained in this Agreement. WAM!NET shall pay to the Vendors from time to time on demand any sum of money which the Purchaser is at any time liable to pay to the Vendors or any of them under or pursuant to this Agreement and which is then due and had not been paid at the time the demand is made. WAM!NET's obligations under this sub-clause 16.1 are primary obligations and not those of a mere surety. If an obligation of the Purchaser is void, voidable or unenforceable for any reason, WAM!NET's obligations under sub-clause 16.1 are unaffected and WAM!NET shall perform the Purchaser's obligations as if it were primarily liable for the performance. 16.2 WAM!NET's obligations under sub-clause 16.1 are continuing obligations and are not satisfied, discharged or affected by an intermediate payment or settlement of account by, or a change in the constitution or control of, or the insolvency of, or bankruptcy, winding up or analogous proceedings relating to, the Purchaser. 16.3 WAM!NET's liability under sub-clause 16.1 is not affected by any arrangements which any of the Vendors may make with the Purchaser or with another person which (but for sub-clause 16.3) might operate to 27 diminish or discharge the liability of WAM!NET or otherwise provide a defence to a surety. 16.4 Without affecting the generality of sub-clause 16.3, the Vendors may at any time as they think fit and without reference to WAM!NET:- 16.4.1 grant a time for payment or grant another indulgence or agree to an amendment, variation, waiver or release in respect of an obligation of the Purchaser under this Agreement; 16.4.2 give up, deal with, vary, exchange or abstain from perfecting or enforcing other securities or guarantees held by any of the Vendors; 16.4.3 discharge a party to other securities or guarantees held by any of the Vendors and realise all or any of those securities or guarantees; and 16.4.4 compound with, accept compositions from and make other arrangements with the Purchaser or a person or persons liable on other securities or guarantees held or to be held by the Vendors. 16.5 WAM!NET's liability under sub-clause 16.1 is not affected by the avoidance of an assurance, security or payment or a release, settlement or discharge which is given or made on the faith of an assurance, security or payment, in either case, under an enactment relating to bankruptcy or insolvency. 17. ANNOUNCEMENTS AND CONFIDENTIALITY --------------------------------- 17.1 Other than to the extent required by law or by any recognised stock exchange or regulatory or governmental body having jurisdiction (and then provided that the announcement or disclosure is only made after consultation with the other parties), or in furtherance of the funding proposed by WAM!NET and referred to in sub-clause 4.1.6, no announcement or disclosure concerning the matters provided for in this Agreement shall be made or issued by or on behalf of the Vendors or the Purchaser without the prior written approval of the other (such approval not to be unreasonably withheld or delayed). 17.2 The Vendors each severally agree to keep secret and confidential and not to use, disclose or divulge to any third party or to enable or cause any person to become aware of (except for the purposes of the business of the Company) any confidential information obtained by such Vendor in connection with the transaction contemplated by this Agreement and 28 relating to the Purchaser's Group (including after Completion, the Company and the subsidiaries) including but not limited to lists of customers, reports, notes, memoranda and all other documentary records pertaining to the Purchaser's Group (including after Completion, the Company and the subsidiaries) or their respective business affairs or products. 17.3 The restrictions in sub-clause 17.2 shall cease to apply to any such confidential information which:- 17.3.1 at the time of disclosure was in the public domain; or 17.3.2 after disclosure comes into the public domain other than by breach of the undertakings contained in sub-clause 17.2; or 17.3.3 was proved to be known to the relevant party at the time of disclosure provided that the source of such information was not subject to any agreement or other duties relating to confidentiality in respect thereof. 29 18. REGISTRATION RIGHTS ------------------- 18.1 Registration Rights ------------------- If WAM!NET, at any time during the period beginning on the date six months from the date WAM!NET completes a public offering of its equity securities and ending on the date seven years from Completion, proposes to register the sale of any of its securities (except debt securities, including debt securities convertible into equity securities) under the Securities Act of 1933 ("the Act"), (except by a claim of exemption or registration statement on a form (i) that does not permit the inclusion of shares by its security holders, (ii) that relates to an employee benefit plan or (iii) that relates to a combination, acquisition or disposition involving one or more other parties), WAM!NET will give written notice to all registered holders of Consideration Shares of its intention to do so and, on the written request of any registered holders of Consideration Shares received by WAM!NET within fifteen (15) days after delivery by WAM!NET of any such notice, WAM!NET will use its best efforts to cause all such Consideration Shares, the holder of which shall have requested the registration or qualification thereof, to be included in such registration statement proposed to be filed by WAM!NET. If any such registration shall be underwritten in whole or in part, WAM!NET may require that the Consideration Shares requested for inclusion pursuant to this paragraph be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. In the event that, in the good faith judgment of the managing underwriter of such public offering, the total number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering, WAM!NET need include in such registration only such number of Consideration Securities and other securities requested to be included in such registration pro rata among the holders of such Consideration Securities and other securities on the basis of the number of shares requested to be included in the registration by each such holder, provided that the inclusion of Consideration Securities or other shares held by persons requesting registration shall not reduce the number of WAM!NET securities being offered in the registration. 18.2 Miscellaneous Registration Rights Provisions -------------------------------------------- 18.2.1 Notwithstanding anything herein to the contrary, WAM!NET may delay filing a registration statement, and may withhold or terminate efforts to cause the registration statement to become effective, if WAM!NET determines in good faith that such registration might adversely affect WAM!NET. 30 18.2.2 From time to time WAM!NET shall amend or supplement, at WAM!NET's expense, the prospectus used in connection therewith to the extent necessary in order to comply with applicable law. If, after the registration statement becomes effective, WAM!NET advises the holders of registered Consideration Shares that WAM!NET considers it appropriate for the registration statement or any prospectus related thereto to be amended, the holders of such Consideration Shares shall immediately suspend any further sales of their registered Consideration Shares until WAM!NET advises them that the registration statement or prospectus has been amended. 18.2.3 The holder shall furnish in writing to WAM!NET all information as may be reasonably requested by WAM!NET or required under applicable securities law in connection with any registration of Consideration Shares, including but not limited to, the proposed method of sale or other disposition of the registered Consideration Shares and any compensation payable in connection therewith. The holder shall comply with the provisions of applicable securities law in connection with the registration of Consideration Shares and the disposition thereof. 18.2.4 All expenses incurred in connection with any registration, qualification or compliance pursuant to this Agreement, including without limitation, all registration, filing and qualification fees, printing expenses, fees and disbursements of counsel for WAM!NET, and expenses of any special audits incidental to or required by such registration, shall be borne by WAM!NET, provided however, that the person for whose account the Consideration Shares covered by such registration are sold shall bear underwriting commissions, discounts or fees relating to Consideration Shares, fees of holders' legal counsel and fees and expenses of any registration begun, the request for which has been subsequently withdrawn by the holders, in which case such expenses shall be borne by the holders requesting such withdrawal. 18.2.5 In connection with any registration statement in which the holder's Consideration Shares are included, the holder will indemnify WAM!NET, its directors and officers and each person who controls WAM!NET, against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a 31 material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement omission is contained in or should be contained in any information furnished in writing by the holder. 18.2.6 WAM!NET's obligation to proceed with registration under this Agreement shall terminate on the date on which, in the opinion of legal counsel to WAM!NET, all common stock of WAM!NET that could be registered under the United States Securities Act of 1933, as amended, or applicable United States state securities laws (including Consideration Shares) ("Registrable Securities") held by a holder may be transferred within a 90-day period, or reissued without restriction, in compliance with the provisions of Rule 144 or 145 under the Act, or any successor provision. 18.2.7 WAM!NET may, at its discretion and in lieu of registering the Registrable Securities (including Consideration Shares) as provided herein, repurchase such Registrable Securities (including Consideration Shares) at "Fair Market Value", as defined below,at any time after receiving a request for registration of such Registrable Securities. For purposes of this sub-clause, "Fair Market Value" shall be determined on the date WAM!NET receives the request for registration. 18.2.8 "Fair Market Value" means, with respect to WAM!NET's Common Stock, as of any date: (i) if the Common Stock is listed or admitted to unlisted trading privileges on any national securities exchange or is not so listed or admitted but transactions in the Common Stock are reported on the Nasdaq National Market, the reported closing price of the Common Stock on such exchange or by the Nasdaq National Market as of such date (or, if no shares were traded on such day, as of the next preceding day on which there was such a trade); or (ii) if the Common Stock is not so listed or admitted to unlisted trading privileges or reported on the Nasdaq National Market, and bid and asked prices therefor in the over- the-counter market are reported by Nasdaq or National Quotation Bureau, Inc. (or any such comparable reporting service), the mean of the closing bid and asked prices as of such date, as so reported by Nasdaq, or, if no so reported thereon, as reported by National Quotation Bureau, Inc. (or such comparable reporting services); or (iii) if the Common Stock is not so listed, or admitted to unlisted trading privileges, or reported on the Nasdaq National Market, and such bid and asked prices are not so reported by Nasdaq or National Quotation Bureau Inc. (or any comparable reporting service), such price as WAM!NET's Board 32 of Directors determines in good faith in the exercise of its reasonable discretion. 18.2.9 Upon request of the managing underwriter of any public offering of WAM!NET's securities, each holder of Consideration Shares agrees to sign and deliver an appropriate agreement limiting such holder's right to dispose of the Consideration Shares during the course of, and for a reasonable time following, such public offering; provided, however, that such agreement (i) is in customary form appropriate to such transaction, (ii) is the same form required by such underwriter from management and other principal shareholders of WAM!NET, and (iii) has a duration not exceeding 180 days following the effective date of the registration statement. 19. FURTHER ASSURANCE ----------------- The Vendors and the Purchaser and WAM!NET shall do and execute, and shall use their respective best endeavours to procure any other necessary party to do and execute, all such further acts, things, deeds and documents as may be necessary to give effect to the terms of this Agreement. 20. WAIVER AND RELEASE ------------------ 20.1 No waiver by any of the parties of any of the requirements hereof or of any of its rights hereunder shall have effect unless given in writing and, in the case of a corporate party, signed by a director or other duly authorised officer of such party. 20.2 The Purchaser may release or compromise the liability of any Vendor hereunder without affecting the liability of any other Vendor. 21. ENTIRE AGREEMENT AND VARIATIONS ------------------------------- 21.1 This Agreement (together with the documents referred to herein) constitutes the entire Agreement between the parties with respect to all matters referred to herein. 21.2 No variations hereof shall be effective unless made in writing and signed by each of the parties and, in the case of a corporate party, by a director or other duly authorised officer of such party. 21.3 Each of the Purchaser and WAM!NET hereby acknowledges that it has not been induced to enter into this Agreement by any representation or 33 warranty other than the Vendor Warranties and the warranties set forth in Clause 8. 21.4 The Vendors hereby acknowledge that they have not been induced to enter into this Agreement by any representation or warranty other than the Purchaser Warranties. 22. COSTS ----- 22.1 Save where otherwise specifically stated, each party to this Agreement shall pay its own costs of and incidental to this Agreement (and its preparation and negotiation) and the sale and purchase hereby agreed to be made. 22.2 The Purchaser shall pay all stamp duty in respect of the transfer of the Shares. 23. COUNTERPARTS ------------ This Agreement may be entered into in any number of counterparts and by the parties to it on separate counterparts each of which when so executed and delivered shall be an original, but all the counterparts shall together constitute one and the same instrument. 24. ASSIGNMENT ---------- 24.1 This Agreement shall be binding upon and enure for the benefit of the successors and permitted assigns of the parties but shall not be assignable save as stated below or otherwise with the agreement of all the parties. Any assignment in breach of this sub-clause 24.1 shall be void and of no force or effect. 24.2 The Purchaser (and any permitted assignee) may at any time assign all or any of its rights and benefits under this Agreement (including the Vendor Warranties and any cause of action arising from any of them) to any member of the Purchaser's Group provided that, if any member to whom such rights and benefits are assigned ceases to be a member of the Purchaser's Group, it shall re-assign the rights and benefits to the Purchaser or another member of the Purchaser's Group. 24.3 Any Vendor may at any time assign all or any of its rights to receive Consideration Shares under Clause 6 to employee(s) of the Company and/or any of its subsidiaries from time to time and (with the prior written consent of WAM!NET) to any other person PROVIDED THAT in any event such assignment shall be conditional on an opinion of Counsel for 34 WAM!NET being received on terms reasonably acceptable to WAM!NET that such assignment is exempt from registration under the US Securities Act of 1933, as amended and under any applicable US state securities laws. 24.4 Any Vendor may at any time sell its Consideration Shares and assign the rights thereto to any other Vendor subject to the condition set out in the proviso to sub-clause 24.3. 25. MISCELLANEOUS ------------- 25.1 The provisions of this Agreement insofar as the same shall not have been performed at Completion (including but not limited to the Vendor Warranties and the Purchaser Warranties) shall remain in full force and effect notwithstanding Completion. 25.2 Time shall be of the essence of this Agreement, both as regards the dates and periods mentioned and as regards any dates and periods which may be substituted for them in accordance with this Agreement or by agreement in writing between the parties. 25.3 If any provision of this Agreement is held to be invalid or unenforceable, then such provision shall so far as it is invalid or unenforceable be given no effect and shall be deemed not to be included in this Agreement but shall not otherwise render any of the remaining provisions of this Agreement invalid or unenforceable. 25.4 If any matter referred to in this Agreement requires the approval or agreement of the Vendors, such approval or agreement shall be deemed to have been given by all of the Vendors if it has been given in writing by such number of Vendors who, at the date hereof, hold 75% or more of the Shares. For the purposes of this Agreement, the approval or agreement of a deceased Vendor shall be deemed to have been given if given by such deceased Vendor's personal representatives. 26. NOTICES ------- 26.1 Any notice to be given hereunder shall either be delivered personally (including by courier) or sent by first class recorded delivery post (if to an addressee in the same country as the sender) or airmail or fax to the party to be served at the address set out opposite his name in the Preamble or in the First Schedule (as the case may be) or relevant fax number (as the case may be) notified from time to time to the other parties for this purpose) or such other address or relevant fax number (as the case may be) as may from time to time be notified to the other parties 35 hereto for this purpose. A notice shall be deemed to have been served as follows:- 26.1.1 if personally delivered, at the time of delivery; 26.1.2 if posted by overland mail at the expiration of two business days after the envelope containing the same was delivered into the custody of the postal authorities; 26.1.3 if posted by airmail at the expiration of five business days after the envelope containing the same was delivered into the custody of the postal authorities; 26.1.4 if sent by fax, at the expiration of one business day after the same was properly despatched (provided that a copy of the notice was also sent by first class recorded delivery post or airmail within 24 hours of the fax transmission). 26.2 In proving such service it shall be sufficient to prove that personal delivery was made, or that the envelope containing such notice was properly addressed and delivered into the custody of the postal authority as a pre- paid first class recorded delivery letter, or airmail letter, or that the fax was properly addressed and despatched and the sender's machine shall have indicated that the message has been received at the addressee's machine, as the case may be. 27. LAWS AND JURISDICTION --------------------- 27.1 The construction, validity and performance of this Agreement (other than Clause 18) shall be governed by the laws of England. The construction, validity and performance of Clause 18 shall be governed by US federal law and the laws of the State of Minnesota. 27.2 In relation to any legal action or proceedings to enforce this Agreement or arising out of or in connection with this Agreement or the Tax Deed, each party irrevocably submits to the non-exclusive jurisdiction of the English courts. 27.3 Geocapital IV L.P. hereby irrevocably appoints the Vendors' Solicitors as its agent for service of process in England in relation to any disputes or proceedings arising out of or in connection with this Agreement. 27.4 WAM!NET hereby irrevocably appoints the Purchaser's Solicitors as its agent for service of process in England in relation to any disputes or 36 proceedings arising out of or in connection with this Agreement or the Tax Deed. IN WITNESS this Agreement has been signed by or on behalf of each of the parties - ---------- hereto the day and year first before written. 37 THE FIRST SCHEDULE ------------------ THE VENDORS -----------
(1) (2) (3) (4) (5) (6) NAME ADDRESS NO OF SHARES CASH CONSIDERATION CONSIDERATION SHARES % OF DEFERRED - ---- ------- ------------ ------------------ -------------------- ------------- CONSIDERATION ------------- (Ordinary unless otherwise stated) David Anthony Townend 3 Marwell Close 31,680,000 $7,991,094 263,460 48.95% Littledown Bournemouth Dorset Andrew Steven Baird 30 Denbigh Road 9,000,000 $2,270,197 74,846 13.90% London W13 8NH Lyndon David Stickley 14 State Street 5,000,000 $1,261,220 41,581 7.72% Marblehead Massachusetts USA Yorick Phoenix 4,320,000 $1,089,694 35,926 6.67% 6 Princes Road Poole Dorset BH12 1BH
38
(1) (2) (3) (4) (5) (6) NAME ADDRESS NO OF SHARES CASH CONSIDERATION CONSIDERATION SHARES % OF DEFERRED - ---- ------- ------------ ------------------ -------------------- ------------- CONSIDERATION ------------- (Ordinary unless otherwise stated) Media Tec Unit 18 5,000,000 $1,261,220 41,581 7.72% Investments Limited Mill Wall Wickham's Cay Tortola British Virgin Island Geocapital IV L.P. One Bridge Plaza 11,883,178 $4,200,820 34,617 12.22% Fort Lee Preferred Ordinary New Jersey Shares USA 31 Group PLC 91 Waterloo Road 2,742,272 $ 981,000 7,989 2.82% London SE1 8XP Preferred Ordinary Shares
39 THE SECOND SCHEDULE ------------------- PART 1 ------ THE COMPANY ----------- (i) Directors: Antony Gerard Ebel, Anthony Richard Prest, Andrew Steven Baird, Lyndon David Stickley, David Anthony Townend, Stephen Joshua Clearman (ii) Secretary: Andrew Steven Baird (iii) Registered Office: Gild House, 64-68 Norwich Avenue West, Bournemouth BH2 6AW (iv) Date of Incorporation: 7 April 1993 (v) Country of Incorporation: England and Wales (vi) Registered Number: 2807473 (vii) Auditors: Ernst & Young (viii) Accounting Reference Date: 30 September (ix) Charges: Legal Mortgage dated 13 December 1994 in favour of National Westminster Bank Plc. (x) Authorised Share Capital: (Pounds)10,000,000 divided into 985,374,550 ordinary shares of 1 pence each and 14,625,450 convertible redeemable preferred ordinary shares of 1 pence each (xi) Issued Share Capital: HOLDER NO. & CLASS OF ------ -------------- SHARES ------ As per columns (1), (2) and (3) of The First Schedule 40 PART 2 ------ THE SUBSIDIARIES ---------------- (A) 4-SIGHT (INTERNATIONAL) LIMITED (i) Directors: Christopher Holly, Harvey George Jones, Anthony Richard Prest, Andrew Steven Baird, Yorick Phoenix, Lyndon David Stickley, David Anthony Townend (ii) Secretary: Andrew Steven Baird (iii) Registered Office: Gild House, 64-68 Norwich Avenue West, Bournemouth, Dorset BH2 6AW (iv) Date of Incorporation: 4 June 1990 (v) Country of Incorporation: England and Wales (vi) Registered Number: 2508346 (vii) Auditors: Ernst & Young (viii) Accounting Reference Date: 30 September (ix) Charges: Mortgage Debenture dated 9 August 1994 in favour of National Westminster Bank Plc (x) Authorised Share Capital: (Pounds)100,000 divided into 25,000 redeemable preference shares of(Pounds)1 each, 250 convertible preference shares of (Pounds)100 each and 50,000 ordinary shares of (Pounds)1 each (xi) Issued Share Capital: HOLDER NO. & CLASS OF ------ -------------- SHARES ------ 41 the Company 1,139 ordinary shares and 250 convertible preference shares (xii) Percentage beneficially owned by the Company: 100% (B) 4-SIGHT (SOFTWARE) LIMITED (i) Directors: Andrew Steven Baird, David Anthony Townend, Anthony Richard Prest, Christopher Holly (ii) Secretaries: Andrew Steven Baird, David Anthony Townend (iii) Registered Office: Gild House, 64-68 Norwich Avenue West, Bournemouth, Dorset BH2 6AW (iv) Date of Incorporation: 15 November 1995 (v) Country of Incorporation: England and Wales (vi) Registered Number: 3126535 (vii) Auditors: Ernst & Young (viii) Accounting Reference Date: 30 September (ix) Charges: None (x) Authorised Share Capital: 100 (Pounds) divided into 100 ordinary shares of (Pounds)1 each (xi) Issued Share Capital: HOLDER NO. & CLASS ------ ----------- OF SHARES --------- the Company 2 ordinary shares (xii) Percentage beneficially owned by the Company: 100% 42 (C) 4-SIGHT INC. (i) Directors: Andrew Titley (ii) Secretary: Andrew Titley (iii) Registered Office: 1209 Orange Street, Wilmington, Delaware 19801, U.S.A. (iv) Date of Incorporation: 4 August 1994 (v) Country of Incorporation: U.S.A. (vi) Registered Number: N/A (vii) Auditors: None (viii) Accounting Reference Date: 30 September (ix) Charges: None (x) Authorised Share Capital: 3,000 shares of common stock, par value of $1.00 per share (xi) Issued Share Capital: HOLDER NO. & CLASS ------ ----------- OF SHARES --------- the Company 1,999 shares of common stock (xii) Percentage beneficially owned by the Company: 100% (D) 4-SIGHT GMBH (i) Directors: David Anthony Townend, Andrew Steven Baird (ii) Secretary: None 43 (iii) Registered Office: Hamburg, Germany (iv) Date of Incorporation: 12 September 1995 (v) Country of Incorporation: Germany (vi) Registered Number: HR B 59 578 (vii) Auditors: None (viii) Accounting Reference Date: 31 December (ix) Charges: None (x) Authorised Share Capital: DM 50,000 (xi) Issued Share Capital: HOLDER NO. & CLASS ------ ----------- OF SHARES --------- the Company DM 50,000 (xii) Percentage beneficially owned by the Company: 100% 44 THE THIRD SCHEDULE ------------------ INTELLECTUAL PROPERTY RIGHTS ---------------------------- 1. all rights in and to the products listed in attachment 14 of the Previous Disclosure Letter (as defined in the Disclosure Letter) and the addendum to that attachment dated 28 January 1998 (both jointly hereinafter referred to as the "Intellectual Property Report") and all rights in and to all other products which the Company is developing and has released and/or developed at any time (all these products jointly hereinafter referred to as the "Products"); 2. all rights in and to all other software programs, files, documentation, databases, artwork, inventions, trade secrets and other information and materials created, developed, and/or designed by the Company's past and present employees whilst in the Company's employ and/or any third parties on behalf of the Company; 3. all rights, by way of licence, in and to third party programs and libraries (so described in the Intellectual Property Report) listed in the Intellectual Property Report and all other third party programs and libraries which are currently used in the development and/or design of any of the Products and/or which are incorporated in any of the Products or are otherwise used by the Company; 4. all rights, by way of a licence agreement, in and to information of a confidential nature of a third party disclosed to the Company for the purpose of using such information subject to the terms of the agreement; 5. all registered and unregistered third party trade marks which the Company features on any of the packaging, instruction manuals and/or any other documentation and/or artwork designed and/or used in conjunction with the Company's business and/or in any of the Company's promotional and/or advertising materials; 6. all registered trade marks and applications for the same listed in the fax of Mrs Lait of Barker, Brettell & Duncan to Mr Baird of 21 January 1998 and unregistered trademarks developed by or on behalf of the Company; 7. all rights, by way of licence, in and to the software used by the Company for accounting, administrative and general office purposes. 45 THE FOURTH SCHEDULE ------------------- THE PENSION SCHEME ------------------ U.S. ---- 4-SIGHT, L.C. 401(k) PLAN U.K. ---- The Equitable Personal Pension Plan with the Equitable Life Assurance Society (dormant) 46 THE FIFTH SCHEDULE ------------------ THE PROPERTIES --------------
DATE PREMISES ORIGINAL PARTIES TERM - ---- -------- ---------------- ---- 13.12.94 Units 4, 5 and 6 Graybird Properties 999 years commencing (Numbers 64-68) Limited (Landlord) commencing Norwich Avenue West 4-Sight (Software) Bournemouth Limited (Tenant) (2) Dorset 20.11.96 70 Norwich Avenue West Peter John Ruckwood Period commencing Bournemouth (Landlord) (1) 01.01.97 and expiring Dorset 4-Sight plc (2) 30.04.99 16.10.97 Oserbekstrasse COH City Office Period commencing 90A-C Hamburg 22083 Hamburg GmBH (1) 01.12.97 and Germany 4-Sight GmBH (2) terminable thereafter, but no earlier than 31.12.98, on any calendar quarter on 6 months' notice 29.02.96 Suites 3600 and 3700 Cummings Property 29.02.96 to 30.08.99 800 West Cummings Park Management Inc (1) Woburn 4-Sight LC (2) Massachusetts U.S.A 01.07.97 Suite 3800 Cummings Property 01.07.97 to 30.07.2001 800 West Cummings Park Management Inc (1) Woburn 4-Sight LC (2) Massachussets U.S.A Undated 1824 Industrial Circle John E Spencer Snr (1) Rolling yearly renewal West Des Moines CE Software Inc (2) period 15 August to 14 Polk, Iowa, USA August
47 THE SIXTH SCHEDULE ------------------ THE TAX DEED ------------ THIS DEED is made this day of 1998 - --------- BETWEEN:- - ------- (1) THE SEVERAL PERSONS whose names and addresses are set out in columns 1 and ------------------- 2 respectively of the First Schedule hereto ("the Covenantors"); and (2) WAM!NET (UK) LIMITED (company number 3969851) whose registered office is at -------------------- 8-10 New Fetter Lane, London EC4A 1RS and WAM!NET INC. whose principal ------------ place of business is at 6100 West 110 Street, Minneapolis, Minnesota 55438, U.S.A (collectively "the Purchaser"). WHEREAS by an Agreement ("the Agreement") between, amongst others, the - ------- Covenantors and the Purchaser, the Covenantors, amongst others, agreed to sell the entire issued share capital of 4-Sight Limited to the Purchaser and by virtue of the Agreement the Covenantors agreed to enter into this Deed. NOW THIS DEED WITNESSETH as follows:- - ------------------------ 1. DEFINITIONS ----------- In this Deed:- 1.1 "Claim" includes any assessment, notice, demand or other document issued or action taken by or on behalf of a Tax Authority whereby the Company is or is sought to be made liable to make a payment of Taxation or a Relief is denied or is sought to be denied; 1.2 "Event" means any event, act, transaction or omission, whether or not the Company is a party thereto, and includes (without limitation) a receipt or accrual of income or gains, distribution, deemed distribution, failure to distribute, acquisition, disposal, transfer, payment, loan, advance, Completion and any combination of two or more such occurrences; 1.3 "Company" means each and every company listed in the Second Schedule hereto or any one of them as the context requires; 48 1.4 "Relief" means any loss, relief, allowance, exemption, set off, credit, rebate, refund, right to repayment or deduction in respect of any Taxation or any set off or deduction in computing, or against, profits, income or gains of any description or source for the purposes of any Taxation; 1.5 reference to income or profits or gains earned, accrued or received, shall include income or profits or gains deemed to have been or treated as or regarded as earned, accrued or received for the purposes of any legislation relating to Taxation; 1.6 reference to the loss of Relief or of a right to repayment of Taxation shall include the loss, reduction, modification, cancellation, nullification, withdrawal, counteracting or clawback of any Relief or right to repayment of Taxation; 1.7 reference to any liability to Taxation shall include not only any liability to make any actual payment of Taxation (whether made before or after the date hereof and whether satisfied or unsatisfied at the date hereof) but also:- 1.7.1 the loss of any Relief which has been shown as an asset in the Audited Accounts or has been taken into account in computing (and reducing) a provision (for deferred tax or otherwise) which appears in the Audited Accounts or which has resulted in no such provision being made in the Audited Accounts; or 1.7.2 the amount of any Relief which has either:- (a) been treated as an asset in the Audited Accounts or has been taken into account in computing (and reducing) a provision (for deferred tax or otherwise) which appears in the Audited Accounts or which has resulted in no such provision being made in the Audited Accounts; or (b) arises in consequence of an Event occurring or is otherwise attributable to a period after Completion; which in each case is used to relieve income, profits or gains or which has been set against any liability to make an actual payment of Taxation in circumstances where (but 49 for such utilisation or set off) the Purchaser would have been entitled to make a claim against the Covenantors pursuant to Clause 2 of this Deed (subject always to the provisions of Clause 3 of this Deed); 1.8 In any case mentioned in Clause 1.7 above there shall be treated as an amount of Taxation for which a liability has arisen:- 1.8.1 in a case which falls within Clause 1.7.1 or Clause 1.7.2, where the Relief which was subject to the loss or utilisation was a deduction from or offset against Taxation, the amount of the Relief; 1.8.2 in a case which falls within Clause 1.7.1 or 1.7.2, where the Relief which was lost or utilised was a deduction from or offset against income or profits or gains:- (a) if the Relief is lost, the amount of Taxation which would, on the basis of the rates of Taxation current at Completion, have been saved had such Relief been available, on the assumption that income, profits or gains in respect of the earliest period for which such Relief is available are such that the Relief (and all other Reliefs available to the Company) could have been utilised in full (and so that for this purpose any actual liability to Taxation as a result of the loss of the Relief shall be disregarded); (b) if the Relief is the subject of such set off, the amount of Taxation which has been saved in consequence of such setting off; 1.9 reference to the result of Events on or before the date hereof shall include the combined result of two or more Events the first of which shall have taken place on or before the date hereof; 1.10 "Taxation" means all forms of taxation, duties, imposts, levies and rates whenever imposed and whether of the United Kingdom or elsewhere and in particular (but without prejudice to the generality of the foregoing) includes income tax, withholding taxes, corporation tax, capital gains tax, capital transfer tax, inheritance tax, value added tax, customs duties, excise duties, development land tax, stamp duty, stamp duty reserve tax, capital 50 duty, national insurance contributions, social security or other similar contributions and generally any other taxes, duties, imposts, levies or other amounts (whether of a like nature or not) and any interest, penalty or fine in connection therewith; 1.11 "Tax Authority" means any local, municipal, governmental, state, federal or other fiscal, revenue, customs or excise authority body or official anywhere in the world, entitled to enforce or collect Taxation including, without limitation, the UK Inland Revenue and HM Customs and Excise; and 1.12 unless the context otherwise requires words and expressions defined in the Agreement have the same meaning in this Deed as in the Agreement. 2. COVENANT -------- 2.1 Subject as hereinafter provided the Covenantors hereby jointly and severally covenant with the Purchaser to pay to the Purchaser or to pay, as directed by the Purchaser, to the Purchaser or to the Company an amount equal to:- 2.1.1 any liability to Taxation of the Company which arises as a result of or by reference to any income, profits, or gains earned, accrued or received on or before Completion or as a result of or in connection with any Event occurring on or before Completion and whether alone or in conjunction with other circumstances and whether or not any such Taxation is primarily chargeable against or attributable to any other person, firm or company; and without limitation of the foregoing, 2.1.2 any liability to Taxation of the Company which arises as a result of the making of a direction by HM Customs and Excise in respect of any supply made before Completion between companies which either form part of the same group of companies for the purposes of Value Added Tax or which at the time of that supply are capable of forming such a group; 2.1.3 any Inheritance Tax for which the Company is or may become liable which:- 51 (a) is at Completion a charge on any of the shares or assets of the Company or gives rise to a power to sell, mortgage or charge any of the shares or assets of the Company; or (b) after Completion becomes a charge on or gives rise to a power to sell, mortgage or charge any of the shares or assets of the Company being a liability in respect of additional Inheritance Tax payable as a result of the death of any person within seven years after a transfer of value (or deemed transfer of value) if a charge on or power to sell, mortgage or charge any such shares or assets existed at Completion or would, if the death had occurred immediately before Completion and the Inheritance Tax payable as a result of such death had not been paid, have existed at Completion; or (c) arises as a result of a transfer of value by or to the Company occurring on or before Completion, and in determining whether a charge on or power to sell, mortgage or charge any of the shares or assets of the Company exists at any time, the fact that any Inheritance Tax is not yet payable or may be paid by instalments shall be disregarded, and Inheritance Tax shall be treated as becoming due and a charge or power to sell, mortgage or charge as arising on the date of the transfer of value or other date or Event on or in respect of which it becomes payable or arises and the provisions of Section 213 of the Inheritance Tax Act 1984 shall not apply thereto; 2.1.4 any liability to Taxation for which the Company is or may become liable in respect of or arising from any Event after Completion outside the ordinary course of business of the Company as carried on at Completion occurring in pursuance of a legally binding obligation incurred or arrangement entered into by the Company on or before Completion and which has not been disclosed in writing to the Purchaser; 2.1.5 the reasonable costs and expenses incurred or payable by the Purchaser and/or the Company in connection with or in consequence of any Claim for Taxation or liability to Taxation or otherwise in respect of any matter for which the Covenantors are liable under the foregoing paragraphs of this Clause 2.1. 52 2.2 Any amount payable hereunder by virtue of the covenant contained in Clause 2.1 above shall so far as possible be deemed to be a reduction in the consideration for the Shares agreed to be sold under the Agreement. 3. EXCLUSIONS ---------- 3.1 The covenant given by the Covenantors under Clause 2 above shall not cover any liability to Taxation:- 3.1.1 to the extent that the liability was specifically taken into account in making any provision or reserve in respect of such liability to Taxation in the Audited Accounts or to the extent that payment or discharge of such liability has been taken into account in the Audited Accounts; or 3.1.2 to the extent that any provision or reserve made in the audited accounts of the Company is insufficient only by reason of any increase in the rates of Taxation introduced after Completion with retrospective effect; or 3.1.3 to the extent that the liability to Taxation arises or is increased as a result of any change in the law relating to Taxation or as a result of any withdrawal, replacement or amendment of any published statement of practice or extra-statutory concession announced or made after Completion with retrospective effect; or 3.1.4 to the extent that the liability to Taxation arises wholly in consequence of a voluntary act or omission after Completion (which could reasonably have been avoided) carried out by the Purchaser or the Company or any member of the Purchaser's Group otherwise than in the ordinary course of business of the Company and which the Purchaser was or ought reasonably to have been aware could give rise to the liability to Taxation in question but so that this exclusion shall not extend to any voluntary act or omission carried out (a) pursuant to a legally binding obligation (whether pursuant to contract or by virtue of any law or regulation) existing on or before Completion; or (b) with the prior written consent of the Covenantors; or 3.1.5 to the extent that the loss occasioned has been recovered pursuant to any claim under the Vendor Warranties or recovered from any third party; or 53 3.1.6 to the extent that such liability to Taxation was discharged prior to Completion (net of any cost to the Purchasers' Group in making such discharge); or 3.1.7 to the extent that any Relief which has not been utilised in the Audited Accounts or which is not shown as an asset in the Audited Accounts arises in respect of or as a consequence of any Event occurring before the Balance Sheet Date is available to the Company to set against or otherwise mitigate the liability to Taxation giving rise to the claim; or 3.1.8 to the extent and insofar that it arises or is increased as a consequence of any failure to or delay by the Purchaser or the Company in complying with any of their obligations under this Deed; or 3.1.9 to the extent that it arises in the ordinary course of business of the Company either as a result of or in respect of any Event which occurred after the Balance Sheet Date or in respect of or by reference to any income profits or gains actually earned, accrued or received after the Balance Sheet Date; or 3.1.10 to the extent that it arises in respect of or by reference to any income profits or gains earned, accrued or received after the Balance Sheet Date to the extent that the consideration actually earned, accrued, received or receivable in relation thereto is not less than the consideration deemed to have earned, accrued or received for Taxation purposes; 3.1.11 to the extent that it is a liability in respect of value added tax relating to supplies made by the Company before Completion in respect of which value added tax has been properly charged and the tax invoice issued but which value added tax is not yet due and payable to HM Customs & Excise unless and to the extent that such value added tax is not actually received by the Company; or 3.1.12 to the extent that the liability arises by reason of a voluntary disclaimer by the Company after Completion of the whole or any part of any allowance to which it is entitled under Part II CAA 1990 or by reason of the revocation by the Company after Completion of any claim for a Relief made (whether provisionally or otherwise) by it prior to 54 Completion in each case where the allowance or Relief was taken into account in the Audited Accounts; or 3.1.13 to the extent that the liability has been made good by insurers or otherwise compensated without cost to the Purchaser or the Company. 3.2 The provisions of Part I of the Eighth Schedule to the Agreement shall operate to limit the liability of the Covenantors under this Deed save in the circumstances referred to in Clause 9.2 of the Agreement (in which case the provisions of paragraphs 1 to 5 (inclusive) of Part I of the Eighth Schedule to the Agreement shall not apply to limit the liability of the Covenantors under this Deed). 3.3 In calculating the liability of the Covenantors in respect of any Claim credit will be given to the Covenantors to the extent of any provision or reserve in respect of Taxation made in the audited accounts of the Company which proves and is certified by the Company's auditors to be an over- provision or over-reserve PROVIDED THAT in computing any such over- provision or over-reserve no account shall be taken of any change in law or the practice of any Tax Authority introduced or announced after the Balance Sheet Date or any Relief arising after the Balance Sheet Date. 4. CONDUCT OF NEGOTIATIONS AND PROCEEDINGS --------------------------------------- 4.1 If any matter or circumstance which may give rise to a Claim relevant for the purposes of this Deed comes to the attention of the Purchaser, it shall:- 4.1.1 forthwith give written notice thereof to the Covenantors indicating in reasonable detail the nature of the Claim and further shall procure that the Company shall promptly supply the Covenantors with full details of the Claim as soon as the Purchaser becomes aware of them including a reasonable estimate of the amount and details of the date on which payment in respect of the Claim is due; and 4.1.2 if the Covenantors indemnify the Purchaser and the Company to their reasonable satisfaction against all losses, costs, damages and expenses (including any interest or penalty on overdue Taxation and any additional Taxation) which may be incurred thereby (and provide security for costs reasonably satisfactory to them in respect of such indemnity) take such steps as the Covenantors 55 may reasonably request to avoid, dispute, resist, appeal, compromise or defend the Claim and provide the Covenantors with such information, books, records and correspondence as are in the control of the Purchaser or the Company and which the Covenantors shall reasonably require for the purpose of contesting such Claim and shall give the Covenantors such assistance and reasonable co- operation for the purposes of taking such action as the Covenantors may reasonably request. 4.2 Neither the Purchaser nor the Company shall be obliged to appeal against any Taxation assessment raised on it if:- 4.2.1 having given the Covenantors written notice of the receipt of the Taxation assessment in accordance with provisions of Clause 4.1.1, it has not within 15 business days received instructions in writing from the Covenantors in accordance with the provisions of Clause 4.1.2 to make that appeal; 4.2.2 any period prescribed by the relevant legislation relating to Taxation for making of an appeal against the liability for Taxation which is the subject of the claim has expired before any request is made by the Covenantors in accordance with Clause 4.1.2; 4.2.3 this will involve contesting any Taxation assessment beyond the first appellate body (excluding the Tax Authority demanding the Taxation in question) in the jurisdiction concerned, unless the Covenantors furnish the Purchaser with the written opinion of tax counsel of at least 10 years standing to the effect that an appeal against the assessment in question will, on the balance of probabilities, succeed. 4.3 Subject to compliance of the Purchaser with its obligations under Clause 4.1.1 the Purchaser and the Company shall be entitled without reference to the Covenantors to admit, compromise, settle, discharge or otherwise deal with any Taxation assessment after whichever is the earliest of:- 4.3.1 the Purchaser or the Company being notified by any of the Covenantors that they consider that the assessment should no longer be resisted; 4.3.2 the expiry of a period of 20 business days following the service of a notice by the Purchaser or the Company on the Covenantors, or on any of them, requiring the Covenantors to clarify or explain the terms of any request made under Clause 4.1.2, during which 56 period no such clarification or explanation has been received by the Purchaser or the Company; and 4.3.3 the expiry of any period prescribed by applicable legislation for the making of an appeal against either the Taxation assessment or the decision of any court or tribunal in respect of any such assessment, as the case may be. 4.4 Neither the Purchaser nor the Company shall be required to take any action which in its reasonable opinion is likely to materially prejudice its business or result in the Purchaser or the Company or any company which forms part of the Purchaser's Group incurring a liability to Taxation or an increased liability to Taxation which would not otherwise have arisen. 4.5 The Purchaser shall make no settlement or compromise of any liability to Taxation for which a claim has been made under this Deed and in respect of which the Covenantors have made any such request as is referred to in Clause 4.1.2 above, nor agree any matter in the course of disputing the said claim likely to affect the amount thereof without the prior written approval of the Covenantors of the terms of the proposed settlement or agreement (such approval not to be unreasonably withheld or delayed) and upon settlement or final adjudication of the said claim the Covenantors shall forthwith discharge any liability to Taxation arising from the said claim in accordance with Clause 6 below. 4.6 Clause 4.1.2 shall not apply in respect of a Claim if the Covenantors or the Company have committed an act or are responsible for an omission in relation to the Claim which the Purchaser or the Company reasonably considers constitutes fraudulent or negligent conduct. 5. TAX RETURNS ----------- 5.1 The Covenantors or their duly authorised agents (at the expense of the Covenantors) shall at their option be responsible for and have the conduct and control of preparing, submitting to and agreeing with the relevant Tax Authority all Tax returns and computations of the Company for all accounting periods ended on or before the Completion, provided that such Tax returns and computations shall be prepared on a basis consistent with that upon which such returns and computations have been prepared by the Covenantors (or their duly authorised agent) previously, save to the extent that any change in such basis is required in order to comply with any change in generally accepted accounting principles or any change in legislation, law or published practice of, or any requirement of, 57 any Tax Authority or to take account of any change in any interpretation thereof. 5.2 The Purchaser and the Covenantors shall each respectively provide (or procure the provision to) the other or their duly authorised agents of such information and assistance which may reasonably be required to prepare, submit and agree all such outstanding Tax computations and returns, including, without limitation, the causing of any computations, returns, notices, claims, elections and agreements to be authorised signed and returned by the Company to the Covenantors or their duly authorised representatives for submission to the appropriate Tax Authority provided that the Purchaser shall not be obliged to and shall not be obliged to procure that the Company take any such action as is mentioned in this sub- clause in relation to any Tax return or other document that is not full, true and accurate in all material respects. 5.3 The Covenantors shall ensure that all such Tax returns and computations, together with any related correspondence, are delivered to the Purchaser before submission to the Tax Authority concerned, and the Covenantors shall consult the Purchaser and consider the Purchaser's comments concerning the same. 6. DATE FOR PAYMENT ---------------- 6.1 Where the Covenantors are liable to make a payment pursuant to this Deed, the due date for making such payment which shall be made in cleared funds shall be :- 6.1.1 in a case which involves the making of an actual payment of Taxation by the Company, the date that is three business days immediately before the last date on which the Company would have had to pay to the relevant Tax Authority the Taxation that has given rise to the Covenantors' liability under this Deed in order to avoid incurring a liability to interest or a charge or penalty in respect of that liability to Taxation; or 6.1.2 in respect of a liability to Taxation falling within Clause 1.7.1 within five business days after the date on which the Covenantors are notified by the Purchaser or the Company that the Covenantors have a liability for a determinable amount; 6.1.3 in respect of a liability to Taxation falling within Clause 1.7.2 the date that is one business day before the last date upon which the Company would have had to make an actual payment of Taxation 58 but for the utilisation or set off of the Relief, as the case may be, in order to avoid incurring a liability to pay interest or a charge or a penalty; 6.1.4 in any other case, within five business days after the date when the Covenantors have been notified by the Company or the Purchaser that the Covenantors have a liability for a determinable amount, such notice to be accompanied by reasonable evidence of the liability in question having been incurred. 6.2 If any sum due and payable by the Covenantors under this Deed is not paid on the due date for payment as ascertained in accordance with the provisions of this Deed, the Covenantors shall in addition to that sum, pay interest on the amount for the time being unpaid from the due date for payment of the sum to and including the day of actual payment of the sum (or the next business day if the day of actual payment is not a business day). The interest shall accrue from day to day (before as well as after judgment) at the rate of 2% per annum above the base lending rate for the time being of Lloyds Bank plc and shall be compounded quarterly on the usual quarter days. 7. GROSSING UP ----------- 7.1 Any payment by the Covenantors to the Purchaser or to the Company hereunder shall be paid free and clear of all deductions, withholdings, set offs or counterclaims whatsoever, save as may be required by law. If any deductions or withholdings shall be required by law, the Covenantors shall be obliged to pay to the Purchaser or to the Company such sum as will, after such deduction or withholding has been made, leave the Purchaser or the Company with the same amount as it would have been entitled to receive in the absence of any such requirement to make a deduction or withholding. 7.2 If any payment by the Covenantors to the Purchaser or the Company hereunder shall be subject to Taxation in the hands of the recipient then the sum payable shall be increased by such amount as will ensure that, after payment of Taxation, the Purchaser or the Company receives a net sum equal to the sum which it would otherwise have received under this Deed had the payment not been subject to Taxation provided always that if any payment is initially made on the basis that the amount due is taxable in the hands of the recipient and it is subsequently determined that is not, the Purchaser shall promptly refund to the Covenantors the excess amount paid. 59 8. REFUNDS ------- If the Covenantors have made a payment under Clause 2 of this Deed and the Purchaser or the Company subsequently receives from any other person (other than the Company or the Purchaser) any sum in respect of the Taxation concerned (otherwise than by reason of any Relief arising in consequence of an Event occurring after Completion), the Purchaser or the Company shall forthwith repay or procure the repayment to the Covenantors of the amount received (including any interest or repayment supplement paid by the Tax Authority relating to the period after receipt of the relevant payment from the Covenantors on or in respect thereof, less any costs reasonably and properly incurred in recovering such amount and any Taxation on such amount) not exceeding the payment by the Covenantors hereunder. 9. CORRESPONDING SAVINGS --------------------- 9.1 If any payment is made by the Covenantors under this Deed in respect of a liability to Taxation and the Company or the Purchaser receives a Relief in respect of the liability to Taxation in question, the Purchaser shall pay to the Covenantors the lower of the amount of Taxation that the Purchaser, the Company or any member of the Purchaser's Group actually saves by virtue of the relief (less any reasonable costs of obtaining or recovering such relief and any Taxation suffered thereon) and the aggregate payments previously made by the Covenantors under this Deed. 9.2 Any payment to be made by the Purchaser pursuant to Clause 9.1 shall be made 5 business days after the date on which Taxation would have been recoverable by a Taxation Authority but for the use of the Relief. 10. GENERAL ------- 10.1 Any liability of the Covenantors to the Purchaser or to the Companies under the provisions of this Deed may in whole or in part be released, varied, compounded or compromised by the Purchaser and by the Companies in their absolute discretion without in any way prejudicing or affecting their rights against the Covenantors hereunder. A waiver by the Purchaser and/or by the Company of any breach by the Covenantors of the covenants and undertakings contained in this Deed or the acquiescence of the Purchaser and/or the Company in the act, whether of commission or omission, which but for such acquiescence would be a breach as aforesaid, shall not constitute a general waiver of such covenant or undertaking or of any subsequent act contrary thereto. 60 10.2 The provisions of Clauses 20.2, 21.2, 22, 23, 24.1, 24.2, 25.2, 25.3, 25.4, 26 and 27 of the Agreement shall apply as if repeated herein with references to the Vendors in such provisions being deemed to be references herein to the Covenantors and references therein to this Agreement being deemed to be references herein to this Deed. 11. SECONDARY LIABILITIES --------------------- 11.1 WAM!NET (UK) Limited and WAM!NET Inc hereby jointly and severally covenant with the Covenantors to pay to the Covenantors an amount equivalent to any liability to Taxation of the Company for which the Covenantors are assessed under Section 767A Taxes Act together with any reasonable costs and expenses properly incurred by the Covenantors in connection with such Taxation or a claim under this Clause. 11.2 The covenant contained in Clause 11.1 shall: 11.2.1 not apply to any Taxation to the extent that the Purchaser could claim payment in respect of it under Clause 2.1 of this Deed; 11.2.2 not apply to Taxation which has been recovered under Section 767B(2) Taxes Act (and the Covenantors shall procure that no such recovery is sought to the extent that payment is made hereunder). IN WITNESS whereof this Deed has been executed by the Covenantors and the - ---------- Purchaser and delivered the day and year first above written. 61 THE FIRST SCHEDULE ------------------ THE COVENANTORS --------------- (1) (2) NAME ADDRESS - ---- ------- Andrew Steven Baird 30 Denbigh Road London W13 8NH Lyndon David Stickley 14 State Street Marblehead Massachusetts USA David Anthony Townend 3 Marwell Close Littledown Bournemouth Dorset Yorick Phoenix 6 Princes Road Poole Dorset BH12 1BH 62 THE SECOND SCHEDULE ------------------- THE COMPANIES -------------
(1) (2) (3) NAME NUMBER REGISTERED OFFICE - ---- ------ ------------------ 4-Sight PLC 2807473 64-68 Norwich Avenue, West Bournemouth, BH2 6AW, England 4-Sight (International) 2508436 " " Limited 4-Sight Software Limited 3126535 " " 4-Sight Inc N/A 1209 Orange Street, Wilmington, Delaware 19801 U.S.A. 4-Sight GmbH HR B59 578 Hamburg, Germany
63 THE SEVENTH SCHEDULE -------------------- PART I ------ THE VENDOR WARRANTIES --------------------- 1. THE SHARES ---------- No person has the right (whether exercisable now or in the future and whether contingent or not) to call for the allotment or issue of any shares or loan capital of the Company (under any option or other agreement (including conversion rights and rights of pre-emption)). 2. SUPPLY OF INFORMATION --------------------- (1) ACCURACY AND ADEQUACY OF INFORMATION DISCLOSED TO THE PURCHASER --------------------------------------------------------------- All information contained in the Recitals and Schedules to this Agreement and the Disclosure Letter (including the documents listed therein) is true and accurate in all respects and none of the Warrantors is aware of any fact or matter or circumstances not disclosed in writing to the Purchaser which renders any such information untrue, inaccurate or misleading. (2) COPIES OF AUDITED ACCOUNTS, THE MANAGEMENT ACCOUNTS AND MEMORANDUM AND ---------------------------------------------------------------------- ARTICLES OF ASSOCIATION ----------------------- The copies of the Audited Accounts, the Management Accounts and the memorandum and articles of association of the Company delivered to the Purchaser are complete and accurate copies of the originals thereof and, in the case of the memorandum and articles of association, contain full details of the rights and restrictions attaching to the share capital of the Company and have attached to them copies of all such resolutions and agreements as are required by law to be delivered to the Registrar of Companies for registration and all other resolutions passed by the Company or any class of members, other than resolutions relating to ordinary business at any annual general meeting of the Company. (3) STATUS OF 4-SIGHT LIMITED ------------------------- The criteria set out in paragraph 4(a)(i)-(iv) of the Introduction to the City Code on Take Overs and Mergers do not apply to 4-Sight Limited. 64 3. ACCOUNTS AND RECORDS -------------------- (1) AUDITED ACCOUNTS ---------------- (a) The bases and policies of accounting adopted for the purpose of preparing the Audited Accounts are the same as those adopted in preparing the audited consolidated accounts of the Company in respect of the two accounting periods of the Company last preceding the Balance Sheet Date. (b) The Audited Accounts give a true and fair view of the Company and of the Company and the Subsidiaries as a whole at the Balance Sheet Date and of the state of affairs of the Company and of the Company and the Subsidiaries at the Balance Sheet Date and of the profits and losses of the Company and of the Company and the Subsidiaries for the financial period ended on the Balance Sheet Date. (c) The Audited Accounts comply with the requirements of the Companies Acts and were prepared in accordance with current FRS's and SSAP's applicable to a United Kingdom company. (d) The Audited Accounts:- (i) disclose, to the full extent required by applicable accounting standards, all the assets of the Company and of the Company and the Subsidiaries, as at the Balance Sheet Date; (ii) make adequate provision to the full extent required by applicable accounting standards for all actual liabilities of the Company and the Subsidiaries as at the Balance Sheet Date; (iii) make proper provision to the full extent required by applicable accounting standards (or note in accordance with good accounting practice) for all contingent liabilities of the Company and of the Company and the Subsidiaries as at the Balance Sheet Date; (iv) make provisions reasonably regarded as adequate for all bad and doubtful debts of the Company and the Subsidiaries as at the Balance Sheet Date. 65 (2) VALUATION OF STOCK AND WORK-IN-PROGRESS --------------------------------------- The stock and work-in-progress were included in the Audited Accounts at figures not exceeding the amounts which could in the circumstances existing at the Balance Sheet Date reasonably be expected to be realised in the normal course of carrying on the business of the Company. (3) TAXATION -------- (a) Full provision or reserve has been made in the Audited Accounts for all Taxation liable to be assessed on the Company or for which it is or may become accountable in respect of:- (i) profits, gains or income (as computed for Taxation purposes) arising or accruing or deemed to arise or accrue on or before the Balance Sheet Date; (ii) any transactions effected or deemed to be effected on or before the Balance Sheet Date or provided for in the Audited Accounts; and (iii) distributions made or deemed to be made on or before the Balance Sheet Date or provided for in the Audited Accounts. (b) Proper provision or reserve for deferred taxation in accordance with accounting principles and standards generally accepted in the United Kingdom at the Balance Sheet Date has been made in the Audited Accounts. (c) Except as disclosed by the Audited Accounts and save in so far as full provision is made in them in a deferred taxation account for Taxation in respect of any chargeable gains or balancing charges which would arise or accrue in respect of any asset or machinery and plant on disposal thereof at the values at which they are included in them, no asset with a book value in excess of (Pounds)5,000 is included in the Audited Accounts at such value that if it were obtained on the disposal or deemed disposal of the asset a chargeable gain or balancing charge would arise or accrue. (4) EXCEPTIONAL ITEMS ----------------- The profits of the Company for the three years ended on the Balance Sheet Date as shown by the Audited Accounts and by the audited 66 accounts of the Company for previous periods delivered to the Purchaser and the trend of profits thereby shown have not (except as disclosed in such accounts) been affected by inconsistencies in accounting practices or by the inclusion of non-recurring items of income or expenditure or by transactions entered into otherwise than on normal commercial terms. (5) BOOK DEBTS ---------- None of the book debts of a value in excess of (Pounds)3,000 in respect of any debt which were included in the Audited Accounts or which have subsequently arisen, have been outstanding for more than three months from their due dates for payment or have been released on terms that the debtor has paid less than the full value of his debt and, so far as the Warrantors are aware all such debts have realised or will realise in the normal course of collection their full value as indicated in the Audited Accounts or in the books of the Company after taking into account the provision for bad and doubtful debts made in the Audited Accounts. For the avoidance of doubt, a debt shall not be regarded as realising its full value to the extent that it is paid, received or otherwise recovered in circumstances in which such payment, receipt or recovery is void, voidable or otherwise liable to be reclaimed or set aside. (6) ACCOUNTING AND OTHER RECORDS ---------------------------- The statutory books, books of account and other records of whatsoever kind of the Company are in all material respects up-to-date and maintained in accordance with all applicable legal requirements on a proper and consistent basis and contain accurate records in all material respects of all matters required to be dealt with in such books and all such books and records and all other material documents (including documents of title and copies of all subsisting agreements to which the Company is a party) which are the property of the Company or ought to be in its possession are in its possession or under its control and no notice or allegation that any is incorrect or should be rectified has been received. All accounts, documents and returns required by law to be delivered or made to the Registrar of Companies or any other authority have been duly and correctly delivered or made. (7) THE MANAGEMENT ACCOUNTS ----------------------- The Management Accounts:- (a) have been prepared in good faith and with due diligence and on bases and principles which are consistent with those used in the 67 preparation of the unaudited management accounts of the Company and the Subsidiaries for the financial year ended on the Balance Sheet Date; and (b) so far as the Warrantors are aware, give a fair and not misleading view in all material respects of the financial state of affairs of the Company and the Subsidiaries and their results for the period from the Balance Sheet Date to the Management Accounts Date. (8) CHANGES SINCE THE BALANCE SHEET DATE ------------------------------------ Since the Balance Sheet Date:- (a) there has been no material adverse change in the financial position or turnover of the Company; (b) the Company's business has been carried on in the ordinary course, without any material interruption or alteration in its nature, scope or manner, and so as to maintain the same as a going concern; (c) the Company has not entered into any transaction or assumed or, so far as the Warrantors are aware, incurred any liabilities (including contingent liabilities) or made any payment not provided for in the Audited Accounts otherwise than in the ordinary course of carrying on its business; (d) the Company's profits have not been adversely affected by inconsistencies in accounting practices, by the inclusion of non- recurring items of income or expenditure, by transactions entered into otherwise than on normal commercial terms; (e) the Company has not entered into any unusual, long term or onerous commitments or contracts; (f) the Company's business has not been materially and adversely affected by the loss of any important customer or source of supply or by an abnormal factor not affecting similar businesses to a like extent and none of the Warrantors is aware of any facts which are likely to give rise to any such effects; (g) no dividend or other distribution has been declared, made or paid to the Company's members and no loan capital or share capital of 68 the Company has been repaid in whole or in part or has become liable to be repaid; (h) the Company has not allotted or issued or agreed to issue any share or loan capital or other securities convertible into shares or loan capital; (i) the Company has not made or received any surrender relating to group relief or the benefit of advance corporation tax; and (j) there has been no unusual increase or decrease in the level of the Company's stock. 4. FINANCE ------- (1) BORROWINGS ---------- (a) The amounts borrowed by the Company (as determined in accordance with the provisions of the relevant instrument) do not exceed any limitation on its borrowing contained in its Articles of Association or in any debenture or other deed or document binding upon it. (b) The Company does not have outstanding any loan capital, and has not currently or within the 3 years preceding the date of this Agreement, factored any of its debts or engaged in financing of a type which is not required to be shown or reflected in audited accounts or borrowed any money which it has not repaid nor otherwise has it the benefit of any overdraft, loan or other financial facilities, save as disclosed in the Disclosure Letter. (c) A statement of all the bank accounts of the Company and of the credit or debit balances on such accounts as at a date not more than seven days before the date hereof is annexed to the Disclosure Letter. The Company has no other bank or deposit accounts (whether in credit or overdrawn) and since such statement there have been no payments out of any such accounts except for routine payments and the balance on current account are not now substantially different from the balances shown on such statements. (2) INSURANCE --------- 69 (a) Particulars of the insurances of the Company are contained in the Disclosure Letter to which copies of the policies are attached. (b) All the assets of the Company which are of an insurable nature have been and are at the date of this Agreement insured to the full replacement value thereof against fire and other risks normally insured against by companies carrying on similar businesses or owning property of a similar nature and the Company has been and is at the date of this Agreement adequately covered against accident, third party injury, damage and other risks normally covered by insurance by such companies. (c) In respect of all such insurances:- (i) all premiums have been duly paid to date; (ii) all the policies are in force and, so far as the Warrantors are aware, are not voidable on account of any act, omission or non- disclosure on the part of the insured party; (iii) there are no special or unusual terms or restrictions, the premiums payable are not materially in excess of the normal rates and neither the Company nor any Subsidiary has been given notice of any circumstances in existence which are likely to give rise to any increase in premiums; and (iv) no claim is outstanding and neither the Company nor any Subsidiary has been given notice of any circumstances which are likely to give rise to any claim. (4) GRANTS ------ Particulars of all investment or other grants, loan subsidies or financial assistance received by virtue of any statute by the Company during the previous six years are contained in the Disclosure Letter and, so far as the Warrantors are aware, and act or transaction has been effected in consequence of which the Company is or may be held liable to forfeit or refund in whole or in part any such grant or loan or any for which application has been made. (5) WORKING CAPITAL --------------- 70 Having regard to existing bank and other facilities, the Company has or will have sufficient working capital for the purposes of continuing to carry on its business in its present form and at its present level of turnover for a period of 12 months after Completion and for the purposes of executing, carrying out and fulfilling in accordance with their terms, all projects and contractual obligations which remain outstanding. 5. TRADING AND CONTRACTUAL ARRANGEMENTS ------------------------------------ (1) CAPITAL COMMITMENTS ------------------- The Company does not have any outstanding capital commitments in excess of an aggregate of (Pounds)50,000. (2) CONTRACTS --------- The Company is not now a party to or subject to any contract, obligation or liability which involves or may reasonably be expected to involve a liability on the Company of in excess of (Pounds)50,000 and which:- (a) is of an unusual or abnormal nature or not wholly on an arm's length basis in the ordinary and usual course of business; (b) is of a long-term nature (that is, unlikely to have been fully performed, in accordance with its terms, more than 12 months after the date on which is was entered into or undertaken); (c) is incapable of termination in accordance with its terms, by the Company, on 60 days' notice or less; (d) is of a loss-making nature (that is to say, known to be likely to result in a loss on completion of performance); (e) cannot readily be fulfilled or performed on time without undue, or unusual, expenditure of money or effort; (f) invoices payment by reference to fluctuations in the index of retail prices, or any other index, or in the rate of exchange for any currency. (3) GUARANTEES ETC -------------- 71 Save as disclosed in the Audited Accounts or the Disclosure Letter, there is not outstanding any guarantee, indemnity or suretyship given by or for the benefit of the Company. (4) DEBTS, CONTRACTS AND ARRANGEMENTS WITH CONNECTED PERSONS ETC ------------------------------------------------------------ (a) With the exception of the loans, debts and securities particulars of which are contained in the Disclosure Letter and which will have been discharged prior to Completion, there are:- (i) no loans made by the Company to the Vendors and/or any director of the Company and/or any person connected with any of them (as such expression is defined in Section 839 of the Taxes Act 1988) and the Company has not been a party to any transaction to which any of the provisions of s.320 (substantial property transactions involving directors, etc), s.322 (liabilities arising from contravention of s.320) or s.330 (general restrictions on loans etc to directors and persons connected with them) Companies Act 1985 may apply; (ii) no debts owing to the Company by any of the Vendors and/or any director of the Company and/or any person connected (as defined in paragraph (i) above) with any of them; (iii) no debts owing by the Company other than debts which have arisen in the ordinary course of business; and (iv) no securities for any such loans or debts. (b) With the exception of the contracts and arrangements particulars of which are contained in the Disclosure Letter, there are no existing contracts or arrangements to which the Company is a party and in which any of the Vendors and/or any director of the Company and/or any person connected with any of them are interested whether directly or indirectly (other than by reason of their shareholdings in the Company). (c) There are not outstanding, nor during the past three years have been, any arrangements or understandings (whether legally binding or not) between the Company and any person who is a shareholder, or the beneficial owner of any interest, in the Company or in any Subsidiary or any person connected (as such 72 expression is defined in Section 839 of the Taxes Act 1988) with any such person, relating to the management of the Company's business, or the appointment or removal of directors of the Company, or the ownership or the letting of any of the assets of the Company, or the provision, supply or purchase of finance, goods, services or other facilities to, by or from the Company, or otherwise howsoever relating to its affairs. (d) None of the Warrantors have any material right or interest, direct or indirect, in any business other than that now carried on by the Company which is or, so far as the Warrantors are aware, will become competitive with the business of the Company. (5) EFFECT OF SALE OF THE SHARES ---------------------------- (a) Compliance with this Agreement does not and will not conflict with or result in the breach of or constitute a default under any agreement or instrument to which the Company is now a party or relieve any other party to a contract with the Company of its obligations under such contract or entitle such party to terminate such contract, whether summarily or by notice. (b) So far as the Warrantors are aware (but without having made specific enquiry of any third party), neither entering into nor completing this Agreement will or is likely to cause the Company to lose the benefit of any right or privilege it presently enjoys or any person who normally does business with or gives credit to the Company not to continue to do so on the same basis or any officer or senior employee of the Company to leave its employment. (6) DEPENDENCE ON INDIVIDUAL SUPPLIERS OR CUSTOMERS ----------------------------------------------- Neither more than 10 per cent of the aggregate amount of all the purchases, nor more than 10 per cent of the aggregate amount of all the sales, of the Company in each case during the 12 month period preceding the date hereof are obtained or made from or to the same supplier or customer (including any person, firm or company in any way connected with such supplier or customer) nor, so far as the Warrantors are aware, is any material source of supply to the Company, or any material outlet for the sales of the Company, in jeopardy or likely to be in jeopardy. (7) COMMISSIONS AND FINDER'S FEES ----------------------------- 73 No one is entitled to receive from the Company any finder's fee, brokerage or other commission in connection with the purchase of the Shares. (8) JOINT VENTURE, PARTNERSHIPS ETC ------------------------------- The Company is not and has not agreed to become, a member of any joint venture, consortium, partnership or other unincorporated association and the Company is not and has not agreed to become a party to any agreement or arrangement for participating with others in any business sharing commissions or other income. (9) AGENCY AGREEMENTS AND AGREEMENTS RESTRICTING BUSINESS ----------------------------------------------------- The Company is not a party to any agency, distributorship, marketing, purchasing, manufacturing or licensing agreement (excluding "off the shelf" software licences) or arrangement or other agreement or arrangement which is material to the Company's business and which is exclusive or restricts its freedom to carry on its business in any part of the world in such manner as it thinks fit. (10) STOCK AND WORK-IN-PROGRESS -------------------------- The stock-in-trade currently held is not excessive but is adequate in relation to the current trading requirements of the business of the Company, is in good, undamaged and merchantable condition, is not obsolete or slow-moving and is capable of being sold by the Company in the ordinary course of its business in accordance with its current price list, without rebate or allowance to a purchaser (or to the extent that this is not the case, adequate provision or reserve has been made therefor in the Audited Accounts or Management Accounts). (11) SUFFICIENCY OF ASSETS --------------------- The assets owned or leased by the Company and the facilities and services to which the Company has a contractual right comprise all the assets, facilities and services necessary for the carrying on of the business of the Company in the manner in which it is presently conducted. 6. LEGAL MATTERS ------------- (1) COMPLIANCE WITH LAWS -------------------- 74 The Company is carrying on its business in accordance with applicable laws, regulations and byelaws in the United Kingdom and in any relevant foreign country and so far as the Warrantors are aware there is no investigation or enquiry by, or order, decree or judgment of, any court or any governmental agency or regulatory body outstanding or anticipated against the Company or which might reasonably be expected to have a material adverse effect upon its assets or business. (2) LICENCES AND CONSENTS --------------------- All material statutory, municipal and other licences, consents, permits and authorities necessary for the carrying on of the business of the Company as now carried on have been obtained and are valid and subsisting and all conditions applicable to any such licence, consent (including planning consent), permit or authority have been complied with and none of the Warrantors is aware of any breach of them or of any intended or likely suspension, cancellation, refusal or revocation of any of them. (3) COMPLIANCE WITH AGREEMENTS -------------------------- The terms of all material leases, tenancies, licences, concessions and agreements of whatsoever nature to which the Company is a party have in all material respects been duly complied with by all the parties thereto and so far as the Warrantors are aware there are no circumstances likely to give rise to any breach of such terms. (4) LITIGATION ---------- (a) Since the Balance Sheet Date the Company has not received notice of any claim for damages or seeking any other relief against the Company. (b) Neither the Company nor in relation to any notice for which the Company is vicariously responsible, any director or (so far as the Warrantors are aware) employee is engaged whether as plaintiff or defendant or otherwise in any legal action, proceedings or arbitration (other than as plaintiff in the collection of debts arising in the ordinary course of its business) nor is being prosecuted for any criminal offence and, so far as the Warrantors are aware, there are no such proceedings or prosecutions pending or threatened. 75 (c) So far as the Warrantors are aware, there are no investigations, disciplinary proceedings or other circumstances likely to lead to any such claim or legal action, proceedings or arbitration (other than as aforesaid) or prosecution in which the Company may become involved. (5) INSOLVENCY ETC -------------- (a) No order has been made, petition presented, resolution passed or meeting convened for the winding up of the Company. (b) No petition has been presented for an administration order to be made in relation to the Company, nor has any such order been made. (c) No receiver and/or manager (including an administrative receiver) has been appointed of the whole or any part of any of the property, assets and/or undertaking of the Company. (d) No composition in satisfaction of the debts of the Company, or scheme or arrangements of its affairs, or compromise or arrangement between it and its creditors and/or members or any class of its creditors and/or members, has been proposed, sanctioned or approved. (e) No distress, distraint, charging order, garnishee order, execution or other process has been levied or, so far as the Warrantors are aware, applied for in respect of the whole or any part of any of the property, assets and/or undertaking of the Company. (f) So far as the Warrantors are aware, no event has occurred causing, or which upon intervention or notice by any third party may cause, any floating charge created by the Company to crystallise or any charge created by it to become enforceable, nor, so far as the Warrantors are aware, has any such crystallisation occurred or is such enforcement in process. (g) In relation to any property or assets held by the Company under hire purchase, conditional sale, chattel leasing or retention of title agreement or otherwise belonging to a third party which are material to the carrying on of the Company's business, no event has occurred which entitles, or which upon intervention or notice by the third party may entitle, the third party to repossess the 76 property or assets concerned or terminate the agreement or any licence in respect of the same. (h) The Company is not unable to pay its debts within the meaning of s.123 Insolvency Act 1986. (i) The Company has not been party to any transaction with any third party or parties which, in the event of any such third party going into liquidation or an administration order or a bankruptcy order being made in relation to it or him, would constitute (in whole or in part) a transaction at an undervalue, a preference, an invalid floating charge or an extortionate credit transaction or a transaction defrauding creditors under ss. 238 to 245 (inclusive) or ss. 339 to 344 (inclusive) or s.423 Insolvency Act 1986. (j) None of the persons who at present is, or who at any time within the last three years was, a director or officer of the Company is or at any material time was subject to any disqualification order under the Companies Acts. (k) No steps have been taken or are contemplated by the Warrantors or any of them or by the Company or any third party, and so far as the Warrantors are aware, no circumstances exist, which may at any time hereafter lead to a result which renders any of the warranties contained in sub-paragraphs (a) to (j) (inclusive) above to be no longer true or accurate and no events or circumstances analogous to any of those referred to in sub-paragraphs (a) to (j) (inclusive) above have occurred, subsist or are contemplated in any jurisdiction other than England. (6) COMPETITION AND RESTRICTIVE PRACTICES ------------------------------------- (a) The Company (so far as the Warrantors are aware) is not a party to any agreement, arrangement or concerted practice and is not carrying on any practice which in whole or in part:- (i) is or requires to be registered under the Restrictive Trade Practices Acts; (ii) contravenes Articles 85(1) or 86 of the Treaty of Rome or which has been notified to the Commission of the European Communities for negative clearance, exemption or other administrative measure; 77 (iii) contravenes the provisions of the Consumer Credit Act 1974; (iv) contravenes or is invalidated by the provisions of the Resale Prices Act 1976; (v) constitutes an anti-competitive practice as defined in the Competition Act 1980; or (vi) contravenes or is invalidated by any anti-trust legislation in any other jurisdiction where the Company has assets or carries on business. (b) The Company has not received any financial or other benefit that requires to be notified to the Commission of European Communities as a state aid pursuant to Article 93 of the Treaty of Rome. (c) The Company has not, within the preceding six years prior to the date of this Agreement Completion, received any notification that proceedings under any applicable anti-trust law have been initiated nor are any such proceedings contemplated by any of the Vendors or any of the directors of the Company nor within such period has it received notice of any claim having been made or threatened alleging any anti- trust law contravention. (7) DEFECTIVE PRODUCTS ------------------ The Company has not been given notice that it has manufactured, sold or supplied products which are, or were, or will become, in any material respect, faulty or defective, or which do not comply with any warranties or representations expressly or impliedly made by the Company, or with all applicable regulations, standards and requirements. (8) POWERS OF ATTORNEY ------------------ The Company has not given a power of attorney or any other authority (express, implied or ostensible) which is still outstanding or effective to any person to enter into any contract or commitment or do anything on its behalf, other than any authority to employees to enter into routine trading contracts in the normal course of their duties. (9) FILING OF DOCUMENTS ------------------- 78 All charges in favour of the Company have (if appropriate) been registered in accordance with the provisions of s. 395 and s.398 Companies Act 1985. (10) NO QUESTIONABLE PAYMENTS ------------------------ None of the directors, nor, so far as the Warrantors are aware, officers, agents, employees or other persons acting on behalf of the Company has been party to the use of any assets of the Company for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity or to the making of any direct or indirect unlawful payment to government officials or employees from such assets or to the establishment or maintenance of any unlawful or unrecorded fund of group monies or other assets or to the making of any deliberately false or fictitious entries on the books or records of the Company or to the making of any unlawful payment. (11) WARRANTIES AND INDEMNITIES -------------------------- The Company has not sold or otherwise disposed of any shares or assets in circumstances such that it is, or may reasonably be expected to be, still subject to any liability (whether contingent or otherwise) under any representation, warranty or indemnity given or agreed to be given on or in connection with such sale or disposal but excluding any representation implied by law or given or agreed to be given in the ordinary course of trading. 7. EMPLOYEES ETC ------------- (1) EMPLOYEES AND TERMS OF EMPLOYMENT --------------------------------- (a) Particulars are contained in the Disclosure Letter of all existing contracts of service with directors or employees of the Company carrying remuneration (including benefits) at a rate in excess of (Pounds)25,000 per annum and of all consultancy agreements with the Company. (b) There are not in existence any contracts of service with directors or employees of the Company, nor any consultancy agreements with the Company, which cannot be terminated by three months' notice or less without giving rise to any claim for damages or compensation (other than a statutory redundancy payment or statutory compensation for unfair dismissal). 79 (c) No changes to the contracts or agreements with the directors of the Company or contracts or agreements referred to in sub-paragraph (a) above have been made or proposed whether by the Company or any director, employee or consultant since the Balance Sheet Date. (2) LIABILITIES TO AND FOR EMPLOYEES -------------------------------- (a) There are no amounts owing to any present or former directors or employees of the Company other than remuneration accrued due or for reimbursement of business expenses, and no directors or senior employees (being for this purpose employees with a remuneration package (including benefits) in excess of (Pounds)25,000 p.a.) of the Company have given or been given notice terminating their contracts of employment. (b) Save to the extent (if any) to which provision or allowance has been made in the Audited Accounts, the Company has not made or agreed to make any payment to or provided or agreed to provide any benefit for any present or former director or employee which is not allowable as a deduction for the purposes of Taxation. (c) The Company is not liable to pay any industrial training levy and does not have outstanding any undischarged liability to pay to any governmental or regulatory authority in any jurisdiction any contribution, taxation or other impost arising in connection with the employment or engagement of employees or directors by it. (d) Save to the extent (if any) to which provision or allowance has been made in the Audited Accounts or Management Accounts or (if applicable) in the audited accounts of the Company for the financial periods preceding the Balance Sheet Date (true and accurate copies of which are annexed to the Disclosure Letter):- (i) no liability has been incurred by the Company in the 3 years preceding the date of this Agreement for breach of any contract of service or for services, for redundancy payments (including protective awards) or for compensation for wrongful dismissal or unfair dismissal or for failure to comply with any order for the reinstatement or re-engagement of any employee or for race, sex or disability discrimination; and 80 (ii) no gratuitous payment has been made or promised by the Company in the 3 years preceding the date of this Agreement in connection with the actual or proposed termination or suspension of employment or variation of any contract of employment of any present or former director or employee. (e) The Company has not received notice of any claims pending or threatened against the Company and the Warrantors are not aware of any circumstances likely to give rise to such a claim:- (i) by an employee or workman or third party, in respect of an accident or injury which is not fully covered by insurance; or (ii) by an employee or director in relation to his terms and conditions of employment or appointment. (3) COMPLIANCE WITH STATUTES ------------------------ The Company has in relation to each of its employees (and so far as relevant to each of its former employees) complied in all material respects with:- (a) all obligations imposed on it by Article 119 of the Treaty of Rome and all statutes, regulations and codes of conduct and practice relevant to the relations between it and its employees or any trade union and has maintained current adequate and suitable records regarding the service of each of its employees; (b) all collective agreements and customs and practices for the time being dealing with such relations or the conditions of service of its employees; and (c) all relevant orders and awards made under any relevant statutes, regulation or code of conduct and practice affecting the conditions of service of its employees. (4) REDUNDANCIES ------------ Within a period of one year preceding the date of this Agreement the Company has not given notice of any redundancies to the relevant Secretary of State or started consultations with any independent trade union or unions under the provisions of s.188 Trade Union and Labour 81 Relations (Consolidation) Act 1992 or Regulation 10 of the Transfer of Undertakings (Protection of Employment) Regulations 1981 and the Company has not failed to comply with any such obligations under the said s.188 or Regulation 10 of the said Regulations. (5) INDUSTRIAL DISPUTES AND NEGOTIATIONS ------------------------------------ (a) The Company has (if applicable) complied with all recommendations made by the Advisory Conciliation and Arbitration Service and with all awards and declarations made by the Central Arbitration Committee. (b) The Company is not involved in any industrial or trade dispute or any dispute or negotiation regarding a claim of material importance with any trade union or association of trade unions or organisation or body of employees and there are no facts known, or which would on reasonable enquiry be known to the Warrantors which might indicate that there may be any such dispute. (6) SHARE INCENTIVE, BONUS SCHEMES ETC ---------------------------------- The Company does not have in existence and is not proposing to introduce any share incentive scheme, share option scheme or profit sharing scheme for all or any part of its directors or employees. (7) INDUSTRIAL AGREEMENTS --------------------- The Company has not within the preceding 3 years prior to the date of this Agreement entered into any union membership, security of employment, recognition or other collective agreement (whether legally binding or not) with a trade union and has not within such period done any act which might be construed as recognition. (8) PENSIONS -------- (a) No agreement or arrangement (other than the Pension Schemes) exists for the provision by the Company of any relevant benefits (as defined in s. 612(1) Taxes Act 1988, being a retirement benefits scheme defined in s. 630 Taxes Act 1988) for any person employed or formerly employed by the Company of for any dependant of any such person. 82 (b) The Company is not providing any ex gratia pensions or other like payments for any person employed or formerly employed by the Company or any dependant of any such person. (c) No undertaking or assurance has been given to all or any of the persons employed or formerly employed by the Company as to the continuance, introduction, increase or improvement of any retirement death or disability benefits (whether or not there is a legal obligation to do so). (d) (1) List of Plans - Part I of the Fourth Schedule to this Agreement ------------- contains an accurate and complete list of all 4-Sight, Inc. employee benefit plans ("Employee Benefit Plans"), within the meaning of section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), including any deferred compensation, separation, retention, severance or similar plan or agreement, whether or not any such Employee Benefit Plan is otherwise exempt from the provisions of ERISA, established, maintained or contributed to by 4-Sight, Inc. (2) Status of Plans - 4-Sight, Inc. does not maintain or contribute to any --------------- Employee Benefit Plan subject to ERISA that is not in substantial compliance with ERISA. None of the Employee Benefit Plans is a "multi employer plan," as defined in ERISA Section 4001(a)(3), or is a defined benefit pension plan subject to Title IV or ERISA. 4-Sight, Inc. is not delinquent in any obligation to make contributions to any multiemployer plan or to any Employee Benefit Plan subject to Internal Revenue Code ("Code") Section 412 or Title IV of ERISA and has not terminated or withdrawn from participation in any such plan. (3) Contributions - Full payment has been made of all amounts which 4- ------------- Sight, Inc. is required, under applicable law or under any Employee Benefit Plan or any agreement relating to any Employee Benefit Plan to which 4-Sight, Inc. is a party, to have paid as contributions thereto as of the last day of the most recent fiscal year of such Employee Benefit Plan ended prior to the date hereof. 4-Sight, Inc. has made adequate provision for reserves to meet contributions that have not been made because they are not yet due under the terms of any Employee Benefit Plan or related agreements. Benefits under all Employee Benefit Plans are as represented and have not been increased subsequent to the date as 83 of which documents evidencing Employee Benefit Plans have been provided to the Purchaser. (4) Tax Qualification - Each Employee Benefit Plan intended to be ----------------- qualified under Section 401(a) of the Code has been determined to be so qualified by the Internal Revenue Service and nothing has occurred since the date of the last such determination which resulted or is likely to result in the revocation of such determination. (5) Transactions - 4-Sight, Inc. has not engaged in any action or ------------ transaction with respect to an Employee Benefit Plan or any participant or beneficiary under an Employee Benefit Plan which would subject it to a tax, penalty, damages or liability under ERISA or the Code, nor have any of 4-Sight, Inc.'s directors, officers or employees to the extent they or any of them are fiduciaries with respect to such plans, breached in any material respect any of their responsibilities or obligations imposed upon fiduciaries under Title I of ERISA which would result in any claim being made under, by or on behalf of any such plans by any party. (6) Audits or Suits - So far as the Warrantors are aware, there are no --------------- pending or threatened audits, investigations, claims, suits, grievances or other proceedings involving any Employee Benefit Plan, or any rights or benefits thereunder, other than the ordinary and usual claims for benefits by participants, dependents or beneficiaries. (7) Plan Amendment or Termination - Neither 4-Sight, Inc. nor any ----------------------------- successor is restricted or prohibited from amending, merging, or terminating any Employee Benefit Plan in accordance with the terms of any such plan and applicable law. (8) Documents - The Warrantors have delivered or caused to be delivered to --------- the Purchaser true and complete copies of (i) all Employee Benefit Plans as in effect, together with all amendments thereto which will become effective at a later date, as well as the latest Internal Revenue Service determination letter obtained with respect to any such Employee Benefit Plan qualified under Section 401 or 501 of the Code, and (ii) Form 5500 for the most recent completed fiscal year for each Employee Benefit Plan required to file such form. 84 8. TAXATION MATTERS ---------------- For the purposes of this paragraph 8, "Company" means all or any of the Company and the Subsidiaries and "UK Company" means the Company and any Subsidiary which is resident in the United Kingdom for the purposes of Taxation. (1) GENERAL TAXATION MATTERS ------------------------ (a) RESIDENCE --------- No Company is treated as resident for Taxation purposes in any jurisdiction other than or in addition to the jurisdiction of its incorporation. (b) TAX PROVISIONS -------------- Full provision or reserve has been made in the Audited Accounts for all Taxation liable to be assessed on any Company or for which it is accountable in respect of income, profits or gains earned, accrued or received on or before the Balance Sheet Date or any event on or before the Balance Sheet Date, including distributions made down to such date or provided for in the Audited Accounts, and full provisions has been made in the Audited Accounts for deferred Taxation in accordance with generally accepted accounting principles. (c) ADMINISTRATION -------------- (i) Each Company has properly and punctually made all returns, notices and claims relating to Taxation and provided all such information and maintained all such records on a proper basis in relation to Taxation as are required to be provided or maintained by it and all such returns, notices, claims and information given to the Inland Revenue or other relevant Tax Authority were, when given, in all material respects, true and accurate and none of such returns is disputed nor so far as the Warrantors are aware likely to be disputed by, or is yet to be determined by, or is subject to agreement with, the Inland Revenue or any other Tax Authority concerned (in the United Kingdom or elsewhere). 85 (ii) Since the Balance Sheet Date, no accounting period of any Company has ended. (iii) Each Company has duly made all claims, disclaimers and elections assumed to have been made for the purposes of the Audited Accounts. (iv) No transaction has been effected by any Company in respect of which any consent or clearance from the Inland Revenue or other Tax Authority was required without such consent or clearance having been validly obtained before the transaction was effected on the basis of a full and accurate disclosure to the Inland Revenue or other Tax Authority of all relevant material facts, circumstances and considerations, and all such transactions have been carried into effect only in accordance with the terms of the relevant consent or clearance. (v) No Company has taken any action which has had, nor so far as the Warrantors are aware will have, the result of altering, prejudicing or in any way disturbing any arrangement or agreement which it has previously had with the Commissioners of Inland Revenue, or the Commissioners of Customs and Excise, or other Tax Authority. (vi) The Disclosure Letter sets out full particulars of any agreement arrangement or dispensation between any Company and the Inland Revenue or other Tax Authority which is currently effective. (d) PAYMENT OF TAX -------------- Each Company has duly and punctually paid all Taxation whether of the United Kingdom or elsewhere which it has become liable to pay and neither the Company nor any director or officer of any Company has paid, or is or has become liable to pay, any fine, penalty, surcharge or interest in connection with any claim for Taxation under the Taxes Management Act 1970 or the VATA 1994 or any other statutory provision relating to Taxation. (e) DISTRIBUTIONS ------------- 86 (i) No UK Company has made a distribution within the meaning of s.210 (bonus issue following repayment of share capital) Taxes Act 1988 or issued any share capital as paid up otherwise than by receipt of new consideration within the meaning of Part VI Taxes Act 1988. (ii) No Company is bound to make any distribution except any dividend disclosed in its audited statutory accounts. (iii) No Company has repaid or agreed to repay or redeemed or agreed to redeem or purchased or agreed to purchase any of its share capital or capitalised or agreed to capitalise in the form of debentures or redeemable shares, any profits or reserves or any class or description. (f) FOREIGN INCOME DIVIDENDS ------------------------ (i) No UK Company has, prior to the date hereof, made any elections under s.246A Taxes Act 1988. (ii) No UK Company has not made any distribution which is deemed to be a foreign income dividend by virtue of Schedule 7 Finance Act 1997. (g) PAYMENTS UNDER DEDUCTION ------------------------ All payments by any Company to any person which ought to have been made under deduction of tax have been so made and the Company has (if required bylaw to do so) provided certificates of deduction in the required form to such person and accounted to the Inland Revenue or other relevant Tax Authority for the Tax so deducted. (h) PAYMENTS AND DISALLOWANCES -------------------------- No rents, interest, annual payments or other sums of an income nature paid or payable by any Company or which any Company is under an obligation to pay in the future are wholly or partially disallowable as deductions, loan relationship debits or charges in computing the profits of the Company for the purposes of Taxation. 87 (i) LOAN RELATIONSHIPS ------------------ (i) Each UK Company applies an authorised accruals method of accounting (as that term is defined in s.85 Finance Act 1996) in respect of all loan relationships (as that term is defined in s.81 Finance Act 1996) to which it is a party. (ii) The Disclosure Letter contains full and accurate particulars of any loan relationship to which any UK Company is a party, whether as a debtor or as a creditor, where any other party to that loan relationship is connected with that Company for the purposes of Chapter II Part IV Finance Act 1996. (iii) No UK Company has entered into any loan relationship to which paragraph 11(1) Schedule 9 Finance Act 1996 applies. (iv) No Company has been nor is entitled to be released from any liability arising under a debtor relationship of the Company. (v) No UK Company is a party to any loan relationship which is subject to the provisions of s.92 (convertible securities) or s.93 (loan relationships linked to the value of chargeable assets) Finance Act 1996. (j) CARRY FORWARD OF LOSSES ETC. ---------------------------- Nothing has been done and no event or series of events has occurred or will as a result of any contract, agreement or arrangement entered into before Completion occur which might, when taken together with the entry into or Completion of this Agreement, cause or contribute to the disallowance of the carry forward of any losses or excess charges on income or surplus advance corporation tax under the provisions of s.245 (calculation etc. of ACT on change of ownership of company), s.245A (restriction on application of s240 in certain circumstances), s.393 (losses other than terminal losses) or s.768 or s.768 A, B or C (change of ownership of company: disallowance of trading losses, expenses of management and other charges) Taxes Act 1988. 88 (k) GROUP INCOME ------------ The Disclosure Letter contains particulars of all elections made by any UK Company under s.247 Taxes Act 1988 (dividends etc. paid by one member of a group to another) and all such elections are now in force. (l) GROUP RELIEF ETC ---------------- (i) The Disclosure Letter contains full details of all surrenders, claims, notices, arrangements and agreements for surrenders or claims or giving of notices to which any UK Company is or has been a party in the last six accounting periods ending on or before Completion for:- (aa) any amounts by way of group relief under the provisions of Chapter IV of Part X Taxes Act 1988; (bb) any amount of surplus advance corporation tax under s.240 Taxes Act 1988; (cc) any amounts of tax refund to be dealt with under s.102 Finance Act 1989. (ii) The Company has received all payments due to it and made all payments due from it under any such arrangement or agreement as is referred to in (i) above for any group relief, advance corporation tax or tax refund under those provisions. (iii) No Company (other than a UK Company) has at any time within the last six accounting periods ending on or before Completion had its tax affairs dealt with on a consolidated basis nor has any Company entered into a tax sharing arrangement with any other company (including without limitation any arrangement whereby tax losses or tax reliefs are surrendered or claimed or profits transferred). (2) CLOSE COMPANIES --------------- (a) CLOSE COMPANY ------------- 89 The Company is a close company within the meaning of s.414 Taxes Act 1988. (b) DISTRIBUTIONS ------------- No distribution within s. 418 Taxes Act 1988 (certain expenses of close companies included as distributions) has been made by the Company within six years of the date hereof and no such distribution will be made before Completion. (c) LOANS TO PARTICIPATORS ---------------------- The Company has not made (and will not be deemed to have made) within six years of the date hereof any loan or advance to a participator or an associate of a participator so as to become liable to make any payment under s.419 Taxes Act 1988 (loans to participators etc.). (d) TRADING COMPANY --------------- The Company is not and has never been a "close investment holding company" within the meaning of s.13A Taxes Act 1988. (3) ANTI-AVOIDANCE -------------- (a) ANTI-AVOIDANCE -------------- (i) No Company has at any time entered into or been a party to a transaction or series of transactions containing steps inserted which the Company was aware had no commercial or business purpose other than the avoidance or deferral of Taxation; or (ii) No UK Company has at any time entered into or been party to a transaction or series of transactions being transactions to which any of the provisions of Part XVII Taxes Act 1988 could apply without, in the appropriate cases, having received clearance in respect thereof from the Inland Revenue. (iii) No transactions or arrangements involving any Company have taken place or are in existence which are such that any provisions relating to transfer pricing have or could be applied to them (including for the avoidance of doubt, in 90 the case of any UK Company, any of the provisions of Sections 770-773 Taxes Act 1988) and no Company is or has been involved in any other enquiry in any jurisdiction in relation to the adjustment of profits of associated enterprises for Taxation purposes. (b) CONTROLLED FOREIGN COMPANIES ---------------------------- No notice of the making of a direction under s.747 Taxes Act 1988 (imputation of chargeable profits and creditable tax of controlled foreign companies) has been received by any UK Company and no circumstances exist which would entitle the Inland Revenue to make such a direction and to apportion any profits of a controlled foreign company to any UK Company pursuant to s.752 Taxes Act 1988 (apportionment of chargeable profits and creditable tax. (5) CAPITAL ASSETS -------------- (a) BASE VALUES ----------- (i) On the disposal of any capital asset of a UK Company for a consideration equal to the book value of that asset in or adopted for the purpose of the Audited Accounts no liability to corporation tax on chargeable gains under the TCGA 1992 would arise (disregarding any right to claim reliefs or allowances other than amounts falling to be deducted from the consideration receivable under s.38 TCGA 1992). (ii) On the disposal by any Company (other than a UK Company) of any asset for a consideration equal to the value attributed to that asset in the Audited Accounts no charge to tax will arise. (b) ROLL-OVER RELIEF ---------------- No UK Company has made a claim under ss. 152 to 156 (inclusive), s.158 or ss.242 to 244 (inclusive) or s.247 TCGA 1992 and no such claim or other claim has been made by any other person (in particular pursuant to s.165 or s.175 TCGA 1992) which affects or could affect the amount or value of the consideration for the acquisition of any asset by the Company 91 taken into account in calculating liability to corporation tax on chargeable gains on a subsequent disposal. (c) CAPITAL ALLOWANCES ------------------ (i) The book value used in preparing the Audited Accounts of each asset or class of assets in respect of which separate computations for capital allowances are required to be made (as a result of an election or otherwise) is such that, on a disposal of each such asset, or (as the case may be) all the assets in such class, for a consideration equal to the value so used (and disregarding any statutory right to claim any allowance or relief), no balancing charge would arise. (ii) No claim has been made for the depreciation of any asset of a Company (other than a UK Company) for Taxation purposes in circumstances where the claim is likely to be disallowed. (d) TRANSACTIONS SINCE THE BALANCE SHEET DATE ----------------------------------------- (i) No liability to Taxation would arise on the disposal by any Company of any asset acquired since the Balance Sheet Date for a consideration equal to the consideration actually given for the acquisition. (ii) Since the Balance Sheet Date, no Company has entered into or been party to any transaction which will or so far as the Warrantors are aware may give rise to a liability to Taxation other than transactions undertaken in the ordinary course of trade of that Company (which, for the avoidance of doubt, shall not include the disposal of a capital asset). (iii) Since the Balance Sheet Date, no event has occurred as a result of which a balancing charge may fall to be made under the CAA 1990 against, or any disposal value may fall to be brought into account under s.24 CAA 1990 by, any UK Company or there may be a recovery of excess relief within s.46 or s.47 CAA 1990 (or other legislation relating to capital allowances). (e) INTRA GROUP TRANSFERS --------------------- 92 Neither s.178 nor s.179 TCGA 1992 will have effect in relation to any asset or property of any UK Company by virtue or in consequence of the entering into or performance of the Agreement or any other Event since the Balance Sheet Date. (6) TAXATION OF EMPLOYEES --------------------- (a) P.A.Y.E. -------- (i) Each UK Company has properly operated the Pay As You Earn System deducting tax as required by law from all payments to or treated as made to employees and ex-employees of the Company and punctually accounted to the Inland Revenue for all tax so deducted. (ii) Each UK Company has paid all national insurance and graduated pension contributions for which it is liable and has kept proper books and records relating to the same. (iii) No UK Company has suffered any Pay As You Earn or national insurance audit nor has been notified that any such audit is expected to be made. (iv) Each Company (other than a UK Company) has properly accounted for all payroll, wage and other taxes, including without limitation, all social security charges for which it is liable. (b) BENEFITS FOR EMPLOYEES ---------------------- No Company has made any payment to or provided any benefit for any officer or employee or ex-officer or ex-employee of the Company which is not allowable as a deduction in calculating the profits of the Company for Taxation purposes. (7) STAMP DUTY ---------- (a) All documents which confer any right upon a Company which it may have an interest in enforcing and all documents which form part of a Company's title to any asset owned or possessed by it or which the Company may need to enforce or produce in evidence in any court have been duly stamped and the Company is not liable to any penalty in respect of any such duty and there are no circumstances which may give rise to such a penalty. 93 (b) Each Company (other than a UK Company) has duly paid all capital duties for which it has at any time been liable. (c) No UK Company has an unsatisfied liability to stamp duty reserve tax. (8) VALUE ADDED TAX --------------- For the purposes of this paragraph (8) where the context so requires, "value added tax" means value added tax which is charged in the United Kingdom under VATA 1994 and any similar or like tax charged on the supply of goods or services in any other jurisdiction. (a) GENERAL ------- (i) Each Company is registered for the purposes of value added tax and has been so registered at all times and in all jurisdictions in which it has been required to be registered by the relevant legislation. (ii) Each Company has complied fully with all statutory requirements, orders, provisions, directions or conditions relating to value added tax including (for the avoidance of doubt) the terms of any agreements reached with the Commissioners of Customs and Excise or other relevant Tax Authority. (iii) Each Company maintains and has at all times maintained complete, correct and up-to-date records for the purposes of any value added tax legislation and has preserved such records in such form and for such periods as are required by the relevant legislation. (iv) No Company is in arrears with any payment or returns, or liable to any abnormal or non-routine payment, or any forfeiture or penalty, or to the operation of any penal provision. (v) No Company has been required by a Taxation Authority (including the Commissioners of Customs and Excise) to give security. 94 (vi) No Company is, nor has it agreed to become, an agent, manager, or factor for the purposes of accounting for value added tax on behalf of any other person other than another Company. (vii) No Company is or has been treated for value added tax purposes as a member of a group of companies. (viii) No Company has made exempt supplies such or of such amount that it is unable to obtain credit for all input tax paid or suffered by it. (xii) There is no asset in respect of which a Company may at any time be required to make any payment to a Tax Authority by way of adjustment to input value added tax deductible on the asset under arrangements giving effect to or comparable with Article 20(2)-(5) EC Sixth Directive (77/388/EC) (capital goods scheme). (b) VAT: PROPERTY TRANSACTIONS -------------------------- The Disclosure Letter contains full details of all properties and interests in land in which any UK Company is or may be interested where any supply by it or to it or in relation thereto is or may be subject to value added tax and all related undertakings, covenants and agreements relating to the exercise or non-exercise of the election to waive exemption from value added tax under paragraph 2 Schedule 10 VATA 1994. (10) INHERITANCE TAX AND GIFTS ------------------------- (a) POWERS OF SALE FOR INHERITANCE TAX PURPOSES ------------------------------------------- There are not in existence any circumstances whereby any such power as is mentioned in s.212 Inheritance Act 1984 could be exercised in relation to any share in, securities of, or assets of, a Company. (b) GIFTS ----- (i) No Company is liable to be assessed to corporation tax on chargeable gains or to inheritance tax as donor or donee of any gift or transferor or transferee of value. 95 (ii) No Company has been a party to associated operations in relation to a transfer of value within the meaning of s.268 Inheritance Tax Act 1984. (iii) No Inland Revenue charge (as defined in s.237 Inheritance Tax Act 1984) is outstanding over any asset of any Company or in relation to any shares in the capital of any Company. (iv) No Company has received any asset as mentioned in s.282 TCGA 1992. (11) PENSION SCHEMES --------------- (a) The Company has not received any payment to which s.601(1) Taxes Act 1988 (payments to employers) could apply. (b) The Pension Schemes are not such, or in such a condition, that the administration thereof may be obliged to submit proposals to the Inland Revenue under schedule 22 Taxes Act 1988 (reduction of pension scheme surpluses). (12) SHARE SCHEMES ------------- The Company is not a participating company in any scheme approved under schedule 9 Taxes Act 1988 (approved share option schemes and profit sharing schemes). 9. ASSETS (OTHER THAN THE PROPERTIES) ---------------------------------- (1) OWNERSHIP OF THE SUBSIDIARIES ----------------------------- The Company is the sole beneficial owner of all the issued or allotted shares of the Subsidiaries free from all liens, claims, charges, equities and encumbrances and all such shares are fully paid or credited as fully paid. (2) SUBSIDIARIES, ASSOCIATES AND BRANCHES ------------------------------------- The Company:- (a) is not the holder or beneficial owner of, and has not agreed to, acquire any share or loan capital of any other company (whether incorporated in the United Kingdom or elsewhere) other than the Subsidiaries; and 96 (b) does not have outside the United Kingdom any branch, agency or place of business, or any permanent establishment (as that expression is defined in the relevant double taxation relief orders current at the date of this Agreement). (3) TITLE TO ASSETS --------------- All assets of the Company (other than the Properties) and all debts due to it which are included in the Audited Accounts or have otherwise been represented as being the property of or due to the Company were at the Balance Sheet Date used or held for the purposes of its business, were at the Balance Sheet Date the absolute property of the Company and (save for those subsequently disposed of or realised in the ordinary course of trading) all such assets and all assets and debts which have subsequently been acquired or arisen are now the absolute property of the Company and none is the subject of any option, right to acquire, assignment, mortgage, charge, lien or hypothecation or other encumbrance whatsoever (excepting other liens arising by operation of law in the normal course of trading) or the subject of any factoring arrangement, hire-purchase, conditional sale or credit sale agreement. (4) PLANT AND MACHINERY ------------------- (a) The plant, machinery, vehicles and all other equipment used in connection with the business of the Company:- (i) is in all material respects in a reasonable state of repair and condition and satisfactory working order (fair wear and tear excepted) and has been regularly and properly maintained; (ii) (except computer equipment) is not surplus to requirements and is in the possession and control of the Company and is not expected to require replacements or additions at a cost in excess of, in aggregate, (Pounds)10,000 within 12 months from the date of this Agreement; and (iii) is capable of doing the work for which it was designed or purchased. (b) Maintenance contracts are in full force and effect in respect of all assets of the Company (except computer equipment) which it is normal or prudent to have maintained by independent or specialist 97 contractors and in respect of all assets which the Company is obliged to maintain or repair under any agreement (other than assets maintained by the Company itself) and all such assets have been maintained regularly to a reasonable technical standard and in accordance with safety regulations usually observed in relation thereto and in accordance with the terms of any leasing or other agreement. (5) INTELLECTUAL PROPERTY --------------------- (a) The Company is the sole legal and beneficial owner of or has the right to use, free and clear of all material liens, claims or restrictions all Intellectual Property Rights. (b) All the Intellectual Property Rights are valid and enforceable and are in full force and effect. (c) The details of the Intellectual Property Rights which are set out in the Third Schedule are true, complete and accurate in all material respects. (d) All Intellectual Property Rights which are capable of registration have been registered. (e) The Company has not granted, or purported to grant, to any third party any licences (whether express or implied) of the Intellectual Property Rights nor has the Company created any equitable interest in, licensed, charged or mortgaged or otherwise encumbered the Intellectual Property Rights. (f) All licences to the Company of Intellectual Property which are disclosed in the Disclosure Letter are in full force and effect, are valid and are not subject to any notice of termination, nor (so far as the Warrantors are aware) are there any grounds for termination of any such licence (including but not limited to termination as a result of any of the transactions contemplated in this Agreement), nor, as far as the Warrantors are aware, is the Company in breach of the terms of any such licence, nor is the Company liable to make any payment (or provide other consideration) contingent or otherwise to any third party in respect of the use of any Intellectual Property. (g) As far as the Warrantors are aware, nothing has been done or omitted to be done and no circumstances exist which could lead to 98 any Intellectual Property Rights ceasing to be valid and enforceable or whereby:- (i) any person is able to seek cancellation, rectification or revocation or any modification of any Intellectual Property Rights; or (ii) any applications for registered Intellectual Property Rights might not proceed to grant or might not proceed to grant in their current form; or (iii) any Intellectual Property Rights could lapse or where fines could become payable for late payment due to failure to pay fees to any regulatory or governmental authority or any third party prior to or within six months of the date of this Agreement. (h) The Warrantors are not aware of any proceedings, actions or claims which are pending or threatened:- (i) impugning the title, validity or enforceability (in whole or in part) of any of the Intellectual Property Rights; or (ii) in respect of employee rights to compensation as the inventor or author of any Intellectual Property Right; or (iii) with the intention that any third party be permitted to use any of the Intellectual Property Rights, and in particular by way of compulsory licence or crown use (or a similar or analogous right in another jurisdiction). (i) The carrying on of the business of the Company does not infringe and has not infringed any Intellectual Property of any third party and, so far as the Warrantors are aware, the Company does not need to obtain rights under any Intellectual Property other than the Intellectual Property Rights in order to continue its business as presently constituted or in accordance with its current business plan. (j) All trade secrets, know-how and other confidential information relating to the business carried on by the Company which were created by the Company including but not limited to lists of customers and suppliers, sales targets, sales statistics, prices, market research reports, business development and planning:- 99 (i) were lawfully created by the Company and were not obtained from a third party; (ii) have not been disclosed to any person (save for employees who were under a duty of confidence) without in each case first obtaining a written undertaking from the person in question to keep the same confidential and the Company has disclosed to the Purchaser the names and identities of all persons who have given such undertakings; and (iii) the Company is not under any obligation to disclose the same to any person. (k) The Company is not using any get up or trading style which is the same as or similar to that of a third party who carries on a similar business to the Company in the countries where the Company conducts its business. (l) So far as the Warrantors are aware the Company is not engaged in any activity which could lead to a third party bringing a claim against the Company for passing off or (in other jurisdictions) for unfair competition and so far as the Warrantors are aware the Company does not have (and never has had) grounds to bring an action against a third party for passing off or for unfair competition. (m) The Company has complied at all times with all applicable requirements of the Data Protection Act 1984. (n) All software held and/or used by the Company is and will remain Millennium Compliant. (o) The Company is not liable to make any payment (or provide other consideration), contingent or otherwise, to any third party in respect of any third party licences, relating to any of the Intellectual Property, which have expired or been terminated and no proceedings, actions or claims are pending or threatened in respect of third party rights in and to such Intellectual Property which is the subject of expired or terminated third party licences. 10. FREEHOLD AND LEASEHOLD PROPERTY ------------------------------- (1) THE PROPERTIES -------------- 100 The Properties comprise all of the premises and land now owned or occupied by or at any time used in connection with the businesses of the Company. (2) TITLE ----- In relation to each Property which is situated in the U.K.:- (a) the Company or the Subsidiary named in the Fifth Schedule as owner of the Property is the legal owner of and beneficially entitled to the whole of the proceeds of sale of and has a good title to the whole of the Property; (b) if the title to the Property is registered then the Company is registered with Absolute Title and if not so registered then the title of the Company commences with the lease of the relevant Property to the Company and the Company has in its possession all original documents and other documents and papers relating to the Company's title to the Property; (c) there are no mortgages, charges or debentures, rent charges, liens, annuities or other unusual outgoings, or trusts affecting the Property or the proceeds of sale of it; (d) save as contained or referred to in the lease of the relevant Property, the Property is not subject to any adverse estate, right, interest, covenant, restriction, stipulation, easement, option, right of pre-emption, wayleave, profit a prendre, licence or other right or informal arrangement in favour of any third party nor is there any agreement or commitment to create any of the foregoing and where the Property is subject to any such arrangement the Company has not received notice of any breach of it and is not aware of any material breach likely to cause such a notice to be received; (e) the Property has access and egress over Norwich Avenue West which is adopted by the appropriate highway authority and are maintainable at the public expense. The Property drains into a public sewer and is served by water and electricity utilities. Either the conducting media serving the Property connect directly to the mains without passing through land in the occupation or ownership of a third party or, if they do not, the rights necessary for the enjoyment and present use of the Property are enjoyed on 101 terms which are set out in the lease relating to the relevant Property; (f) where the title of the Property or any part of it is unregistered but situated in an area of compulsory registration no event has occurred in consequence of which registration of the Company's title to the relevant Property should have been effected; and (g) there are no material outstanding disputes, claims or demands between the Company and any third party affecting the Property of which the Warrantors are aware. (3) TOWN AND COUNTRY PLANNING ------------------------- In relation to each Property which is situated in the U.K.:- (a) no development at the Property or use of the Property has been undertaken by the Company in breach of the Town and Country Planning legislation; (b) the planning consents and permissions affecting the Property are either unconditional or are subject only to conditions which are neither unusual, personal nor temporary and which have been satisfied or fully observed and performed up to the date of this Agreement; (c) there is no resolution, proposal, scheme or order, whether formally adopted or not, for the compulsory acquisition of the whole or any part of the Property or any access or egress; (d) there is no outstanding statutory or other notice relating to the Property, any business carried on there or the use of the Property; (e) there is no outstanding monetary claim or liability, contingent or otherwise, in respect of the Property; (f) none of the buildings or structures on the Property has been listed under s.54 Town and Country Planning Act 1971 or s.1 Planning (Listed Buildings and Conservation Areas) Act 1990, nor has the local authority authorised the service of any building preservation notice under s.58 Town and County Planning Act 1971 or s.3 Planning (Listed Buildings and Conservation Areas) Act 1990 or any repairs notice under s.115 Town and Country Planning Act 1971 or s.48 Planning (Listed Buildings and Conservation Areas) 102 Act 1990 in respect of the Property or any building or structure thereon, nor has the local authority made or resolved to make any noise abatement zone order under s. 63 Control of Pollution Act 1974 for any area which includes the Property; (g) the Property is not in an urban development area, an improvement area or an enterprise zone; and (h) there are no onerous Local Land Charges registered in respect of the Property. (4) STATUTORY REQUIREMENTS ---------------------- In relation to each Property which is situated in the U.K.:- (a) a Fire Certificate has been issued in respect of the Property and there has been no breach of the provisions or conditions contained in it; (b) so far as the Warrantors are aware the Property complies with the requirements of the Shops Act 1950, the Factories Acts, the Offices, Shops and Railway Premises Act 1963 (as modified), the Fire Precautions Act 1971, the Health and Safety at Work etc., Act 1974 and any similar legislation, bye-laws and regulations made thereunder; and (c) so far as the Warrantors are aware there is no actual or potential liability arising under the Control of Pollution Act 1974 or any other public health legislation which could give rise to any costs, liabilities or other obligations binding upon either the Vendors or the Purchaser. (5) STATE AND CONDITION OF THE PROPERTIES ------------------------------------- The Property is fit for the purposes for which it is used. (6) LEASEHOLD PROPERTIES -------------------- Where the interest of the Company in any Property is leasehold the details of the date, parties, premises and term have been completed in the Fifth Schedule and:- 103 (a) The Company has paid the rent and the last demands for rent (or receipts if issued) were unqualified. (b) So far as the Warrantors are aware, there are no material subsisting breaches of any covenant or condition contained in the Lease on the part of either the relevant landlord or the Company and no landlord has refused to accept rent or made any complaint or objection; (c) (UK Property only) no structural alterations have been made to the exterior of the Property at the expense of the Company without landlord's consents and approvals and all other alterations to the Property have been made in accordance with the terms of the relevant Lease and with all necessary consents and approvals and do not have to be reinstated at the expiry of the term. (d) (UK Property only) all steps in rent reviews have been duly taken and no rent reviews are or should be currently under negotiation or the subject of a reference to any expert or arbitrator of the Courts; (e) (UK Property only) the Lease does not contain a covenant which requires the tenant to offer to surrender the same before or as a pre- condition of an assignment or underletting nor does it contain requirements to be satisfied on a change of ownership of the share capital or control of the tenant; (f) (US Property only) a full and complete lease together with all amendments thereto and any related documents have been supplied to the Purchaser and WAM!NET. (7) PROPERTIES SUBJECT TO LEASES AND LICENCES ----------------------------------------- No Property is the subject of any Lease or Licence for the benefit of any person other than the Company. (8) CONTINGENT LIABILITIES ---------------------- There is no actual or contingent liability on the part of the Company arising directly or indirectly out of any lease, agreement for lease, conveyance or licence or other deed previously held by the Company as an original lessee or underlessee or otherwise in respect of any Property situated in the U.K. 104 (9) REPLIES BEFORE CONTRACT ----------------------- Any replies given by or on behalf of the Vendor to Enquiries Before Contract raised by or on behalf of the Purchaser relating in any way to the Property are true and accurate in all respects. 11. ENVIRONMENTAL ISSUES -------------------- In respect of such of the Properties which are situated in the U.K.: (a) So far as the Warrantors are aware the Company has obtained all necessary Environmental Licences and complied with the terms and conditions of such Environmental Licences and all other applicable Environmental Law. (b) Neither the Company nor (so far as the Warrantors are aware) any of its directors, officers or employees nor any person for whose acts or defaults the Company may be vicariously liable is involved (in relation to any matter for which the Company is vicariously liable) in any legal, administrative, civil, criminal, arbitration or other proceedings or investigations in relation to any Environmental Law or any Environmental Licence or concerned with the pollution or protection of the Environment or the protection of or harm to the health of humans, animals or plants in any jurisdiction and, so far as the Warrantors are aware, none such are pending or threatened by or against the Company or any such person and, so far as the Warrantors are aware, there are no facts or circumstances that may give rise to any such proceedings arbitration or investigations. (c) So far as the Warrantor are aware, the Company does not own use or occupy and has not owned used or occupied any land, water supply, plant or equipment, whether or not in or at the Properties, which contains or has contained a hazardous substance or article, waste or other pollutant or contaminant or which is or has been used for the deposit, storage, treatment or disposal of waste or sewage or been affected by any pollution, noise or nuisance from any other land or activity thereon or use thereof and, so far as the Warrantors are aware, no land or water supply adjoining any land or water supply owned, used or occupied by the Company has contained or contains any such hazardous substance, waste or other pollutant or contaminant. 105 (d) So far as the Warrantors are aware the Company has not discharged or emitted into or on, so far as the Warrantors are aware, to the Environment any hazardous substance or article, pollutant or contaminant in breach of the terms and conditions of any Environmental Licence. (e) The Company has not received or given any notice or other communications alleging breach of any Environmental Law or Environmental Licence and, so far as the Warrantors are aware, there are no facts or circumstances that may give rise to the giving or receipt of any such notice or communication. (f) There is and has been no governmental or other investigation, enquiry or disciplinary proceeding relating to the pollution or protection of the Environment concerning the Company or the Properties and, so far as the Warrantors are aware, none is pending or threatened and no facts or circumstances exist which might give rise to any such investigations, enquiries or proceedings. 12. MEDIA TEC INVESTMENTS LIMITED ----------------------------- None of the Warrantors have any interest whatsoever in Media Tec Investments Limited. 13. NO BROKERS OR FINDERS --------------------- No person, firm or corporation has or will have, as a result of any act or omission of any of the Vendors, any right, interest or valid claim against or upon the Purchaser or WAM!NET for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by this Agreement. 106 PART II ------- THE PURCHASER WARRANTIES ------------------------ 1. CORPORATE STATUS ---------------- Each of WAM!NET and the Purchaser is a corporation duly organised, validly existing and (if appropriate) in good standing under respectively the laws of the State of Minnesota and England with full corporate power and authority to own its properties and carry on its business as now conducted. 2. AUTHORITY FOR AGREEMENTS ------------------------ Each of WAM!NET and the Purchaser has the power and authority to execute and deliver this Agreement and to carry out its obligations hereunder. The execution, delivery and performance by each of WAM!NET and the Purchaser of this Agreement and the consummation of the transactions contemplated therein have been duly authorised by all necessary corporate action on the part of each. This Agreement has been duly executed and delivered by WAM!NET and the Purchaser and constitutes the valid and legally binding obligations of WAM!NET and the Purchaser respectively enforceable against each such company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganisation and similar laws of general application relating to or affecting the rights and remedies of creditors. 3. NO CONFLICTS ------------ The execution, delivery and performance of this Agreement and the consummation of all of the transactions contemplated hereby, except where the failure to obtain a consent or waiver of any third party will not have a material adverse effect on WAM!NET and the Purchaser or impair the ability of WAM!NET or the Purchaser to consummate the transactions thereby contemplated (i) do not and will not, so far as the Purchaser or WAM!NET is concerned, require the consent, waiver, approval, license, designation or authorisation of, or declaration with, any person or public authority; (ii) do not and will not with or without the giving of notice or the passage of time or both, violate or conflict with or result in a breach or termination of any provision of, or constitute a default under, or accelerate or permit the acceleration of the performance required by the terms of, or result in the creation of any mortgage, 107 security interest, claim, lien, charge or other encumbrance upon any of the assets of WAM!NET or the Purchaser or pursuant to, or otherwise give rise to any liability or obligation under the articles or bylaws (or similar organisational documents) of WAM!NET or the Purchaser under any agreement, mortgage, deed of trust, indenture, licence, permit or any other agreement or instrument or any order, judgment, decree, statute, regulation or any other restriction of any kind or description to which WAM!NET or the Purchaser is a party or by which WAM!NET or the Purchaser may be bound; and (iii) will not terminate or result in the termination of any such agreement or instrument, or in any way affect or violate the terms and conditions of, or result in the cancellation, modification, revocation or suspension of, any rights of WAM!NET or the Purchaser. 4. ORGANISATIONAL DOCUMENTS; SUBSIDIARIES -------------------------------------- The copies of the articles of incorporation and bylaws or memorandum and articles of association (or similar organisational documents) of WAM!NET and the Purchaser delivered to the Vendors or their agents prior to the execution of this Agreement are true and complete copies of the duly and legally adopted articles of incorporation and bylaws or memorandum and articles of association (or similar organisational documents) of WAM!NET and the Purchaser in effect as of the date of this Agreement. 5. QUALIFICATION ------------- Each of WAM!NET and the Purchaser is duly qualified or licensed to do business and in good standing as a foreign corporation in each jurisdiction wherein the nature of its activities or of its properties owned or leased makes such qualification or licensing necessary and failure to be so qualified or licensed or in good standing would have a material adverse impact on its business. 6. FINANCIAL STATEMENTS -------------------- WAM!NET has heretofore delivered to each of the Vendors a consolidated balance sheet of WAM!NET and the WAM!NET Subsidiaries at 31 December 1997 (the "Audited Balance Sheet"), together with consolidated statements of operations, stockholders' equity and cash flow of WAM!NET and the subsidiaries of WAM!NET ("WAM!NET Subsidiaries") for the fiscal year then ended, and the report thereon of Ernst & Young, certified public accountants. Such financial statements present fairly the consolidated financial condition of 108 WAM!NET and the WAM!NET Subsidiaries at the relevant balance sheet date and the consolidated results of operations of WAM!NET and the WAM!NET Subsidiaries for the period therein specified, and have been prepared in accordance with U.S. generally accepted accounting principles applied on a basis consistent with prior accounting periods. 7. LITIGATION ---------- (a) Since 31 December 1997 neither WAM!NET nor any WAM!NET Subsidiary has received notice of any claim for damages or seeking any other relief against WAM!NET or any WAM!NET Subsidiary. (b) Neither WAM!NET nor any WAM!NET Subsidiary is engaged whether as plaintiff or defendant or otherwise in any legal action, proceedings or arbitration (other than as plaintiff in the collection of debts arising in the ordinary course of its business) nor is WAM!NET nor any WAM!NET Subsidiary being prosecuted for any criminal offence and, so far as WAM!NET is aware, there are no such proceedings or prosecutions pending or threatened. (c) So far as WAM!NET is are aware, there are no investigations, disciplinary proceedings or other circumstances likely to lead to any such claim or legal action, proceedings or arbitration (other than as aforesaid) or prosecution in which WAM!NET or any WAM!NET Subsidiary may become involved. 8. CONSIDERATION SHARES -------------------- The Consideration Shares referred to in sub-clause 5.1.2 are duly authorised and, when issued at Completion pursuant to the terms of this Agreement, will be validly issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions (except restrictions on transfer thereof other than in compliance with federal and state securities laws). The Consideration Shares referred to in Clause 6 are duly authorised and reserved to the Vendors and, when issued pursuant to the terms of this Agreement, will be validly issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions (except restrictions on transfer thereof other than in compliance with federal and state securities laws). The certificates representing the Consideration Shares to be delivered by WAM!NET under this Agreement will be genuine, and WAM!NET has no knowledge of any facts which would impair the validity thereof. 109 9. CAPITAL STOCK ------------- The authorized capital stock of WAM!NET consists of (a) 90,000,000 shares of Common Stock, par value U.S. $0.01 per share, of which 1,339,948 shares of Common Stock are issued and outstanding, and (b) 100,000 shares of Class A Preferred Stock, par value U.S. $10.00 per share, of which 100,000 shares are issued and outstanding and (c) 9,900,000 shares of undesignated capital stock, none of which are issued and outstanding. All of the outstanding shares of capital stock of each of WAM!NET and the WAM!NET Subsidiaries were duly authorized and validly issued and are fully paid and nonassessable. No holder of any security of WAM!NET is entitled to any preemptive or similar rights to purchase securities from WAM!NET. All outstanding securities of WAM!NET and the WAM!NET Subsidiaries have been issued in full compliance with an exemption or exemptions from the registration and prospectus delivery requirements of the Securities Act and from the registration and qualification requirements of all applicable state securities laws. 10. NO BROKERS OR FINDERS --------------------- No person, firm or corporation has or will have, as a result of any act or omission of any of WAM!NET or the WAM!NET Subsidiaries, any right, interest or valid claim against or upon the Vendors for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by this Agreement. 11. REGISTRATION RIGHTS ------------------- Other than under Clause 18 WAM!NET has not agreed to register any of its authorized or outstanding securities under the Securities Act. 110 THE EIGHTH SCHEDULE ------------------- LIMITATIONS OF LIABILITY ------------------------ PART I ------ 1. No liability shall arise in respect of a Relevant Claim unless the aggregate amount of all Relevant Claims exceeds (Pounds)300,000 but if the aggregate of all Relevant Claims exceeds such sum as aforesaid then (subject to the other provisions hereof), the Warrantors shall be liable for the whole of such liabilities and not merely for the excess. The foregoing shall not apply to a Relevant Claim which relates to a liability to Taxation (as defined in the Tax Deed) arising as a result of any adjustment of the profits of the Company or any Subsidiary for the purposes of Taxation in connection with a marketing rebate of approximately (Pounds)180,000 from the Company to 4-Sight Inc nor, for the avoidance of doubt, any liability arising pursuant to the indemnity contained in Clause 10.2. 2. (a) The aggregate amount of liabilities of the Warrantors under or in connection with all Relevant Claims shall not exceed the amount of the Consideration actually received by the Warrantors. The aggregate amount of liability of each Warrantor under or in connection with all Relevant Claims shall not exceed the aggregate amount of the Consideration actually received by such Warrantor for his Shares including the Consideration Shares. For the purposes of this paragraph the Consideration Shares shall be deemed to have a value per Share equal to the net proceeds of sale not exceeding US$40 per Consideration Share sold (less Taxation thereon) at arms' length of such Consideration Shares as are required to meet the Warrantors' liability for any Relevant Claim (in excess of the cash consideration received by him) PROVIDED THAT to the extent that prior to the date of the Relevant Claim, any of such Consideration Shares shall have been disposed of by way of sale at arms' length, the net proceeds of sale (less Taxation thereon) shall be substituted pro rata for such value. (b) The amount of Taxation taken into account in determining the value per Share for the purposes of sub-paragraph 2(a) above shall be reduced by the amount of any credit in respect of Taxation given to the Warrantor as a result of an adjustment of the Consideration which is attributable to a payment made in respect of a Relevant Claim. 111 (c) The Warrantors undertake that, to the extent required, they will dispose of the Consideration Shares held by them by way of arms length sale in order to meet any Relevant Claim. (d) The US dollar value of any net proceeds of sale of any Consideration Shares shall, for the purposes of this paragraph 2 be converted into sterling at the spot rate (at which dollars are bought with sterling) on the date on which the net proceeds are received. 3. All Relevant Claims against the Warrantors under or in connection with the Vendor Warranties shall be wholly barred and unenforceable unless written particulars thereof (giving reasonable details of the specific matter or claim in respect of which a claim is made to the extent known to the Purchaser) shall have been given to the Warrantors by no later than the second anniversary of Completion or, in the case of any claim by reason of a breach of a Warranty contained in paragraph 8 of the Seventh Schedule, within a period of six years from the end of the current accounting reference period of the Company. 4. All Relevant Claims against the Warrantors under or in connection with the Tax Deed shall be wholly barred and unenforceable unless written particulars thereof (giving reasonable details of the specific matter or claim in respect of which a claim is made to the extent known to the Purchaser) shall have been given to the Warrantors within a period of six years from the end of the current accounting reference period of the Company. 5. Where notice of a Relevant Claim has been duly given, such claim shall be wholly barred and unenforceable unless proceedings in respect of such claim shall have been issued and served upon the Warrantors within 12 months after notice of such claim shall be deemed to have been served (or, if part of such claim relates to a liability which is contingent, then in respect of such part only, within 12 months after such liability becomes an actual liability). 6. Where notice of a Relevant Claim has been duly given and part of such claim relates to a liability which is contingent, the Warrantors shall not be under any obligation to make any payment to the Purchaser or (if applicable) the Company in respect of such liability until such time as it becomes an actual liability. 112 7. In the event that the Purchaser or the Company or any of the Subsidiaries recovers any sum (whether by payment, discount, credit or otherwise) from any third party which relates to the subject matter of a Relevant Claim the Purchaser shall offset (after deducting any applicable tax and the reasonable expenses incurred by the Purchaser or the Company or any of the Subsidiaries in the recovery thereof) such sum against the amount of the related claim payable by the Warrantors or, if the Warrantors have already paid such Relevant Claim, the Purchaser shall pay promptly or procure that the Company or the Subsidiaries (as the case may be) shall pay promptly such portion of such sum to the Warrantors, but only to the extent of the net payment received by the Purchaser from the Warrantors in respect of such Relevant Claim. 8. In respect of any Relevant Claim paid in full by the Warrantors, the Warrantors shall be entitled to full subrogation to the rights of the Company, the Subsidiaries and the Purchaser against the third party to the extent that the Warrantors have so paid and the Purchaser shall and shall procure that the Company and the Subsidiaries shall co-operate with all reasonable requests to aid the Warrantors to collect from the third party, PROVIDED THAT all reasonable out-of-pocket expenses and all costs, claims, actions and demands made on the Purchaser or the Company or any of the Subsidiaries as a result of any action required to be taken by the Warrantors shall be paid for by the Warrantors. 9. In respect of any Relevant Claim not first paid in full by the Warrantors, the Purchaser will take such action as the Warrantors may reasonably require to avoid, resist, contest or compromise any Relevant Claim or matter which gives or may give rise to a Relevant Claim, and where required by the Warrantors, give control of the conduct of any Relevant Claim or matter which may give rise to a Relevant Claim to the Warrantors (provided that such action or control shall not be required by the Warrantors in relation to any matters which is likely or might reasonably be expected directly or indirectly adversely to affect relations with customers or suppliers of the Company and/or any of the Subsidiaries or may otherwise adversely affect the business or financial position of the Company and/or any of the Subsidiaries), and subject in each such case to being indemnified and secured first to the Purchaser's reasonable satisfaction by the Warrantors against all reasonable costs in so doing. 10. The Warrantors shall not be liable in respect of a Relevant Claim under or in connection with the Vendor Warranties if and to the extent that the loss is or has been included and satisfied in any Relevant Claim under the Tax Deed nor shall they be liable in respect of a Relevant Claim under or 113 in connection with the Tax Deed if and to the extent that the loss is or has been included and satisfied in any Relevant Claim under the Warranties. To the extent that the Relevant Claim arises under the Vendor Warranties and also under the Tax Deed, such claim shall first be satisfied under the Warranties. 11. The Purchaser shall not be entitled to make any Relevant Claim under or in connection with the Vendor Warranties to the extent that the matter giving rise to the Relevant Claim has been fairly disclosed in the Disclosure Letter. 12. The Purchaser shall not be entitled to make any Relevant Claim (and the Warrantors shall not be liable in respect of any such claim):- (a) to the extent that the subject matter of the claim is specifically reserved or provided for or included as a liability in the Audited Accounts or the Management Accounts; (b) to the extent that such liability would not have arisen but for a voluntary act or omission by the Company or any Subsidiary which was provided for in or carried out to comply with the terms of or give effect to this Agreement or which is outside the ordinary course of business after Completion and which could reasonably have been avoided and which the Purchaser was aware or ought reasonably to have been aware might give rise to a Relevant Claim (save where such act or omission is a result of a legally binding obligation of the Company or the Subsidiary entered into before Completion or is done with the prior written approval of the Warrantors); (c) to the extent that liability in respect of such claim arises or is increased as a result of any increase in the rates of Taxation made or imposed after Completion with retrospective effect to any period ending on or before Completion; (d) to the extent that liability in respect of such claim arises or is increased as a result of the retrospective imposition of Taxation as a consequence of any change in the law enacted or in the published Inland Revenue practice thereof or otherwise made after the date hereof; (e) to the extent that such liability arises wholly or partly out of or the amount thereof is increased as a result of any change in the accounting principles or practices of the Purchaser or WAM!NET 114 or the Company or any of the Subsidiaries introduced or having effect after the date hereof unless the same is introduced to bring such accounting principles and practices into line with generally accepted accounting principles and practices in relation to a business of the type carried on by the Company and the Subsidiaries. 13. In this Part I of this Schedule, any reference to the Purchaser shall be construed as meaning the Purchaser and/or WAM!NET. 115 PART II ------- 1. No liability shall arise in respect of a Relevant Claim unless the aggregate amount of all Relevant Claims exceeds (Pounds)300,000 but if the aggregate of all Relevant Claims exceeds such sum as aforesaid then (subject to the other provisions hereof), the Purchaser and WAM!NET shall be liable for the whole of such liabilities and not merely for the excess. 2. The aggregate amount of liabilities of the Purchaser and WAM!NET under or in connection with all Relevant Claims shall not exceed US$12,612,204 . 3. All Relevant Claims against the Purchaser and WAM!NET under or in connection with the Purchaser Warranties shall be wholly barred and unenforceable unless written particulars thereof (giving reasonable details of the specific matter or claim in respect of which a claim is made to the extent known to the Vendors) shall have been given to the Purchaser and WAM!NET by no later than the second anniversary of Completion. 4. Where notice of a Relevant Claim has been duly given, such claim shall be wholly barred and unenforceable unless proceedings in respect of such claim shall have been issued and served upon the Purchaser and WAM!NET within 12 months after notice of such claim shall be deemed to have been served (or, if part of such claim relates to a liability which is contingent, then in respect of such part only, within 12 months after such liability becomes an actual liability). 5. Where notice of a Relevant Claim has been duly given and part of such claim relates to a liability which is contingent, the Purchaser and WAM!NET shall not be under any obligation to make any payment to the Vendors in respect of such liability until such time as it becomes an actual liability. 6. In the event that the Vendors or the Company or any of the Subsidiaries recovers any sum (whether by payment, discount, credit or otherwise) from any third party which relates to the subject matter of a Relevant Claim the Vendors shall offset (after deducting any applicable tax and the reasonable expenses incurred by the Vendors or the Company or any of the Subsidiaries in the recovery thereof) such sum against the amount of the related claim payable by the Purchaser and WAM!NET or, if the 116 Purchaser and WAM!NET have already paid such Relevant Claim, the Vendors shall pay promptly such portion of such sum to the Purchaser and WAM!NET, but only to the extent of the net payment received by the Vendors from the Purchaser and WAM!NET in respect of such Relevant Claim. 7. In respect of any Relevant Claim paid in full by the Purchaser and WAM!NET, the Purchaser and WAM!NET shall be entitled to full subrogation to the rights of the Company and the Subsidiaries and the Vendor against the third party to the extent that the Purchaser and/or WAM!NET have so paid and the Vendors shall and shall procure that the Company and the Subsidiaries shall co-operate with all reasonable requests to aid the Purchaser and/or WAM!NET to collect from the third party, PROVIDED THAT all reasonable out-of-pocket expenses and all costs, claims, actions and demands made on the Vendors or the Company or any of the Subsidiaries as a result of any action required to be taken by the Purchaser and WAM!NET shall be paid for by the Purchaser and WAM!NET. 8. In respect of any Relevant Claim not first paid in full by the Purchaser and/or WAM!NET, the Vendors will take such action as the Purchaser and WAM!NET may reasonably require to avoid, resist, contest or compromise any relevant claim or matter which gives or may give rise to a Relevant Claim, and where required by the Purchaser and WAM!NET, give control of the conduct of any Relevant Claim or matter which may give rise to a Relevant Claim to the Purchaser and WAM!NET (provided that such action or control shall not be required by the Purchaser and WAM!NET in relation to any matters which are likely or might reasonably be expected directly or indirectly adversely to affect relations with customers or suppliers of the Company and/or any of the Subsidiaries or may otherwise adversely affect the business or financial position of the Company and/or any of the Subsidiaries), and subject in each such case to being indemnified and secured first to the Vendors' reasonable satisfaction by the Purchaser and WAM!NET against all reasonable costs in so doing. 9. The Vendors shall not be entitled to make any Relevant Claim under or in connection with the Purchaser Warranties to the extent that the matter giving rise to the Relevant Claim has been fairly disclosed in the Purchaser's Disclosure Letter. 10. The Vendors shall not be entitled to make any Relevant Claim (and the Purchaser and WAM!NET shall not be liable in respect of any such claim):- 117 (a) to the extent that the subject matter of the claim is specifically reserved or provided for or included as a liability in the Audited Balance Sheet referred to in paragraph 6 of the Seventh Schedule; (b) to the extent that liability in respect of such claim arises or is increased as a result of any increase in the rates of Taxation made or imposed after Completion with retrospective effect to any period ending on or before Completion; (c) to the extent that liability in respect of such claim arises or is increased as a result of the retrospective imposition of Taxation as a consequence of any change in the law enacted or in the published Inland Revenue or other Tax Authority practice thereof or otherwise made after the date hereof. 118 SIGNED by ) - ------ DAVID ANTHONY TOWNEND ) /s/ David Townend - --------------------- in the presence of:- ) /s/ A.R. Prest SIGNED by ) - ------ LYNDON DAVID STICKLEY ) /s/ Lyndon David Stickley - --------------------- in the presence of:- ) /s/ Peter Basius SIGNED by ) - ------ ANDREW STEVEN BAIRD ) /s/ Andrew S. Baird - ------------------- in the presence of:- ) /s/ Clair Baird SIGNED by ) - ------ YORICK PHOENIX ) /s/ Yorick Phoenix - -------------- in the presence of:- ) /s/ A.R. Prest SIGNED by Frank Dearie ) - ------ for and on behalf of ) /s/ Frank Dearie MEDIA TEC INVESTMENTS ) - --------------------- LIMITED in the presence of:- ) - ------- /s/ Karen B. Smith SIGNED by ) - ------ for and on behalf of ) /s/ GEOCAPITAL IV L.P. ) - ------------------ in the presence of:- ) 119 SIGNED by ) - ------ for and on behalf of ) Catherine C. Clarke 3i GROUP PLC ) /s/ Catherine C. Clarke - ------------ in the presence of:- ) SIGNED by ) - ------ for and on behalf of ) WAM!NET (UK) LIMITED ) /s/ Michael Borman - -------------------- in the presence of:- ) /s/ Edward J. Driscoll, Jr. SIGNED by ) - ------ for and on behalf of ) WAM!NET INC. ) /s/ Edward J. Driscoll III - ------------ in the presence of:- ) /s/ Michael O'Donnell 120 EX-3.1 3 ARTICLES OF INCORPORATION OF THE COMPANY Exhibit 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF WAM!NET INC. ARTICLE 1. NAME The name of the corporation is WAM!NET Inc., which shall be referred to in these Articles of Incorporation as the "Corporation." ARTICLE 2. REGISTERED OFFICE The address of the registered office of the Corporation in Minnesota is 6100 West 110th Street, Minneapolis, Minnesota 55438 ARTICLE 3. DURATION The duration of the Corporation shall be perpetual. ARTICLE 4. PURPOSE The Corporation is organized for general business purposes. ARTICLE 5. POWERS The Corporation shall have the unlimited power to engage in and to do any act necessary or incidental to the carrying out of its purposes, together with the power to do or perform any acts consistent with or which may be implied from the powers expressly conferred upon corporations by Minnesota Statutes, Chapter 302A. ARTICLE 6. STOCK 6.1) Capitalization. The aggregate number of shares of stock that the -------------- Corporation has authority to issue shall be one hundred million (100,000,000) shares, which shall consist of (a) ninety million (90,000,000) shares of common stock, with a par value of One Cent ($.01) per share ("Common Stock"); (b) one hundred thousand (100,000) shares of Class A preferred stock ("Class A Preferred Stock"); and (c) nine million nine hundred thousand (9,900,000) shares of undesignated stock. The Board of Directors of the Corporation is authorized to establish from the undesignated stock, by resolution adopted and filed in the manner provided by law, one or more classes or series of shares, to designate each such class or series (which may include but is not limited to designation as additional Common Stock), and to fix the relative rights and preferences of each such class or series. 6.2) Class A Preferred Stock. The express terms and provisions of the ----------------------- shares classified and designated as Class A Preferred Shares are as follows: (a) Designation and Amount. Each share of Class A Preferred Stock shall ---------------------- have a par value of Ten Dollars ($10.00) per share. The number of shares of Class A Preferred Stock may be increased or decreased by resolution of the Board of Directors; provided, that, no decrease shall reduce the number of shares of Class A Preferred Stock to a number less than the number of shares then outstanding, plus the number of shares of Class A Preferred Stock, if any, reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Company convertible into Class A Preferred Stock. (b) Dividends and Distributions. --------------------------- (1) The holders of shares of Class A Preferred Stock, in preference to the holders of Common Stock of the Company, shall be entitled to receive, when, as and if declared by the Board of Directors of the Company (the "Directors"), a dividend (the "Quarterly Dividend") in the amount of Seventeen and One-half Cents ($.175) per share payable out of the net earnings of the Company constituting funds legally available for the purpose. The Quarterly Dividend shall begin to accrue on January 1, 1997, and shall be payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Class A Preferred Stock. If the net earnings in any year are not sufficient to pay the Quarterly Dividend, either in whole or in part, then any unpaid portion of such dividend will become a charge against the net earnings of the Company, and will be paid in full out of the net earnings of the Company in subsequent years before any dividends are 2. paid on the Common Stock of the Company in those years. No dividends will be paid or set apart for payment on the Common Stock, no distribution will be made on the Common Stock, and no shares of Common Stock will be redeemed, retired or otherwise acquired for valuable consideration unless all theretofore unpaid Quarterly Dividends have been declared, and the Company has paid those dividends or has set aside a sum sufficient to pay them. (2) Dividends shall begin to accrue and accumulate on outstanding shares of Class A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Class A Preferred Stock entitled to receive Quarterly Dividends and before such Quarterly Dividend Payment Date, in either of which events such Quarterly Dividends shall begin to accrue and accumulate from such Quarterly Dividend Payment Date. Accrued but unpaid Quarterly Dividends shall not bear interest. Dividends paid on the shares of Class A Preferred Stock in an amount less than the total amount of Quarterly Dividends then accrued and payable shall be allocated pro rata on a share-by-share basis among all such shares of Class A Preferred Stock then outstanding. The Directors may fix a record date for the determination of holders of shares of Class A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than sixty (60) days prior to the date fixed for the payment thereof. (c) Voting Rights. The holders of shares of Class A Preferred Stock shall have ------------- the following voting rights: (1) Each share of Class A Preferred Stock shall entitle the holder thereof to one (1) vote for each share of Class A Preferred Stock standing in the name of the holder on the books of the Company. The holders of Class A Preferred Stock, voting separately as a class, shall be entitled to elect a majority of the Directors. The right to elect Directors may be exercised at any annual meeting of the stockholders of the Company, at any special meeting held in place of an annual meeting, or at a special meeting called to elect directors. The right to elect directors shall continue until December 31, 1999, and then expire. The directors elected by the Class A Preferred Stock shall serve until the next annual or special meeting of the stockholders of the Company and until their respective successors have been elected by the holders of Class A Preferred Stock and have been qualified. The term of office of any person elected as a director by the holders of Class A Preferred Stock shall terminate on December 31, 1999. 3. The vacancies created thereby may be filled by resolution of the remaining Directors who shall have been elected by a vote of the holders of the Common Stock of the Company. If the office of a director elected by the holders of Class A Preferred Stock is vacant prior to December 31, 1999, due to resignation, removal or death, the vacancy shall be filled by the majority vote of the directors then in office, even if less than a quorum, upon the recommendation of the remaining director or directors who were elected by the holders of the Class A Preferred Stock. If the office of a director who was elected by the holders of Common Stock is vacant prior to December 31, 1999, due to resignation, removal or death, the vacancy shall be filled by the majority vote of the directors then in office, even if less than a quorum, upon the recommendation of the remaining director or directors who were elected by the holders of the Common Stock. If the vacancy is not so filled within forty (40) days after the creation of the vacancy, a special meeting of the holders of Preferred Stock and/or Common Stock shall be called and the vacancy or vacancies shall be filled at that meeting. (2) In addition to the right to elect a majority of the Directors as provided in Section 6.2(c)(1), the holder of each share of Class A Preferred Stock shall be entitled to one (1) vote, voting together with the holders of Common Stock as a single class, on all matters, excluding the election of Directors, submitted to the vote of shareholders of the Company. (3) Except as otherwise provided in Section 6.2(c) or in Section 6.2(j) hereof, or in any Certificate of Designations creating another class or series of preferred stock, or in any similar stock of the Company hereafter created, or by law, the holders of shares of Class A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Company having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Company. (4) Except as expressly set forth herein, or as otherwise provided by law, holders of Class A Preferred Stock shall have no special voting rights and their consent, as a separate class, shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. (d) Certain Restrictions -------------------- (1) Whenever Quarterly Dividends or distributions payable on Class A Preferred Stock as provided in Section 6.2(b) are in arrears, thereafter and until all accrued and unpaid Quarterly Dividends and distributions, whether or not declared, on shares of Class A Preferred Stock outstanding shall have been paid in full, the Company shall not, without the express 4. affirmative unanimous approval of the Directors elected by holders of the Class A Preferred Stock: a. declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Class A Preferred Stock; b. declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Class A Preferred Stock, except dividends paid ratably on the Class A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; c. redeem or purchase or otherwise acquire for consideration shares of any stock of the Company ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Class A Preferred Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Company ranking junior (as to dividends and upon dissolution, liquidation and winding up) to the Class A Preferred Stock; or d. redeem or purchase or otherwise acquire for consideration any shares of Class A Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Class A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (2) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under Section 6.2(d)(1), purchase or otherwise acquire such shares at such time and in such manner. (e) Liquidation, Dissolution or Winding Up. Upon any voluntary or involuntary -------------------------------------- liquidation, dissolution or winding up of the affairs of the Company, no distribution shall be made (a) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Class A Preferred Stock, or (b) to the 5. holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Class A Preferred Stock unless each holder of Class A Preferred Stock has received in cash out of the assets of the Company, whether from capital or earnings, available for distribution to the shareholders of the Company, before any amount is paid to the holders of Common Stock, the sum of Ten Dollars ($10.00) per share for each share of Class A Preferred Stock held by the holder, plus an amount equal to the sum of all accumulated and unpaid dividends to the date affixed for the payment of the distribution on the shares of Class A Preferred Stock held by the holder. The sale or transfer by the Company of all or substantially all of its assets shall not, for the purposes of determining preferences and liquidation, be deemed to be a liquidation, dissolution or winding up of the Company. (f) Preemptive Rights. No holder of any shares of Class A Preferred Stock shall ------------------ be entitled as such, as a matter of right, to subscribe for, purchase or receive any part of any class whatsoever, or of securities convertible into or exchangeable for any stock or any class whatsoever, whether now or hereafter authorized or whether issued for cash or other consideration or by way of a dividend. (g) Mandatory Redemption. Unless earlier redeemed or acquired in whole or in -------------------- part by the Company with the consent of the holder, the shares of Class A Preferred Stock that remain issued and outstanding shall expire and and shall be automatically redeemed on December 31, 1999, at par value, plus an amount equal to all accumulated and unpaid dividends, if any, due with respect to the Class A Preferred Stock (collectively, the "Redemption Price"). Redemption shall be in cash out of any funds legally available for the redemption of the Class A Preferred Stock. (h) Rank. The Class A Preferred Stock shall rank, with respect to the payment ---- of dividends and the distribution of assets, senior to all other classes and series of preferred stock. (i) Reacquired Shares. Any shares of Class A Preferred Stock purchased or ----------------- otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of undesignated stock and may be reissued subject to the conditions and restrictions on issuance in the Articles of Incorporation, or in any other Certificate or Designations creating another class or series of stock or as otherwise required by law. (j) Amendment. If any proposed amendment to these Articles of Incorporation --------- would alter or change the preferences, special rights or powers given to the Class A Preferred Stock so as to affect the Class A Preferred Stock adversely, or would authorize the issuance of a class or classes of stock having preferences or rights with respect to dividends or dissolution or the distribution of assets that would be superior to the preferences or rights of the Class A Preferred Stock, then the holders of the Class A Preferred Stock shall be entitled to vote as a series upon such amendment, and the 6. affirmative vote of two-thirds of the outstanding shares of Class A Preferred Stock shall be necessary to the adoption thereof, in addition to such other vote as may be required by law. 6.3) Preemptive Rights. Shareholders shall not have any preemptive or ----------------- preferential rights for or to shares of this Corporation, whether now or hereafter authorized, or to any obligations convertible into shares of this Corporation, or to any options, warrants or other right to acquire shares of this Corporation, or to any subscription or right of subscription therefor, except such, if any, as the Board of Directors in its sole discretion may determine from time to time, and at such price or terms as the Board of Directors may fix. The Board of Directors may, at any time and from time to time, issue and sell for such consideration as may be permitted by law and these Articles of Incorporation, any or all of the authorized shares of the Corporation not then issued and any and all of any stock of any class or series that may hereafter be authorized. 6.4) Issuance of Shares. Subject to this Article 6, the Board of Directors ------------------ may issue any or all shares of the Corporation authorized by these Articles and not already issued, including any shares previously issued and reacquired by the Corporation. Upon approval by the Board of Directors, shares may be issued (i) for any consideration determined appropriate by the Board of Directors, or (ii) for no consideration in order to effectuate share conversions, dividends or splits, including reverse splits. The Board of Directors shall determine the value of non-monetary consideration received for shares. 6.5) Issuance of Rights to Acquire Shares. Subject to Section 6.4, the ------------------------------------ Board of Directors may issue rights to purchase shares of the Corporation, and shall fix the terms, provisions and conditions of such rights to purchase, including the conversion basis and the price at which shares may be purchased or subscribed for. Shares to be issuable upon the exercise of all outstanding rights to purchase, including such rights to be issued, must be authorized by these Articles and not already issued. ARTICLE 7. SHAREHOLDERS All shareholder actions shall require an affirmative vote of the holders of a majority of the voting power of the shares represented and entitled to vote at a duly held meeting, except where the law requires a vote with respect to all outstanding shares of the Corporation, in which case the affirmative vote of a majority of the shares entitled to vote (by class or series if more than one class or series of shares is outstanding and entitled to vote separately as a class or series on such matter) shall be sufficient to authorize the action. ARTICLE 8. NON-CUMULATIVE VOTING Unless otherwise provided in these Articles or in a Certificate of Designation, cumulative voting for directors shall not be permitted. 7. ARTICLE 9. DIRECTORS 9.1) Power; Voting. The Board of Directors shall have the power and ------------- authority to take any action required or permitted by law or by these Articles. The Board of Directors shall take action by the affirmative vote of a majority of directors present at a duly held meeting, except where law requires the affirmative vote of a larger proportion or number. 9.2) Written Action. Any action required or permitted to be taken at a -------------- board meeting may be taken by written action signed by a majority of directors. If the action must also be approved by the shareholders, then the action must be taken by written action of all the directors. 9.3) Indemnification. A director of the Corporation shall not be --------------- personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for (i) liability based on a breach of the duty of loyalty to the Corporation or the shareholders (ii) liability for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) liability under Minnesota Statutes Section 302A.559 or 80A.23; or (iv) liability for any transaction from which the director derived an improper personal benefit. If Chapter 302A, the Minnesota Business Corporation Act, is hereafter amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended Chapter 302A, the Minnesota Business Corporation Act. Any repeal or modification of this Section 9.3 by the shareholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation at the time of such repeal or modification. ARTICLE 10. BYLAWS The Board of Directors may adopt bylaws which may contain any provision relating to the management of the business or the regulation of the affairs of the Corporation not inconsistent with law or these Articles of Incorporation. The power to adopt, amend or repeal the bylaws shall be vested in the Board of Directors. 8. EX-3.2 4 BY-LAWS OF THE COMPANY Exhibit 3.2 BYLAWS OF NETCO COMMUNICATIONS CORPORATION ARTICLE I. OFFICES, CORPORATE SEAL Section 1.01. Registered Office. The registered office of the ----------------- corporation in Minnesota shall be that set forth in the articles of incorporation or in the most recent amendment of the articles of incorporation or resolution of the directors filed with the secretary of state of Minnesota changing the registered office. Section 1.02. Other Offices. The corporation may have such other ------------- offices, within or without the state of Minnesota, as the directors shall, from time to time, determine. Section 1.03. Corporate Seal. The corporation shall have no seal. -------------- ARTICLE II. MEETINGS OF SHAREHOLDERS Section. 2.01. Place and Time of Meetings. Except as provided -------------------------- otherwise by the Minnesota Business Corporation Act, meetings of the shareholders may be held at any place, within or without the state of Minnesota, as may from time to time be designated by the directors and, in the absence of such designation, shall be held at the registered office of the corporation in the state of Minnesota. The directors shall designate the time of day for each meeting and, in the absence of such designation, every meeting of shareholders shall be held at ten o'clock a.m. Section 2.02. Regular Meetings. (a) A regular meeting of the ---------------- shareholders shall be held on such date, as the board of directors shall by resolution establish. (b) Voting as provided in the articles of incorporation and these bylaws, at a regular meeting the shareholders (i) shall elect qualified successors for directors who serve for an indefinite term or whose terms have expired or are due to expire within six months after the date of the meeting and (ii) shall transact such other business as may properly come before them. Bylaws Netco Communications Corporation September 19, 1994 (c) The number of directors to constitute the board of directors shall be determined by the board of directors or by the shareholders (subject to the authority of the board of directors thereafter to increase or decrease the number of directors as permitted by law). Section 2.03. Special Meetings. Special meetings of the shareholders ---------------- may be held at any time and for any purpose and may be called by the chief executive officer, the chief financial officer, two or more directors or by a shareholder or shareholders holding 10% or more of the voting power of all shares entitled to vote, except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or affect a business combination, including any action to change or otherwise affect the composition of the board of directors for that purpose, must be called by 25% or more of the voting power of all shares entitled to vote. A shareholder or shareholders holding the requisite percentage of the voting power of all shares entitled to vote may demand a special meeting of the shareholders by written notice of demand given to the chief executive officer or chief financial officer of the corporation and containing the purposes of the meeting. Within 30 days after receipt of demand by one of those officers, the board of directors shall cause a special meeting of shareholders to be called and held on notice no later than 90 days after receipt of the demand, at the expense of the corporation. Special meetings shall be held on the date and at the time and place fixed by the chief executive officer or the board of directors, except that a special meeting called by or at demand of a shareholder or shareholders shall be held in the county where the principal executive office is located. The business transacted at a special meeting shall be limited to the purposes as stated in the notice of the meeting. Section 2.04. Quorum. Adjourned Meetings. The holders of a majority of -------------------------- the shares entitled to vote shall constitute a quorum for the transaction of business at any regular or special meeting. In case a quorum shall not be present at a meeting, the meeting may be adjourned from time to time without notice other than announcement at the time of adjournment of the date, time and place of the adjourned meeting. If a quorum is present, a meeting may be adjourned from time to time without notice other than announcement at the time of adjournment of the date, time and place of the adjourned meeting. At adjourned meetings at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. If a quorum is present when a meeting is convened, the shareholders present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders originally present to leave less than a quorum. 2 Bylaws Netco Communications Corporation September 19, 1994 Section 2.05. Voting. At each meeting of the shareholders every ------ shareholder having the right to vote shall be entitled to vote either in person or by proxy. Each shareholder, unless the articles of incorporation or statutes provide otherwise, shall have one vote for each share having voting power registered in such shareholder's name on the books of the corporation. Jointly owned shares may be voted by any joint owner unless the corporation receives written notice from any one of them denying the authority of that person to vote those shares. Upon the demand of any shareholder, the vote upon any question before the meeting shall be by ballot. All questions shall be decided by a majority vote of the number of shares entitled to vote and represented at the meeting at the time of the vote except if otherwise required by statute, the articles of incorporation, or these bylaws. Section 2.06. Record Date. The board of directors may fix a date, not ----------- exceeding 60 days preceding the date of any meeting of shareholders, as a record date for the determination of the shareholders entitled to notice of, and to vote at, such meeting, notwithstanding any transfer of shares on the books of the corporation after any record date so fixed. If the board of directors fails to fix a record date for determination of the shareholders entitled to notice of, and to vote at, any meeting of shareholders, the record date shall be the 20th day preceding the date of such meeting. Section 2.07. Notice of Meetings. There shall be mailed to each ------------------ shareholder, shown by the books of the corporation to be a holder of record of voting shares, at his address as shown by the books of the corporation, a notice setting out the time and place of each regular meeting and each special meeting, except (unless otherwise provided in section 2.04 hereof) where the meeting is an adjourned meeting and the date, time and place of the meeting were announced at the time of adjournment, which notice shall be mailed at least five days prior thereto (unless otherwise provided in section 2.04 hereof); except that notice of a meeting at which a plan of merger or exchange is to be considered shall be mailed to all shareholders of record, whether entitled to vote or not, at least fourteen days prior thereto. Every notice of any special meeting called pursuant to section 2.03 hereof shall state the purpose or purposes for which the meeting has been called, and the business transacted at all special meetings shall be confined to the purposes stated in the notice. The written notice of any meeting at which a plan of merger or exchange is to be considered shall so state such as a purpose of the meeting. A copy or short description of the plan of merger or exchange shall be included in or enclosed with such notice. Section 2.08. Waiver of Notice. Notice of any regular or special ---------------- meeting may be waived by any shareholder either before, at or after such meeting orally or in writing signed by such 3 Bylaws Netco Communications Corporation September 19, 1994 shareholder or a representative entitled to vote the shares of such shareholder. A shareholder, by his attendance at any meeting of shareholders, shall be deemed to have waived notice of such meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting. Section 2.09. Written Action. Any action which might be taken at a -------------- meeting of the shareholders may be taken without a meeting if done in writing and signed by all of the shareholders entitled to vote on that action. ARTICLE III. DIRECTORS Section 3.01. General Powers. The business and affairs of the -------------- corporation shall be managed by or under the authority of the board of directors, except as otherwise permitted by statute. Section 3.02. Number, Qualification and Term of Office. Until the ---------------------------------------- organizational meeting of the board of directors, the number of directors shall be the number named in the articles of incorporation. Thereafter, the number of directors shall be increased or decreased from time to time by resolution of the board of directors or the shareholders (subject to the authority of the board of directors thereafter to increase or decrease the number of directors as permitted by law). Directors need not be shareholders. Each of the directors shall hold office until the regular meeting of shareholders next held after such director's election and until such director's successor shall have been elected and shall qualify, or until the earlier death, resignation, removal, or disqualification of such director. Section 3.03. Board Meetings. Meetings of the board of directors may -------------- be held from time to time at such time and place within or without the state of Minnesota as may be designated in the notice of such meeting. Section 3.04. Calling Meetings: Notice. Meetings of the board of ------------------------ directors may be called by the chairman of the board by giving at least twenty-four hours' notice, or by any other director by giving at least five days' notice, of the date, time and place thereof to each director by mail, telephone, telegram or in person. If the day or date, time and place of a meeting of the board of directors has been announced at a previous meeting of the board, no notice is required. Notice of an adjourned meeting of the board of directors need not be given other than by announcement at the meeting at which adjournment is taken. 4 Bylaws Netco Communications Corporation September 19, 1994 Section 3.05. Waiver of Notice. Notice of any meeting of the board of ---------------- directors may be waived by any director either before, at, or after such meeting orally or in writing signed by such director. A director, by his attendance at any meeting of the board of directors, shall be deemed to have waived notice of such meeting, except where the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and does not participate thereafter in the meeting. Section 3.06. Quorum. A majority of the directors holding office ------ immediately prior to a meeting of the board of directors shall constitute a quorum for the transaction of business at such meeting. Section 3.07. Absent Directors. A director may give advance written ---------------- consent or opposition to a proposal to be acted on at a meeting of the board of directors. If such director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected. Section 3.08. Conference Communications. Any or all directors may ------------------------- participate in any meeting of the board of directors, or of any duly constituted committee thereof, by any means of communication through which the directors may simultaneously hear each other during such meeting. For the purposes of establishing a quorum and taking any action at the meeting, such directors participating pursuant to this section 3.08 shall be deemed present in person at the meeting; and the place of the meeting shall be the place of origination of the conference telephone conversation or other comparable communication technique. Section 3.09. Vacancies: Newly Created Directorships. Vacancies on the -------------------------------------- board of directors of this corporation occurring by reason of death, resignation, removal or disqualification shall be filled for the unexpired term by a majority of the remaining directors of the board although less than a quorum; newly created directorships resulting from an increase in the authorized number of directors by action of the board of directors as permitted by section 3.02 may be filled by a majority vote of the directors serving at the time of such increase; and each director elected pursuant to this section 3.09 shall be a director until such director's successor is elected by the shareholders at their next regular or special meeting. 5 Bylaws Netco Communications Corporation September 19, 1994 Section 3.10. Removal. Any or all of the directors may be removed from ------- office at any time, with or without cause, by the affirmative vote of the shareholders holding a majority of the shares entitled to vote at an election of directors except, as otherwise provided by the Minnesota Business Corporation Act, section 302A.223, as amended, if, for any reason, shareholders become entitled to cumulate their votes for the election of directors. A director named by the board of directors to fill a vacancy may be removed from office at any time, with or without cause, by the affirmative vote of the remaining directors if the shareholders have not elected directors in the interim between the time of the appointment to fill such vacancy and the time of the removal. In the event that the entire board or any one or more directors be so removed, new directors may be elected at the same meeting. Section 3.11. Committees. A resolution approved by the affirmative ---------- vote of a majority of the board of directors may establish committees having the authority of the board in the management of the business of the corporation to the extent provided in the resolution. A committee shall consist of one or more persons, who need not be directors, appointed by affirmative vote of a majority of the directors present. Committees are subject to the direction and control of, and vacancies in the membership thereof shall be filled by, the board of directors, except as provided by the Minnesota Business Corporation Act, section 302A.243. A majority of the members of the committee present at a meeting is a quorum for the transaction of business, unless a larger or smaller proportion or number is provided in a resolution approved by the affirmative vote of a majority of the directors present. Section 3.12. Written Action. Any action which might be taken at a -------------- meeting of the board of directors, or any duly constituted committee thereof, may be taken without a meeting if done in writing and signed by all of the directors or committee members, unless the articles provide otherwise and the action need not be approved by the shareholders. Section 3.13. Compensation. Directors who are not salaried officers of ------------ this corporation shall receive such fixed sum per meeting attended or such fixed annual sum as shall be determined, from time to time, by resolution of the board of directors. The board of directors may, by resolution, provide that all directors shall receive their expenses, if any, of attendance at meetings of the board of directors or any committee thereof. Nothing herein contained shall be construed to preclude any director from serving this corporation in any other capacity and receiving proper compensation therefor. 6 Bylaws Netco Communications Corporation September 19, 1994 ARTICLE IV. OFFICERS Section 4.01. Number. The officers of the corporation shall consist of ------ a chairman of the board (if one is elected by the board), the president, one or more vice presidents (if desired by the board), a treasurer, a secretary (if one is elected by the board) and such other officers and agents as may, from time to time, be elected by the board of directors. Any number of offices may be held by the same person. Section 4.02. Election, Term of Office and Qualifications. The board ------------------------------------------- of directors shall elect or appoint, by resolution approved by the affirmative vote of a majority of the directors present, from within or without their number, the president, treasurer and such other officers as may be deemed advisable, each of whom shall have the powers, rights, duties, responsibilities, and terms in office provided for in these bylaws or a resolution of the board of directors not inconsistent therewith. The president and all other officers who may be directors shall continue to hold office until the election and qualification of their successors, notwithstanding an earlier termination of their directorship. Section 4.03. Removal and Vacancies. Any officer may be removed from --------------------- his office by the board of directors at any time, with or without cause. Such removal, however, shall be without prejudice to the contract rights of the person so removed. If there be a vacancy in an office of the corporation by reason of death, resignation or otherwise, such vacancy shall be filled for the unexpired term by the board of directors. Section 4.04. Chairman of the Board. The chairman of the board, if one --------------------- is elected, shall preside at all meetings of the shareholders and directors and shall have such other duties as may be prescribed, from time to time, by the board of directors. Section 4.05. President. The president shall be the chief executive --------- officer and shall have general active management of the business of the corporation. In the absence of the chairman of the board, he shall preside at all meetings of the shareholders and directors. He shall see that all orders and resolutions of the board of directors are carried into effect. He shall execute and deliver, in the name of the corporation, any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the corporation unless the authority to execute and deliver is required by law to be exercised by another person or is expressly delegated by the articles or bylaws or by the board of directors to some other officer or agent of the corporation. He shall maintain records of and, whenever necessary, certify all 7 Bylaws Netco Communications Corporation September 19, 1994 proceedings of the board of directors and the shareholders, and in general, shall perform all duties usually incident to the office of the president. He shall have such other duties as may, from time to time, be prescribed by the board of directors. Section 4.06. Vice President. Each vice president, if one or more is -------------- elected, shall have such powers and shall perform such duties as prescribed by the board of directors or by the president. In the event of the absence or disability of the president, the vice president(s) shall succeed to his power and duties in the order designated by the board of directors. Section 4.07. Secretary. The secretary, if one is elected, shall be --------- secretary of and shall attend all meetings of the shareholders and board of directors and shall record all proceedings of such meetings in the minute book of the corporation. He shall give proper notice of meetings of shareholders and directors. He shall perform such other duties as may, from time to time, be prescribed by the board of directors or by the president. Section 4.08. Treasurer. The treasurer shall be the chief financial --------- officer and shall keep accurate financial records for the corporation. He shall deposit all moneys, drafts and checks in the name of, and to the credit of, the corporation in such banks and depositories as the board of directors shall, from time to time, designate. He shall have power to endorse, for deposit, all notes, checks and drafts received by the corporation. He shall disburse the funds of the corporation, as ordered by the board of directors, making proper vouchers therefor. He shall render to the president and the directors, whenever requested, an account of all his transactions as treasurer and of the financial condition of the corporation, and shall perform such other duties as may, from time to time, be prescribed by the board of directors or by the president. Section 4.09. Compensation. The officers of the corporation shall ------------ receive such compensation for their services as may be determined, from time to time, by resolution of the board of directors. ARTICLE V. SHARES AND THEIR TRANSFER Section 5.01. Certificates for Shares. All shares of the corporation ----------------------- shall be certificated shares. Every owner of shares of the corporation shall be entitled to a certificate, to be in such form as shall be prescribed by the board of directors, certifying the number of shares of the corporation owned by such shareholder. The certificates for such shares shall be numbered 8 Bylaws Netco Communications Corporation September 19, 1994 in the order in which they shall be issued and shall be signed, in the name of the corporation, by the president and by the secretary or an assistant secretary or by such officers as the board of directors may designate. If the certificate is signed by a transfer agent or registrar, such signatures of the corporate officers may be by facsimile if authorized by the board of directors. Every certificate surrendered to the corporation for exchange or transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except in cases provided for in section 5.04. Section 5.02. Issuance of Shares. The board of directors is authorized ------------------ to cause to be issued shares of the corporation up to the full amount authorized by the articles of incorporation in such amounts as may be determined by the board of directors and as may be permitted by law. Shares may be issued for any consideration, including, without limitation, in consideration of cash or other property, tangible or intangible, received or to be received by the corporation under a written agreement, of services rendered or to be rendered to the corporation under a written agreement, or of an amount transferred from surplus to stated capital upon a share dividend. At the time of approval of the issuance of shares, the board of directors shall state, by resolution, its determination of the fair value to the corporation in monetary terms of any consideration other than cash for which shares are to be issued. Section 5.03. Transfer of Shares. Transfer of shares on the books of ------------------ the corporation may be authorized only by the shareholder named in the certificate, or the shareholder's legal representative, or the shareholder's duly authorized attorney-in-fact, and upon surrender of the certificate or the certificates for such shares. The corporation may treat as the absolute owner of shares of the corporation, the person or persons in whose name shares are registered on the books of the corporation. Section 5.04. Loss of Certificates. Except as otherwise provided by -------------------- the Minnesota Business Corporation Act, section 302A.419, any shareholder claiming a certificate for shares to be lost, stolen, or destroyed shall make an affidavit of that fact in such form as the board of directors shall require and shall, if the board of directors so requires, give the corporation a bond of indemnity in form, in an amount, and with one or more sureties satisfactory to the board of directors, to indemnify the corporation against any claim which may be made against it on account of the reissue of such certificate, whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to have been lost, stolen or destroyed. 9 Bylaws Netco Communications Corporation September 19, 1994 ARTICLE VI. DISTRIBUTIONS, RECORD DATE Section 6.01. Distributions. Subject to the provisions of the articles ------------- of incorporation, of these bylaws, and of law, the board of directors may authorize and cause the corporation to make distributions whenever, and in such amounts or forms as, in its opinion, are deemed advisable. Section 6.02. Record Date. Subject to any provisions of the articles ----------- of incorporation, the board of directors may fix a date not exceeding 120 days preceding the date fixed for the payment of any distribution as the record date for the determination of the shareholders entitled to receive payment of the distribution and, in such case, only shareholders of record on the date so fixed shall be entitled to receive payment of such distribution notwithstanding any transfer of shares on the books of the corporation after the record date. ARTICLE VII. BOOKS AND RECORDS, FISCAL YEAR Section 7.01. Share Register. The board of directors of the -------------- corporation shall cause to be kept at its principal executive office, or at another place or places within the United States determined by the board: (1) a share register not more than one year old, containing the names and addresses of the shareholders and the number and classes of shares held by each shareholder; and (2) a record of the dates on which certificates or transaction statements representing shares were issued. Section 7.02. Other Books and Records. The board of directors shall ----------------------- cause to be kept at its principal executive office, or, if its principal executive office is not in Minnesota, shall make available at its Minnesota registered office within ten days after receipt by an officer of the corporation of a written demand for them made by a shareholder or other person authorized by the Minnesota Business Corporation Act, section 302A.461, originals or copies of: (1) records of all proceedings of shareholders for the last three years; 10 Bylaws Netco Communications Corporation September 19, 1994 (2) records of all proceedings of the board for the last three years; (3) its articles and all amendments currently in effect; (4) its bylaws and all amendments currently in effect; (5) financial statements required by the Minnesota Business Corporation Act, section 302A.463 and the financial statements for the most recent interim period prepared in the course of the operation of the corporation for distribution to the shareholders or to a governmental agency as a matter of public record; (6) reports made to shareholders generally within the last three years; (7) a statement of the names and usual business addresses of its directors and principal officers; and (8) any shareholder voting or control agreements of which the corporation is aware. Section 7.03. Fiscal Year. The fiscal year of the corporation shall be ----------- determined by the board of directors. ARTICLE VIII. LOANS, GUARANTEES, SURETYSHIP Section 8.01. The corporation may lend money to, guarantee an obligation of, become a surety for, or otherwise financially assist a person if the transaction, or a class of transactions to which the transaction belongs, is approved by the affirmative vote of a majority of the directors present, and: (1) is in the usual and regular course of business of the corporation; (2) is with, or for the benefit of, a related corporation, an organization in which the corporation has a financial interest, an organization with which the corporation has a business relationship, or an organization to which the corporation has the power to make donations; 11 Bylaws Netco Communications Corporation September 19, 1994 (3) is with, or for the benefit of, an officer or other employee of the corporation or a subsidiary, including an officer or employee who is a director of the corporation or a subsidiary, and may reasonably be expected, in the judgment of the board, to benefit the corporation; or (4) has been approved by (a) the holders of two-thirds of the voting power of the shares entitled to vote which are owned by persons other than the interested person or persons, or (b) the unanimous affirmative vote of the holders of all outstanding shares whether or not entitled to vote. Such loan, guarantee, surety contract or other financial assistance may be with or without interest, and may be unsecured, or may be secured in the manner as a majority of the directors present approve, including, without limitation, a pledge of or other security interest in shares of the corporation. Nothing in this section shall be deemed to deny, limit or restrict the powers of guaranty, surety or warranty of the corporation at common law or under a statute of the state of Minnesota. ARTICLE IX. INDEMNIFICATION OF CERTAIN PERSONS Section 9.01. The corporation shall indemnify all officers and directors of the corporation, for such expenses and liabilities, in such manner, under such circumstances and to such extent as permitted by Minnesota Business Corporation Act section 302A.521, as now enacted or hereafter amended. Unless otherwise approved by the board of directors, the corporation shall not indemnify any employee of the corporation who is not otherwise entitled to indemnification pursuant to the prior sentence of this section 9.01. ARTICLE X. AMENDMENTS Section 10.01. These bylaws may be amended or altered by a vote of the majority of the whole board of directors at any meeting. Such authority of the board of directors is subject to the power of the shareholders, exercisable in the manner provided in the Minnesota Business Corporation Act, section 302A.181, subd. 3, to adopt, amend, repeal bylaws adopted, amended, or repealed by the board of directors. After the adoption of the initial bylaws, the board of directors shall not make or alter any bylaws fixing a 12 Bylaws Netco Communications Corporation September 19, 1994 quorum for meetings of shareholders, prescribing procedures for removing directors or filling vacancies in the board of directors, or fixing the number of directors or their classifications, qualifications, or terms of office, except that the board of directors may adopt or amend any bylaw to increase their number. ARTICLE XI. SECURITIES OF OTHER CORPORATIONS Section 11.01. Voting Securities Held by the Corporation. Unless ----------------------------------------- otherwise ordered by the board of directors, the president shall have full power and authority on behalf of the corporation (a) to attend any meeting of security holders of other corporations in which the corporation may hold securities and to vote such securities on behalf of this corporation; (b) to execute any proxy for such meeting on behalf of the corporation; or (c) to execute a written action in lieu of a meeting of such other corporation on behalf of this corporation. At such meeting, the President shall possess and may exercise any and all rights and powers incident to the ownership of such securities that the corporation possesses. The board of directors may, from time to time, grant such power and authority to one or more other persons and may remove such power and authority from the president or any other person or persons. Section 11.02. Purchase and Sale of Securities. Unless otherwise ------------------------------- ordered by the board of directors, the president shall have full power and authority on behalf of the corporation to purchase, sell, transfer or encumber any and all securities of any other corporation owned by the corporation, and may execute and deliver such documents as may be necessary to effectuate such purchase, sale, transfer or encumbrance. The board of directors may, from time to time, confer like powers upon any other person or persons. AUTHENTICATION The foregoing bylaws of Netco Communications Corporation were duly adopted by the corporation on September 19, 1994. /s/ George H. Frisch ----------------------------- 13 EX-4.1 5 INDENTURE DATED AS OF MARCH 5, 1998 ================================================================================ Exhibit 4.1 WAM!NET INC., as Issuer, and FIRST TRUST NATIONAL ASSOCIATION, as Trustee ------------------------------------ INDENTURE Dated as of March 5, 1998 ------------------------------------ $208,530,000 13 1/4% Senior Discount Notes due 2005, Series A 13 1/4 Senior Discount Notes due 2005, Series B ================================================================================ Reconciliation and tie between Trust Indenture Act of 1939, as amended, and Indenture, dated as of March 5, 1998 TRUST INDENTURE INDENTURE ACT SECTION SECTION - --------------- --------- ss. 310 (a) (1) ...................................... 6.09 (a) (2) ...................................... 6.09 (a) (3) ...................................... Not Applicable (a) (4) ...................................... 6.05 (b) ...................................... 6.05, 6.08 6.10 ss. 311 (a) ...................................... 6.07 (b) ...................................... 6.07 (c) ...................................... Not Applicable ss. 312 (a) ...................................... 3.05, 7.01 (b) ...................................... 7.02 (c) ...................................... 7.02 ss. 313 (a) ...................................... 7.03 (b) ...................................... 7.03 (c) ...................................... 7.03 (d) ...................................... 7.03 ss. 314 (a) ...................................... 10.09 (b) ...................................... Not Applicable (c) (1) ...................................... 1.04, 4.04(10), 10.21, 12.01, 13.03, 13.04 (c) (2) ...................................... 1.04, 4.04(10), 10.21, 12.01, 13.03, 13.04 (c) (3) ...................................... Not Applicable (d) ...................................... Not Applicable (e) ...................................... 1.04 ss. 315 (a) ...................................... 6.01(a) (b) ...................................... 6.02 (c) ...................................... 6.01(b) (d) ...................................... 6.01(c) (e) ...................................... 5.14 ss. 316 (a) (last sentence)........................... 3.14 (a) (1) (A).................................... 5.12 (a) (1) (B).................................... 5.13 (a) (2) ...................................... Not Applicable (b) ...................................... 5.08 (c) ...................................... Not Applicable ss. 317 (a) (1) ...................................... 5.03 (a) (2) ...................................... 5.04 (b) ...................................... 10.03 ss. 318 (a) ...................................... 1.08 TABLE OF CONTENTS Page ---- RECITALS .................................................................... 1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.01. Definitions................................................... 1 Section 1.02. Other Definitions............................................. 25 Section 1.03. Rules of Construction......................................... 26 Section 1.04. Form of Documents Delivered to Trustee........................ 27 Section 1.05. Acts of Holders............................................... 27 Section 1.06. Notices, etc., to the Trustee, the Company and the Subsidiary Guarantors.................................................. 28 Section 1.07. Notice to Holders; Waiver..................................... 28 Section 1.08. Conflict with Trust Indenture Act............................. 29 Section 1.09. Effect of Headings and Table of Contents...................... 29 Section 1.10. Successors and Assigns........................................ 29 Section 1.11. Separability Clause........................................... 29 Section 1.12. Benefits of Indenture......................................... 30 Section 1.13. GOVERNING LAW................................................. 30 Section 1.14. No Recourse Against Others.................................... 30 Section 1.15. Independence of Covenants..................................... 30 Section 1.16. Exhibits...................................................... 30 Section 1.17. Counterparts.................................................. 30 Section 1.18. Duplicate Originals........................................... 30 ARTICLE TWO FORM OF NOTES; FORM OF NOTATION OF SUBSIDIARY GUARANTEES Section 2.01. Form and Dating............................................... 31 ARTICLE THREE THE NOTES AND THE SUBSIDIARY GUARANTEES Section 3.01. Title and Terms............................................... 31 Section 3.02. Registrar and Paying Agent.................................... 32 Section 3.03. Execution and Authentication.................................. 32 Section 3.04. Temporary Notes............................................... 34 -i- Section 3.05. Transfer and Exchange......................................... 34 Section 3.06. Mutilated, Destroyed, Lost and Stolen Notes................... 35 Section 3.07. Payment of Interest; Interest Rights Preserved................ 36 Section 3.08. Persons Deemed Owners......................................... 37 Section 3.09. Cancellation.................................................. 37 Section 3.10. Computation of Interest....................................... 38 Section 3.11. Legal Holidays................................................ 38 Section 3.12. CUSIP and CINS Numbers........................................ 38 Section 3.13. Paying Agent To Hold Money in Trust........................... 38 Section 3.14. Treasury Notes................................................ 39 Section 3.15. Deposits of Monies............................................ 39 Section 3.16. Book-Entry Provisions for Global Notes........................ 39 Section 3.17. Special Transfer Provisions................................... 40 Section 3.18. Component of Unit............................................. 43 ARTICLE FOUR DEFEASANCE OR COVENANT DEFEASANCE Section 4.01. Company's Option To Effect Defeasance or Covenant Defeasance.. 44 Section 4.02. Defeasance and Discharge...................................... 44 Section 4.03. Covenant Defeasance........................................... 44 Section 4.04. Conditions to Defeasance or Covenant Defeasance. ......... 45 Section 4.05. Deposited Money and U.S. Government Obligations To Be Held in Trust; Other Miscellaneous Provisions....................... 47 Section 4.06. Reinstatement................................................. 47 ARTICLE FIVE REMEDIES Section 5.01. Events of Default............................................. 48 Section 5.02. Acceleration of Maturity Rescission and Annulment............. 50 Section 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee.................................................. 50 Section 5.04. Trustee May File Proofs of Claims............................. 51 Section 5.05. Trustee May Enforce Claims Without Possession of Notes........ 52 Section 5.06. Application of Money Collected................................ 52 Section 5.07. Limitation on Suits........................................... 53 Section 5.08. Unconditional Right of Holders To Receive Principal, Premium and Interest.................................................. 53 Section 5.09. Restoration of Rights and Remedies............................ 54 Section 5.10. Rights and Remedies Cumulative................................ 54 Section 5.11. Delay or Omission Not Waiver.................................. 54 Section 5.12. Control by Majority........................................... 54 Section 5.13. Waiver of Past Defaults....................................... 55 -ii- Section 5.14. Undertaking for Costs......................................... 55 Section 5.15. Waiver of Stay, Extension or Usury Laws....................... 55 Section 5.16. Unconditional Right of Holders To Receive Payment............. 56 ARTICLE SIX THE TRUSTEE Section 6.01. Certain Duties and Responsibilities........................... 56 Section 6.02. Notice of Defaults............................................ 57 Section 6.03. Certain Rights of Trustee..................................... 57 Section 6.04. Trustee Not Responsible for Recitals, Dispositions of Notes or Application of Proceeds Thereof.......................... 58 Section 6.05. Trustee and Agents May Hold Notes; Collections; Etc........... 59 Section 6.06. Money Held in Trust........................................... 59 Section 6.07. Compensation and Indemnification of Trustee and Its Prior Claim................................................. 59 Section 6.08. Conflicting Interests......................................... 60 Section 6.09. Corporate Trustee Required; Eligibility....................... 60 Section 6.10. Resignation and Removal; Appointment of Successor Trustee..... 60 Section 6.11. Acceptance of Appointment by Successor........................ 62 Section 6.12. Merger, Conversion, Amalgamation, Consolidation or Succession to Business...................................... 62 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY Section 7.01. Preservation of Information; Company To Furnish Trustee Names and Addresses of Holders.................................... 63 Section 7.02. Communications of Holders..................................... 63 Section 7.03. Reports by Trustee............................................ 64 ARTICLE EIGHT CONSOLIDATION, MERGER, SALE OF ASSETS, ETC. Section 8.01. Company May Consolidate, etc., Only on Certain Terms.......... 64 Section 8.02. Successor Substituted......................................... 65 ARTICLE NINE SUPPLEMENTAL INDENTURES AND WAIVERS Section 9.01. Supplemental Indentures, Agreements and Waivers Without Consent of Holders.......................................... 65 Section 9.02. Supplemental Indentures, Agreements and Waivers with Consent of Holders. ................................................ 66 -iii- Section 9.03. Execution of Supplemental Indentures, Agreements and Waivers.. 67 Section 9.04. Effect of Supplemental Indentures............................. 68 Section 9.05. Conformity with Trust Indenture Act........................... 68 Section 9.06. Reference in Notes to Supplemental Indentures................. 68 Section 9.07. Record Date................................................... 68 Section 9.08. Revocation and Effect of Consents.............................69 ARTICLE TEN COVENANTS Section 10.01. Payment of Principal, Premium and Interest.................... 69 Section 10.02. Maintenance of Office or Agency............................... 69 Section 10.03. Money for Note Payments To Be Held in Trust................... 70 Section 10.04. Corporate Existence........................................... 71 Section 10.05. Payment of Taxes and Other Claims............................. 71 Section 10.06. Maintenance of Properties..................................... 72 Section 10.07. Insurance..................................................... 72 Section 10.08. Books and Records............................................. 72 Section 10.09. Provision of SEC Reports...................................... 72 Section 10.10. Change of Control............................................. 73 Section 10.11. Limitation on Additional Indebtedness......................... 75 Section 10.12. Statement by Officers as to Default........................... 76 Section 10.13. Limitation on Restricted Payments............................. 76 Section 10.14. Limitation on Transactions with Affiliates.................... 79 Section 10.15. Disposition of Proceeds of Asset Sales........................ 80 Section 10.16. Limitation on Liens Securing Certain Indebtedness............. 84 Section 10.17. Limitations on Status as Investment Company................... 84 Section 10.18. Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries..................................... 84 Section 10.19. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries........................... 85 Section 10.20. Limitation on Designations of Unrestricted Subsidiaries....... 85 Section 10.21. Compliance Certificates and Opinions.......................... 86 Section 10.22. Issuance of Guarantees by Material Restricted Subsidiaries; Limitation on Guarantees by Other Restricted Subsidiaries... 87 Section 10.23. Registration Rights........................................... 88 Section 10.24. Warrant Agreement............................................. 89 ARTICLE ELEVEN SATISFACTION AND DISCHARGE Section 11.01. Satisfaction and Discharge of Indenture....................... 89 Section 11.02. Application of Trust Money.................................... 90 -iv- ARTICLE TWELVE REDEMPTION Section 12.01. Notices to the Trustee........................................ 91 Section 12.02. Selection of Notes To Be Redeemed............................. 91 Section 12.03. Notice of Redemption.......................................... 91 Section 12.04. Effect of Notice of Redemption................................ 92 Section 12.05. Deposit of Redemption Price................................... 92 Section 12.06. Notes Redeemed or Purchased in Part........................... 93 ARTICLE THIRTEEN SUBSIDIARY GUARANTEES Section 13.01. Unconditional Guarantee....................................... 93 Section 13.02. Limitation of Liability....................................... 95 Section 13.03. Subsidiary Guarantors May Consolidate, etc., on Certain Terms............................................... 95 Section 13.04. Release of a Subsidiary Guarantor............................. 96 Section 13.05. Successor and Assigns......................................... 97 Section 13.06. No Waiver. ................................................... 97 Section 13.07. Modification. ................................................ 97 Section 13.08. Severability.................................................. 97 EXHIBIT A-1 - Form of WAM!NET Inc.13 1/4% Senior Discount Notes due 2005, Series A EXHIBIT A-2 - Form of WAM!NET Inc.13 1/4% Senior Discount Notes due 2005, Series B EXHIBIT B - Form of Notation on Notes Relating to Subsidiary Guarantees EXHIBIT C - Form of Legend for Book-Entry Securities EXHIBIT D - Form of Certificate To Be Delivered in Connection with Transfers to Non-QIB Accredited Investors EXHIBIT E - Form of Certificate To Be Delivered in Connection with Transfers Pursuant to Regulation S EXHIBIT F - Form of Supplemental Indenture EXHIBIT G - Form of Registration Rights Agreement EXHIBIT H - Form of Warrant Agreement -v- INDENTURE INDENTURE, dated as of March 5, 1998, between WAM!NET INC., a corporation incorporated under the laws of the State of Minnesota, as issuer (the "Company"), and FIRST TRUST NATIONAL ASSOCIATION, a national banking corporation, as trustee (the "Trustee"). RECITALS The Company has duly authorized the creation of an issue of (i) 13 1/4% Senior Discount Notes due 2005, Series A, and (ii) 13 1/4% Senior Discount Notes due 2005, Series B, to be issued in exchange for the 13 1/4% Senior Discount Notes due 2005, Series A, pursuant to the Registration Rights Agreement (the "Notes"; such term to include the Initial Notes, the Private Exchange Notes, if any, and the Unrestricted Notes, if any, treated as a single class of securities under this Indenture), of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. All things necessary have been done to make the Notes, when executed by the Company, and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company and to make this Indenture a valid agreement of each of the Company and the Trustee in accordance with the terms hereof. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Notes by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders (as hereinafter defined) of the Notes, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.01. DEFINITIONS. "Accreted Value" means, as of any date (the "Specified Date"), with respect to each $1,000 principal face amount of Notes: (i) if the Specified Date is one of the following dates (each a "Semi-Annual Accrual Date"), the amount set forth opposite such date below: SEMI-ANNUAL ACCRETED ACCRUAL DATE VALUE - ------------ ------ Issue Date ............................................. $599.44 September 1, 1998 ............................................. 638.24 March 1, 1999 ............................................. 680.53 September 1, 1999 ............................................. 725.61 March 1, 2000 ............................................. 773.68 September 1, 2000 ............................................. 824.94 March 1, 2001 ............................................. 879.59 September 1, 2001 ............................................. 937.87 March 1, 2002 ............................................. 1,000.00 (ii) if the Specified Date occurs between two Semi-Annual Accrual Dates, the sum of (a) the Accreted Value for the Semi-Annual Accrual Date immediately preceding the Specified Date and (b) an amount equal to the product of (x) the Accreted Value for the Semi-Annual Accrual Date immediately following the Specified Date less the Accreted Value for the Semi-Annual Accrual Date immediately preceding the Specified Date and (y) a fraction, the numerator of which is the number of days actually elapsed from the immediately preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day year of twelve 30-day months, and the denominator of which is 180; and (iii) if the Specified Date is after March 1, 2002, $1,000. "Acquired Indebtedness" means Indebtedness of a person (i) assumed in connection with an Asset Acquisition from such person or (ii) existing at the time such person is merged or consolidated with or into the Company or any Restricted Subsidiary or becomes a Restricted Subsidiary, in each case not incurred in connection with, or in anticipation of, such Asset Acquisition or merger or consolidation or such person becoming a Restricted Subsidiary; provided that Indebtedness of such person which is redeemed, defeased, retired or otherwise repaid at the time of or immediately upon consummation of such Asset Acquisition or the transactions by which such person is merged or consolidated with or into the Company or any Restricted Subsidiary or becomes a Restricted Subsidiary shall not constitute Acquired Indebtedness. "Affiliate" of any specified person means any other person which, directly or indirectly, controls, is controlled by or is under direct or indirect common control with, such specified person. For the purposes of this definition, "control" when used with respect to any person -2- means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. "Asset Acquisition" means (i) any capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others) by the Company or any Restricted Subsidiary in any other person, or any acquisition or purchase of Capital Stock of any other person by the Company or any Restricted Subsidiary, in either case pursuant to which such person shall (a) become a Restricted Subsidiary or (b) shall be merged or consolidated with or into the Company or any Restricted Subsidiary or (ii) any acquisition by the Company or any Restricted Subsidiary of the assets of any person which constitute substantially all of an operating unit or line of business of such person or which is otherwise outside of the ordinary course of business. "Asset Sale" means any direct or indirect sale, conveyance, transfer or lease (that has the effect of a disposition and is not for security purposes) or other disposition (that is not for security purposes) to any person other than the Company or a Wholly Owned Restricted Subsidiary, in one transaction or a series of related transactions, of (i) any Capital Stock of any Restricted Subsidiary, (ii) any assets of the Company or any Restricted Subsidiary which constitute substantially all of an operating unit or line of business of the Company and the Restricted Subsidiaries or (iii) any other property or asset of the Company or any Restricted Subsidiary outside of the ordinary course of business. For the purposes of this definition, the term "Asset Sale" shall not include (i) any disposition of properties and assets of the Company that is governed under Article Eight, (ii) sales of property or equipment that have become worn out, obsolete or damaged or otherwise unsuitable for use in connection with the business of the Company or any Restricted Subsidiary, as the case may be, and (iii) for purposes of Section 10.15 hereof, sales, conveyances, transfers, leases or other dispositions of property or assets, whether in one transaction or a series of related transactions occurring within one year, either (x) involving assets with a Fair Market Value not in excess of $1 million in any 12 month period, or (y) which constitutes the incurrence of a Capitalized Lease Obligation. "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the interest rate implicit in the terms of the lease included in such Sale/Leaseback Transaction) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction (including any period for which such lease has been extended). "Average Life to Stated Maturity" means, with respect to any Indebtedness, as at any date of determination, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from such date to the date or dates of each successive scheduled principal payment (including, without limitation, any sinking fund requirements) of such Indebtedness multiplied by (b) the amount of each such principal payment by (ii) the sum of all such principal payments; -3- provided that, in the case of any Capitalized Lease Obligation, all calculations hereunder shall give effect to any applicable options to renew in favor of the Company or any Restricted Subsidiary. "Bankruptcy Law" means Title 11, United States Code or any similar federal or state law relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or relief of debtors or the law of any other jurisdiction relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or relief of debtors or any amendment to, succession to or change in any such law. "Bankruptcy Order" means any court order made in a proceeding pursuant to or within the meaning of any Bankruptcy Law, containing an adjudication of bankruptcy or insolvency, or providing for liquidation, receivership, winding-up, dissolution or reorganization, or appointing a Custodian of a debtor or of all or any substantial part of a debtor's property, or providing for the staying, arrangement, adjustment or composition of indebtedness or other relief of a debtor. "Board" means the Board of Directors of the Company. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York, New York or Minneapolis, Minnesota are authorized or obligated by law, regulation or executive order to close. "Capital Stock" means, with respect to any person, any and all shares, interests, participations, rights in, or other equivalents (however designated and whether voting and/or non-voting) of, such person's capital stock, whether outstanding on the Issue Date or issued after the Issue Date, and any and all rights (other than any evidence of Indebtedness), warrants or options exchangeable for or convertible into such capital stock. "Capitalized Lease Obligation" means any obligation to pay rent or other amounts under a lease of (or other agreement conveying the right to use) any property (whether real, personal or mixed, immovable or movable) that is required to be classified and accounted for as a capitalized lease obligation under GAAP, and for the purpose of this Indenture, the amount of such obligation at any date shall be the capitalized amount thereof at such date, determined in accordance with GAAP. "Cash Equivalents" means (i) any evidence of Indebtedness with a maturity of 365 days or less issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof or such Indebtedness constitutes a general obligation of such country); (ii) deposits, certificates of deposit or acceptances with a maturity of 365 days or less of any financial institution -4- that is a member of the Federal Reserve System, in each case having combined capital and surplus and undivided profits (or any similar capital concept) of not less than $500.0 million and whose senior unsecured debt is rated at least "A-l" by S&P or "P-l" by Moody's; (iii) commercial paper with a maturity of 365 days or less issued by a corporation (other than an Affiliate of the Company) organized under the laws of the United States or any State thereof and rated at least "A-l" by S&P or "P-1" by Moody's; (iv) repurchase agreements and reverse repurchase agreements relating to marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States Government maturing within 365 days from the date of acquisition; (v) money market funds in the United States which invest substantially all of their assets in securities of the type described in any of the preceding clauses (i) through (iv); and (vi) any evidence of Indebtedness with a maturity of 365 days or less issued by WorldCom and rated at least "BBB-" or "A2" by S&P and at least "Baa3" or "P2" by Moody's. "Cedel" means Cedel Bank, Societe Anonyme. "Change of Control" means the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) or 14(d) of the Exchange Act), excluding Permitted Holders, is or becomes the "beneficial owner" (as defined in Rules 13d-3 or 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has or acquires the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total voting power of all Voting Stock of the Company (unless the Permitted Holders "beneficially own" (as so defined), directly or indirectly, in the aggregate a greater percentage of the voting power of the Voting Stock of the Company) or has, directly or indirectly, the right to elect or designate a majority of the Board or (b) the Company consolidates with, or merges with or into, another person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any person, or any person consolidates with, or mergers with or into, the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where (i) the outstanding Voting Stock of the Company is converted into or exchanged for (1) Voting Stock (other than Disqualified Stock) of the surviving or transferee corporation or its parent corporation and/or (2) cash, securities and other property in any amount which could be paid by the Company as a Restricted Payment under this Indenture, (ii) the "beneficial owners" (as so defined) of the Voting Stock of the Company immediately before such transaction own, directly or indirectly, immediately after such transaction, at least a majority of the voting power of all Voting Stock of the surviving or transferee corporation or its parent corporation immediately after such transaction, as applicable, or (iii) no "person" or "group" (as such terms are used in Sections 13(d) or 14(d) of the Exchange Act), excluding the Permitted Holders, is the "beneficial owner" (as so defined), directly or indirectly, of more than 35% of the Voting Stock or such surviving or transferee corporation or its parent corporation, as applicable (unless the Permitted Holders "beneficially own" (as so defined), directly or indirectly, in the aggregate a greater percentage of the voting power of the Voting Stock of such surviving or transferee corporation or its parent corporation (as the case may be)), or has, directly or -5- indirectly, the right to elect or designate a majority of the board of directors of the surviving or transferee corporation or its parent corporation, as applicable, or (c) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board (together with any new directors whose election by the Board or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board then in office. The good faith determination by the Board, based upon advice of outside counsel, of the beneficial ownership of securities of the Company within the meaning of Rules 13d-3 or 13d-5 under the Exchange Act shall be conclusive, absent contrary controlling precedent or contrary written interpretation published by the SEC. No inference shall be created that officers or employees of the Company are acting as a "person" or "group" (as such terms are used in Sections 13(d) or 14(d) of the Exchange Act) with the power to designate a majority of the members of the Board solely because such officers or employees constitute a majority of the members of the Board. "Closing Time" has the meaning specified in the Purchase Agreement. "Common Stock" means, with respect to any person, any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or non-voting) of such person's common stock and includes, without limitation, all series and classes of such common stock. "Company" means the person named as the "Company" in the first paragraph of this Indenture, until a successor person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by any one of its Chairman of the Board, its Vice-Chairman, its Chief Executive Officer, its President or a Vice President, and by its Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and delivered to the Trustee. "Consolidated Income Tax Expense" means, with respect to any period, the provision for federal, state, local, foreign and other income taxes of the Company and the Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" means, with respect to any period, without duplication, the sum of (i) the interest expense of the Company and the Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP, including, without limitation, (a) any amortization of debt discount, (b) the net cost under Interest Rate Obligations and Currency Hedge Obligations (including any amortization of discounts), (c) the interest portion of any deferred payment obligation, (d) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and similar transactions and (e) all capitalized interest and accrued interest, (ii) the interest component of Capitalized Lease Obligations paid, accrued and/or -6- scheduled to be paid or accrued by the Company and the Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP and (iii) the amount of dividends and distributions in respect of Disqualified Stock paid by the Company and the Restricted Subsidiaries during such period. "Consolidated Net Income" means, with respect to any period, the net income (or loss) of the Company and the Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, adjusted, to the extent included in calculating such consolidated net income (or loss), by excluding, without duplication, (i) all extraordinary, unusual or nonrecurring gains or losses and all gains or losses from sales or other dispositions of assets (including Asset Sales) out of the ordinary course of business (net of taxes, fees and expenses relating to the transaction giving rise thereto) for such period, (ii) that portion of such net income (or loss) derived from or in respect of Investments in persons other than Restricted Subsidiaries, except to the extent of any cash dividends actually received by the Company or any Restricted Subsidiary (subject, in the case of any Restricted Subsidiary, to the provisions of clause (vi) of this definition); (iii) any gain or loss, net of taxes, realized upon the termination of any employee pension benefit plan during such period, (iv) that portion of such net income (or loss) allocable to minority interests in any Restricted Subsidiary for such period, (v) net income (or loss) of any other person combined with the Company or any Restricted Subsidiary on a "pooling of interests" basis attributable to any period prior to the date of combination and (vi) the net income of any Restricted Subsidiary for such period to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is not at the time permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulations applicable to that Restricted Subsidiary or its stockholders. "Consolidated Net Worth" means, with respect to any person, the consolidated stockholders' or partners' equity of such person reflected on the most recent balance sheet of such person, determined in accordance with GAAP, less any amounts attributable to redeemable capital stock (as determined under applicable accounting standards promulgated by the SEC) of such person. "Consolidated Operating Cash Flow" means, with respect to any period, Consolidated Net Income for such period (a) increased (without duplication), to the extent deducted in arriving at such Consolidated Net Income, by the sum of (i) Consolidated Income Tax Expense for such period; (ii) Consolidated Interest Expense for such period; and (iii) depreciation, amortization and any other non-cash items for such period of the Company and the Restricted Subsidiaries (other than any non-cash item which requires the accrual of, or a reserve for, cash charges for any future period), including, without limitation, amortization of capitalized debt issuance costs for such period, all determined on a consolidated basis in accordance with GAAP, and (b) decreased by any non-cash items (including non-recurring gains and non-recurring items of income) to the extent they increased Consolidated Net Income for such period (including any partial or complete reversal of reserves taken in a prior period). "consolidation" means, with respect to the Company, the consolidation of the accounts of the Restricted Subsidiaries with those of the Company, all in accordance with GAAP; provided that -7- "consolidation" will not include consolidation of the accounts of any Unrestricted Subsidiary with the accounts of the Company or any Restricted Subsidiary. The term "consolidated" has a correlative meaning to the foregoing. "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the date of execution of this Indenture is located at 180 East 5th Street, St. Paul, Minnesota 55101, Attention: Corporate Trust Administration, except for purposes of Sections 3.02 and 10.02 hereof. For purposes of such Sections, such office is located at 100 Wall Street, Suite 2000, New York, New York 10005. "Currency Hedge Obligation" means the obligations of a person, incurred in the ordinary course of business, pursuant to a foreign currency exchange agreement, option or futures contract or other similar agreement or arrangement designed to protect against or manage such person's or its subsidiaries' exposure to fluctuations in foreign currency exchange rates. "Custodian" means any receiver, interim receiver, receiver and manager, receiver-manager, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law or any other law respecting secured creditors and the enforcement of their security or any other person with like powers whether appointed judicially or out of court and whether pursuant to an interim or final appointment. "Debt Securities" means any debt securities issued by the Company in a public offering or in a private placement to institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act). "Deeply Subordinated Indebtedness" means Indebtedness of the Company as to which the payment of principal of (and premium, if any) and interest and other payment obligations in respect of such Indebtedness shall be subordinate to the prior payment in full of the Notes to at least the following extent: (i) no payments of principal of (or premium on) or interest on or otherwise in respect of such Indebtedness may be made prior to the date that is 180 days following the Stated Maturity of the principal of the Notes; except that such Indebtedness may be redeemed or retired by the Company with, or converted at the option of the holder into, Capital Stock (other than Disqualified Stock) of the Company or options, warrants or other rights to purchase any such Capital Stock (other than Disqualified Stock) ; and (ii) the payment of the principal of and interest on such Indebtedness may be accelerated only in the event of the acceleration of the payment of the principal amount of the Notes following an Event of Default; provided, that any payment in respect of such Indebtedness following the acceleration thereof shall be subordinated to the prior payment in full of all amounts due in respect of the Notes and under the Indenture; and provided, further, in the event of the recision of any such acceleration of the Notes, the acceleration of such Indebtedness shall be deemed rescinded upon notice to such effect to the holder(s) of such Indebtedness from the Trustee. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. -8- "Default Amount" means (i) as of any date prior to March 1, 2002, the Accreted Value of the Notes (and any applicable premium thereon) as of such date and (ii) as of any date on and after March 1, 2002, the principal face amount of the Notes (and any applicable premium thereon) and any accrued and unpaid interest thereon. "Depository" means The Depository Trust Company, its nominees and successors. "Digital Network Business" means the business of developing, implementing, operating, managing or maintaining networks or systems for the transportation or management of data and any related, ancillary or complementary business; provided, that the determination of what constitutes a Digital Network Business shall be made in good faith by the Board, which determination shall be conclusive. "Disinterested Director" means, with respect to any transaction or series of related transactions, a member of the Board other than a director who (i) has any material direct or indirect financial interest in or with respect to such transaction or series of related transactions or (ii) is an employee or officer of the Company or an Affiliate that is itself a party to such transaction or series of transactions or an Affiliate of a party to such transaction or series of related transactions. "Disqualified Stock" means, with respect to any person, any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or becomes mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or becomes exchangeable for Indebtedness at the option of the holder thereof, or becomes redeemable at the option of the holder thereof, in whole or in part, on or prior to the final maturity date of the Notes. "Euroclear" means Morgan Guaranty Trust Company of New York, Brussels Office, as operator of the Euroclear System. "Exchange Act" means the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder. "Exchange Notes" means the 13 1/4% Senior Discount Notes due 2005, Series B, to be issued in exchange for the Initial Notes pursuant to the Registration Rights Agreement. "Exchange Offer" shall have the meaning specified in the Registration Rights Agreement. "Fair Market Value" means, with respect to any asset or property, the price (after taking into account any liabilities relating to such asset or property) that could be negotiated in an arms-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under pressure or compulsion to complete the transaction. Unless otherwise specified in the Indenture, -9- Fair Market Value shall be determined by the Board acting in good faith and shall be evidenced by a Board Resolution. "Foreign Subsidiary" means any Subsidiary of the Company that is organized or incorporated under the laws of any jurisdiction other than the laws of the United States or any State or territory thereof. "4-Sight" means 4-Sight Limited, a private limited company organized under the laws of England and Wales. "GAAP" means, at any date of determination, generally accepted accounting principles in effect in the United States and which are applicable as of the date of determination and which are consistently applied for all applicable periods. "Global Notes" means one or more Regulation S Global Notes and 144A Global Notes. "Guarantee" means, as applied to any obligation, (i) a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner, of any part or all of such obligation and (ii) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of all or any part of such obligation, including, without limiting the foregoing, any obligation (A) to pay amounts drawn down by letters of credit, (B) to purchase or pay (or advance or supply funds for the purchase or payment of) such obligation (whether arising by virtue of partnership arrangement, agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (C) entered into for purposes of assuring in any other manner the obligee of such obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Holder" or "Noteholder" means a person in whose name a Note is registered in the Note Register. "Indebtedness" means, with respect to any person, without duplication (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof), and whether or not contingent, (i) every liability of such person (A) for borrowed money, (B) evidenced by notes, bonds, debenture or other similar instruments (whether or not negotiable), (c) for reimbursement of amounts expended under letters of credit, bankers' acceptances or similar facilities issued for the account of such person, (D) issued or assumed as the deferred purchase price of property or services, (E) relating to a Capitalized Lease Obligation and all Attributable Debt in respect of Sale/Leaseback Transactions of such person and (F) in respect of an Interest Rate Obligation or Currency Hedge Obligation; (ii) every liability of others of the kind described in the preceding clause -10- (i) which such person has guaranteed or which is otherwise its legal liability; or (iii) every obligation secured by a Lien (other than (x) Permitted Liens of the types described in clauses (b), (d) or (e) of the definition of Permitted Liens; provided that the obligations secured would not constitute Indebtedness under clauses (i) or (ii) or (iii) of this definition, and (y) Liens on Capital Stock or Indebtedness of any Unrestricted Subsidiary) to which the property or assets of such person are subject, whether or not the obligations secured thereby shall have been assumed by or shall otherwise be such person's legal liability (the amount of such obligation being deemed to be the lesser of the Fair Market Value of such property or asset or the amount of the obligation so secured); (iv) all Disqualified Stock of such person, valued at the greater of its voluntary or involuntary maximum fixed repurchase or redemption price (plus accrued and unpaid dividends to the date of determination); and (v) any and all deferrals, renewals, extensions and refundings of, or amendments, modifications or supplements to, any liability of the kind described in any of the preceding clauses (i), (ii), (iii) or (iv). In no event shall "Indebtedness" include trade payables and accrued liabilities that are current liabilities incurred in the ordinary course of business, excluding the current maturity of any obligation which would otherwise constitute Indebtedness. For purposes of Section 10.11 and Section 10.13 hereof and in the definition of "Events of Default," in determining the principal amount of any Indebtedness to be incurred by the Company or a Restricted Subsidiary or which is outstanding at any date, (i) the principal amount of any Indebtedness which provides that an amount less than the principal amount at maturity thereof shall be due upon any declaration of acceleration thereof shall be the accreted value thereof at the date of determination; (ii) the principal amount of any Indebtedness shall be reduced by any amount of cash or Cash Equivalent collateral securing on a perfected basis, and dedicated for disbursement exclusively to the payment of principal of and interest on, such Indebtedness and (iii) the amount of Indebtedness of any person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations that are included in any clause above, the maximum liability upon the occurrence of the contingency giving rise to the obligation. "Indebtedness to EBITDA Ratio" means, as at any date of determination (the "Transaction Date"), the ratio of (i) Total Consolidated Indebtedness (including all Permitted Indebtedness) as at the Transaction Date to (ii) Consolidated Operating Cash Flow for the four full fiscal quarters immediately preceding the Transaction Date for which financial information has been distributed to the holders of the Notes in accordance with Section 10.09 (such four full fiscal quarter period being referred to herein as the "Measurement Period"). For purposes of calculating Consolidated Operating Cash Flow for the relevant Measurement Period prior to a Transaction Date, (A) any person that is a Restricted Subsidiary on the Transaction Date (or would become a Restricted Subsidiary on such Transaction Date in connection with the transaction that requires the calculation of such Consolidated Operating Cash Flow) shall be deemed to have been a Restricted Subsidiary at all times during the Measurement Period, (B) any person that is not a Restricted Subsidiary on such Transaction Date (or would cease to be a Restricted Subsidiary on such Transaction Date in connection with the transaction that requires the calculation of Consolidated Operating Cash Flow) will be deemed not to have been a Restricted Subsidiary at any time during the Measurement Period, (c) if the Company or any Restricted Subsidiary shall have in any manner (x) acquired through an Asset Acquisition or (y) disposed of (including by way of an Asset Sale or the termination or discontinuance of activities constituting such operating business) any operating business during such Measurement -11- Period or after the end of such period and on or prior to the Transaction Date, such calculation will be made on a pro forma basis in accordance with GAAP as if, in the case of an Asset Acquisition, such transaction had been consummated on the first day of the Measurement Period and, in the case of a Asset Sale or other disposition, termination or discontinuance of activities constituting such an operating business, such transaction had been consummated prior to the first day of the Measurement Period; provided, however that such pro forma adjustment shall not give effect to the operating cash flow of any person that would become a Restricted Subsidiary on the Transaction Date in connection with the transaction that requires the calculation of Consolidated Operating Cash Flow to the extent that such person's net income would be excluded from the calculation of Consolidated Net Income pursuant to clause (vi) of the definition of Consolidated Net Income. "Indenture" means this instrument as originally executed (including all exhibits and schedules hereto) and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Indenture Obligations" means the obligations of the Company and any other obligor under this Indenture or under the Notes, to pay principal of, premium, if any, and interest on the Notes when due and payable, whether at maturity, by acceleration, call for redemption or repurchase or otherwise, and all other amounts due or to become due under or in connection with this Indenture or the Notes and the performance of all other obligations to the Trustee (including, but not limited to, payment of all amounts due the Trustee under Section 6.07 hereof) and the Holders of the Notes under this Indenture and the Notes, according to the terms thereof. "Independent Financial Advisor" means a United States investment banking firm of national or regional standing in the United States (i) which does not, and whose directors, officers and employees or Affiliates do not have, a direct or indirect financial interest in the Company and (ii) which, in the judgment of the Board, is otherwise independent and qualified to perform the task for which it is to be engaged. "Initial Notes" means the 13 1/4% Senior Discount Notes due 2005, Series A, of the Company. "Initial Public Equity Offering" means an underwritten primary public offering of Capital Stock (other than Disqualified Stock) of the Company for cash pursuant to an effective registration statement filed under the Securities Act. "Initial Purchasers" means Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. "Institutional Accredited Investor" means an institution that is an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. -12- "interest" means, when used with respect to any Note, the amount of all interest accruing on such Note, including all additional interest payable on the Notes pursuant to the Registration Rights Agreement and all interest accruing subsequent to the occurrence of any events specified in Sections 5.01(ix), (x) and (xi) hereof or which would have accrued but for any such event, whether or not such claims are allowable under applicable law. "Interest Payment Date" means, when used with respect to any Note, the Stated Maturity of an installment of cash interest on such Note, as set forth in such Note. "Interest Rate Obligations" means the obligations of any person pursuant to any arrangement with any other person whereby, directly or indirectly, such person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount and shall include without limitation, interest rate swaps, caps, floors, collars, forward interest rate agreements and similar agreements. "Investment" means, with respect to any person, any direct or indirect advance, loan, account receivable (other than an account receivable arising in the ordinary course of business), or other extension of credit (including, without limitation, by means of any guarantee) or any capital contribution to (by means of transfers of cash or other property or assets to others, payments for property or services for the account or use of others, or otherwise), or any purchase or acquisition of capital stock, bonds, notes, debentures or other securities or evidences of Indebtedness of any other person. The amount of any Investment shall be the original cost of such Investment, plus the cost of all additions thereto, and minus the amount of any portion of such Investment repaid to such person in cash as a repayment of principal or a return of capital, as the case may be, but without any other adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. In determining the amount of any Investment involving a transfer of any property or assets other than cash, such property shall be valued at its Fair Market Value at the time of transfer. "Issue Date" means the original date of issuance of the Notes. "Lien" means any mortgage, charge, pledge, lien (statutory or other), security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance upon or with respect to any property of any kind whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). A person shall be deemed to own subject to a Lien any property which such person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "Market Capitalization" of any person means, as of any day of determination, the product of (i) the average Closing Price of a share of such person's Common Stock over the 20 consecutive trading days immediately preceding such date and (ii) the number of shares of such -13- Common Stock issued and outstanding on such date. "Closing Price" on any trading day with respect to the per share price of any shares of Common Stock means the last reported sale price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange or, if such shares of Common Stock are not listed or admitted to trading on such exchange, on the principal national securities exchange on which such shares are listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the Nasdaq National Market or, if such shares are not listed or admitted to trading on any national securities exchange or quoted on The Nasdaq National Market but such person is a "foreign issuer" (as defined Rule 3b-4(b) under the Exchange Act) and the principal securities exchange on which such shares are listed or admitted to trading is a "designated offshore securities market" (as defined in Rule 902(a) under the Securities Act), the average of the reported closing bid and asked prices regular way on such principal exchange or, if such shares are not listed or admitted to trading on any national securities exchange or quoted on the Nasdaq National Market and such person and any securities markets in which such person's Common Stock trades does not meet any of the foregoing such requirements, the average of the closing bid and asked prices in the over-the-counter marked as furnished by any New York Stock Exchange member firm that is selected from time to time by the Company for the purpose and is reasonably acceptable to the Trustee. "Material Restricted Subsidiary" means any Restricted Subsidiary, together with its Subsidiaries that are themselves Restricted Subsidiaries, of the Company which, at any date of determination, (i) is a "Significant Subsidiary" under the definition of that term set forth in Regulation S-X promulgated under the Securities Act, as in effect on the Issue Date (but substituting "5 percent" for each occurrence of "10 percent" in such definition), (ii) contributed 5% or more of the Consolidated Operating Cash Flow of the Company on a pro forma basis in the immediately preceding fiscal quarter for which financial information is available, (iii) when aggregated with all other Restricted Subsidiaries that are not otherwise Material Restricted Subsidiaries and as to which any event described in clauses (vi), (vii) or (viii) of Section 5.01 hereof has occurred, would constitute a Material Restricted Subsidiary under clause (i) or (ii) of this definition. "Maturity Date" means, with respect to any Note, the date specified in such Note as the fixed date on which the principal of such Note is due and payable. "Moody's" means Moody's Investors Service, Inc. (and any successor). "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds thereof received by the Company or any Restricted Subsidiary in the form of cash (including assumed Indebtedness (other than Subordinated Indebtedness) and other items deemed to be cash under the proviso to the first sentence of Section 10.15 hereof) or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) net of (i) brokerage commissions and other fees, costs and expenses (including fees and expenses of legal counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes paid or payable as a result of such Asset Sale, (iii) amounts required to be paid to any person -14- (other than the Company or any Restricted Subsidiary) owning a beneficial interest in or having a Lien on the assets subject to the Asset Sale, (iv) with respect to Asset Sales by Restricted Subsidiaries, the portion of such cash and Cash Equivalents attributable to any persons holding a minority interest in such Restricted Subsidiary and (v) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP against any liabilities associated with such Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in an Officers' Certificate delivered to the Trustee. "Non-U.S. Person" has the meaning assigned to such term in Regulation S. "Notes" shall have the meaning specified in the recitals of this Indenture. "Offering Memorandum" means the Offering Memorandum of the Company, dated February 26, 1998, pursuant to which the Notes were offered, and any supplement thereto. "Officer" means, with respect to the Company and each Subsidiary Guarantor, as applicable, the Chairman of the Board, a Vice Chairman, the President, a Vice President, the Secretary, an Assistant Secretary or the Treasurer. "Officers' Certificate" means a certificate signed by the Chairman of the Board, a Vice Chairman, the President or a Vice President, and by the Secretary, an Assistant Secretary or the Treasurer, of the Company or any Subsidiary Guarantor, as applicable, and delivered to the Trustee. "144A Global Note" means a permanent global note in registered form representing the aggregate principal amount of Notes sold in reliance on Rule 144A under the Securities Act. "Opinion of Counsel" means a written opinion of counsel who may be counsel for the Company, the Trustee or any Subsidiary Guarantor, as applicable, and who shall be reasonably acceptable to the Trustee. "Outstanding" means, as of the date of determination, all Notes theretofore authenticated and delivered under this Indenture, except: (i) Notes theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (ii) Notes, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company or any Affiliate thereof) in trust or set aside and segregated in trust by the Company or any Affiliate thereof (if the Company or such Affiliate shall act as Paying Agent) for the Holders of such -15- Notes; provided, however, that if such Notes are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (iii) Notes with respect to which the Company has effected defeasance or covenant defeasance as provided in Article Four, to the extent provided in Sections 4.02 and 4.03 hereof; and (iv) Notes in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to this Indenture, other than any such Notes in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Notes are held by a bona fide purchaser in whose hands the Notes are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Notes have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Notes owned by the Company, any Subsidiary Guarantor any other obligor upon the Notes or any Affiliate of the Company, such Subsidiary Guarantor or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes that a Responsible Officer of the Trustee knows to be so owned shall be so disregarded. The Company shall notify the Trustee, in writing, when it or any Subsidiary Guarantor purchases or otherwise acquires Notes, of the aggregate principal amount of such Notes so repurchased or otherwise acquired. Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Notes and that the pledgee is not the Company, a Subsidiary Guarantor or any other obligor upon the Notes or any Affiliate of the Company, such Subsidiary Guarantor or such other obligor. If the Paying Agent holds, in its capacity as such, on any Maturity Date or on any optional redemption date money sufficient to pay all accrued interest and principal with respect to such Notes payable on that date and is not prohibited from paying such money to the Holders thereof pursuant to the terms of this Indenture, then on and after that date such Notes cease to be Outstanding and interest on them ceases to accrue. Notes may also cease to be outstanding to the extent expressly provided in Article Four. "Permitted Credit Facility" means any senior secured or unsecured commercial term loan and/or revolving credit facility (including any letter of credit subfacility) entered into principally with commercial banks and/or other financial institutions. "Permitted Equipment Financing" means any credit facility (including a Permitted Credit Facility) or other financing arrangement entered into with any vendor, supplier or third party (or any financial institution for the purposes of financing purchases from any vendor, supplier or third party) to the extent the Indebtedness thereunder is incurred for the purpose of financing the cost (including the cost of design, development, construction, improvement, enhancement, upgrade, replacement, integration, manufacture or acquisition) of real or personal property (tangible or intangible) used, or to be used, in the Digital Network Business of the Company or any of its Restricted Subsidiaries. -16- "Permitted Holders" means (i) WorldCom and each of its Affiliates and (ii) Edward J. Driscoll III (the Chairman of the Board and Chief Executive Officer of the Company as of the date of this Indenture) and his family members, any trust for the benefit of any of the foregoing persons and their respective estates and heirs. As used herein, "family member" means the spouse, siblings and lineal descendants of Mr. Driscoll. "Permitted Indebtedness" means the following Indebtedness (each of which shall be given independent effect): (a) Indebtedness under the Notes, the Subsidiary Guarantees and the Indenture; (b) Indebtedness (including Disqualified Stock) of the Company and/or any Restricted Subsidiary outstanding on the Issue Date and identified on a schedule to the Indenture; provided, that Indebtedness that may be borrowed under credit facilities in place on the Issue Date shall be deemed outstanding for purposes of this clause (b); (c) (i) Indebtedness of any Restricted Subsidiary owed to and held by the Company or a Restricted Subsidiary and (ii) Indebtedness of the Company, which is not secured by any Lien and is subordinated to the Company's obligations with respect to the Notes, owed to and held by any Restricted Subsidiary; provided that an incurrence of Indebtedness shall be deemed to have occurred upon (x) any sale or other disposition of any Indebtedness of the Company or a Restricted Subsidiary referred to in this clause (c) to a person other than the Company or a Restricted Subsidiary, (y) any sale or other disposition of Capital Stock of a Restricted Subsidiary which holds Indebtedness of the Company or another Restricted Subsidiary such that such Restricted Subsidiary ceases to be a Restricted Subsidiary or (z) the Designation of a Restricted Subsidiary which holds Indebtedness of the Company or another Restricted Subsidiary as an Unrestricted Subsidiary; (d) Interest Rate Obligations of the Company and/or any Restricted Subsidiary relating to Indebtedness of the Company and/or such Restricted Subsidiary, as the case may be (which Indebtedness (x) bears interest at fluctuating interest rates and (y) is otherwise permitted to be incurred under Section 10.11 hereof), but only to the extent that the notional amount of such Interest Rate Obligations does not exceed the principal amount of the Indebtedness (and/or Indebtedness subject to commitments) to which such Interest Rate Obligations relate; (e) Indebtedness of the Company and/or any Restricted Subsidiary in respect of performance bonds of the Company or any Restricted Subsidiary or surety bonds provided by the Company or any Restricted Subsidiary, in each case incurred in the ordinary course of business; (f) Indebtedness of the Company and/or any Restricted Subsidiary to the extent it represents a replacement, renewal, refinancing or extension (a "refinancing") of outstanding -17- Indebtedness of the Company and/or of any Restricted Subsidiary incurred or outstanding pursuant to clause (a), (b), (g), (h) or (i) of this definition or the proviso in the first paragraph of Section 10.11 hereof; provided that (1) no Restricted Subsidiary may incur Indebtedness to refinance Indebtedness of the Company, (2) any such refinancing shall not (x) result in a lower Average Life to Stated Maturity of such Indebtedness as compared with the Indebtedness being refinanced or (y) exceed the sum of the principal amount (or, if such Indebtedness provides for a lesser amount to be due and payable upon a declaration of acceleration thereof, an amount no greater than such lesser amount) of the Indebtedness being refinanced, plus the amount of accrued and unpaid interest thereon, plus the amount of any reasonably determined prepayment premium necessary to accomplish such refinancing and such reasonable fees and expenses incurred in connection therewith; (3) Indebtedness that ranks pari passu with the Notes may be refinanced only with Indebtedness that is made pari passu with or subordinate in right of payment to the Notes, and Subordinated Indebtedness may only be refinanced with Subordinated Indebtedness; and (4) the refinancing Indebtedness shall be incurred by the obligor on the Indebtedness being refinanced or by the Company; (g) Indebtedness of the Company such that, after giving effect to the incurrence thereof, the total aggregate principal amount of Indebtedness incurred under this clause (g) and any refinancings thereof otherwise incurred in compliance with this Indenture would not exceed 175% of Total Incremental Equity; (h) Indebtedness of the Company incurred under one or more Permitted Credit Facilities and/or Indebtedness of the Company represented by Debt Securities, and any refinancings of the foregoing otherwise incurred in compliance with this Indenture, in an aggregate principal amount not to exceed $50 million at any time outstanding; and Guarantees by any Restricted Subsidiary that is a Subsidiary Guarantor of Indebtedness of the Company incurred under any Permitted Credit Facility in compliance with Section 10.11 hereof; (i) Indebtedness of the Company incurred under any Permitted Equipment Financing and Guarantees by any Restricted Subsidiary that is a Foreign Subsidiary of Indebtedness incurred in respect of property acquired by such Restricted Subsidiary under such Permitted Equipment Financing; provided any Restricted Subsidiary that issues such a Guaranty is a Subsidiary Guarantor or complies with Section 10.22 in connection with its issuance of such Guarantee; (j) Indebtedness in respect of any Currency Hedge Obligations of the Company and/or any Restricted Subsidiary (which Indebtedness is otherwise permitted to be incurred under Section 10.11 hereof), but only to the extent that the notional amount of such Currency Hedge Obligations do not exceed the principal amount of the Indebtedness (and/or Indebted ness subject to commitments) to which such Currency Hedge Obligations relate; (k) in addition to any Indebtedness of the Company referred to in clause (b) above, Deeply Subordinated Indebtedness of the Company owed to and held by WorldCom or any -18- other Strategic Equity Investor in an aggregate principal amount not to exceed $50 million at any time outstanding; provided, at the time of incurrence of such Indebtedness by the Company, the payee is the "beneficial owner" (as defined in Rules 13d-3 or 13d-5 under the Exchange Act (except that WorldCom shall be deemed to have "beneficial ownership" of all Voting Stock of the Company that it, directly or indirectly, has or acquires the right to acquire, whether such right is exercisable immediately or only after the passage of time) of at least 10% of the total voting power of all Voting Stock of the Company; (l) Indebtedness of 4-Sight and each of its Subsidiaries existing at the time 4-Sight and such Subsidiaries become Restricted Subsidiaries; and (m) in addition to the items referred to in clauses (a) through (l) above, Indebtedness of the Company having an aggregate principal amount not to exceed $15 million at any time outstanding. "Permitted Investments" means (a) Cash Equivalents; (b) Investments in prepaid expenses, negotiable instruments held for collection and lease, utility and workers' compensation, performance and other similar deposits; (c) Interest Rate Obligations and Currency Hedge Obligations incurred in compliance with Section 10.11 hereof; (d) loans and advances to employees made in the ordinary course of business not to exceed $750,000 in the aggregate at any one time outstanding; (e) bonds, notes, debentures or other securities received as a result of Asset Sales permitted under Section 10.15 hereof not to exceed 20% of the total consideration for such Asset Sales; (f) any Investment to the extent that the consideration therefor consists of Capital Stock (other than Disqualified Stock) of the Company; and (g) the extension by the Company of (i) trade credit to Subsidiaries of the Company represented by accounts receivable, extended on usual and customary terms in the ordinary course of business or (ii) guarantees of commitments for the purchase of goods or services incurred in the ordinary course of business so long as such guarantees, to the extent constituting Indebtedness, are permitted to be incurred under Section 10.11 hereof. "Permitted Liens" means (a) Liens on property of a person existing at the time such person is merged into or consolidated with the Company or any Restricted Subsidiary or becomes a Restricted Subsidiary; provided that such Liens were in existence prior to the contemplation of such merger, consolidation or acquisition and do not secure any property or assets of the Company or any Restricted Subsidiary other than the property or assets subject to the Liens prior to such merger or consolidation or acquisition; (b) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens and other similar Liens arising in the ordinary course of business that secure payment of obligations not more than 60 days past due or that are being contested in good faith and by appropriate proceedings; (c) Liens existing on the Issue Date (including Liens securing Indebtedness permitted under the proviso of clause (b) of the definition of Permitted Indebtedness); (d) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted; provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (e) easements, rights of way, restrictions and other similar -19- easements, licenses, restrictions on the use of properties, or minor imperfections of title that, in the aggregate, are not material in amount and do not in any case materially detract from the properties subject thereto or interfere with the ordinary conduct of the business of the Company or the Restricted Subsidiaries; (f) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (g) Liens securing Indebtedness incurred under a Permitted Equipment Financing; provided, that (I) such Liens attach within 180 days of the incurrence of such Indebtedness and (II) if such Liens include a pledge of Capital Stock of any Restricted Subsidiary, such Liens were created in connection with financing the cost of property or assets acquired or used by such Restricted Subsidiary, directly or indirectly, with Indebtedness incurred pursuant to such Permitted Equipment Financing; (h) Liens securing Indebtedness incurred under a Permitted Credit Facility; provided that (I) the incurrence of such Indebtedness is permitted by Section 10.11 hereof and (II) such Liens attach within 180 days of the incurrence of such Indebtedness; (i) Liens to secure any refinancing of any Indebtedness secured by Liens referred to in the clauses above; (j) Liens to secure the Notes; (k) Liens on real property incurred in connection with the financing of the purchase of such real property (or incurred within 60 days of purchase) by the Company or any Restricted Subsidiary; and (l) Liens on and pledges of Capital Stock of any Unrestricted Subsidiary securing any Indebtedness of such Unrestricted Subsidiary. "person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Note" means, with respect to any particular Note, every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 3.06 hereof in exchange for a mutilated Note or in lieu of a lost, destroyed or stolen Note shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Note. "Preferred Stock" means, with respect to any person, any and all shares, interests, participations or other equivalents (however designated) of such person's preferred or preference stock whether now outstanding or issued after the Issue Date, and including, without limitation, all classes and series of preferred or preference stock of such person. "Private Exchange Notes" shall have the meaning specified in the Registration Rights Agreement. "Private Placement Legend" shall mean the first paragraph of the legend initially set forth in the Notes in the form set forth on Exhibit A-1. "Purchase Agreement" means the Purchase Agreement, dated as of February 26, 1998, by and among the Company and the Initial Purchasers, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof. -20- "Qualified Institutional Buyer" or "QIB" shall have the meaning specified in Rule 144A under the Securities Act. "Redemption Date" means, with respect to any Note to be redeemed, the date fixed by the Company for such redemption pursuant to this Indenture and the Notes. "Redemption Price" means, with respect to any Note to be redeemed, the price fixed for such redemption pursuant to the terms of this Indenture and the Notes. "refinancing" has the meaning set forth in clause (f) of the definition of "Permitted Indebtedness." "Registrable Securities" has the meaning specified in the Registration Rights Agreement. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of March 5, 1998, between the Company and the Initial Purchasers, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof. "Regular Record Date" means the Regular Record Date specified in the Notes. "Regulation S" means Regulation S under the Securities Act. "Regulation S Global Note" means a permanent global note in registered form representing the aggregate principal amount of Notes sold in reliance on Regulation S under the Securities Act. "Responsible Officer" means, with respect to the Trustee, the chairman or vice chairman of the board of directors, the chairman or vice chairman of the executive committee of the board of directors, the president, any vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any trust officer or assistant trust officer, the controller and any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer of the Trustee to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with the particular subject. "Restricted Note" means a Note that constitutes a "restricted security" within the meaning of Rule 144(a)(3) under the Securities Act; provided, however, that the Trustee shall be entitled to request and conclusively rely on an Opinion of Counsel with respect to whether any Note constitutes a Restricted Note. "Restricted Payment" means any of the following: (i) the declaration or payment of any dividend or any other distribution on any Capital Stock of the Company or any Restricted Subsidiary -21- or any other payment made to the direct or indirect holders (in their capacities as such) of Capital Stock of the Company or any Restricted Subsidiary (other than any dividends, distributions or payments made to the Company or any Restricted Subsidiary and dividends or distributions payable solely in Capital Stock (other than Disqualified Stock) of the Company or in options, warrants or other rights to purchase Capital Stock (other than Disqualified Stock) of the Company); (ii) the purchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company or any Restricted Subsidiary (other than any such Capital Stock owned by the Company or a Restricted Subsidiary); (iii) the purchase, redemption, defeasance or other acquisition or retirement for value, or the making of any principal payment on, prior to any scheduled repayment, scheduled sinking fund payment or scheduled maturity, of any Subordinated Indebtedness (other than any Subordinated Indebtedness held by a Wholly Owned Restricted Subsidiary); or (iv) the making by the Company or any Restricted Subsidiary of any Investment (other than a Permitted Investment) in any person (other than in the Company, any Restricted Subsidiary or a person that becomes a Restricted Subsidiary, or is merged with or into or consolidated with the Company or a Restricted Subsidiary (provided the Company or a Restricted Subsidiary is the survivor) as a result of or in connection with such Investment. "Restricted Subsidiary" means any Subsidiary of the Company that has not been designated by the Board, by a Board Resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in compliance with Section 10.20 hereof. Any such designation may be revoked by a Board Resolution delivered to the Trustee, subject to the provisions of such covenant. "Rule 144A" means Rule 144A under the Securities Act. "S&P" means Standard & Poor's Rating Services, a division of The McGraw-Hill Companies (and any successor). "Sale/Leaseback Transaction" of any person means an arrangement with any lender or investor or to which such lender or investor is a party providing for the leasing by such person of any property or assets of such person which has been or is being sold or transferred by such person after its acquisition thereof or the completion of construction or commencement of operations thereof to such lender or investor or to any other person to whom funds have been or are to be advanced by such lender or investor on the security of such property or asset. "SEC" means the Securities and Exchange Commission, as from time to time constituted, or if at any time after the execution of this Indenture such agency is not existing and performing the applicable duties now assigned to it, then the body or bodies performing such duties at such time. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated by the SEC thereunder. -22- "Shelf Registration Statement" shall have the meaning specified in the Registration Rights Agreement. "Special Record Date" means, with respect to the payment of any Defaulted Interest, a date fixed by the Trustee pursuant to Section 3.07 hereof. "Stated Maturity" means, with respect to any Note or any installment of interest thereon, the dates specified in such Note as the fixed date on which the principal of such Note or such installment of interest is due and payable and, when used with respect to any other Indebtedness, means the date specified in the instrument governing such Indebtedness as the fixed date on which the principal of such Indebtedness, or any installment of interest, is due and payable. "Strategic Equity Investor" means any person that, as of the date of determination, has a Market Capitalization or Consolidated Net Worth of at least $2.0 billion and that is principally engaged in the communications, entertainment or electronics business or any other business related to the Digital Network Business. "Subordinated Indebtedness" means any Indebtedness of the Company or any Subsidiary Guarantor which is expressly subordinated in right of payment to any other Indebtedness of the Company or such Subsidiary Guarantor. "Subsidiary" means, with respect to any person, (i) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors shall at the time be owned, directly or indirectly, by such person, or (ii) any other person of which at least a majority of voting interest is at the time, directly or indirectly, owned by such person. "Subsidiary Guarantor" means each Restricted Subsidiary that becomes a guarantor of the Notes pursuant to the provisions of Section 10.22 and Article Thirteen hereof, in each case until it is released from its Subsidiary Guarantee pursuant to the provisions of Section 13.04 hereof. "Subsidiary Guarantor Board Resolution" means, with respect to any Subsidiary Guarantor, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Subsidiary Guarantor to have been duly adopted by the Board of Directors of such Subsidiary Guarantor and to be in full force and effect on the date of such certification and delivered to the Trustee. "Total Consolidated Indebtedness" means, at any date of determination, an amount equal to the aggregate amount of all Indebtedness of the Company and the Restricted Subsidiaries outstanding as of such date of determination. "Total Incremental Equity" means, at any time of determination, the sum of, without duplication, (i) the aggregate cash proceeds received by the Company from capital contributions in respect of existing Capital Stock (other than Disqualified Stock) or the issuance and sale of Capital -23- Stock (other than Disqualified Stock but including Capital Stock issued upon the conversion of convertible Indebtedness or from the exercise of options, warrants or rights to purchase Capital Stock (other than Disqualified Stock)) subsequent to the Issue Date, other than to a Subsidiary of the Company, plus (ii) the aggregate cash proceeds received by the Company or any Restricted Subsidiary from the sale, disposition or repayment (in whole or in part) of any Investment that is made after the Issue Date and that constitutes a Restricted Payment that has been deducted from Total Incremental Equity pursuant to clause (iii) below in an amount equal to the lesser of (a) the return of capital with respect to the applicable portion of such Investment and (b) the cost of the applicable portion of such Investment, in either case, less the cost of the disposition of such Investment, plus (iii) the value (determined at the time of issuance) of any Capital Stock (other than Disqualified Stock) of the Company issued as consideration for the acquisition of Capital Stock or assets of any other person (other than a Subsidiary or an Affiliate of the Company or any Subsidiary) engaged in the Digital Network Business; provided, the issuance of the first 2,500,000 shares of Common Stock of the Company (as adjusted for subdivisions, combinations or reclassifications of such stock subsequent to the Issue Date) to the stockholders of 4-Sight in connection with the Company's acquisition of 4-Sight shall be excluded from this clause (iii); minus (iv) the aggregate amount of all Restricted Payments declared or made (including by way of a Designation) on and after the Issue Date. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939, as amended. "Trustee" means the person named as the "Trustee" in the first paragraph of this Indenture, until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Unit Agent" means First Trust National Association, a national banking association, as unit agent for the Units, and any successor unit agent. "Unrestricted Notes" means one or more Notes that do not and are not required to bear the Private Placement Legend in the form set forth in Exhibit A, including, without limitation, the Exchange Notes. "Unrestricted Subsidiary" means any Subsidiary of the Company designated as such pursuant to and in compliance with Section 10.20 hereof. Any such designation may be revoked by a Board Resolution delivered to the Trustee, subject to the provisions of such covenant. "U.S. Government Securities" means securities that are direct obligations of the United States of America for the payment of which its full faith and credit is pledged. "Voting Stock" means, with respect to any person, the Capital Stock of any class or kind ordinarily having the power to vote for the election of directors or other members of the governing body of such person. -24- "voting power" means, with respect to the Capital Stock of any person, the relative voting power in any general election of directors or other members of the governing body of such person. "Warrant Agreement" means the Warrant Agreement, dated as of March 5, 1998, between the Company and First Trust National Association, as warrant agent, as the same may be amended, supplemented or otherwise modified from time to time in accordance with its terms. "Warrant Change of Control" has the meaning set forth in the Warrant Agreement. "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of which 100% of the outstanding Capital Stock is owned by the Company or another Wholly Owned Restricted Subsidiary. For the purposes of this definition, any directors' qualifying shares or investments by foreign nationals mandated by applicable law shall be disregarded in determining the ownership of a Restricted Subsidiary. "WorldCom" means WorldCom Inc., a Georgia corporation. Section 1.02. OTHER DEFINITIONS. DEFINED IN TERM SECTION ---- -------- "Act" 1.05 "Additional Interest" 10.23 "Additional Interest Payment Date" 10.23 "Affiliate Transaction" 10.14 "Agent Members" 3.16 "Asset Sale Offer" 10.15 "Asset Sale Offer Purchase Date" 10.15 "assumed liabilities" 10.15 "Change of Control Date" 10.10 "Change of Control Offer" 10.11 "Change of Control Payment Date" 10.11 "covenant defeasance" 4.03 "Defaulted Interest" 3.07 "defeasance" 4.02 "Defeased Notes" 4.01 "Designation" 10.20 -25- DEFINED IN TERM SECTION ---- -------- "Designation Amount" 10.20 "Event of Default" 5.01 "incur" 10.11 "insolvent person" 4.04 "Note Pro Rate Share of Unutilized Net Cash Proceeds" 10.15 "Note Register" 3.05 "Other Indebtedness" 10.15 "Paying Agent" or "Agent" 3.02 "Physical Notes" 3.03 "Registrar" 3.02 "Replacement Assets" 10.15 "Restricted Period" 3.17 "Revocation" 10.20 "Subsidiary Guarantee" 10.22 "surviving entity" 8.01 "Unit" 3.18 "Unutilized Net Cash Proceeds" 10.15 Section 1.03. RULES OF CONSTRUCTION. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; -26- (d) the words "herein" "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (e) all references to "$" or "dollars" refer to the lawful currency of the United States of America; and (f) the words "include," "included" and "including" as used herein are deemed in each case to be followed by the phrase "without limitation." Section 1.04. FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where several matters are required to be certified by, or covered by an opinion of, any specified person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such person, or that they be so certified or covered by only one document, but one such person may certify or give an opinion with respect to some matters and one or more other persons as to other matters, and any such person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company or a Subsidiary Guarantor may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company or a Subsidiary Guarantor, as applicable, stating that the information with respect to such factual matters is in the possession of the Company or the Subsidiary Guarantor, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated, with proper identification of each matter covered therein, and form one instrument. Section 1.05. ACTS OF HOLDERS. Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company and the Subsidiary Guarantors. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" -27- of the Holders signing such instrument or instruments. Proof of execution (as provided below in this Section 1.05) of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01 hereof) conclusive in favor of the Trustee, the Company and the Subsidiary Guarantors, if made in the manner provided in this Section. The fact and date of the execution by any person of any such instrument or writing may be proved in any reasonable manner which the Trustee deems sufficient. The ownership of Notes shall be proved by the Note Register. Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Note shall bind every future Holder of the same Note or the Holder of every Note issued upon the transfer thereof or in exchange therefor or in lieu thereof to the same extent as the original Holder, in respect of anything done, suffered or omitted to be done by the Trustee, any Paying Agent, the Company or any Subsidiary Guarantor in reliance thereon, whether or not notation of such action is made upon such Note. Section 1.06. NOTICES, ETC., TO THE TRUSTEE, THE COMPANY AND THE SUBSIDIARY GUARANTORS Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with: (a) the Trustee by any Holder or by the Company or any Subsidiary Guarantor shall be sufficient for every purpose hereunder if made, given, furnished or filed, in writing, to or with the Trustee at: First Trust National Association, 180 East Fifth Street, St. Paul, MN 55101, Attention: Corporate Trust Department, or at any other address previously furnished in writing to the Holders and the Company by the Trustee; or (b) the Company or any Subsidiary Guarantor by the Trustee or by any Holder shall be sufficient for every purpose (except as otherwise expressly provided herein) hereunder if in writing and mailed, first-class postage prepaid, to the Company or such Subsidiary Guarantor addressed to it at (or in the case of any Subsidiary Guarantor in care of) WAM!NET Inc., 6100 West 110 Street, Minneapolis, Minnesota, 55438, Attention: Chief Executive Officer, or at any other address previously furnished in writing to the Trustee by the Company. Section 1.07. NOTICE TO HOLDERS; WAIVER. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise expressly provided herein) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at the address of such Holder as it appears in the Note Register, not later than the latest date, and not earlier than the earliest date, prescribed for the -28- giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Any notice when mailed to a Holder in the aforesaid manner shall be conclusively deemed to have been received by such Holder whether or not actually received by such Holder. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause, it shall be impracticable to mail notice of any event as required by any provision of this Indenture, then any method of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. Section 1.08. CONFLICT WITH TRUST INDENTURE ACT. If any provision hereof limits, qualifies or conflicts with any provision of the Trust Indenture Act or another provision which is required or deemed to be included in this Indenture by any of the provisions of the Trust Indenture Act, such provision or requirement of the Trust Indenture Act shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or excluded, as the case may be. Section 1.09. EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. Section 1.10. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Indenture by the Company or the Subsidiary Guarantors shall bind their respective successors and assigns, whether so expressed or not. Section 1.11. SEPARABILITY CLAUSE. In case any provision in this Indenture or in the Notes issued pursuant hereto shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. -29- Section 1.12. BENEFITS OF INDENTURE. Nothing in this Indenture or in the Notes issued pursuant hereto, express or implied, shall give to any person (other than the parties hereto and their successors hereunder, any Paying Agent and the Holders) any benefit or any legal or equitable right, remedy or claim under this Indenture. Section 1.13. GOVERNING LAW. THIS INDENTURE, THE NOTES AND EACH SUBSIDIARY GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Section 1.14. NO RECOURSE AGAINST OTHERS. A director, officer, employee or stockholder, as such, of the Company or any Subsidiary Guarantor shall not have any liability for any obligations of the Company or such Subsidiary Guarantor under the Notes, any Subsidiary Guarantee or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Section 1.15. INDEPENDENCE OF COVENANTS. All covenants and agreements in this Indenture shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default if such action is taken or condition exists. Section 1.16. EXHIBITS. All exhibits attached hereto are by this reference made a part hereof with the same effect as if herein set forth in full. Section 1.17. COUNTERPARTS. This Indenture may be executed in any number of counterparts and by telecopier, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. Section 1.18. DUPLICATE ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. -30- ARTICLE TWO FORM OF NOTES; FORM OF NOTATION OF SUBSIDIARY GUARANTEES Section 2.01. FORM AND DATING. The Notes and the Trustee's certificate of authentication with respect thereto shall be in substantially the forms set forth, or referenced, in EXHIBIT A-1 and EXHIBIT A-2, respectively, annexed hereto, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with any applicable law or with the rules of the Depository, any clearing agency or any securities exchange or as may, consistently herewith, be determined by the officers executing such Notes, as evidenced by their execution thereof. The definitive Notes shall be printed, typewritten, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by the rules of any securities exchange on which the Notes may be listed, all as determined by the officers executing such Notes, as evidenced by their execution of such Notes. Each Note shall be dated the date of its issuance and shall show the date of its authentication. The terms and provisions contained in the Notes constitute, and are expressly made, a part of this Indenture. The Notes shall have notated thereon evidence of each Subsidiary Guarantee, if any, in the form set forth in EXHIBIT B; provided, however, that the failure of any Note to include such notation shall not affect the validity or enforceability of such Subsidiary Guarantee or such Note against any Subsidiary Guarantor. ARTICLE THREE THE NOTES AND THE SUBSIDIARY GUARANTEES Section 3.01. TITLE AND TERMS. The aggregate principal face amount of Notes which may be authenticated and delivered under this Indenture is limited to $208,530,000 in aggregate principal face amount of Notes, except for Notes authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Notes pursuant to Section 3.03, 3.04, 3.05, 3.06, 9.06, 10.10 or 10.15 hereof or the optional redemption provisions of the Notes. -31- The Stated Maturity of the principal of the Notes shall be March 1, 2005. Interest on the Notes will not accrue prior to March 1, 2002. The Notes shall bear interest at the rate of 13 1/4% per annum from March 1, 2002 or from the most recent Interest Payment Date to which interest has been paid, payable semi-annually on March 1 and September 1, in each year, commencing on September 1, 2002, to the registered Holders at the close of business on the February 15 or August 15, respectively, immediately preceding such Interest Payment Dates, until the principal thereof is paid or duly provided for. At the election of the Company, the entire Indebtedness on the Notes or certain of the Company's obligations and covenants and certain Events of Default thereunder may be defeased as provided in Article Four. Section 3.02. REGISTRAR AND PAYING AGENT. The Company shall maintain an office or agency (which shall be located in the Borough of Manhattan in The City of New York, State of New York) where Notes may be presented for registration of transfer or for exchange (the "Registrar"), an office or agency (which shall be located in the Borough of Manhattan in The City of New York, State of New York) where Notes may be presented for payment (the "Paying Agent" or "Agent") and an office or agency where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" or "Agent" includes any additional paying agent. The Company may act as its own Paying Agent, except for the purposes of payments on account of principal on the Notes pursuant to Sections 10.10 and 10.15 hereof. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which shall incorporate the provisions of the Trust Indenture Act. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee of the name and address of any such Agent. If the Company fails to maintain a Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such and shall be entitled to appropriate compensation in accordance with Section 6.07 hereof. The Company initially appoints the Trustee as the Registrar and Paying Agent and agent for service of notices and demands in connection with the Notes. Section 3.03. EXECUTION AND AUTHENTICATION. The Initial Notes and the Trustee's certificate of authentication shall be substantially in the form of EXHIBIT A-1 hereto. The Exchange Notes and the Trustee's certificate of authentication relating thereto shall be substantially in the form of EXHIBIT A-2 hereto. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. The Company shall -32- approve the form of the Notes and any notation, legend or endorsement thereon. Each Note shall be dated the date of issuance and shall show the date of its authentication. The terms and provisions contained in the Notes annexed hereto as EXHIBIT A-1 and EXHIBIT A-2 shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Notes offered and sold in reliance on Rule 144A and Notes offered and sold in reliance on Regulation S shall be issued initially in the form of one or more Global Notes, substantially in the form set forth in EXHIBIT A-1, deposited with the Trustee, as custodian for the Depository, duly executed by the Company and authenticated by the Trustee as hereinafter provided and shall bear the legend set forth in EXHIBIT C. The aggregate principal amount of the Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depository, as hereinafter provided. Notes issued in exchange for interests in a Global Note pursuant to Section 3.17 hereof may be issued in the form of permanent certificated Notes in registered form in substantially the form set forth in EXHIBIT A-1 (the "Physical Notes"). Two Officers, or an Officer and an Assistant Secretary, of the Company shall sign, or one Officer of the Company shall sign, and one Officer or an Assistant Secretary of the Company (each of whom shall, in each case, have been duly authorized by all requisite corporate actions) shall attest to, the Notes for the Company by manual or facsimile signature. An Officer of a Subsidiary Guarantor (who shall have been duly authorized by all requisite corporate actions) shall sign by manual or facsimile signature a notation, in the form of EXHIBIT B, in respect of the Subsidiary Guarantee of such Subsidiary Guarantor, on the Notes transferred and exchanged subsequent to the issuance of such Subsidiary Guarantee for so long as it remains outstanding. If an Officer or Assistant Secretary of the Company or an Officer of a Subsidiary Guarantor whose signature is on a Note or a notation, as the case may be, was an Officer or (in the case of the Company) Assistant Secretary at the time of such execution but no longer holds that office or position at the time the Trustee authenticates the Note, the Note and any notation thereon shall nevertheless be valid. The Trustee shall authenticate (i) Initial Notes for original issue in an aggregate principal face amount not to exceed $208,530,000, (ii) Private Exchange Notes from time to time only in exchange for a like principal face amount of Initial Notes and (iii) Unrestricted Notes from time to time only in exchange for (A) a like principal face amount of Initial Notes or (B) a like principal face amount of Private Exchange Notes, in each case upon a written order of the Company in the form of an Officers' Certificate of the Company. Each such written order shall specify the amount of Notes -33- to be authenticated and the date on which the Notes are to be authenticated, whether the Notes are to be Initial Notes, Private Exchange Notes or Unrestricted Notes and whether (subject to this Section 3.03) the Notes are to be issued as Physical Notes or Global Notes and such other information as the Trustee may reasonably request. The aggregate principal face amount of Notes outstanding at any time may not exceed $208,530,000, except as provided in Section 3.06 hereof. Notwithstanding the foregoing, all Notes issued under this Indenture shall vote and consent together on all matters (as to which any of such Notes may vote or consent) as one class and no series of Notes will have the right to vote or consent as a separate class on any matter. The Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate Notes. Unless otherwise provided in the appointment, an authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company and Affiliates of the Company. The Notes shall be issuable in fully registered form only, without coupons, in denominations of $1,000 and any integral multiple thereof. Section 3.04. TEMPORARY NOTES. Until definitive Notes are prepared and ready for delivery, the Company may execute and upon a Company Order the Trustee shall authenticate and deliver temporary Notes. Temporary Notes shall be substantially in the form of definitive Notes, in any authorized denominations, but may have variations that the Company reasonably considers appropriate for temporary Notes as conclusively evidenced by the Company's execution of such temporary Notes. If temporary Notes are issued, the Company will cause definitive Notes to be prepared without unreasonable delay but in no event later than the date that the Exchange Offer is consummated. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Company designated for such purpose pursuant to Section 10.02 hereof, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of like tenor and of authorized denominations. Until so exchanged the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Notes. Section 3.05. TRANSFER AND EXCHANGE. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 10.02 hereof being sometimes referred to herein as the "Note Register") in which, subject to such reasonable regulations as the Registrar may prescribe, the Company shall provide for the -34- registration of Notes and of transfers and exchanges of Notes. The Trustee is hereby initially appointed Registrar for the purpose of registering Notes and transfers of Notes as herein provided. When Notes are presented to the Registrar or a co-Registrar with a request from the Holder of such Notes to register the transfer or exchange for an equal principal amount of Notes of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested; provided, however, that every Note presented or surrendered for registration of transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer or exchange in form satisfactory to the Company and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. Whenever any Notes are so presented for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Notes which the Holder making the exchange is entitled to receive, and each Subsidiary Guarantor, if any, shall execute a notation on such Notes with respect to its Subsidiary Guarantee. No service charge shall be made to the Noteholder for any registration of transfer or exchange. The Company may require from the Noteholder payment of a sum sufficient to cover any transfer taxes or other governmental charge that may be imposed in relation to a transfer or exchange, but this provision shall not apply to any exchange pursuant to Section 10.10, 10.15 or 9.06 hereof (in which events the Company will be responsible for the payment of all such taxes which arise solely as a result of the transfer or exchange and do not depend on the tax status of the Holder). The Trustee shall not be required to exchange or register the transfer of any Note for a period of 15 days immediately preceding the first mailing of notice of redemption of Notes to be redeemed or of any Note selected, called or being called for redemption except, in the case of any Note where public notice has been given that such Note is to be redeemed in part, the portion thereof not to be redeemed. All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Company and each Subsidiary Guarantor, if any, evidencing the same Indebtedness, and entitled to the same benefits under this Indenture, as the Notes surrendered upon such registration of transfer or exchange. Any Holder of a beneficial interest in a Global Note shall, by acceptance of such Global Note, agree that transfers of beneficial interests in such Global Notes may be effected only through a book-entry system maintained by the Holder of such Global Note (or its agent), and that ownership of a beneficial interest in the Note shall be required to be reflected in a book-entry system. Section 3.06. MUTILATED, DESTROYED, LOST AND STOLEN NOTES. If a mutilated Note is surrendered to the Trustee or if the Holder of a Note of any series claims that the Note has been lost, destroyed or wrongfully taken, the Company and each Subsidiary Guarantor, if any, shall execute and upon a Company Order, the Trustee shall authenticate and deliver a replacement Note of like tenor and principal amount, bearing a number not contemporaneously outstanding if the Holder of such Note furnishes to the Company, each Subsidiary Guarantor, if any, and to the Trustee evidence reasonably acceptable to them of the ownership and the destruction, loss or theft of such Note and an indemnity bond shall be posted by such Holder, sufficient in the judgment -35- of the Company or the Trustee, as the case may be, to protect the Company, each Subsidiary Guarantor, the Trustee or any Agent from any loss that any of them may suffer if such Note is replaced. The Company may charge such Holder for the Company's expenses in replacing such Note (including (i) expenses of the Trustee charged to the Company and (ii) any tax or other governmental charge that may be imposed) and the Trustee may charge the Company for the Trustee's expenses in replacing such Note. Every replacement Note issued pursuant to this Section in lieu of any destroyed, lost or stolen Note shall constitute an original additional contractual obligation of the Company and each Subsidiary Guarantor, if any, whether or not the destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. Section 3.07. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED. Interest on any Note which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the person in whose name that Note (or one or more Predecessor Notes) is registered at the close of business on the Regular Record Date for such interest. Any interest on any Note which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date and interest on such defaulted interest at the then applicable interest rate borne by the Notes, to the extent lawful (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the Regular Record Date; and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in subsection (a) or (b) below: (a) The Company may elect to make payment of any Defaulted Interest to the persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Note and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the persons entitled to such Defaulted Interest as provided in this subsection (a). Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company in writing of such Special Record -36- Date. In the name and at the expense of the Company, the Trustee shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at its address as it appears in the Note Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the persons in whose names the Notes (or their respective Predecessor Notes) are registered on such Special Record Date and shall no longer be payable pursuant to the following subsection (b). (b) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, if, after written notice given by the Company to the Trustee of the proposed payment pursuant to this subsection (b), such payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Note delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Note shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Note. Section 3.08. PERSONS DEEMED OWNERS. Prior to and at the time of due presentment for registration of transfer, the Company, the Subsidiary Guarantors, if any, the Trustee and any agent of the Company or the Trustee may treat the person in whose name any Note is registered in the Note Register as the owner of such Note for the purpose of receiving payment of principal of, premium, if any, and (subject to Section 3.07 hereof) interest on such Note and for all other purposes whatsoever, whether or not such Note shall be overdue, and none of the Company, the Subsidiary Guarantors, the Trustee or any agent of the Company or the Trustee shall be affected by notice to the contrary. Section 3.09. CANCELLATION. All Notes surrendered for payment, redemption, registration of transfer or exchange shall be delivered to the Trustee and, if not already canceled, shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Notes so delivered shall be promptly canceled by the Trustee. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer or exchange, redemption or payment. The Trustee and no one else shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation. No Notes shall be authenticated in lieu of or in exchange for any Notes canceled as provided in this Section 3.09 hereof, except as expressly permitted by this Indenture. All canceled Notes held by the Trustee shall be destroyed and certification of their destruction delivered to the Company unless by a Company Order the Company shall direct that the canceled Notes be returned to it. The Trustee shall provide the Company a list of all Notes that have been canceled from time to time as requested by the Company. -37- Section 3.10. COMPUTATION OF INTEREST. Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months and, in the case of a partial month, the actual number of days elapsed. Section 3.11. LEGAL HOLIDAYS. In any case where any Interest Payment Date, Redemption Date, date established for the payment of Defaulted Interest or Stated Maturity of any Note shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Notes) payment of principal, premium, if any, or interest need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date, date established for the payment of Defaulted Interest or at the Stated Maturity, as the case may be. In such event, no interest shall accrue with respect to such payment for the period from and after such Interest Payment Date, Redemption Date, date established for the payment of Defaulted Interest or Stated Maturity, as the case may be, to the next succeeding Business Day and, with respect to any Interest Payment Date, interest for the period from and after such Interest Payment Date shall accrue with respect to the next succeeding Interest Payment Date. Section 3.12. CUSIP AND CINS NUMBERS. The Company in issuing the Notes may use "CUSIP" and "CINS" numbers (if then generally in use), and if so, the Trustee shall use the CUSIP or CINS numbers, as the case may be, in notices of redemption or exchange as a convenience to Holders; provided, however, that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP or CINS number, as the case may be, printed in the notice or on the Notes, and that reliance may be placed only on the other identification numbers printed on the Notes. The Company shall promptly notify the Trustee in writing of any change in the CUSIP or CINS number of any series of Notes. Section 3.13. PAYING AGENT TO HOLD MONEY IN TRUST. Each Paying Agent shall hold in trust for the benefit of the Noteholders or the Trustee all money held by the Paying Agent for the payment of principal of, premium, if any, or interest on the Notes, and shall notify the Trustee of any default by the Company in making any such payment. Money held in trust by the Paying Agent need not be segregated except as required by law and in no event shall the Paying Agent be liable for any interest on any money received by it hereunder. The Company at any time may require the Paying Agent to pay all money held by it to the Trustee and account for any funds disbursed and the Trustee may at any time during the continuance of any Event of Default, upon a Company Order to the Paying Agent, require such Paying Agent to pay forthwith all money so held by it to the Trustee and to account for any funds disbursed. Upon making such payment, the Paying Agent shall have no further liability for the money delivered to the Trustee. -38- Section 3.14. TREASURY NOTES. In determining whether the Holders of the required aggregate principal amount of Notes have concurred in any direction, waiver, consent or notice, Notes owned by the Company or an Affiliate of the Company shall be considered as though they are not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes which the Trustee actually knows are so owned shall be so considered. The Company shall notify the Trustee, in writing, when it or any of its Affiliates repurchases or otherwise acquires Notes, of the aggregate principal amount of such Notes so repurchased or otherwise acquired. Section 3.15. DEPOSITS OF MONIES. Prior to 11:00 a.m. New York City time on each Interest Payment Date, maturity date, Redemption Date, Change of Control Payment Date and Asset Sale Offer Purchase Date, the Company shall have deposited with the Paying Agent in immediately available funds money sufficient to make cash payments, if any, due on such Interest Payment Date, maturity date, Redemption Date, Change of Control Payment Date or Asset Sale Offer Purchase Date, as the case may be, in a timely manner which permits the Paying Agent to remit payment to the Holders on such Interest Payment Date, maturity date, Redemption Date, Change of Control Payment Date or Asset Sale Offer Purchase Date, as the case may be. Section 3.16. BOOK-ENTRY PROVISIONS FOR GLOBAL NOTES. (a) The Global Notes initially shall (i) be registered in the name of the Depository or the nominee of such Depository, (ii) be delivered to the Trustee as custodian for such Depository and (iii) bear legends as set forth in EXHIBIT C. Members of, or participants in, the Depository ("Agent Members") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depository, or the Trustee as its custodian, or under the Global Note, and the Depository may be treated by the Company, each Subsidiary Guarantor, the Trustee and any agent of the Company or the Trustee as the absolute owner of the Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, any Subsidiary Guarantor, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Note. (b) Transfers of Global Notes shall be limited to transfers in whole, but not in part, to the Depository, its successors or their respective nominees. Interests of beneficial owners in the Global Notes may be transferred or exchanged for Physical Notes in accordance with the rules and procedures of the Depository and the provisions of Sections 3.03 and 3.17 hereof. In addition, Physical Notes shall be transferred to all beneficial owners in exchange for their beneficial interests -39- in Global Notes if (i) the Depository notifies the Company that it is unwilling or unable to continue as Depository for any Global Note, or that it will cease to be a "Clearing Agency" under the Exchange Act, and in either case a successor Depository is not appointed by the Company within 90 days of such notice or (ii) an Event of Default has occurred and is continuing and the Registrar has received a written request from the Depository to issue Physical Notes. (c) In connection with any transfer or exchange of a portion of the beneficial interest in any Global Note to beneficial owners pursuant to paragraph (b), the Registrar shall (if one or more Physical Notes are to be issued) reflect on its books and records the date and a decrease in the principal amount of the Global Note in an amount equal to the principal amount of the beneficial interest in the Global Note to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Physical Notes of like tenor and principal amount of authorized denominations, and each Subsidiary Guarantor, if any, shall execute a notation thereon in respect of its Subsidiary Guarantee. (d) In connection with the transfer of Global Notes as an entirety to beneficial owners pursuant to paragraph (b), the Global Notes shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depository in exchange for its beneficial interest in the Global Notes, an equal aggregate principal amount at maturity of Physical Notes of like tenor of authorized denominations, and each Subsidiary Guarantor, if any, shall execute a notation thereon in respect of its Subsidiary Guarantee. (e) Any Physical Note constituting a Restricted Note delivered in exchange for an interest in a Global Note pursuant to subparagraph (b), (c) or (d) of this Section 3.16 shall, except as otherwise provided by Section 3.17 hereof, bear the Private Placement Legend. (f) The Holder of any Global Note may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Notes. Section 3.17. SPECIAL TRANSFER PROVISIONS. (a) TRANSFERS TO NON-QIB INSTITUTIONAL ACCREDITED INVESTORS. The following additional provisions shall apply with respect to the registration of any proposed transfer of an Initial Note to any Institutional Accredited Investor which is not a QIB: (i) the Registrar shall register the transfer of any Initial Note, whether or not such Note bears the Private Placement Legend, if (x) the requested transfer is after the second anniversary of the Issue Date; provided, however, that neither the Company nor any Affiliate of the Company has held any beneficial interest in such Note, or portion thereof, at any time on or prior to the second anniversary of the Issue Date and such transfer can otherwise be lawfully made under the Securities Act without registering such Initial Notes thereunder or (y) the proposed transferee has delivered to -40- the Registrar a certificate substantially in the form of EXHIBIT D hereto and any legal opinions and certifications required thereby; (ii) if the proposed transferor is an Agent Member seeking to transfer an interest in a Global Note, upon receipt by the Registrar of (x) written instructions given in accordance with the Depository's and the Registrar's procedures and (y) the appropriate certificate, if any, required by clause (y) of paragraph (i) above, together with any required legal opinions and certifications, the Registrar shall register the transfer and reflect on its books and records the date and a decrease in the principal amount of the Global Note from which such interests are to be transferred in an amount equal to the principal amount of the Notes to be transferred and the Company shall execute, each Subsidiary Guarantor, if any, shall execute a notation on and, upon a Company Order, the Trustee shall authenticate Physical Notes in a principal amount equal to the principal amount of the Global Note to be transferred. (b) TRANSFERS TO NON-U.S. PERSONS. The following additional provisions shall apply with respect to the registration of any proposed transfer of an Initial Note to any Non-U.S. Person: (i) the Registrar shall register the transfer of any Initial Note, whether or not such Note bears the Private Placement Legend, if (x) the requested transfer is after the second anniversary of the Issue Date; provided, however, that neither the Company nor any Affiliate of the Company has held any beneficial interest in such Note, or portion thereof, at any time on or prior to the second anniversary of the Issue Date and such transfer can otherwise be lawfully made under the Securities Act without registering such Initial Notes thereunder or (y) the proposed transferor has delivered to the Registrar a certificate substantially in the form of EXHIBIT E hereto; (ii) if the proposed transferee is an Agent Member and the Notes to be transferred consist of Physical Notes which after transfer are to be evidenced by an interest in the Regulation S Global Note, upon receipt by the Registrar of (x) written instructions given in accordance with the Depository's and the Registrar's procedures and (y) the appropriate certificate, if any, required by clause (y) of paragraph (i) above, together with any required legal opinions and certifications, the Registrar shall register the transfer and reflect on its books and records the date and an increase in the principal amount of the Regulation S Global Note in an amount equal to the principal amount of Physical Notes to be transferred, and the Trustee shall cancel the Physical Notes so transferred; (iii) if the proposed transferor is an Agent Member seeking to transfer an interest in the 144A Global Note, upon receipt by the Registrar of (x) written instructions given in accordance with the Depository's and the Registrar's procedures and (y) the appropriate certificate, if any, required by clause (y) of paragraph (i) above, together with any required legal opinions and certifications, the Registrar shall register the transfer and reflect on its books and records the date and (A) a decrease in the principal amount of the 144A Global Note from which such interests are to be transferred in an amount equal to the principal amount of the Notes to be transferred and (B) an increase in the principal amount of the Regulation S Global Note in an amount equal to the principal amount of the 144A Global Note to be transferred; and -41- (iv) until the 41st day after the Issue Date (the "Restricted Period"), an owner of a beneficial interest in the Regulation S Global Note may not transfer such interest to a transferee that is a U.S. person or for the account or benefit of a U.S. person within the meaning of Rule 902(o) of the Securities Act. During the Restricted Period, all beneficial interests in the Regulation S Global Note shall be transferred only through Cedel or Euroclear, either directly if the transferor and transferee are participants in such systems, or indirectly through organizations that are participants. (c) TRANSFERS TO QIBS. The following provisions shall apply with respect to the registration of any proposed transfer of an Initial Note to a QIB (excluding Non-U.S. Persons): (i) the Registrar shall register the transfer of any Initial Note, whether or not such Note bears the Private Placement Legend, if (x) the requested transfer is after the second anniversary of the Issue Date; provided, however, that neither the Company nor any Affiliate of the Company has held any beneficial interest in such Note, or portion thereof, at any time on or prior to the second anniversary of the Issue Date and such transfer can otherwise be lawfully made under the Securities Act without registering such Initial Note thereunder or (y) such transfer is being made by a proposed transferor who has checked the box provided for on the form of Note stating, or has otherwise advised the Company and the Registrar in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Note stating, or has otherwise advised the Company and the Registrar in writing, that it is purchasing the Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A; (ii) if the proposed transferee is an Agent Member and the Notes to be transferred consist of Physical Notes which after transfer are to be evidenced by an interest in the 144A Global Note, upon receipt by the Registrar of written instructions given in accordance with the Depository's and the Registrar's procedures, the Registrar shall register the transfer and reflect on its book and records the date and an increase in the principal amount of the 144A Global Note in an amount equal to the principal amount of Physical Notes to be transferred, and the Trustee shall cancel the Physical Note so transferred; and (iii) if the proposed transferor is an Agent Member seeking to transfer an interest in the Regulation S Global Note, upon receipt by the Registrar of written instructions given in accordance with the Depository's and the Registrar's procedures, the Registrar shall register the transfer and reflect on its books and records the date and (A) a decrease in the principal amount of the Regulation S Global Note in an amount equal to the principal amount of the Notes to be transferred and (B) an increase in the principal amount of the 144A Global Note in an amount equal to the principal amount of the Regulation S Global Note to be transferred. -42- (d) PRIVATE PLACEMENT LEGEND. Upon the registration of transfer, exchange or replacement of Notes not bearing the Private Placement Legend, the Registrar shall deliver Notes that do not bear the Private Placement Legend. Upon the registration of transfer, exchange or replacement of Notes bearing the Private Placement Legend, the Registrar shall deliver only Notes that bear the Private Placement Legend unless (i) the circumstances contemplated by paragraph (a)(i)(x) of this Section 3.17 exist, (ii) there is delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act or (iii) such Note has been sold pursuant to an effective registration statement under the Securities Act. (e) OTHER TRANSFERS. If a Holder proposes to transfer a Note constituting a Restricted Note pursuant to any exemption from the registration requirements of the Securities Act other than as provided for by Section 3.17(a), (b) and (c) hereof, the Registrar shall only register such transfer or exchange if such transferor delivers an Opinion of Counsel satisfactory to the Company and the Registrar that such transfer is in compliance with the Securities Act and the terms of this Indenture; provided, however, that the Company may, based upon the opinion of its counsel, instruct the Registrar by a Company Order not to register such transfer in any case where the proposed transferee is not a QIB, Non-U.S. Person or Institutional Accredited Investor. (f) GENERAL. By its acceptance of any Note bearing the Private Placement Legend, each Holder of such a Note acknowledges the restrictions on transfer of such Note set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Note only as provided in this Indenture. The Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 3.16 hereof or this Section 3.17. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable prior written notice to the Registrar. Section 3.18. COMPONENT OF UNIT. The Notes shall initially be issued as part of a unit ("Unit"), each Unit consisting of $1,000 principal face amount of Notes and three Warrants. The Notes and the Warrants comprising a Unit shall not be separately transferable until the "Separability Date," which means the earliest to occur of: (i) September 1, 1998, (ii) the occurrence of an Exercise Event (as defined in the Warrant Agreement), (iii) the occurrence of an Event of Default, (iv) the date on which a registration statement under the Securities Act of 1933 with respect to the Exchange Offer or covering the sale by holders of the Notes is declared effective under the Securities Act, (v) immediately prior to any optional redemption of Notes by the Company from the net proceeds of an Initial Public Equity Offering, (vi) immediately prior to the occurrence of a Warrant Change of Control or (vii) such earlier date as determined by Merrill Lynch & Co. in its sole discretion. Transfers of the Units shall be made by the Unit Agent in accordance with the restrictions set forth in Section 3.17 hereof. The Unit Agent shall be entitled to the same benefits and privileges as those accorded to theTrustee under this Indenture. -43- ARTICLE FOUR DEFEASANCE OR COVENANT DEFEASANCE Section 4.01. COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE. The Company may, at its option by Board Resolution, at any time, with respect to the Notes, elect to have either Section 4.02 or Section 4.03 hereof be applied to all of the Outstanding Notes (the "Defeased Notes"), upon compliance with the conditions set forth below in this Article Four. Section 4.02. DEFEASANCE AND DISCHARGE. Upon the Company's exercise under Section 4.01 hereof of the option applicable to this Section 4.02, the Company shall be deemed to have been discharged from its obligations with respect to the Defeased Notes on the date the conditions set forth below are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Defeased Notes, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 4.05 and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all its other obligations under such Notes and this Indenture insofar as such Notes are concerned (and the Trustee, at the expense of the Company and upon Company Request, shall execute proper instruments acknowledging the same), except for the following, which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of Defeased Notes to receive, solely from the trust fund described in Section 4.04 hereof and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest on such Notes when such payments are due, (b) the Company's obligations with respect to such Defeased Notes under Sections 3.04, 3.05, 3.06, 10.02 and 10.03 hereof, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder, including, without limitation, the Trustee's rights under Section 6.07 hereof, and (d) this Article Four. Subject to compliance with this Article Four, the Company may exercise its option applicable to this Section 4.02 notwithstanding the prior exercise of its option applicable to Section 4.03 hereof with respect to the Notes. Section 4.03. COVENANT DEFEASANCE. Upon the Company's exercise under Section 4.01 hereof of the option applicable to this Section 4.03, the Company shall be released from its obligations under any covenant or provision contained in Sections 10.06 through 10.22 hereof and the provisions of Articles Eight shall not apply, with respect to the Defeased Notes, on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), and the Defeased Notes shall thereafter be deemed not to be "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means -44- that, with respect to the Defeased Notes, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Sections or Article, whether directly or indirectly, by reason of any reference elsewhere herein to any such Section or Article or by reason of any reference in any such Section or Article to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 5.01(iii), (iv) or (v) hereof, but, except as specified above, the remainder of this Indenture and such Defeased Notes shall be unaffected thereby. Section 4.04. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE. The following shall be the conditions to application of either Section 4.02 or Section 4.03 hereof to the Defeased Notes: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 6.09 hereof who shall agree to comply with the provisions of this Article Four applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Notes, (a) cash (in United States dollars) in an amount, or (b) U.S. Government Securities which through the scheduled payment of principal, premium, if any, and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (c) a combination thereof, in any such case, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of, premium, if any, and interest on the Defeased Notes at the Stated Maturity of such principal or installment of principal, premium, if any, or interest; provided, however, that the Trustee shall have been irrevocably instructed to apply such cash or the proceeds of such U.S. Government Securities to said payments with respect to the Notes; (2) No Default shall have occurred and be continuing on the date of such deposit or, insofar as Section 5.01(ix), (x) or (xi) hereof is concerned, at any time during the period ending on the ninety-first day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period); (3) Neither the Company nor any Subsidiary of the Company is an "insolvent person" within the meaning of any applicable Bankruptcy Law on the date of such deposit or at any time during the period ending on the ninety-first day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period); -45- (4) Such defeasance or covenant defeasance shall not cause the Trustee for the Notes to have a conflicting interest in violation of Section 6.08 hereof and for purposes of the Trust Indenture Act with respect to any securities of the Company; (5) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Company is a party or by which it is bound; (6) In the case of an election under Section 4.02 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (y) since the date hereof, there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Notes will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (7) In the case of an election under Section 4.03 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Notes will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; (8) The Company shall have delivered to the Trustee an Opinion of Counsel to the effect that, immediately following the ninety-first day after the deposit, the trust funds established pursuant to this Article will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally under any applicable U.S. Federal or state law; (9) The Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit made by the Company pursuant to its election applicable to Section 4.02 or 4.03 hereof was not made by the Company with the intent of preferring the Holders over the other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; (10) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that (i) all conditions precedent (other than conditions requiring the passage of time) provided for relating to either the defeasance under Section 4.02 or the covenant defeasance under Section 4.03 (as the case may be) have been complied with as contemplated by this Section 4.04 and (ii) if any other Indebtedness of the Company shall then be outstanding or committed, such defeasance or covenant defeasance will not violate the provisions of the agreements or instruments evidencing such Indebtedness; and -46- (11) Such defeasance or covenant defeasance shall not result in a trust arising from such deposit constituting an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Opinions required to be delivered under this Section may have such qualifications as are customary for opinions of the type required and reasonably acceptable to the Trustee. Section 4.05. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. Subject to the proviso of the last paragraph of Section 10.03, all money and U.S. Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 4.05, the "Trustee") pursuant to Section 4.04 in respect of the Defeased Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (other than the Company) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee and hold it harmless against any tax, fee or other charge imposed on or assessed against the U.S. Government Securities deposited pursuant to Section 4.04 or the principal, premium, if any, and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Defeased Notes. Anything in this Article Four to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Securities held by it as provided in Section 4.04 which, in the opinion of an internationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance. Section 4.06. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Securities in accordance with Section 4.02 or 4.03 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations of the Company under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 4.02 or 4.03 hereof, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money and U.S. Government Securities in accordance with Section 4.02 or 4.03 hereof, as the case may be; provided, however, that if the Company makes any payment of principal, premium, if any, or interest on any Note following the reinstatement of its obligations, the Company shall be subrogated to the -47- rights of the Holders of such Notes to receive such payment from the money and U.S. Government Securities held by the Trustee or Paying Agent. ARTICLE FIVE REMEDIES Section 5.01. EVENTS OF DEFAULT. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (i) default in the payment of interest on the Notes when it becomes due and payable and continuance of such default for a period of 30 days or more; or (ii) default in the payment of the principal of, or premium, if any, on the Notes when due at maturity, upon redemption or otherwise; or (iii) default in the payment of the Accreted Value of, and any accrued and unpaid interest on, any Notes required to be purchased pursuant to a Change of Control Offer or Asset Sale Offer when due and payable; or (iv) default in the performance, or breach, of any covenant described under Section 10.10, Section 10.15 or Article Eight; or (v) default in the performance, or breach, of any term, covenant or agreement in the Notes, this Indenture (other than defaults specified in clause (i), (ii), (iii) or (iv) above), and continuance of such default or breach for a period of 30 days or more after written notice to the Company and the Subsidiary Guarantors by the Trustee or to the Company and the Trustee by the holders of at least 25% in aggregate principal face amount of the outstanding Notes (in each case, when such notice is deemed received in accordance with this Indenture); or (vi) (a) failure to pay, following any applicable grace period, any installment of principal due (whether at maturity or otherwise) under one or more classes or issues of Indebtedness in an aggregate principal amount of $5 million or more under which the Company or any Material Restricted Subsidiary is obligated or (b) failure by the Company or any Material Restricted Subsidiary to perform any other term, covenant, condition or provision of one or more classes or issues of Indebtedness in an aggregate principal amount of $5 million or more under which the Company or such Material Restricted Subsidiary is obligated -48- and, in the case of this clause (b), such failure results in an acceleration of the maturity thereof; or (vii) any holder of Indebtedness in an aggregate principal amount of $5 million or more of the Company or any Material Restricted Subsidiary shall commence judicial proceedings or take any other action to foreclose upon, or dispose of assets of the Company or any Material Restricted Subsidiary having an aggregate Fair Market Value, individually or in the aggregate, of $5 million or more or shall have exercised any right under applicable law or applicable security documents to take ownership of any such assets in lieu of foreclosure; provided that, in any such case, the Company or any Material Restricted Subsidiary shall not have obtained, prior to any such foreclosure or disposition of assets, a stay of all such actions that remains in effect; or (viii) one or more judgments, orders or decrees for the payment of money of $5 million or more, either individually or in the aggregate, shall be entered into against the Company or any Material Restricted Subsidiary or any of their respective properties and shall not be discharged and there shall have been a period of 60 days or more during which a stay of enforcement of such judgment or order, by reason of pending appeal or otherwise, shall not be in effect; or (ix) the Company, any Material Restricted Subsidiary any Subsidiary Guarantor of the Company pursuant to or under or within the meaning of any Bankruptcy Law: (A) commences a voluntary case or proceeding; (B) consents to the making of a Bankruptcy Order in an involuntary case or proceeding or the commencement of any case against it; (C) consents to the appointment of a Custodian of it or for any substantial part of its property; (D) makes a general assignment for the benefit of its creditors; (E) files an answer or consent seeking reorganization or relief; (F) shall admit in writing its inability to pay its debts generally; or (G) consents to the filing of a petition in bankruptcy; or (x) a court of competent jurisdiction in any involuntary case or proceeding enters a Bankruptcy Order against the Company, any Material Restricted Subsidiary or any Subsidiary Guarantor, and such Bankruptcy Order remains unstayed and in effect for 60 consecutive days; or -49- (xi) a Custodian shall be appointed out of court with respect to the Company, any Material Restricted Subsidiary or any Subsidiary Guarantor with respect to all or any substantial part of the assets or properties of the Company, any Material Restricted Subsidiary or any Subsidiary Guarantor; or (xii) this Indenture or the Registration Rights Agreement ceases to be in full force and effect or is declared null and void or the Company denies that it has any further obligation or liability thereunder or gives notice to that effect (other than by reason of termination or release in accordance with the terms thereof); or (xiii) any Subsidiary Guarantee or any provision thereof shall at any time cease to be the legal, valid and binding obligation of the Subsidiary Guarantor party thereto such that the Holders of the Notes could not reasonably be expected to realize the material benefits intended to be provided by such Subsidiary Guarantor under its Subsidiary Guarantee or any Subsidiary Guarantor shall assert that its Subsidiary Guarantee is not a legal, valid and binding obligation or shall purport to revoke its obligations thereunder. Section 5.02. ACCELERATION OF MATURITY RESCISSION AND ANNULMENT. If an Event of Default (other than an Event of Default specified in clause (viii), (ix) or (x) of Section 5.01 hereof with respect to the Company) occurs and is continuing, then the Trustee or the holders of at least 25% in principal face amount of the outstanding Notes may, by written notice, and the Trustee upon the request of the holders of not less than 25% in principal face amount of the outstanding Notes shall, declare the Default Amount of all outstanding Notes to be immediately due and payable and upon any such declaration such amount shall become immediately due and payable. If an Event of Default specified in clause (viii), (ix) or (x) above with respect to the Company occurs and is continuing, then the Default Amount of all outstanding Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holder. After a declaration of acceleration, the holders of a majority in aggregate principal face amount of outstanding Notes may, by notice to the Trustee, rescind such declaration of acceleration if all existing Events of Default, other than nonpayment of the principal of, premium (if any) on, and any accrued and unpaid interest on, the Notes that has become due solely as a result of such acceleration, have been cured or waived and if the rescission of acceleration would not conflict with any judgment or decree. Section 5.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. The Company covenants that if an Event of Default specified in Section 5.01(i) or 5.01(ii) shall have occurred and be continuing, the Company will, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of such Notes, the whole amount then due and payable on such Notes for principal, premium, if any, and interest, with interest upon the overdue principal, -50- premium, if any, and, to the extent that payment of such interest shall be legally enforceable, upon overdue installments of interest, at the rate then borne by the Notes; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may, but is not obligated under this paragraph to, institute a judicial proceeding for the collection of the sums so due and unpaid and may, but is not obligated under this paragraph to, prosecute such proceeding to judgment or final decree, and may, but is not obligated under this paragraph to, enforce the same against the Company, any Subsidiary Guarantor or any other obligor upon the Notes and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company, any Subsidiary Guarantor or any other obligor upon the Notes, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion, but is not obligated under this paragraph to, (i) proceed to protect and enforce its rights and the rights of the Holders under this Indenture by such appropriate private or judicial proceedings as the Trustee shall deem most effectual to protect and enforce such rights, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted herein or (ii) proceed to protect and enforce any other proper remedy. No recovery of any such judgment upon any property of the Company shall affect or impair any rights, powers or remedies of the Trustee or the Holders. Section 5.04. TRUSTEE MAY FILE PROOFS OF CLAIMS. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company, any Subsidiary Guarantor or any other obligor upon the Notes or the property of the Company, any Subsidiary Guarantor or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company or any Subsidiary Guarantor for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal, premium, if any, and interest owing and unpaid in respect of the Notes and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, fees, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any Custodian, in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the -51- Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07 hereof. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 5.05. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF NOTES. All rights of action and claims under this Indenture or the Notes may be prosecuted and enforced by the Trustee without the possession of any of the Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, fees, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Notes in respect of which such judgment has been recovered. Section 5.06. APPLICATION OF MONEY COLLECTED. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal, premium, if any, or interest, upon presentation of the Notes and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: First: to the Trustee for amounts due under Section 6.07; Second: to Holders for interest accrued on the Notes, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for interest; Third: to Holders for principal and premium, if any, amounts owing under the Notes, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal and premium, if any; and Fourth: the balance, if any, to the Company. The Trustee, upon prior written notice to the Company, may fix a record date and payment date for any payment to Noteholders pursuant to this Section 5.06. -52- Section 5.07. LIMITATION ON SUITS. No Holder of any Notes shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (a) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (b) the Holders of not less than 25% in principal face amount of the Outstanding Notes shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (c) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in aggregate principal face amount of the Outstanding Notes; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture, any Note or any Subsidiary Guarantee to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, any Note or any Subsidiary Guarantee, except in the manner provided in this Indenture and for the equal and ratable benefit of all the Holders. Section 5.08. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM AND INTEREST. Notwithstanding any other provision in this Indenture, the Holder of any Note shall have the right, which is absolute and unconditional, to receive cash payment of the principal of, premium, if any, and (subject to Section 3.07 hereof) interest on such Note on the respective Stated Maturities expressed in such Note (or, in the case of redemption, on the respective Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. -53- Section 5.09. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture or any Note and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, each Subsidiary Guarantor, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 5.10. RIGHTS AND REMEDIES CUMULATIVE. Except as provided in Section 3.06, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 5.11. DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any Holder of any Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article Five or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. Section 5.12. CONTROL BY MAJORITY. The Holders of a majority in aggregate principal face amount of the Outstanding Notes shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided, however, that: (a) such direction shall not be in conflict with any rule of law or with this Indenture or any Note or expose the Trustee to personal liability; and (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. -54- Section 5.13. WAIVER OF PAST DEFAULTS. The Holders of not less than a majority in aggregate principal face amount of the Outstanding Notes may on behalf of the Holders of all the Notes waive any past Default hereunder and its consequences, except a Default (a) in the payment of the principal of, premium, if any, or interest on any Note, (b) arising from failure to purchase any Notes tendered pursuant to an offer to purchase required to be made by any provision of this Indenture, or (c) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Note affected thereby. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. Section 5.14. UNDERTAKING FOR COSTS. All parties to this Indenture agree, and each Holder of any Note by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.14 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal face amount of the Outstanding Notes, or to any suit instituted by any Holder for the enforcement of the payment of the principal of, premium, if any, or interest on any Note on or after the respective Stated Maturities expressed in such Note (or, in the case of redemption, on or after the respective Redemption Dates). Section 5.15. WAIVER OF STAY, EXTENSION OR USURY LAWS. The Company and each Subsidiary Guarantor covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury or other law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company or such Subsidiary Guarantor from paying all or any portion of the principal of, premium, if any, or interest on the Notes contemplated herein or in the Notes or which may affect the covenants or the performance of this Indenture; and the Company and each Subsidiary Guarantor (to the extent that it -55- may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 5.16. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision in this Indenture and any provision of any Note, the right of any Holder of any Note to receive payment of the principal of, premium, if any, and interest on such Note on or after the respective Stated Maturities (or the respective Redemption Dates, in the case of redemption) expressed in such Note, or after such respective dates, shall not be impaired or affected without the consent of such Holder. ARTICLE SIX THE TRUSTEE Section 6.01. CERTAIN DUTIES AND RESPONSIBILITIES. (a) Except during the continuance of an Event of Default, (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (a) During the existence of an Event of Default, the Trustee is required to exercise such rights and powers vested in it under this Indenture and use the same degree of care and skill in its exercise thereof as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. (b) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the -56- exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (c) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 6.01. Section 6.02. NOTICE OF DEFAULTS. Within 45 days after the occurrence of any Default, the Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Note Register, notice of such Default hereunder known to the Trustee, unless such Default shall have been cured or waived; provided, however, that, except in the case of a Default in the payment of the principal of, premium, if any, or interest on any Note or in respect of Article 8 hereof, the Trustee shall be protected in withholding such notice if and so long as a trust committee of Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interest of the Holders. Section 6.03. CERTAIN RIGHTS OF TRUSTEE. Subject to Section 6.01 hereof and the provisions of Section 315 of the Trust Indenture Act: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board may be sufficiently evidenced by a Board Resolution thereof; (c) the Trustee may consult with counsel and any written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by the Trustee in compliance with such request or direction; -57- (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture other than any liabilities arising out of its own negligence; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, approval, appraisal, bond, debenture, note, coupon, security, other evidence of indebtedness or other paper or document unless requested in writing so to do by the Holders of not less than a majority in aggregate principal amount of the Notes then Outstanding; provided, however, that, if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liabilities as a condition to proceeding; the reasonable expenses of every such investigation shall be paid by the Company or, if paid by the Trustee or any predecessor Trustee, shall be repaid by the Company upon demand; provided, further, the Trustee in its discretion may make such further inquiry or investigation into such facts or matters as it may deem fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; and (h) except with respect to Section 10.01, the Trustee shall have no duty to inquire as to the performance of the Company's covenants in Article Ten. In addition, the Trustee shall not be deemed to have knowledge of any Default or Event of Default except (i) any Event of Default occurring pursuant to Sections 5.01(i), 5.01(ii) and 10.01 or (ii) any Default or Event of Default of which the Trustee shall have received written notification or obtained actual knowledge. Section 6.04. TRUSTEE NOT RESPONSIBLE FOR RECITALS, DISPOSITIONS OF NOTES OR APPLICATION OF PROCEEDS THEREOF. The recitals contained herein and in the Notes, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Notes and perform its obligations hereunder and that the statements to be made by it in any Statement of Eligibility and Qualification on Form T-1 supplied to the Company will be true and accurate subject to the qualifications set forth therein. The Trustee shall not be accountable for the use or application by the Company of Notes or the proceeds thereof. -58- Section 6.05. TRUSTEE AND AGENTS MAY HOLD NOTES; COLLECTIONS; ETC. The Trustee, any Paying Agent, Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Notes, with the same rights it would have if it were not the Trustee, Paying Agent, Registrar or such other agent and, subject to Section 6.08 hereof and Sections 310 and 311 of the Trust Indenture Act, may otherwise deal with the Company and receive, collect, hold and retain collections from the Company with the same rights it would have if it were not the Trustee, Paying Agent, Registrar or such other agent. Section 6.06. MONEY HELD IN TRUST. All moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required herein or by law. The Trustee shall not be under any liability for interest on any moneys received by it hereunder. Section 6.07. COMPENSATION AND INDEMNIFICATION OF TRUSTEE AND ITS PRIOR CLAIM. The Company covenants and agrees: (a) to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation for all services rendered by it hereunder (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) to reimburse the Trustee and each predecessor Trustee upon its request for all reasonable expenses, fees, disbursements and advances incurred or made by or on behalf of it in accordance with any of the provisions of this Indenture (including the reasonable compensation, fees, and the expenses and disbursements of its counsel and of all agents and other persons not regularly in its employ), except any such expense, disbursement or advance as may arise from its negligence or bad faith; and (c) to indemnify the Trustee and each predecessor Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder and its duties hereunder, including enforcement of this Section 6.07. The obligations of the Company under this Section to compensate and indemnify the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and each predecessor Trustee for expenses, fees, disbursements and advances shall constitute an additional obligation hereunder and shall survive the satisfaction and discharge of this Indenture. To secure the obligations of the Company to the Trustee under this Section 6.07, the Trustee shall have a prior Lien upon all property and funds held or collected by the Trustee as such, except funds and property paid by the Company and held in trust for the benefit of the Holders of particular Notes. -59- Section 6.08. CONFLICTING INTERESTS. The Trustee shall be subject to and comply with the provisions of Section 310(b) of the Trust Indenture Act. Section 6.09. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY. There shall at all times be a Trustee hereunder which shall be eligible to act as Trustee under Trust Indenture Act Sections 310(a)(1) and (2) and which shall have a combined capital and surplus of at least $25,000,000 and a Corporate Trust Office in the Borough of Manhattan in The City of New York, State of New York. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of any Federal, state, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect hereinafter specified in this Article. Section 6.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR TRUSTEE. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 6.11. (b) The Trustee, or any trustee or trustees hereinafter appointed, may at any time resign by giving written notice thereof to the Company at least 20 Business Days prior to the date of such proposed resignation. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument executed by authority of the Board, a copy of which shall be delivered to the resigning Trustee and a copy to the successor Trustee. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 20 Business Days after the giving of such notice of resignation, the resigning Trustee may, or (if an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 Business Days after the giving of such notice of resignation) any Holder who has been a bona fide Holder of a Note for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper, appoint a successor Trustee. (c) The Trustee may be removed at any time by an Act of the Holders of a majority in principal amount of the Outstanding Notes, delivered to the Trustee and to the Company. (d) If at any time: -60- (1) the Trustee shall fail to comply with the provisions of Section 310(b) of the Trust Indenture Act in accordance with Section 6.08 hereof after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Note for at least six months, or (2) the Trustee shall cease to be eligible under Section 6.09 hereof and shall fail to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Note for at least six months, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose or rehabilitation, conservation or liquidation, then, in any case, (i) the Company by a Board Resolution may remove the Trustee, or (ii) subject to Section 5.14, the Holder of any Note who has been a bona fide Holder of a Note for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Notes delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders of the Notes and accepted appointment in the manner hereinafter provided, the Holder of any Note who has been a bona fide Holder for at least six months may, subject to Section 5.14, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee by mailing written notice of such event by first-class mail, postage prepaid, to the Holders of Notes as their names and addresses appear in the Note Register. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. -61- Section 6.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee as if originally named as Trustee hereunder; but, nevertheless, on the written request of the Company or the successor Trustee, upon payment of amounts due it pursuant to Section 6.07, such retiring Trustee shall duly assign, transfer and deliver to the successor Trustee all moneys and property at the time held by it hereunder and shall execute and deliver an instrument transferring to such successor Trustee all the rights, powers, duties and obligations of the retiring Trustee. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a prior claim upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to the provisions of Section 6.07. No successor Trustee with respect to the Notes shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor Trustee shall be eligible to act as Trustee under this Article. Upon acceptance of appointment by any successor Trustee as provided in this Section 6.11, the successor shall give notice thereof to the Holders of the Notes, by mailing such notice to such Holders at their addresses as they shall appear on the Note Register. If the acceptance of appointment is substantially contemporaneous with the resignation, then the notice called for by the preceding sentence may be combined with the notice called for by Section 6.10. If the Company fails to give such notice within 10 days after acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be given at the expense of the Company. Section 6.12. MERGER, CONVERSION, AMALGAMATION, CONSOLIDATION OR SUCCESSION TO BUSINESS. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated or amalgamated, or any corporation resulting from any merger, conversion, amalgamation or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided such corporation shall be eligible under this Article Six to serve as Trustee hereunder. In case at the time such successor to the Trustee under this Section 6.12 shall succeed to the trusts created by this Indenture any of the Notes shall have been authenticated but not delivered, -62- any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee and deliver such Notes so authenticated; and, in case at that time any of the Notes shall not have been authenticated, any successor to the Trustee under this Section 6.12 may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificate shall have the full force which it is anywhere in the Notes or in this Indenture provided that the certificate of the Trustee shall have been authenticated. ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY Section 7.01. PRESERVATION OF INFORMATION; COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS. (a) The Trustee shall preserve the names and addresses of the Noteholders and otherwise comply with TIA Section 312(a). If the Trustee is not the Registrar, the Company shall furnish or cause the Registrar to furnish to the Trustee before each Interest Payment Date, and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Noteholders. Neither the Company nor the Trustee shall be under any responsibility with regard to the accuracy of such list. (b) The Company will furnish or cause to be furnished to the Trustee (i) semi-annually, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date; and (ii) at such other times as the Trustee may reasonably request in writing, within 30 days after receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; provided, however, that if and so long as the Trustee shall be the Registrar, no such list need be furnished pursuant to this Subsection 7.01(b). Section 7.02. COMMUNICATIONS OF HOLDERS. Holders may communicate with other Holders with respect to their rights under this Indenture or under the Notes pursuant to Section 312(b) of the Trust Indenture Act. The Company and the Trustee and any and all other persons benefited by this Indenture shall have the protection afforded by Section 312(c) of the Trust Indenture Act. -63- Section 7.03. REPORTS BY TRUSTEE. Within 60 days after May 15th of each year commencing with the first May 15th following the date of this Indenture, the Trustee shall mail to all Holders, as their names and addresses appear in the Note Register, a brief report dated as of such May 15th, in accordance with and to the extent required under Section 313 of the Trust Indenture Act. At the time of its mailing to Holders, a copy of each such report shall be filed by the Trustee with the Company, the SEC and with each stock exchange on which the Notes are listed. The Company shall notify the Trustee when the Notes are listed on any stock exchange. ARTICLE EIGHT CONSOLIDATION, MERGER, SALE OF ASSETS, ETC. Section 8.01. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS. The Company will not (i) consolidate or combine with or merge with or into or, directly or indirectly, sell, assign, convey, lease, transfer or otherwise dispose of all or substantially all of its properties and assets to any person or persons in a single transaction or through a series of transactions, or (ii) permit any of the Restricted Subsidiaries to enter into any such transaction or series of transactions if it would result in the disposition of all or substantially all of the properties or assets of the Company and the Restricted Subsidiaries on a consolidated basis, unless, in the case of either (i) or (ii), (a) the Company shall be the continuing person or, if the Company is not the continuing person, the resulting, surviving or transferee person (the "surviving entity") shall be a company organized and existing under the laws of the United States or any State or territory thereof; (b) if the Company is not the continuing person, the surviving entity shall expressly assume all of the obligations of the Company under the Notes and this Indenture, and shall execute a supplemental indenture to effect such assumption which supplemental indenture shall be delivered to the Trustee and shall be in form and substance reasonably satisfactory to the Trustee; (c) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), the Company or the surviving entity (assuming such surviving entity's assumption of the Company's obligations under the Notes and this Indenture), as the case may be, would be able to incur $1.00 of Indebtedness under the proviso of Section 10.11; (d) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), no Default shall have occurred and be continuing; and (e) the Company or the surviving entity, as the case may be, shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel stating that such transaction or series of transactions, and, if a supplemental indenture is required in connection with such transaction or series of transactions to effectuate such assumption, such supplemental indenture, complies with this covenant and that all conditions precedent in this Indenture relating to the transaction or series of transactions have been satisfied. -64- Section 8.02. SUCCESSOR SUBSTITUTED. Upon any consolidation or merger or any sale, assignment, conveyance, lease, transfer or other disposition of all or substantially all of the properties and assets of the Company in accordance with the foregoing in which the Company or the Restricted Subsidiary, as the case may be, is not the continuing corporation, the successor corporation formed by such a consolidation or into which the Company or such Restricted Subsidiary is merged or to which such transfer is made will succeed to, and be substituted for, and may exercise every right and power of, the Company or such Restricted Subsidiary, as the case may be, under this Indenture and the Notes with the same effect as if such successor corporation had been named as the Company or such Restricted Subsidiary therein; and thereafter, except in the case of (i) any lease or (ii) any sale, assignment, conveyance, transfer, lease or other disposition to a Restricted Subsidiary of the Company, the Company shall be discharged from all obligations and covenants under this Indenture and the Notes. For all purposes of this Indenture (including the provisions of this Article Eight and Sections 10.11, Section 10.13 and Section 10.16) and the Notes, Subsidiaries of any surviving entity will, upon such transaction or series of related transactions, become Restricted Subsidiaries or Unrestricted Subsidiaries as provided pursuant to Section 10.20, and all Indebtedness, and all Liens on property or assets, of the surviving entity and the Restricted Subsidiaries (except Indebtedness, or Liens on property or assets, of the Company and the Restricted Subsidiaries in existence immediately prior to such transaction or series of related transactions) shall be deemed to have been incurred upon such transaction or series of related transactions. ARTICLE NINE SUPPLEMENTAL INDENTURES AND WAIVERS Section 9.01. SUPPLEMENTAL INDENTURES, AGREEMENTS AND WAIVERS WITHOUT CONSENT OF HOLDERS. Without the consent of any Holders, the Company, when authorized by a Board Resolution, each Subsidiary Guarantor, if any, when authorized by a Subsidiary Guarantor Board Resolution, and the Trustee, at any time and from time to time, may amend, waive, modify or supplement this Indenture or the Notes for any of the following purposes: (a) to evidence the succession of another person to the Company, and the assumption by any such successor of the covenants of the Company in the Notes and this Indenture; (b) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company in the Notes or this Indenture; -65- (c) to cure any ambiguity, or to correct or supplement any provision in this Indenture or in the Notes which may be defective or inconsistent with any other provision herein or to make any other provisions with respect to matters or questions arising under this Indenture or the Notes; provided, however, that, in each case, such provisions shall not adversely affect the legal rights of the Holders; (d) to comply with the requirements of the SEC in order to effect or maintain the qualification of this Indenture under the Trust Indenture Act, as contemplated by Section 9.05 hereof or otherwise; (e) to evidence and provide the acceptance of the appointment of a successor Trustee hereunder; (f) to mortgage, pledge, hypothecate or grant a security interest in any property or assets in favor of the Trustee for the benefit of the Holders as security for the payment and performance of the Indenture Obligations; (g) to provide for assumption of a Subsidiary Guarantor's obligations under its Subsidiary Guarantee upon a merger, consolidation, sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the property and assets of such Subsidiary Guarantor, in compliance with Section 13.03; (h) to add or release a Subsidiary Guarantor in compliance with the provisions of Article Thirteen hereof; or (i) to make any other change that does not adversely affect the legal rights of any Holder; provided, however, that the Company has delivered to the Trustee an Opinion of Counsel stating that such change, agreement or waiver does not adversely affect the legal rights of any Holder. Section 9.02. SUPPLEMENTAL INDENTURES, AGREEMENTS AND WAIVERS WITH CONSENT OF HOLDERS. With the written consent of the Holders of not less than a majority in aggregate principal face amount of the Outstanding Notes delivered to the Company, each of the Subsidiary Guarantors, if any, and the Trustee, the Company, when authorized by a Board Resolution, each Subsidiary Guarantor, if any, when authorized by a Subsidiary Guarantor Board Resolution, together with the Trustee, may amend, waive, modify or supplement any other provision of this Indenture or the Notes; provided, however, that no such amendment, waiver, modification or supplement may, without the written consent of the Holder of each Outstanding Note affected thereby: -66- (i) reduce the principal amount of, change the fixed maturity of, or alter the redemption provisions of, the Notes, (ii) change the currency in which any Notes or amounts owing thereon is payable, (iii) reduce the percentage of the aggregate principal face amount outstanding of Notes which must consent to an amendment, supplement or waiver or consent to take any action under this Indenture or the Notes, (iv) impair the right to institute suit for the enforcement of any payment on or with respect to the Notes, (v) waive a default in payment with respect to the Notes, other than a waiver consisting of the rescission of any declaration of acceleration with respect to the Notes effected in compliance with Section 5.02, (vi) reduce the rate or change the time for payment of interest on the Notes, (vii) following the occurrence of a Change of Control or an Asset Sale, alter the Company's obligation to purchase the Notes in accordance with this Indenture or waive any default in the performance thereof, (viii) affect the ranking of the Notes in a manner adverse to the Holders of the Notes, or (ix) release any Subsidiary Guarantee except in compliance with Article Thirteen hereof. Upon the written request of the Company accompanied by a Board Resolution authorizing the execution of any such supplemental indenture or other agreement, instrument or waiver, and upon the filing with the Trustee of evidence of the consent of Holders as aforesaid, the Trustee and each Subsidiary Guarantor, if any, shall join with the Company in the execution of such supplemental indenture or other agreement, instrument or waiver. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture or other agreement, instrument or waiver, but it shall be sufficient if such Act shall approve the substance thereof. Section 9.03. EXECUTION OF SUPPLEMENTAL INDENTURES, AGREEMENTS AND WAIVERS. In executing, or accepting the additional trusts created by, any supplemental indenture, agreement, instrument or waiver permitted by this Article Nine or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.01 -67- hereof) shall be fully protected in relying upon, an Opinion of Counsel and an Officers' Certificate from each obligor under the Notes entering into such supplemental indenture, agreement, instrument or waiver, each stating that the execution of such supplemental indenture, agreement, instrument or waiver (a) is authorized or permitted by this Indenture and (b) does not violate the provisions of any agreement or instrument evidencing any other Indebtedness of the Company or any other Subsidiary of the Company. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture, agreement, instrument or waiver which affects the Trustee's own rights, duties or immunities under this Indenture, the Notes or otherwise. Section 9.04. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture under this Article Nine, this Indenture and/or the Notes, if applicable, shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture and/or the Notes, if applicable, as the case may be, for all purposes; and every Holder of Notes theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. Section 9.05. CONFORMITY WITH TRUST INDENTURE ACT. Every supplemental indenture executed pursuant to this Article Nine shall conform to the requirements of the Trust Indenture Act as then in effect. Section 9.06. REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article, may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Board, to any such supplemental indenture may be prepared and executed by the Company and the Subsidiary Guarantors, if any, and authenticated and delivered by the Trustee upon a Company Order in exchange for Outstanding Notes. In addition, Notes authenticated and delivered after the execution of any supplemental indenture in compliance with Section 10.22 and this Article shall, if required by the Trustee, bear a notation substantially in the form annexed hereto as EXHIBIT B, and new Notes bearing such notation shall be prepared and executed by the Company, with such notation executed by the Subsidiary Guarantors. The Trustee, upon a Company Order, shall thereafter authenticate and deliver such Notes in exchange for Outstanding Notes. Section 9.07. RECORD DATE. The Company may, but shall not be obligated to, fix, a record date for the purpose of determining the Holders entitled to consent to any supplemental indenture, agreement or instrument -68- or any waiver, and shall promptly notify the Trustee of any such record date. If a record date is fixed those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to consent to such supplemental indenture, agreement or instrument or waiver or to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. Section 9.08. REVOCATION AND EFFECT OF CONSENTS. Until an amendment or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if a notation of the consent is not made on any Note. However, any such Holder, or subsequent Holder, may revoke the consent as to his Note or portion of a Note if the Trustee receives the notice of revocation before the date the amendment or waiver becomes effective. An amendment or waiver shall become effective in accordance with its terms and thereafter bind every Holder. ARTICLE TEN COVENANTS Section 10.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The Company will duly and punctually pay the principal of, premium, if any, and interest on the Notes in accordance with the terms of the Notes, this Indenture and the Registration Rights Agreement. Section 10.02. MAINTENANCE OF OFFICE OR AGENCY. The Company will maintain in the Borough of Manhattan in The City of New York, State of New York, an office or agency where Notes may be presented or surrendered for payment, where Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The office of the Trustee at its Corporate Trust Office will be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more of such purposes. The Company will give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. -69- The Company may also from time to time designate one or more other offices or agencies (in or outside of The City of New York, State of New York) where the Notes may be presented or surrendered for any or all such purposes, and may from time to time rescind such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in The City of New York, State of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. Section 10.03. MONEY FOR NOTE PAYMENTS TO BE HELD IN TRUST. If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of, premium, if any, or interest on any of the Notes, segregate and hold in trust for the benefit of the Holders entitled thereto a sum sufficient to pay the principal, premium, if any, or interest so becoming due until such sums shall be paid to such persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act. If the Company is not acting as Paying Agent, the Company will, on or before each due date of the principal of, premium, if any, or interest on, any Notes, deposit with a Paying Agent a sum in same day funds sufficient to pay the principal, premium, if any, or interest so becoming due, such sum to be held in trust for the benefit of the Holders entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure so to act. If the Company is not acting as Paying Agent, the Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent will agree with the Trustee, subject to the provisions of this Section 10.03, that such Paying Agent will: (a) hold all sums held by it for the payment of the principal of, premium, if any, or interest on Notes in trust for the benefit of the Holders entitled thereto until such sums shall be paid to such Holders or otherwise disposed of as herein provided; (b) give the Trustee notice of any Default by the Company (or any Subsidiary Guarantor or other obligor upon the Notes) in the making of any payment of principal of, premium, if any, or interest on the Notes; (c) at any time during the continuance of any such Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent; and (d) acknowledge, accept and agree to comply in all aspects with the provisions of this Indenture relating to the duties, rights and liabilities of such Paying Agent. -70- The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent will be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Note and remaining unclaimed for two years after such principal, premium, if any, or interest has become due and payable shall be paid to the Company upon receipt of a Company Request therefor, or (if then held by the Company) will be discharged from such trust; and the Holder of such Note will thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, will thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, at the option of the Company in the New York Times or the Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining shall be repaid to the Company. Section 10.04. CORPORATE EXISTENCE. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence, rights (charter and statutory), licenses and franchises of the Company and each of the Restricted Subsidiaries; provided, however, that the Company will not be required to preserve any such right, license or franchise if the Board shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and the Restricted Subsidiaries as a whole and that the loss thereof is not adverse in any material respect to the Holders; provided, further, that the foregoing will not prohibit a sale, transfer or conveyance of a Restricted Subsidiary of the Company or any of its assets in compliance with the terms of this Indenture. Section 10.05. PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all material taxes, assessments and governmental charges levied or imposed (i) upon the Company or any of the Restricted Subsidiaries or (ii) upon the income, profits or property of the Company or any of the Restricted Subsidiaries and (b) all material lawful claims for labor, materials and supplies, which, if unpaid, could reasonably be expected to become a Lien upon the property of the Company or any of the Restricted Subsidiaries; provided, however, that the Company will not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim (x) whose amount, applicability or validity is being contested in good faith -71- by appropriate proceedings properly instituted and diligently conducted or (y) if the failure to so pay, discharge or cause to be paid or discharged could not reasonably be expected to have a Material Adverse Effect (as such term is defined in the Purchase Agreement). Section 10.06. MAINTENANCE OF PROPERTIES. The Company will cause all material properties owned by the Company or any of the Restricted Subsidiaries or used or held for use in the conduct of their respective businesses to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section 10.06 will prevent the Company from discontinuing the maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any of the Restricted Subsidiaries and is not disadvantageous in any material respect to the Holders. Section 10.07. INSURANCE. The Company will at all times keep all of its and the Restricted Subsidiaries' properties which are of an insurable nature insured with insurers, believed by the Company in good faith to be financially sound and responsible, against loss or damage to the extent that property of similar character is usually and customarily so insured by corporations similarly situated and owning like properties. Section 10.08. BOOKS AND RECORDS. The Company will keep proper books of record and account, in which full and correct entries will be made of all financial transactions and the assets and business of the Company and each Restricted Subsidiary of the Company in compliance with GAAP. Section 10.09. PROVISION OF SEC REPORTS. Whether or not the Company is subject to Section 13(a) or 15(d) of the Exchange Act or any successor provision of law, the Company shall furnish without cost to each Holder, and file with the Trustee, (i) within 135 days after the end of each fiscal year of the Company (commencing with its 1998 fiscal year end), financial information with respect to the Company that would be required to be contained in an Annual Report on Form 10-K for such year filed by the Company with the SEC (whether or not the Company is then required to file such Form with the SEC), including (x) audited financial statements of the Company, including the report of the Company's independent auditors thereon, and (y) a discussion of the Company's financial condition and results of operations that complies with Item 303 of Regulation S-K of the SEC, (ii) within 60 days after the end of each of the first three fiscal quarters of each fiscal year of the Company, financial information with respect -72- to the Company that would be required to be contained in a Quarterly Report on Form 10-Q filed by the Company with the SEC (whether or not the Company is then required to file such Form with the SEC), including a discussion of the Company's financial condition and results of operations that complies with Item 303 of Regulation S-K of the SEC and (iii) on a timely basis, any information concerning the Company or any Restricted Subsidiary required to be contained in a Current Report on Form 8-K (whether or not the Company is then required to file such Form with the SEC). Until such time as the Company is otherwise required to file periodic reports with the SEC under the Exchange Act (or any successor provision of law), the Company shall file with the SEC (if permitted by SEC practice and applicable law and regulations), for public availability, a copy of the annual and quarterly financial information and other information prepared by it for distribution to Holders and filing with the Trustee. For so long as any Notes remain outstanding, the Company shall furnish to securities analysts and prospective investors, upon their request, information of the type required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act, and, to any beneficial holder of Notes, if not obtainable from the SEC, information of the type that would be filed with the SEC pursuant to the foregoing provisions, upon the request of any such holder. Delivery of the foregoing reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of the Trustee of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). The Company will also comply with the other provisions of Section 314(a) of the Trust Indenture Act. Section 10.10. CHANGE OF CONTROL. Upon the occurrence of a Change of Control (the date of such occurrence being the "Change of Control Date"), the Company shall make an offer to purchase (the "Change of Control Offer"), on a Business Day (the "Change of Control Payment Date") not later than 60 days following the Change of Control Date, all Notes then outstanding at a purchase price equal to 101% of the Accreted Value thereof as of, plus accrued and unpaid interest, if any, to, such Change of Control Payment Date. Notice of a Change of Control Offer shall be mailed to holders of Notes not less than 25 days nor more than 45 days before the Change of Control Payment Date. Notice of a Change of Control Offer shall be mailed by the Company to the Holders at their last registered addresses with a copy to the Trustee and the Paying Agent. The Change of Control Offer shall remain open from the time of mailing for at least 20 Business Days and until 5:00 p.m., New York City time, on the Change of Control Payment Date. The notice, which shall govern the terms of the Change of Control Offer, shall include such disclosures as are required by law and shall state: -73- (a) that the Change of Control Offer is being made pursuant to this Section 10.10 and that all Notes validly tendered into the Change of Control Offer and not withdrawn will be accepted for payment; (b) the purchase price (including the amount of accrued interest, if any) for each Note, the Change of Control Payment Date and the date on which the Change of Control Offer expires; (c) that any Note not tendered for payment will continue to accrue Accreted Value (if the Change of Control Offer occurs prior to March 1, 2002) and, subsequent to March 1, 2002, will accrue interest in accordance with the terms thereof; (d) that, unless the Company shall default in the payment of the purchase price, any Note accepted for payment pursuant to the Change of Control Offer shall cease to accrete Accreted Value or, if the Change of Control Payment Date is after March 1, 2002, shall cease to accrue interest, in either case after the Change of Control Payment Date; (e) that Holders electing to have Notes purchased pursuant to a Change of Control Offer will be required to surrender their Notes to the Paying Agent at the address specified in the notice prior to 5:00 p.m., New York City time, on the Change of Control Payment Date and must complete any form letter of transmittal proposed by the Company and acceptable to the Trustee and the Paying Agent; (f) that a Holder that tenders a Note pursuant to a Change of Control Offer will be entitled to withdraw such Note if the Paying Agent receives, not later than 5:00 p.m., New York City time, on the Change of Control Payment Date, a facsimile transmission or letter setting forth the name of such Holder, the principal face amount of Note the Holder tendered for purchase, the Note certificate number (if any) and a statement that such Holder is withdrawing his election to have such Note purchased; (g) that a Holder may tender all or any portion of a Note owned by such Holder pursuant to the Change of Control Offer, subject to the requirement that any portion of a Note tendered must be tendered in an integral multiple of $1,000 in principal face amount, and that any Holder that tenders a portion of a Note will be issued a Note of like tenor equal in principal face amount to the portion of the Note not tendered; (h) the instructions that Holders must follow in order to tender their Notes; and (i) information concerning the business of the Company, the most recent annual and quarterly reports of the Company filed with the SEC pursuant to the Exchange Act (or, if the Company is not required to file any such reports with the SEC at that time, the comparable information prepared pursuant to Section 10.09), a description of material developments in the Company's business and such other information concerning the circumstances and relevant facts regarding such -74- Change of Control and Change of Control Offer (including, without limitation, pro forma financial information giving effect to such Change of Control) as would, in the good faith judgment of the Company, be material to a Holder in connection with the decision of such Holder as to whether or not it should tender Notes pursuant to the Change of Control Offer. On the Change of Control Payment Date, the Company shall (i) accept for payment all Notes, or portions thereof, validly tendered and not withdrawn pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent money, in immediately available funds, sufficient to pay the purchase price of all Notes, or portions thereof, so tendered and accepted and (iii) deliver to the Trustee the Notes so accepted together with an Officers' Certificate setting forth the registered numbers of such Notes. The Paying Agent shall, with the funds so deposited with it by the Company, promptly mail or deliver to each Holder that validly tendered and did not withdraw Notes, or any portion thereof, an amount equal to the purchase price for the portion so tendered, and the Trustee shall promptly authenticate and mail or deliver to such Holder a new Note of like tenor equal in principal face amount to that portion, if any, of any Note surrendered by such Holder but not tendered pursuant to the Change of Control Offer. The Company will publicly announce the results of the Change of Control Offer as soon as practicable following the Change of Control Payment Date. The Company shall not be required to make a Change of Control Offer following a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements applicable to a Change of Control Offer otherwise required to be made by the Company and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. If the Company is required to make a Change of Control Offer, the Company (or any such third party) shall comply with all applicable tender offer laws and regulations, including, to the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other applicable securities laws and regulations. To the extent that the provisions of any such securities laws or regulations conflict with the provisions of this Section 10.10, the Company will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section 10.10 solely by virtue of such compliance. Section 10.11. LIMITATION ON ADDITIONAL INDEBTEDNESS. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume, issue, guarantee or in any manner become directly or indirectly liable for or with respect to, contingently or otherwise, the payment of (collectively to "incur") any Indebtedness (including any Acquired Indebtedness), except for Permitted Indebtedness (including Acquired Indebtedness to the extent it would constitute Permitted Indebtedness); provided, that (i) the Company will be permitted to incur Indebtedness (including Acquired Indebtedness) and (ii) a Restricted Subsidiary will be permitted to incur Acquired Indebtedness, if, in either case, after giving pro forma effect to such incurrence (including the application of the net proceeds therefrom), the Indebtedness to EBITDA Ratio would be less than or equal to 5 to 1. -75- Indebtedness of any person existing at the time such person becomes a Restricted Subsidiary (or is merged into or consolidated with the Company or any Restricted Subsidiary), whether or not such Indebtedness was incurred in connection with, or in contemplation of, such person becoming a Restricted Subsidiary (or being merged into or consolidated with the Company or any Restricted Subsidiary) shall be deemed incurred at the time such person becomes a Restricted Subsidiary or merges into or consolidates with the Company or any Restricted Subsidiary. For purposes of determining compliance with this Section 10.11, in the event that an item of Indebtedness may be incurred by meeting the criteria of one or more items of Permitted Indebtedness, the Company may, in its sole discretion, classify and divide such item of Indebtedness among more than one of such items of Permitted Indebtedness. Section 10.12. STATEMENT BY OFFICERS AS TO DEFAULT. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, a written statement signed by the chairman or the chief executive officer and by the principal financial officer or principal accounting officer of the Company, stating (i) that a review of the activities of the Company during the preceding fiscal year has been made under the supervision of the signing officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture and, if in effect during any portion of such fiscal year, the Escrow Agreement, and (ii) that, to the knowledge of each officer signing such certificate, the Company has kept, observed, performed and fulfilled each and every covenant and condition contained in this Indenture and, if applicable, the Escrow Agreement and is not in default in the performance or observance of any of the terms, provisions, conditions and covenants hereof or thereof (or, if a Default shall have occurred, describing all such Defaults of which such officers have knowledge, their status and what action the Company is taking or proposes to take with respect thereto). When any Default under this Indenture or a default under the Escrow Agreement has occurred and is continuing, or if the Trustee or any Holder or the trustee for or the holder of any other evidence of Indebtedness of the Company or any Material Restricted Subsidiary gives any notice or takes any other action with respect to a claimed default (other than with respect to Indebtedness (other than Indebtedness evidenced by the Notes) in the principal amount of less than $5 million), the Company will promptly notify the Trustee of such Default, notice or action and will deliver to the Trustee by registered or certified mail or by telegram, or facsimile transmission followed by hard copy by registered or certified mail an Officers' Certificate specifying such event, notice or other action within five Business Days after the Company becomes aware of such occurrence and what action the Company is taking or proposes to take with respect thereto. -76- Section 10.13. LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not permit any of the Restricted Subsidiaries to, make, directly or indirectly, any Restricted Payment unless: (i) no Default shall have occurred and be continuing at the time of or upon giving effect to such Restricted Payment; (ii) immediately after giving effect to such Restricted Payment, the Company would be able to incur $1.00 of Indebtedness under the proviso of Section 10.11 hereof; and (iii) immediately after giving effect to such Restricted Payment, the aggregate amount of all Restricted Payments declared or made on or after the Issue Date does not exceed an amount equal to the sum of, without duplication, (a) 50% of Consolidated Net Income accrued on a cumulative basis during the period beginning on the first day of the first fiscal quarter immediately following the Issue Date and ending on the last day of the fiscal quarter of the Company immediately preceding the date of such proposed Restricted Payment (or, if such cumulative Consolidated Net Income of the Company for such period is a deficit, minus 100% of such deficit) for which financial statements have been provided pursuant to Section 10.09, in any event determined by excluding income resulting from transfers of assets by the Company or a Restricted Subsidiary to an Unrestricted Subsidiary, plus (b) the aggregate net cash proceeds received by the Company either (x) as capital contributions to the Company after the Issue Date or (y) from the issuance and sale of its Capital Stock (other than Disqualified Stock) or options, warrants or other rights to acquire its Capital Stock (other than Disqualified Stock) (exclusive of any convertible Indebtedness or any options, warrants or other rights that are redeemable at the option of the holder, or are required to be redeemed, prior to the Stated Maturity of the principal of the Notes), in each case on or after the Issue Date to a person who is not a Subsidiary of the Company, plus (c) the aggregate net proceeds received by the Company from the issuance (other than to a Subsidiary of the Company) on or after the Issue Date of its Capital Stock (other than Disqualified Stock) upon the conversion of, or in exchange for, Indebtedness of the Company or upon the exercise of options, warrants or other rights of the Company, plus (d) in the case of the disposition or repayment (in whole or in part) of any Investment constituting a Restricted Payment made after the Issue Date, an amount equal to the lesser of the return of capital with respect to the applicable portion of such Investment and the cost of the applicable portion of such Investment, in either case, less the cost of the disposition of such Investment, plus (e) in the case of any Revocation with respect to a Subsidiary of the Company that was made subject to a Designation after the Issue Date, an amount equal to the lesser of the Designation Amount with respect to such Subsidiary or the Fair Market Value of the Investment of the Company and the Restricted Subsidiaries in such Subsidiary at the time of Revocation, minus (f) 50% of the principal amount of any Indebtedness incurred pursuant to clause (g) of the definition of "Permitted Indebtedness," minus the greater of (x) $0 and (y) the Designation Amount (measured as of the date of Designation) with respect to any Subsidiary that has been designated as an Unrestricted -77- Subsidiary in accordance with Section 10.20. For purposes of the preceding clauses (b) (y) and (c), as applicable, (A) the value of the aggregate net proceeds received by the Company upon the issuance of Capital Stock either upon the conversion of convertible Indebtedness or in exchange for outstanding Indebtedness or upon the exercise of options, warrants or rights will be the net cash proceeds received upon the issuance of such Indebtedness, options, warrants or rights plus the incremental amount received, if any, by the Company upon the conversion, exchange or exercise thereof, (B) there shall be excluded in all cases any issuance and sale of Capital Stock financed, directly or indirectly, using funds (I) borrowed from the Company or any Subsidiary until and to the extent such borrowing is repaid or (II) contributed, extended, guaranteed or advanced by the Company or any Subsidiary (including, without limitation, in respect of any employee stock ownership or benefit plan) and (C) there shall be excluded in all cases any issuance and sale of Capital Stock in an Initial Public Equity Offering to the extent the net cash proceeds are used, prior to March 1, 2001, to redeem Notes as permitted under the optional redemption provisions of the Notes. The Company may not redeem Notes pursuant to the optional redemption provisions of the Notes referred to in the immediately preceding sentence from net cash proceeds received by the Company from the issuance on or after the Issue Date of its Capital Stock if such net cash proceeds have ever been included in a determination of the amount of Restricted Payments that may be made by the Company pursuant to this Section 10.13 For purposes of determining the amount expended for Restricted Payments, cash distributed shall be valued at the face amount thereof and property other than cash shall be valued at its Fair Market Value. The provisions of this Section 10.13 shall not prohibit the following (each of which shall be given independent effect): (i) the payment of any dividend or other distribution within 60 days after the date of declaration thereof if at such date of declaration such payment would be permitted by the provisions of this Indenture; (ii) the purchase, redemption, retirement or other acquisition of any shares of Capital Stock of the Company in exchange for, or out of the net cash proceeds of the substantially concurrent issue and sale (other than to a Subsidiary of the Company) of, shares of Capital Stock of the Company (other than Disqualified Stock); provided that any such net cash proceeds are excluded from clause (iii)(b) of the second preceding paragraph; (iii) so long as no Default shall have occurred and be continuing, the purchase, redemption, retirement, defeasance or other acquisition of Subordinated Indebtedness made by exchange for, or out of the net cash proceeds of, a substantially concurrent issue and sale (other than to a Subsidiary of the Company) of (x) Capital Stock (other than Disqualified Stock) of the Company or (y) other Subordinated Indebtedness to the extent that its stated maturity for the payment of -78- principal thereof is not prior to the 180th day after the final Stated Maturity of the Notes; provided that any such net cash proceeds are excluded from clause (iii)(b) of the second preceding paragraph; (iv) so long as no Default shall have occurred and be continuing, purchases or redemptions of Capital Stock (including cash settlements of stock options) held by employees, officers or directors upon or following termination of their employment with the Company or one of its Subsidiaries; provided that payments shall not exceed $750,000 in any fiscal year in the aggregate or $3.0 million in the aggregate during the term of the Notes; (v) so long as no Default shall have occurred and be continuing, Investments in Unrestricted Subsidiaries to the extent reasonably promptly made with the proceeds of (x) a capital contribution to the Company or (y) an issue or sale of Capital Stock (other than Disqualified Stock) of the Company (other than to a Subsidiary); provided that any net cash proceeds received by the Company are excluded from clause (iii)(b) of the second preceding paragraph; (vi) so long as no Default shall have occurred and be continuing, Investments in (x) joint ventures formed to engage in the Digital Network Business and (y) other persons principally engaged in the Digital Network Business; provided that no more than $12.5 million of Investments made pursuant to this clause (vi) shall be outstanding at any time; and (vii) cash payments in lieu of fractional shares pursuant to any warrant, option or other similar agreement. In determining the amount of Restricted Payments permissible under this covenant, amounts expended pursuant to clauses (i), (iv), (vi) and (vii) above shall be included, without duplication, as Restricted Payments. Section 10.14. LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall not permit, cause or suffer any Restricted Subsidiary to, directly or indirectly, conduct any business, sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into any contract, agreement, loan, advance or Guarantee or engage in any other transaction (or series of related transactions which are similar or part of a common plan) with or for the benefit of any of, their respective Affiliates or any beneficial owner of 10% or more of the Common Stock of the Company or any officer or director of the Company or any Subsidiary (each, an "Affiliate Transaction"), unless the terms of the Affiliate Transaction are set forth in writing and are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than would be available in a comparable transaction with an unaffiliated third party. Each Affiliate Transaction (or series of related Affiliate Transactions) involving aggregate payments and/or other consideration having Fair Market Value (i) in excess of $1 million shall be approved by a majority of the Board, such approval to be evidenced by a Board Resolution stating that the Board has determined that such transaction or transactions comply with the foregoing provisions, (ii) in excess of $5 million shall further require the approval of a majority of the -79- Disinterested Directors and (iii) in excess of $10 million shall require that the Company obtain a written opinion from an Independent Financial Advisor stating that the terms of such Affiliate Transaction (or series of related Affiliate Transactions) to the Company or the Restricted Subsidiary, as the case may be, are fair from a financial point of view; provided, however, that the dollar thresholds set forth in clauses (i), (ii) and (iii) above shall be increased to $2.5 million, $10 million and $25 million, respectively, in the case of any Affiliate Transaction with WorldCom or any of its Affiliates. For purposes of this Section 10.14, any Affiliate Transaction approved by a majority of the Disinterested Directors or as to which a written opinion has been obtained from an Independent Financial Advisor, on the basis set forth in the preceding sentence, shall be deemed to be on terms that are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than would be available in a comparable transaction with an unaffiliated third party and, therefore, shall be permitted under this Section 10.14. Notwithstanding the foregoing, the restrictions set forth in this covenant shall not apply to (i) transactions with or among, or solely for the benefit of, the Company and/or any of the Restricted Subsidiaries, provided that in any such case, no officer, director or beneficial owner of 10% or more of any class of Capital Stock of the Company shall beneficially own any Capital Stock of any such Restricted Subsidiary, (ii) transactions pursuant to agreements and arrangements existing on the Issue Date and specified on a schedule to the Indenture, (iii) any Restricted Payment made in compliance with Section 10.13, (iv) customary directors' fees, indemnification and similar arrangements, consulting fees, legal fees, employee salaries, bonuses and employment agreements, compensation or employee benefit arrangements and incentive arrangements with any officer, director or employee of the Company or any Restricted Subsidiary entered into in the ordinary course of business and payments under indemnification arrangements permitted by applicable law, (v) loans and advances to officers, directors and employees of the Company or any Restricted Subsidiary for travel, entertainment, moving and other relocation expenses, in each case made in the ordinary course of business and consistent with past business practices, (vi) any contract or arrangement entered into in the ordinary course of business by the Company or any Restricted Subsidiary with WorldCom or any of its Affiliates with respect to communications or communications related products and services, and (vii) any Permitted Investment. Section 10.15. DISPOSITION OF PROCEEDS OF ASSET SALES The Company will not, and will not permit any Restricted Subsidiary to, make any Asset Sale unless (a) the Company or such Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the shares or assets sold or otherwise disposed of and (b) at least 80% of such consideration consists of cash or Cash Equivalents; provided that the following shall be treated as cash for purposes of this Section 10.15: (x) the amount of Indebtedness (other than Subordinated Indebtedness and Deeply Subordinated Indebtedness) of the Company or any Restricted Subsidiary that is actually assumed by the transferee of assets disposed of in such Asset Sale pursuant to an agreement that fully and unconditionally releases the Company or such Restricted Subsidiary from further liability ("Assumed Indebtedness") and (y) the amount of any notes or other obligations that within 30 days of receipt are converted into -80- cash (to the extent of the cash (after payment of any costs of disposition) so received). The Company or the applicable Restricted Subsidiary, as the case may be, may (i) apply the Net Cash Proceeds from such Asset Sale, within 365 days of the receipt thereof, to repay secured Indebtedness incurred pursuant to a Permitted Credit Facility, (ii) apply such Net Cash Proceeds within 365 days of the receipt thereof to repay Indebtedness of any Restricted Subsidiary (other than Indebtedness of any Subsidiary Guarantor), provided any commitments thereunder are permanently reduced by the amount of the Indebtedness so repaid and/or (iii) apply the Net Cash Proceeds, within 365 days of the receipt thereof, to an investment in properties and assets that will be used in a Digital Network Business (or in Capital Stock of any person that will become a Restricted Subsidiary as a result of such investment if all or substantially all of the properties and assets of such person are used in a Digital Network Business) of the Company or any Restricted Subsidiary ("Replacement Assets"). To the extent all or part of the Net Cash Proceeds of any Asset Sale are not applied within 365 days of such Asset Sale as described in clause (i) or (ii) of the preceding paragraph (such Net Cash Proceeds, the "Unutilized Net Cash Proceeds"), the Company shall, within 20 Business Days after such 365th day, make an offer to purchase (an "Asset Sale Offer") all outstanding Notes up to a maximum Accreted Value (expressed as a multiple of $1,000) equal to the Note Pro Rata Share of Unutilized Net Cash Proceeds, at a purchase price in cash equal to 100% of the Accreted Value thereof on any purchase date, plus accrued and unpaid interest, if any, to such purchase date; provided, however, that an Asset Sale Offer may be deferred by the Company until there are Unutilized Net Cash Proceeds equal to at least $5.0 million, at which time the entire amount of such Unutilized Net Cash Proceeds (and not just the amount in excess of $5.0 million) shall be applied as required pursuant to this paragraph and the next following paragraph. If any other Indebtedness of the Company which ranks pari passu with the Notes (the "Other Indebtedness") requires that an offer to repurchase such Indebtedness be made upon the consummation of an Asset Sale, the Company may apply the Unutilized Net Cash Proceeds otherwise required to be applied to an Asset Sale Offer to offer to purchase such Other Indebtedness and to an Asset Sale Offer so long as the amount of such Unutilized Net Cash Proceeds applied to repurchase the Notes is not less than the Note Pro Rata Share of Unutilized Net Cash Proceeds. Any offer to purchase such Other Indebtedness shall be made at the same time as the Asset Sale Offer, and the purchase date in respect of any such offer to purchase and the Asset Sale Offer shall occur on the same day. For purposes of this Section 10.15, "Note Pro Rata Share of Unutilized Net Cash Proceeds" means the amount of the Unutilized Net Cash Proceeds equal to the product of (x) the Unutilized Net Cash Proceeds and (y) a fraction, the numerator of which is the aggregate Accreted Value of, and all accrued interest thereon to the purchase date on, all Notes (or portions thereof) validly tendered and not withdrawn pursuant to an Asset Sale Offer related to such Unutilized Net Cash Proceeds (the "Note Amount") and the denominator of which is the sum of the Note Amount and the lesser of (i) the aggregate principal face amount, and all accrued interest thereon to the purchase date, or (ii) the accreted value as of the purchase date of all Other Indebtedness (or portions thereof) validly tendered and not withdrawn pursuant to a concurrent offer to purchase such Other Indebtedness made at the time of such Asset Sale Offer. -81- Each Asset Sale Offer shall remain open for a period of 20 Business Days or such longer period as may be required by law. To the extent that the Accreted Value of, plus accrued interest thereon, if any, to the payment date, of Notes validly tendered and not withdrawan pursuant to an Asset Sale Offer is less than the Note Pro Rata Share of Unutilized Net Cash Proceeds, the Company or any Restricted Subsidiary may use such excess for general corporate purposes. If the Accreted Value of, plus accrued interest thereon, if any, to the payment date, of Notes validly tendered and not withdrawn by holders thereof exceeds the amount of Notes which can be purchased with the Note Pro Rata Share of Unutilized Net Cash Proceeds, Notes to be purchased will be selected on a pro rata basis. Upon completion of such Asset Sale Offer and offer for any Other Indebtedness, the amount of Unutilized Net Cash Proceeds shall be reset to zero. Notice of an Asset Sale Offer shall be mailed by the Company not more than 20 Business Days after the obligation to make such Asset Sale Offer arises to the Holders of Notes at their last registered addresses with a copy to the Trustee and the Paying Agent. The Asset Sale Offer shall remain open from the time of mailing for at least 20 Business Days and until 5:00 p.m., New York City time, on the date fixed for purchase of Notes validly tendered and not withdrawn, which date shall be not later than the 30th Business Day following the mailing of such Asset Sale Offer (the "Asset Sale Offer Purchase Date"). The notice, which shall govern the terms of the Asset Sale Offer, shall include such disclosures as are required by law and shall state: (a) that the Asset Sale Offer is being made pursuant to this Section 10.15 and that all Notes validly tendered into the Asset Sale Offer and not withdrawn will be accepted for payment; provided, however, that if the aggregate Accreted Value of Notes tendered in an Asset Sale Offer, plus accrued interest, if any, thereon to the Asset Sale Offer Purchase Date of such offer exceeds the aggregate amount of the Note Pro Rata Share of Unutilized Net Cash Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Trustee so that only Notes in denominations of $1,000 or multiples thereof shall be purchased); (b) the purchase price (including the amount of accrued interest, if any) for each Note and the Asset Sale Offer Purchase Date; (c) that any Note not tendered for payment will remain outstanding and continue to accrete Accreted Value (if the Asset Sale Offer occurs prior to March 1, 2002) and, subsequent to March 1, 2002, will accrue interest in accordance with the terms thereof ; (d) that, unless the Company shall default in the payment of the purchase price, any Note accepted for payment pursuant to the Asset Sale Offer shall cease to accrete Accreted Value or, if the Change of Control Payment Date is after March 1, 2002, shall cease to accrue interest, in either case after the Asset Sale Offer Purchase Date; (e) that Holders electing to have Notes purchased pursuant to the Asset Sale Offer will be required to surrender their Notes to the Paying Agent at the address specified in the notice prior to 5:00 p.m., New York City time, on the Asset Sale Offer Purchase Date and must -82- complete any form letter of transmittal proposed by the Company and acceptable to the Trustee and the Paying Agent; (f) that a Holder of Notes will be entitled to withdraw its Notes from the Asset Sale Offer if the Paying Agent receives, not later than 5:00 p.m., New York City time, on the Asset Sale Offer Purchase Date, a facsimile transmission or letter setting forth the name of such Holder, the principal face amount of each Note such Holder delivered for purchase that such Holder elects to withdraw, the Note certificate number (if any) and a statement that such Holder is withdrawing his election to have such Notes (or a specified portion thereof) purchased; (g) that Holders whose Notes are purchased only in part will be issued Notes of like tenor equal in principal face amount to the unpurchased portion of the Notes surrendered; (h) the instructions that Holders must follow in order to validly tender their Notes; and (i) information concerning the business of the Company, the most recent annual and quarterly reports of the Company filed with the Commission pursuant to the Exchange Act (or, if the Company is not required to file any such reports with the SEC at that time, the comparable information prepared pursuant to Section 10.09), a description of material developments in the Company's business, and such other information concerning the circumstances and relevant facts regarding such Asset Sale (including, without limitation, pro forma financial information giving effect to such Asset Sale) and Asset Sale Offer as would, in the good faith judgment of the Company, be material to a Holder of Notes in connection with the decision of such Holder as to whether or not it should tender Notes pursuant to the Asset Sale Offer. On the Asset Sale Offer Purchase Date, the Company will (i) accept for payment Notes or portions thereof validly tendered and not withdrawn pursuant to the Asset Sale Offer, subject to pro ration under the circumstances and in the manner described in clause (a) of the preceding paragraph, (ii) deposit with the Paying Agent money, in immediately available funds, sufficient to pay the purchase price of all Notes or portions thereof so accepted by the Company and (iii) deliver to the Trustee the Notes so accepted (in whole or in part) together with an Officers' Certificate setting forth the registered numbers of such Notes. The Paying Agent shall, with the funds so deposited with it by the Company, promptly mail or deliver to the Holders of Notes so accepted payment in an amount equal to the purchase price therefor, and the Trustee shall promptly authenticate and mail or deliver to such Holders new Notes of like tenor equal in principal face amount to the unpurchased portion of the Notes surrendered in the Asset Sale Offer and not purchased by the Company. The Company will publicly announce the results of the Asset Sale Offer as promptly as practicable following the Asset Sale Offer Purchase Date. If the Company is required to make an Asset Sale Offer, the Company shall comply with all applicable tender offer rules, including to the extent applicable, Section 14(e) and Rule 14e-1 -83- under the Exchange Act, and any other applicable securities laws and regulations. To the extent that the provisions of any such securities laws or regulations conflict with the provisions of this Section 10.15, the Company will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the Section 10.15 solely by virtue of such compliance. Section 10.16. LIMITATION ON LIENS SECURING CERTAIN INDEBTEDNESS. The Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Liens of any kind against or upon any of the property or assets of the Company or any Restricted Subsidiary, whether now owned or hereafter acquired, or any proceeds therefrom, which secure either (x) Subordinated Indebtedness, unless the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to the Liens securing such Subordinated Indebtedness or (y) Indebtedness of (A) the Company or any Subsidiary Guarantor that is not Subordinated Indebtedness, or (B) any Restricted Subsidiary (other than a Subsidiary Guarantor), unless in each case the Notes are equally and ratably secured with the Liens securing such other Indebtedness, except, in the case of this clause (y), Permitted Liens. Section 10.17. LIMITATIONS ON STATUS AS INVESTMENT COMPANY. The Company will not and will not permit any of its Subsidiaries or controlled Affiliates to, conduct its business in a fashion that would cause the Company to be required to register as an "investment company" (as that term is defined in the Investment Company Act of 1940, as amended (the "Investment Company Act")), or otherwise become subject to regulation under the Investment Company Act. For purposes of establishing the Company's compliance with this provision, any exemption which is or would become available under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act will be disregarded. Section 10.18. LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. The Company will not sell, and will not permit any Restricted Subsidiary, directly or indirectly, to issue or sell any shares of Capital Stock (or any options, warrants or other rights to purchase such Capital Stock) of a Restricted Subsidiary, except (i) to the Company or a Wholly Owned Restricted Subsidiary, (ii) to directors as director qualifying shares, but only to the extent required under applicable law, (iii) the Company or a Restricted Subsidiary may pledge Capital Stock of a Restricted Subsidiary that is a Foreign Subsidiary to the extent and in the manner permitted under clause (g) of the definition of "Permitted Liens," (iv) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer be a Restricted Subsidiary or (v) if Section 10.15 hereof is complied with. -84- Section 10.19. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise enter into or cause to become effective any consensual encumbrance or consensual restriction of any kind on the ability of any Restricted Subsidiary to pay dividends, in cash or otherwise, or make any other distributions on its Capital Stock or any other interest or participation in, or measured by, its profits to the extent owned by the Company or any Restricted Subsidiary, except for (i) any encumbrance or restriction in existence on the Issue Date, (ii) customary non-assignment provisions, (iii) any encumbrances or restriction pertaining to an asset subject to a Lien to the extent set forth in the security documentation governing such Lien, (iv) any encumbrance or restriction applicable to a Restricted Subsidiary at the time that it becomes a Restricted Subsidiary that is not created in contemplation thereof, (v) any encumbrance or restriction existing under any agreement that refinances or replaces an agreement containing a restriction permitted by clause (iv) above; provided that the terms and conditions of any such encumbrance or restriction are not materially less favorable to the holders of Notes than those under or pursuant to the agreement being replaced or the agreement evidencing the Indebtedness refinanced, (vi) any encumbrance or restriction imposed upon a Restricted Subsidiary pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary or any Asset Sale to the extent limited to the Capital Stock or assets in question, (vii) any customary encumbrance or restriction applicable to a Restricted Subsidiary that is contained in an agreement or instrument governing or relating to Indebtedness contained in any Debt Securities; provided that the terms and conditions of any such encumbrance or restriction are no more restrictive than those contained in this Indenture; and provided, further, that the provisions of such agreement or instrument permit the payment of interest and principal and mandatory repurchases pursuant to the terms of this Indenture and the Notes and other Indebtedness (other than Subordinated Indebtedness) that is solely an obligation of the Company and (viii) any customary encumbrance or restriction contained in (x) a Permitted Credit Facility or (y) a pledge agreement applicable to Capital Stock of a Restricted Subsidiary that is a Foreign Subsidiary pledged to secure Indebtedness pursuant to a Permitted Equipment Financing; provided that the provisions of such agreement do not restrict the payment of cash dividends or distributions to the Company or any Restricted Subsidiary prior to the occurrence of a default or an event of default under such Permitted Equipment Financing. Section 10.20. LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Company will not designate any Subsidiary of the Company (other than a newly created Subsidiary in which the Company has made an Investment of $1,000 or less) as an "Unrestricted Subsidiary" under this Indenture (a "Designation") unless: (a) no Default shall have occurred and be continuing at the time of or after giving effect to such Designation; (b) except in the case of Permitted Investments and Investments made pursuant to clause (v) of the third paragraph of Section 10.13 hereof, at the time of and after giving effect -85- to such Designation, the Company would be able to incur $1.00 of Indebtedness (other than Permitted Indebtedness) under Section 10.11 hereof; and (c) the Company would be permitted under this Indenture to make an Investment at the time of such Designation (assuming the effectiveness of such Designation) in an amount (the "Designation Amount") equal to the Fair Market Value of the interest of the Company and its Restricted Subsidiaries in such Subsidiary on such date. In the event of any such Designation, the Company shall be deemed to have made an Investment constituting a Restricted Payment pursuant to Section 10.13 hereof for all purposes of this Indenture in an amount equal to the Designation Amount. Neither the Company nor any Restricted Subsidiary shall at any time (x) provide a Guarantee of, or similar credit support for, or subject any of its properties or assets (other than the Capital Stock of any Unrestricted Subsidiary) to the satisfaction of, any Indebtedness of any Unrestricted Subsidiary (including any undertaking, agreement or instrument evidencing such Indebtedness), (y) be directly or indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be directly or indirectly liable for any other Indebtedness which provides that the holder thereof may (upon notice, lapse of time or both) declare a default thereon (or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity) upon the occurrence of a default with respect to any other Indebtedness that is Indebtedness of an Unrestricted Subsidiary (including any corresponding right to take enforcement action against such Unrestricted Subsidiary), except in the case of clause (x) or (y) to the extent otherwise permitted under this Indenture, including without limitation under Section 10.13 hereof. The Company will not revoke any Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation") unless: (a) no Default shall have occurred and be continuing at the time of and after giving effect to such Revocation; and (b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of this Indenture. All Designations and Revocations must be evidenced by Board Resolutions and Officers' Certificates delivered to the Trustee certifying compliance with the foregoing provisions. The Company shall designate 4-Sight and each of its Subsidiaries as Restricted Subsidiaries at such time as 4-Sight and its Subsidiaries become Subsidiaries of the Company. Section 10.21. COMPLIANCE CERTIFICATES AND OPINIONS. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company, each Subsidiary Guarantor and any other obligor on the Notes will furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, -86- provided for in this Indenture (including any covenants compliance with which constitutes a condition precedent) relating to the proposed action have been complied with, and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that, in the case of any such application or request as to which the furnishing of such documents, certificates and/or opinions is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture will include: (i) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (iii) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether such covenant or condition has been complied with; and (iv) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. Section 10.22. ISSUANCE OF GUARANTEES BY MATERIAL RESTRICTED SUBSIDIARIES; LIMITATION ON GUARANTEES BY OTHER RESTRICTED SUBSIDIARIES. The Company shall cause each Material Restricted Subsidiary to execute and deliver to the Trustee a supplemental indenture, in the form of EXHIBIT F hereto, pursuant to which such Subsidiary shall guarantee (a "Subsidiary Guarantee") the full and punctual payment of all Indenture Obligations of the Company to the extent set forth in Article Thirteen hereof; provided, that a Material Restricted Subsidiary that is a Foreign Subsidiary shall not become a Subsidiary Guarantor if by doing so it would violate applicable law of its jurisdiction of organization or incorporation. The Company shall determine whether a Restricted Subsidiary is a Material Restricted Subsidiary (i) upon such Subsidiary's designation as a Restricted Subsidiary by the Company, (iii) upon the consummation of any consolidation, share exchange or merger involving such Subsidiary in which such Subsidiary is the continuing corporation, (iv) upon the purchase by such Subsidiary, other than in the ordinary course of business, of assets and properties or capital stock of any person and (v) upon the filing with the SEC or the Trustee, whichever is earlier, and on the basis, of the financial information prepared by the Company pursuant to Section 10.09. hereof. In addition, the Company shall determine whether a Subsidiary is a Material Restricted Subsidiary upon the Revocation of such Subsidiary's designation as an Unrestricted Subsidiary in accordance with Section 10.20 hereof. The Company will not permit any Restricted Subsidiary that is not a Subsidiary Guarantor, directly or indirectly, to Guarantee any Indebtedness of any person unless, in each case, -87- such Restricted Subsidiary simultaneously executes and delivers to the Trustee a supplemental indenture, in the form of EXHIBIT F hereto, pursuant to which such Restricted Subsidiary shall guarantee the full and punctual payment of all Indenture Obligations of the Company on the same terms and conditions as the Subsidiary Guarantees by the Subsidiary Guarantors. At the time of the delivery to the Trustee of a supplemental indenture by a Restricted Subsidiary pursuant to this Section 10.22, such Restricted Subsidiary shall also deliver to the Trustee an Opinion of Counsel and Officers' Certificate to the effect that such supplemental indenture and separate Guarantee have been duly authorized and executed by such Restricted Subsidiary and constitute the legal, valid, binding and enforceable obligations of such Restricted Subsidiary (subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally). Section 10.23. REGISTRATION RIGHTS (a) Simultaneously with the execution and delivery of this Indenture, the Company shall enter into the Registration Rights Agreement, the form of which is attached hereto as EXHIBIT G hereto, and shall deliver to the Trustee an Opinion of Counsel stating that the Registration Rights Agreement has been duly authorized, executed and delivered by the Company, and constitutes a legal, valid and binding agreement enforceable against the Company in accordance with its terms (subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally). (b) In the event that (a) the Exchange Offer Registration Statement is not filed with the SEC on or prior to the 90th calendar day following the Closing Time, (b) the Exchange Offer Registration Statement has not been declared effective on or prior to the 150th calendar day following the Closing Time, (c) the Exchange Offer is not consummated on or prior to the 180th calendar day following the Closing Time or a Shelf Registration Statement is not declared effective with the period prescribed by the Registration Rights Agreement (each such event referred to in clauses (a) through (c) above, a "Registration Default"), the Restricted Notes shall, with respect to each Registration Default, accrue interest, as liquidated damages ("Additional Interest"), at a rate of one-half of one percent per annum of the Accreted Value of the Restricted Notes commencing upon the occurrence of such Registration Default, which rate will increase by one-half of one percent at the end of each 90- day period in which such Registration Default is not cured, provided that the maximum aggregate interest rate that accrues on the Accreted Value of the Restricted Notes as a result of all Registration Defaults will in no event exceed one and one-half percent (1.5%) per annum. Upon the cure of a Registration Default the accrual of Additional Interest on the Restricted Notes with respect to such Registration Default will cease. If a Shelf Registration Statement is declared effective but becomes unusable by the Holders of Notes covered by such Shelf Registration Statement ("Shelf Registered Notes") for any reason, and the aggregate number of days in any consecutive twelve-month period for which the Shelf Registration Statement shall not be usable exceeds 30 days in the aggregate, then commencing upon such 30th day the Shelf Registered Notes shall accrue Additional Interest (in addition to any interest -88- then accruing in accordance with the immediately preceding paragraph), as liquidated damages, at a rate of one-half of one percent per annum of the Accreted Value of the Shelf Restricted Notes, which rate will increase by one-half of one percent at the end of each 90-day period in which such Shelf Registration Statement is not usable, provided that the maximum aggregate interest rate that accrues on the Accreted Value of the Shelf Registered Notes as a result of a Shelf Registration Statement being unusable (inclusive of any interest that accrues on such Notes pursuant to the first paragraph of this Section 10.23(b)) will in no event exceed one and one-half percent (1.5%) per annum. Upon the Shelf Registration Statement once again becoming usable, the accrual of Additional Interest on the Shelf Registered Notes due to such Shelf Registration Statement not being usable will cease. Additional Interest shall be computed based on the actual number of days elapsed in each 90-day period in which Additional Interest accrues on the Notes. The Company shall notify the Trustee within three Business Days after each date on which an event occurs as a result of which Additional Interest begins to accrue on any Notes (an "Event Date"). Additional Interest payable with respect to any Note shall be due and payable on each March 1 and September 1 (each an "Additional Interest Payment Date") if Additional Interest has accrued on such Note during the semi-annual period immediately preceding such Additional Interest Payment Date, to the person in whose name such Note (or one or more Predecessor Notes) is registered at the close of business on the February 15 or August 15, whether or not a Business Day, next preceding such Additional Interest Payment Date. Each obligation to pay Additional Interest shall be deemed to accrue from and including the day following the applicable Event Date. Additional Interest shall be paid by depositing with the Trustee, in trust for the benefit of the Holders of Notes, prior to 11:00 a.m. New York City time on the applicable Additional Interest Payment Date, immediately available funds sufficient to pay the Additional Interest then due. Section 10.24. WARRANT AGREEMENT. Simultaneously with the execution and delivery of this Indenture, the Company shall enter into the Warrant Agreement, the form of which is attached hereto as EXHIBIT H hereto (the "Warrant Agreement"), and shall deliver to the Trustee an Opinion of Counsel stating that the Warrant Agreement has been duly authorized, executed and delivered by the Company, and constitutes a legal, valid and binding agreement enforceable against the Company in accordance with its terms (subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally). -89- ARTICLE ELEVEN SATISFACTION AND DISCHARGE Section 11.01. SATISFACTION AND DISCHARGE OF INDENTURE. This Indenture shall be discharged and will cease to be of further effect (except as to surviving rights or registration of transfer or exchange of Notes herein expressly provided for) as to all outstanding Notes and the Trustee, on written demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when either (a) all Notes theretofore authenticated and delivered (other than (A) Notes which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.06 hereof and (B) Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.03) have been delivered to the Trustee for cancellation; or (b) (i) all such Notes not theretofore delivered to the Trustee for cancellation have become due and payable and the Company has irrevocably deposited or caused to be deposited with the Trustee in trust an amount of money in dollars sufficient to pay and discharge the entire Indebtedness on such Notes not theretofore delivered to the Trustee for cancellation, for the principal of, premium, if any, and interest to the date of such deposit; (ii) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (iii) the Company has delivered to the Trustee (i) irrevocable instructions to apply the deposited money toward payment of the Notes at the Stated Maturities and the Redemption Dates thereof, and (ii) an Officers' Certificate and an Opinion of Counsel each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.07 and, if money shall have been deposited with the Trustee pursuant to subclause (b)(ii) of this Section 11.01, the obligations of the Trustee under Section 11.02 and the last paragraph of Section 10.03, shall survive. Section 11.02. APPLICATION OF TRUST MONEY. Subject to the provisions of the last paragraph of Section 10.03, all money deposited with the Trustee pursuant to Section 11.01 shall be held in trust and applied by it, in accordance with the provisions of the Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the -90- persons entitled thereto, of the principal of, premium, if any, and interest on the Notes for whose payment such money has been deposited with the Trustee. ARTICLE TWELVE REDEMPTION Section 12.01. NOTICES TO THE TRUSTEE. If the Company elects to redeem Notes pursuant to Paragraph 3 of the reverse side of the Initial Notes or Paragraph 2 of the reverse side of the Exchange Notes, it shall notify the Trustee of the Redemption Date and principal amount of Notes to be redeemed. The Company shall notify the Trustee of any redemption at least 45 days before the Redemption Date by an Officers' Certificate, stating that such redemption will comply with the provisions hereof and of the Notes. Section 12.02. SELECTION OF NOTES TO BE REDEEMED. In the event that less than all of the Notes are to be redeemed at any time, selection of such Notes for redemption will be made by the Trustee in compliance with any applicable requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not then listed on a national securities exchange (or if the Notes are so listed but the exchange does not impose requirements with respect to the selection of debt securities for redemption), on a pro rata basis, by lot or by such method as the Trustee in its sole discretion shall deem fair and appropriate; provided, however, that any redemption pursuant to the provisions relating to redemptions from the proceeds of one or more Public Equity Offerings of Common Stock and/or (b) the sale of Capital Stock (other than Disqualified Stock) to Strategic Equity Investors shall be made on a pro rata basis or on as nearly a pro rata basis as practicable (subject to the Depository's procedures). No Notes of a principal face amount of $1,000 or less shall be redeemed in part. The Trustee shall promptly notify the Company and the Registrar in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Notes shall relate, in the case of any Note redeemed or to be redeemed only in part, to the portion of the Accreted Value of such Note which has been or is to be redeemed. -91- Section 12.03. NOTICE OF REDEMPTION. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Notes to be redeemed, at the address of such Holder appearing in the Note Register maintained by the Registrar. All notices of redemption shall identify the Notes to be redeemed and shall state: (a) the Redemption Date; (b) the Redemption Price; (c) that, unless the Company defaults in paying the Redemption Price, any Note called for redemption shall cease to accrete Accreted Value or, if the Redemption Date is after March 1, 2002, shall cease to accrue interest, in either case on and after the Redemption Date, and the only remaining right of the Holders of such Notes is to receive payment of the Redemption Price upon surrender to the Paying Agent of the Notes redeemed; (d) if any Note is to be redeemed in part, the portion of the principal face amount (equal to $1,000 or any integral multiple thereof) of such Note to be redeemed and that on and after the Redemption Date, upon surrender for cancellation of such Note to the Paying Agent, a new Note or Notes in the aggregate principal face amount equal to the unredeemed portion thereof will be issued without charge to the Noteholder; (e) that Notes called for redemption must be surrendered to the Paying Agent to collect the Redemption Price and the name and address of the Paying Agent; and (f) the CUSIP or CINS number, if any, relating to such Notes. Notice of redemption of Notes to be redeemed at the election of the Company shall be given by the Company or, at the Company's written request, by the Trustee in the name and at the expense of the Company. Section 12.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed, Notes called for redemption become due and payable on the Redemption Date and at the Redemption Price. Upon surrender to the Paying Agent, such Notes called for redemption shall be paid at the Redemption Price (including accrued interest, if any, to the Redemption Date) ,but interest installments whose Stated Maturity is on or prior to such Redemption Date will be payable on the relevant Interest Payment Dates to the Holders of record at the close of business on the relevant Regular Record Dates referred to in the Notes. -92- Section 12.05. DEPOSIT OF REDEMPTION PRICE. On or prior to any Redemption Date, the Company shall deposit with the Paying Agent an amount of money in same day funds sufficient to pay the Redemption Price of all the Notes or portions thereof which are to be redeemed on that date (including any accrued interest to the Redemption Date), other than Notes or portions thereof called for redemption on that date which have been delivered by the Company to the Trustee for cancellation. If the Company complies with the preceding paragraph, then, unless the Company defaults in the payment of such Redemption Price, interest on the Notes to be redeemed will cease to accrue on and after the applicable Redemption Date, whether or not such Notes are presented for payment, and the Holders of such Notes shall have no further rights with respect to such Notes except for the right to receive the Redemption Price (including unpaid interest on the Notes through the Redemption Date), upon surrender of such Notes. If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal, premium, if any, and, to the extent lawful, accrued interest thereon shall, until paid, bear interest from the Redemption Date at the rate provided in the Notes. Section 12.06. NOTES REDEEMED OR PURCHASED IN PART. Upon surrender to the Paying Agent of a Note which is to be redeemed in part, the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Note, without service charge, a new Note or Notes, of any authorized denomination as requested by such Holder in aggregate principal face amount equal to, and in exchange for, the unredeemed portion of the principal face amount of the Note so surrendered that is not redeemed. ARTICLE THIRTEEN SUBSIDIARY GUARANTEES Section 13.01. UNCONDITIONAL GUARANTEE. Each Subsidiary Guarantor hereby unconditionally and irrevocably guarantees, jointly and severally, to each Holder and to the Trustee, the full and punctual payment of principal of, premium, if any, and interest on the Notes when due, whether at maturity, by acceleration, by redemption, by repurchase or otherwise, and all other Indenture Obligations of the Company (all the foregoing being hereinafter collectively called the "Guaranteed Obligations"). Each Subsidiary Guarantor further agrees that the Guaranteed Obligations may be extended or renewed, in whole or in part, without notice or further assent from such Subsidiary Guarantor and that such Subsidiary Guarantor will remain bound under this Article Thirteen notwithstanding any extension or renewal of any Guaranteed Obligation. -93- Each Subsidiary Guarantor waives presentation to, demand of, payment from and protest to the Company of any of the Guaranteed Obligations and also waives notice of protest from nonpayment. Each Subsidiary Guarantor waives notice of any default under the Notes or the other Guaranteed Obligations. The obligations of each Subsidiary Guarantor hereunder shall not be affected by (a) the failure of any Holder or the Trustee to assert any claim or demand or to enforce any right or remedy against the Company or any other person under this Indenture, the Notes or any other agreement or otherwise; (b) any extension or renewal of any thereof; (c) any rescission, waiver, amendment or modification of any of the terms or provisions of this Indenture, the Notes or any other agreement; (d) the release of any security held by any Holder or the Trustee for Notes or any of the other Guaranteed Obligations; (e) the failure of any Holder or the Trustee to exercise any right or remedy against any other guarantor of the Guaranteed Obligations; or (f), subject to Section 13.04, any change in the ownership of such Subsidiary Guarantor. Each Subsidiary Guarantor further agrees that its Subsidiary Guaranty herein constitutes a guarantee of payment, performance and compliance when due (and not a guarantee of collection) and waives any right to require that any resort be had by any Holder or the Trustee to any security held for payment of any of the Guaranteed Obligations. Except as expressly set forth in Section 13.02, the obligations of each Subsidiary Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense of setoff, counterclaim, recoupment or termination whatsoever or by reason of the invalidity, illegality or unenforceability of any of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of each Subsidiary Guarantor herein shall not be discharged or impaired or otherwise affected by the failure of any Holder or the Trustee to assert any claim or demand or to enforce any remedy under this Indenture, the Notes or any other agreement, by any waiver or modification of any thereof, by any default, failure or delay, wilful or otherwise, in the performance of any of the Guaranteed Obligations, or by any other act or thing or omission or delay to do any other act or thing which may or might in any manner or to any extent vary the risk of such Subsidiary Guarantor or would otherwise operate as a discharge of such Subsidiary Guarantor from its Subsidiary Guarantee as a matter of law or equity. Each Subsidiary Guarantor further agrees that its Subsidiary Guarantee shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of, premium, if any, or interest on the Notes, or any other payment made in respect of any Guaranteed Obligation, is rescinded or must otherwise be restored by any Holder or the Trustee upon the bankruptcy or reorganization of the Company or otherwise. In furtherance of the foregoing and not in limitation of any other right which any Holder or the Trustee has at law or in equity against any Subsidiary Guarantor by virtue hereof, upon the failure of the Company to pay the principal of, premium, if any, or interest on any of the Notes when and as the same shall become due, whether at maturity, by acceleration, by redemption, by repurchase or otherwise, or to perform or comply with any other Guaranteed Obligation, each Subsidiary Guarantor hereby promises to and will, upon receipt of written demand by the Trustee, forthwith pay, -94- or cause to be paid, in cash, to the Holders or the Trustee an amount equal to the sum of (i) the unpaid amount of such Guaranteed Obligations, (ii) accrued and unpaid interest on such Guaranteed Obligations (but only to the extent not prohibited by law) and (iii) all other Guaranteed Obligations of the Company to the Holders and the Trustee. Each Subsidiary Guarantor agrees that it shall not be entitled to any right of subrogation in respect of any Guaranteed Obligations guaranteed hereby until payment in full of all Guaranteed Obligations. Each Subsidiary Guarantor further agrees that, as between it, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of any or all of the Guaranteed Obligations may be accelerated as provided in Article Five hereof for the purposes of such Subsidiary Guarantor's Subsidiary Guaranty herein, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations of the Company guaranteed hereby, and (y) in the event of any declaration of acceleration of such obligations as provided in Article Five (subject to the recision thereof as provided therein), such obligations (whether or not due and payable) shall forthwith become due and payable by such Subsidiary Guarantor for the purposes of this Section 13.01. Each Subsidiary Guarantor also agrees to pay any and all costs and expenses (including reasonable attorney's fees) incurred by any Holder or the Trustee in enforcing any rights under this Article. Section 13.02. LIMITATION OF LIABILITY. Any term or provision of this Indenture to the contrary notwithstanding, the maximum aggregate amount of the obligations guaranteed hereunder by any Subsidiary Guarantor shall not exceed the maximum amount that can be guaranteed by it without rendering this Indenture or its Subsidiary Guarantee, as it relates to such Subsidiary Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. To effectuate the foregoing intention, the obligations of each Subsidiary Guarantor shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Subsidiary Guaranty or pursuant to its contribution obligations hereunder, result in the obligations of such Subsidiary Guarantor under its Subsidiary Guaranty not constituting a fraudulent conveyance or fraudulent transfer under federal, state or foreign law. Each Subsidiary Guarantor that makes a payment or distribution under a Subsidiary Guaranty shall be entitled to a contribution from each other Subsidiary Guarantor in an amount based on the consolidated net worth of each Subsidiary Guarantor. Section 13.03. SUBSIDIARY GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS. (a) Except as set forth in Articles Eight and Ten, nothing contained in this Indenture or in any of the Notes shall prevent any consolidation or merger of a Subsidiary Guarantor, with or into the Company or another Subsidiary Guarantor or shall prevent any sale, assignment, transfer, lease, conveyance or other disposition of the property of a Subsidiary Guarantor as an entirety or substantially as an entirety, to the Company or another Subsidiary Guarantor. -95- (b) Nothing contained in this Indenture or in any of the Notes shall prevent any consolidation or merger of a Subsidiary Guarantor with or into a corporation or corporations other than the Company or a Subsidiary Guarantor (whether or not affiliated with the Subsidiary Guarantor), or successive consolidations or mergers in which a Subsidiary Guarantor or its successor or successors shall be a party or parties, or shall prevent any sale, assignment, transfer, lease, conveyance or other disposition of the property of a Subsidiary Guarantor as an entirety or substantially as an entirety, to a person other than the Company or another Subsidiary Guarantor (whether or not affiliated with the Subsidiary Guarantor); provided, that (i) such Subsidiary Guarantor shall be the continuing person or, if such Subsidiary Guarantor is not the continuing person, the resulting, surviving or transferee person (the "surviving entity") shall be a company organized and existing under the laws of the United States or any State or territory thereof; (b) if such Subsidiary Guarantor is not the continuing person and the surviving entity is a Restricted Subsidiary of the Company, the surviving entity shall expressly assume all of the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee, and shall execute a supplemental indenture and a separate Guarantee to effect such assumption which supplemental indenture and separate Guarantee shall each be delivered to the Trustee and shall be in form and substance reasonably satisfactory to the Trustee; (c) such consolidation or merger involving such Subsidiary Guarantor, and any sale, assignment, transfer, lease, conveyance or other disposition of the property of such Subsidiary Guarantor as an entirety or substantially as an entirety, shall comply with the provisions of Article Eight and Article Ten hereof; and (d) the Company and such Subsidiary Guarantor or the surviving entity, as the case may be, shall each deliver to the Trustee an Officers' Certificate and an Opinion of Counsel stating that such transaction or series of transactions, and, if a supplemental indenture and a separate Guarantee are required in connection with such transaction or series of transactions to effectuate such assumption, such supplemental indenture and Guarantee, complies with this covenant and that all conditions precedent in this Indenture relating to the transaction or series of transactions have been satisfied. The provisions of this Section 13.03 shall not apply if to any merger or consolidation or any sale, assignment, transfer, lease, conveyance or other disposition of the property of any Subsidiary Guarantor if, following such transaction and pursuant to Section 13.04, such Subsidiary Guarantor (or any surviving entity) is released from its Subsidiary Guarantee. Section 13.04. RELEASE OF A SUBSIDIARY GUARANTOR. (a) Upon the sale or other disposition (by merger or otherwise) of a Subsidiary Guarantor (or all or substantially all of its assets) to a person other than the Company or another Subsidiary Guarantor and pursuant to a transaction that is otherwise in compliance with this Indenture (including as described in Sections 13.03 above) and pursuant to which such Subsidiary Guarantor ceases to be a Restricted Subsidiary, such Subsidiary Guarantor shall be automatically and unconditionally released from all obligations under its Subsidiary Guarantee. (b) Each Subsidiary Guarantor that is Designated an Unrestricted Subsidiary in compliance with Section 10.20 shall, upon such Designation, be automatically and unconditionally released from all obligations under its Subsidiary Guarantee. -96- (c) Each Restricted Subsidiary that becomes a Subsidiary Guarantor in accordance with the second paragraph of Section 10.22 due to its Guarantee of, or in any other manner becoming liable with respect to, any Indebtedness of any person, shall be automatically released from all obligations under its Subsidiary Guarantee upon the unconditional release of such Restricted Subsidiary from its obligations in respect of the Indebtedness which gave rise to the requirement that its Subsidiary Guarantee be given; provided, that at the time of such release such Restricted Subsidiary (i) does not have any Guarantees, other than its Subsidiary Guarantee, outstanding and (ii) is not a Material Restricted Subsidiary. (d) Upon the release of a Subsidiary Guarantor from its Subsidiary Guarantee pursuant to paragraph (a), (b) or (c) above, the Company and each Subsidiary Guarantor shall each furnish to the Trustee an Officers' Certificate stating that all conditions precedent for the automatic release of such Subsidiary Guarantor from its Subsidiary Guarantee have been satisfied, and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied. On the basis of such Officers' Certificates and Opinions of Counsel, the Trustee shall deliver an appropriate instrument evidencing such release. Any Subsidiary Guarantor not so released shall remain liable for all of the Guaranteed Obligations as provided in this Article Thirteen. Section 13.05. SUCCESSOR AND ASSIGNS. This Article Thirteen shall be binding upon each Subsidiary Guarantor and its successors and assigns and shall enure to the benefit of the successors and assigns of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges conferred upon that party in this Indenture and in the Notes shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions of this Indenture. Section 13.06. NO WAIVER. Neither a failure nor a delay on the part of either the Trustee or the Holders in exercising any right, power or privilege under this Article Thirteen shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Trustee and the Holders herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which either may have under this Article Thirteen at law, in equity, by statute or otherwise. Section 13.07. MODIFICATION. No modification, amendment or waiver of any provision of this Article Thirteen, nor the consent to any departure by any Subsidiary Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Trustee, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any Subsidiary Guarantor in any case shall entitle such Subsidiary Guarantor to any other or further notice or demand in the same, similar or other circumstances. Section 13.08. SEVERABILITY. In case any provision of this Article Thirteen shall be invalid, illegal or unenforceable, that portion of such provision that is not invalid, illegal or unenforceable shall remain in effect, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. -97- IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. WAM!NET INC, as Issuer By: /s/ Edward J. Driscoll III ---------------------------- Name: Edward J. Driscoll III Title: President and CEO FIRST TRUST NATIONAL ASSOCIATION, as Trustee By: /s/ Kathe Barrett ---------------------------- Name: Kathe Barrett Title: Trust Officer EXHIBIT A-1 [FORM OF NOTE] [FACE OF NOTE] THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 903 OR 904 OF REGULATION S, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, PURSUANT TO RULE 904 OF REGULATION S, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE COMPANY, THE TRUSTEE, THE TRANSFER AGENT AND THE REGISTRAR SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE A-1-1 FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. This Note is issued with original issue discount for purposes of Section 1271 et seq. of the Internal Revenue Code of 1986, as amended. For each $1,000 principal face amount of this Note, the issue price is $539.37 and the amount of original issue discount is $460.63. The issue date of this Note is March 5, 1998 and the yield to maturity is 14.59%. A-1-2 WAM!NET INC. ------------------------------------ GLOBAL NOTE 13 1/4% SENIOR DISCOUNT NOTES DUE 2005, SERIES A CUSIP No. 933590 AA 9 $ ___________ REGISTERED No. WAM!NET INC., a corporation incorporated under the laws of the State of Minnesota (herein called the "Company," which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to ___________, or registered assigns, the principal sum of __________ Dollars ($__________) on March 1, 2005, at the office or agency of the Company referred to below, and to pay interest thereon on March 1 and September 1 (each an "Interest Payment Date"), of each year, commencing on September 1, 2002, accruing from March 1, 2002 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of 13 1/4% per annum, until the principal hereof is paid or duly provided for. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on the February 15 or August 15 (each a "Regular Record Date"), whether or not a Business Day, as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the then applicable interest rate borne by the Notes, to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice of which shall be given to Holders of Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. Payment of the principal of, premium, if any, and interest on this Note will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the person entitled thereto as such address shall appear on the Note Register. A-1-3 Reference is hereby made to the further provisions of this Note set forth on the reverse hereof. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Note shall not be entitled to any benefit under this Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: March 5, 1998 WAM!NET INC. By: -------------------------- Name: Title: By: -------------------------- Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 13 1/4% Senior Discount Notes due 2005, Series A, referred to in the within-mentioned Indenture. FIRST TRUST NATIONAL ASSOCIATION, as Trustee By: -------------------------- Authorized Signatory A-1-4 [REVERSE OF NOTE] ARTICLE Indenture; Guaranties. This Note is one of a duly authorized --------- ---------- issue of Notes of the Company designated as its 13 1/4% Senior Discount Notes due 2005, Series A (herein called the "Initial Notes"). The Notes are limited (except as otherwise provided in the Indenture referred to below) in aggregate principal face amount to $208,530,000, which may be issued under an indenture (herein called the "Indenture") dated as of March 5, 1998, by and between the Company and First Trust National Association, as trustee (herein called the "Trustee," which term includes any successor Trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Trustee and the Holders of the Notes, and of the terms upon which the Notes are, and are to be, authenticated and delivered. The Notes include the Initial Notes, the Private Exchange Notes and the Unrestricted Notes (including the Exchange Notes referred to below), issued in exchange for the Initial Notes pursuant to the Registration Rights Agreement. The Initial Notes, the Private Exchange Notes and the Unrestricted Notes are treated as a single class of securities under the Indenture. All capitalized terms used in this Note which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture. Notwithstanding anything to the contrary herein, the Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and the TIA for a statement of such terms. No reference herein to the Indenture and no provisions of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Note at the times, place, and rate, and in the coin or currency, herein prescribed. To guarantee the due and punctual payment of the principal, premium, if any, and interest on the Notes and all other amounts payable by the Company under the Indenture and the Notes when and as the same may be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Indenture and the Notes, the Subsidiary Guarantors, if any, have unconditionally guaranteed the obligations of the Company under the Indenture and the Notes on a senior basis pursuant to the terms of the Indenture. Pursuant to the Indenture, a Subsidiary Guarantor may be released from its obligations under its Subsidiary Guarantee under certain circumstances. ARTICLE Units. This Note has initially been issued as part of a unit ----- ("Unit"), each Unit consisting of $1,000 principal face amount of Notes and three Warrants, each Warrant entitling the holder to purchase 2.01 shares of the Company's Common Stock, subject to certain adjustments. The Warrants have been issued pursuant to a Warrant Agreement dated as of March 5, 1998 (as amended from time to time, the "Warrant Agreement"), between the Company and First Trust National A-1-5 Association, as warrant agent. Pursuant to the Indenture and the Warrant Agreement, the Warrants and the Notes will not be separately transferable until the "Separability Date," which means the earliest to occur of: (i) September 1, 1998, (ii) the occurrence of an Exercise Event (as defined in the Warrant Agreement), (iii) the occurrence of an Event of Default, (iv) the date on which a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to a registered exchange offer for the Notes or covering the sale by holders of the Notes is declared effective under the Securities Act, (v) immediately prior to any redemption of Notes by the Company from the net proceeds of an Initial Public Equity Offering, (vi) immediately prior to the occurrence of a Warrant Change of Control (as defined in the Warrant Agreement) or (v) such earlier date as determined by Merrill Lynch & Co. in its sole discretion. ARTICLE Registration Rights. The Holder of this Note is entitled to the ------------------- benefits of a Registration Rights Agreement, dated March 5, 1998, between the Company and the Initial Purchasers (as amended from time to time, the "Registration Rights Agreement"). Pursuant to the Registration Rights Agreement, the Company is obligated to consummate an exchange offer pursuant to which the Holders of Initial Notes shall have the right to exchange the Initial Notes for 13 1/4% Senior Discount Notes due 2005, Series B, of the Company (herein called the "Exchange Notes"), which have been registered under the Securities Act, in like principal amount and having identical terms as the Initial Notes (other than as set forth in this paragraph and paragraph 2 above). The Holders of Initial Notes shall be entitled to receive, as liquidated damages, certain cash interest payments in the event such exchange offer is not consummated within a specified period and upon certain other conditions, all pursuant to and in accordance with the terms of the Registration Rights Agreement and the Indenture. ARTICLE Redemption. The Notes will be redeemable, at the option of the ---------- Company, in whole or in part, on or after March 1, 2002 upon not less than 30 nor more than 60 days' written notice at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on March 1 of each of the years indicated below: YEAR PERCENTAGE ---- ---------- 2002............................... 106.6250% 2003............................... 103.3125% 2004............................... 100.0000% In addition, at any time on or prior to March 1, 2001, the Company may, other than in any circumstances resulting in a Change of Control, redeem, at its option, up to a maximum of 25% of the originally-issued aggregate principal face amount of Notes at a redemption price equal to 113.25% of the Accreted Value of the Notes so redeemed, with the net cash proceeds of an Initial Public Equity Offering resulting in gross cash proceeds to the Issuer of at least $35 million in the aggregate; provided that not less than 75% of the originally-issued aggregate principal face amount of Notes is outstanding immediately following such redemption. Any such redemption must be effected upon not less than A-1-6 30 nor more than 60 days' notice given within 30 days after the consummation of such Initial Public Equity Offering. ARTICLE Offers To Purchase. Sections 10.10 and 10.15 of the Indenture ------------------ provide that upon the occurrence of a Change of Control and following certain Asset Sales, and subject to certain conditions and limitations contained therein, the Company shall make an offer to purchase all or a portion of the Notes at the purchase prices and in accordance with the procedures set forth in the Indenture. ARTICLE Defaults And Remedies. If an Event of Default occurs and is --------------------- continuing, the Default Amount of all outstanding Notes may be declared due and payable in the manner and with the effect provided in this Indenture. ARTICLE DEFEASANCE. The Indenture contains provisions (which provisions apply to this Note) for defeasance at any time of (a) the entire indebtedness of the Company on this Note and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance by the Company with certain conditions set forth therein. ARTICLE Amendments And Waivers. The Indenture permits, with certain ---------------------- exceptions as provided therein, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal face amount of the Notes at the time Outstanding. This Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal face amount of the Notes at the time Outstanding, on behalf of the Holders of all the Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past Defaults under the Indenture and this Note and their consequences. Any such consent or waiver by or on behalf of the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. ARTICLE Denominations, Transfer And Exchange. The Notes are issuable ------------------------------------ only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Notes are exchangeable for a like aggregate principal amount of Notes of a different authorized denomination, as requested by the Holder surrendering the same. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note is registrable on the Note Register, upon surrender of this Note for registration of transfer at the office or agency of the Company maintained for such purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes, of A-1-7 authorized denominations and for the same aggregate principal face amount, will be issued to the designated transferee or transferees. No service charge shall be made for any registration of transfer or exchange or redemption of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. ARTICLE Persons Deemed Owners. Prior to and at the time of due --------------------- presentment of this Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note shall be overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. ARTICLE GOVERNING LAW. THE INDENTURE, THIS NOTE AND EACH SUBSIDIARY ------------- GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. The Company will furnish to any Holder of a Note upon written request and without charge a copy of the Indenture and the Registration Rights Agreement. Requests may be made to: WAM!NET Inc., 6100 West 110th Street, Minneapolis, Minnesota 55438; Attention: Secretary. ASSIGNMENT FORM If you the holder want to assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name and address (including zip code) and social security or tax ID number) and irrevocably appoint --------------------------------------------------------- - -------------------------------------------------------------------------------- A-1-8 agent to transfer this Note on the books of the Company. The agent may substitute another to act for such agent. In connection with any transfer of this Note occurring prior to the date which is the earlier of (i) the date of the declaration by the SEC of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering resales of this Note (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) the date two years (or such shorter period of time as permitted by Rule 144 under the Securities Act or any successor provision thereunder) after the later of the original issuance date appearing on the face of this Note (or any Predecessor Note) or the last date on which the Company or any Affiliate of the Company was the owner of this Note (or any Predecessor Note), the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that: A-1-9 [CHECK ONE] [ ] (a) this Note is being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. OR [ ] (b) this Note is being transferred other than in accordance with (a) above and documents, including (i) a transferee certificate substantially in the form of Exhibit D to the Indenture in the case of a transfer to non-QIB Accredited Investors or (ii) a transferor certificate substantially in the form of Exhibit E to the Indenture in the case of a transfer pursuant to Regulation S, are being furnished which comply with the conditions of transfer set forth in this Note and the Indenture. If none of the foregoing boxes is checked and, in the case of (b) above, if the appropriate document is not attached or otherwise furnished to the Trustee, the Trustee or Registrar shall not be obligated to register this Note in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Sections 3.16 and 3.17 of the Indenture shall have been satisfied. - -------------------------------------------------------------------------------- Date: Your signature: ----------------- -------------------------------- (Sign exactly as your name appears on the other side of this Note) By: -------------------------------- NOTICE: To be executed by an executive officer Signature Guarantee: ------------------------- A-1-10 TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A (including the information specified in Rule 144A(d)(4)) or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: Name of ----------- Purchaser: ------------------------------- NOTICE: To be executed by an executive officer A-1-11 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Note purchased by the Company pursuant to Section 10.10 or 10.15 of this Indenture, check the appropriate box: Section 10.10 [ ] Section 10.15 [ ] If you wish to have a portion of this Note purchased by the Company pursuant to Section 10.10 or 10.15 of this Indenture, state the Accreted Value (or percentage of principal amount at maturity): $______________ or ___% Date: Your signature: -------------- -------------------------------- (Sign exactly as your name appears on the other side of this Note) By: -------------------------------- NOTICE: To be executed by an executive officer Signature Guarantee: ------------------------- D-1 EXHIBIT A-2 This Note is issued with original issue discount for purposes of Section 1271 et seq. of the Internal Revenue Code of 1986, as amended. For each $1,000 principal face amount of this Note, the issue price is $539.37 and the amount of original issue discount is $460.63. The issue date of this Note is March 5, 1998 and the yield to maturity is 14.59%. WAM!NET INC. ------------------------------------ GLOBAL NOTE 13 1/4% SENIOR DISCOUNT NOTES DUE 2005, SERIES B CUSIP No. $ REGISTERED No. WAM!NET INC., a corporation incorporated under the laws of the State of Minnesota (herein called the "Company," which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to ____________________ , or registered assigns, the principal sum of __________________________($_____________ ) on March 1, 2005, at the office or agency of the Company referred to below, and to pay interest thereon on March 1 and September 1 (each an "Interest Payment Date"), of each year, commencing on September 1, 2002, accruing from March 1, 2002 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of 13 1/4% per annum, until the principal hereof is paid or duLY provided for. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on the February 15 or August 15 (each a "Regular Record Date"), whether or not a Business Day, as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the then applicable interest rate borne by the Notes, to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice of which shall be given to Holders of Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not A-2-1 inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. Payment of the principal of, premium, if any, and interest on this Note will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the person entitled thereto as such address shall appear on the Note Register. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Note shall not be entitled to any benefit under this Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: WAM!NET INC. By: --------------------------------- Name: Title: By: --------------------------------- Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 13 1/4% Senior Discount Notes due 2005, Series B, referred to in the within-mentioned Indenture. FIRST TRUST NATIONAL ASSOCIATION, as Trustee By: --------------------------------- Authorized Signatory A-2-2 [REVERSE OF NOTE] 1. Indenture; Guaranties. This Note is one of a duly authorized issue of --------------------- Notes of the Company designated as its 13 1/4% Senior Discount Notes due 2005, Series B (herein called the "Unrestricted Notes"). The Notes are limited (except as otherwise provided in the Indenture referred to below) in aggregate principal face amount to $208,530,000, which may be issued under an indenture (herein called the "Indenture") dated as of March 5, 1998, by and between the Company and First Trust National Association, as trustee (herein called the "Trustee," which term includes any successor Trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Trustee and the Holders of the Notes, and of the terms upon which the Notes are, and are to be, authenticated and delivered. The Notes include the Initial Notes, the Private Exchange Notes and the Unrestricted Notes (including the Exchange Notes), issued in exchange for the Initial Notes pursuant to the Registration Rights Agreement. The Initial Notes, the Private Exchange Notes and the Unrestricted Notes are treated as a single class of securities under the Indenture. All capitalized terms used in this Note which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture. Notwithstanding anything to the contrary herein, the Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and the TIA for a statement of such terms. No reference herein to the Indenture and no provisions of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Note at the times, place, and rate, and in the coin or currency, herein prescribed. To guarantee the due and punctual payment of the principal, premium, if any, and interest on the Notes and all other amounts payable by the Company under the Indenture and the Notes when and as the same may be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Indenture and the Notes, the Subsidiary Guarantors, if any, have unconditionally guaranteed the obligations of the Company under the Indenture and the Notes on a senior basis pursuant to the terms of the Indenture. Pursuant to the Indenture, a Subsidiary Guarantor may be released from its obligations under its Subsidiary Guarantee under certain circumstances. 2. Redemption. The Notes will be redeemable, at the option of the Company, ---------- in whole or in part, on or after March 1, 2002 upon not less than 30 nor more than 60 days' written notice at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and A-2-3 unpaid interest thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on March 1 of each of the years indicated below: YEAR PERCENTAGE ---- ---------- 2002..................................... 106.6250% 2003..................................... 103.3125% 2004..................................... 100.0000% In addition, at any time on or prior to March 1, 2001, the Company may, other than in any circumstances resulting in a Change of Control, redeem, at its option, up to a maximum of 25% of the originally-issued aggregate principal face amount of Notes at a redemption price equal to 113.25% of the Accreted Value of the Notes so redeemed, with the net cash proceeds of an Initial Public Equity Offering resulting in gross cash proceeds to the Issuer of at least $35 million in the aggregate; provided that not less than 75% of the originally-issued aggregate principal face amount of Notes is outstanding immediately following such redemption. Any such redemption must be effected upon not less than 30 nor more than 60 days' notice given within 30 days after the consummation of such Initial Public Equity Offering. 3. Offers To Purchase. Sections 10.10 and 10.15 of the Indenture provide ------------------ that upon the occurrence of a Change of Control and following certain Asset Sales, and subject to certain conditions and limitations contained therein, the Company shall make an offer to purchase all or a portion of the Notes at the purchase prices and in accordance with the procedures set forth in the Indenture. 4. Defaults And Remedies. If an Event of Default occurs and is continuing, --------------------- the Default Amount of all outstanding Notes may be declared due and payable in the manner and with the effect provided in this Indenture. 5. Defeasance. The Indenture contains provisions (which provisions apply to ---------- this Note) for defeasance at any time of (a) the entire indebtedness of the Company on this Note and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance by the Company with certain conditions set forth therein. 6. Amendments And Waivers. The Indenture permits, with certain exceptions ---------------------- as provided therein, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal face amount of the Notes at the time Outstanding. This Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal face amount of the Notes at the time Outstanding, on behalf of the Holders of all the Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past Defaults under the Indenture and this Note and their consequences. Any such consent or waiver by or on behalf of the Holder of this Note shall be conclusive and binding upon such Holder A-2-4 and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. 7. Denominations, Transfer And Exchange. The Notes are issuable only in ------------------------------------ registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Notes are exchangeable for a like aggregate principal amount of Notes of a different authorized denomination, as requested by the Holder surrendering the same. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note is registrable on the Note Register, upon surrender of this Note for registration of transfer at the office or agency of the Company maintained for such purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal face amount, will be issued to the designated transferee or transferees. No service charge shall be made for any registration of transfer or exchange or redemption of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. 8. Persons Deemed Owners. Prior to and at the time of due presentment of --------------------- this Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note shall be overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. 9. GOVERNING LAW. THE INDENTURE, THIS NOTE AND EACH SUBSIDIARY GUARANTEE ------------- SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. The Company will furnish to any Holder of a Note upon written request and without charge a copy of the Indenture and the Registration Rights Agreement. Requests may be made to: WAM!NET Inc., 6100 West 110th Street, Minneapolis, Minnesota 55438; Attention: Secretary. A-2-5 ASSIGNMENT FORM If you the holder want to assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name and address (including zip code) and social security or tax ID number) and irrevocably appoint --------------------------------------------------------- - -------------------------------------------------------------------------------- agent to transfer this Note on the books of the Company. The agent may substitute another to act for such agent. A-2-6 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Note purchased by the Company pursuant to Section 10.10 or 10.15 of this Indenture, check the appropriate box: Section 10.10 [ ] Section 10.15 [ ] If you wish to have a portion of this Note purchased by the Company pursuant to Section 10.10 or 10.15 of this Indenture, state the Accreted Value (or percentage of principal amount at maturity): $____________________ or ___% Date: Your signature: ---------------------- ----------------------------- (Sign exactly as your name appears on the other side of this Note) By: ----------------------------- NOTICE: To be executed by an executive officer Signature Guarantee: ------------------- A-2-7 EXHIBIT B FORM OF NOTATION ON NOTES RELATING TO SUBSIDIARY GUARANTEES The undersigned Subsidiary Guarantor(s) (as defined in the Indenture), jointly and severally, have unconditionally guaranteed the due and punctual payment of the principal of, premium, if any, and interest on the Notes, and all other amounts due and payable under the Indenture and the Notes, whether at maturity, acceleration, redemption, repurchase or otherwise, including, without limitation, the due and punctual payment of interest on the overdue principal of, premium, if any, and interest on the Notes, to the extent lawful. The obligation of each Subsidiary Guarantor pursuant to its Subsidiary Guarantee is subject to the terms and limitations set forth in Article Thirteen of the Indenture, and reference is made thereto for the precise terms of each Subsidiary Guarantee. SUBSIDIARY GUARANTORS: [Insert name of Subsidiary Guarantor] By: ------------------------------- Name: Title: [Insert name of Subsidiary Guarantor] By: ------------------------------- Name: Title: B-1 EXHIBIT C FORM OF LEGEND FOR BOOK-ENTRY SECURITIES Any Global Note authenticated and delivered hereunder shall bear a legend (which would be in addition to any other legends required in the case of a Restricted Note) in substantially the following form: THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS NOTE IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. C-1 EXHIBIT D Form of Certificate To Be Delivered in Connection with Transfers to Institutional (non-QIB) Accredited Investors ----------, ---- First Trust National Association 180 East 5th Street St. Paul, MN 55101 Attention: Corporate Trust Department Re: WAM!NET Inc.(the "Company") Indenture (the "Indenture") relating to __% SENIOR DISCOUNT NOTES DUE 2005 Ladies and Gentlemen: In connection with our proposed purchase of __% Senior Discount Notes due 2005 (the "Notes") of the Company we confirm that: 1. We have received such information as we deem necessary in order to make our investment decision. 2. We understand that any subsequent transfer of the Notes is subject to certain restrictions and conditions set forth in the Indenture and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"). 3. We understand that the offer and sale of the Notes have not been registered under the Securities Act, and that the Notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell any Notes, we will do so only (A) to the Company, (B) inside the United States in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined therein), (C) inside the United States to an D-1 institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the Trustee a signed letter substantially in the form hereof, (D) outside the United States in accordance with Regulation S under the Securities Act, (E) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available), or (F) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing Notes from us a notice advising such purchaser that resales of the Notes are restricted as stated herein. 4. We understand that, on any proposed resale of Notes, we will be required to furnish to the Trustee and the Company such certification, legal opinion and other information as the Trustee and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Notes purchased by us will bear a legend to the foregoing effect. 5. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or their investment, as the case may be. 6. We are acquiring the Notes purchased by us for our account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Proposed Transferee] By: -------------------------------- [Authorized Signature] D-2 EXHIBIT E Form of Certificate To Be Delivered in Connection with Transfers PURSUANT TO REGULATION S _____________, _____ First Trust National Association 180 East 5th Street St. Paul, MN 55101 Attention: Corporate Trust Department Re: WAM!NET Inc. (the "Company") _____% Senior Discount Notes due 2005 Ladies and Gentlemen: In connection with our proposed sale of __% Senior Discount Notes due 2005 (the "Notes") of the Company, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (1) the offer of the Notes was not made to a person in the United States; (2) either (a) at the time the buy offer was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States, or (b) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States; (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; (5) we have advised the transferee of the transfer restrictions applicable to the Notes; E-1 (6) if the circumstances set forth in Rule 904(c) under the Securities Act are applicable, we have complied with the additional conditions therein, including (if applicable) sending a confirmation or other notice stating that the Notes may be offered and sold during the restricted period specified in Rule 903(c)(3), as applicable, in accordance with the provisions of Regulation S; pursuant to registration of the Securities under the Securities Act; or pursuant to an available exemption from the registration requirements under the Securities Act; and (7) if the sale is made during a restricted period and the provisions of Rule 903(c)(3) are applicable thereto, we confirm that such sale has been made in accordance with such provisions. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By: --------------------------- Authorized Signature E-2 EXHIBIT F FORM OF SUPPLEMENTAL INDENTURE SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of _____________, ____ among [Insert name of new Subsidiary Guarantor] (the "New Subsidiary Guarantor"), a subsidiary of WAM!NET, INC. (or its successor), a Minnesota corporation (the "Company"), [Insert name of each existing Subsidiary Guarantor at the time of execution of this Supplemental Indenture] (the "Existing Subsidiary Guarantors"), and FIRST TRUST NATIONAL ASSOCIATION, a national banking corporation, as trustee under the Indenture referred to below (the "Trustee"). W I T N E S S E T H: WHEREAS the Company has heretofore executed and delivered to the Trustee an Indenture (as such may be amended from time to time, the "Indenture"), dated as of March __, 1998, providing for the issuance of an aggregate principal face amount of $_____________ of the Company's __% Senior Discount Notes due 2005 (the "Notes"); WHEREAS Section 10.22 of the Indenture provides that under certain circumstances the Company is required to cause Material Restricted Subsidiaries and certain other Restricted Subsidiaries to execute and deliver to the Trustee a supplemental indenture pursuant to which such Subsidiaries unconditionally guarantee all of the Company's Indenture Obligations pursuant to a Subsidiary Guaranty on the terms and conditions set forth herein and in the Indenture; [WHEREAS the Existing Subsidiary Guarantors, in accordance with Section 10.22 of the Indenture, have previously executed and delivered to the Trustee supplemental indentures pursuant to which such Subsidiaries have unconditionally guaranteed all of the Company's Indenture Obligations pursuant to a Subsidiary Guaranty on the terms and conditions set forth therein and in Article Thirteen of the Indenture;] WHEREAS pursuant to Section 9.1 of the Indenture, the Trustee, the Company [and the Existing Subsidiary Guarantors] are authorized to execute and deliver this Supplemental Indenture; and WHEREAS the New Subsidiary Guarantor is executing and delivering to the Trustee this Supplemental Indenture pursuant to Section 10.22 of the Indenture. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the New Subsidiary Guarantor, the Company, the Existing Subsidiary Guarantors and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Notes as follows: F-1 1. DEFINITIONS. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. 2. RULES OF CONSTRUCTION. For all purposes of this Supplemental Indenture and the Indenture as supplemented hereby, except as otherwise herein expressly provided or unless the context otherwise requires: (i) words in the singular include the plural, and in the plural include the singular; and (ii) the words "herein" and "hereof" and other words of similar import refer to the Indenture and this Supplemental Indenture as a whole and, unless the context otherwise requires, not to any particular Article, Section or other subdivision. 3. SUPPLEMENTAL INDENTURE INCORPORATED INTO INDENTURE. This Supplemental Indenture is executed by the Company, [the Existing Subsidiary Guarantors,] the New Subsidiary Guarantor and the Trustee pursuant to the provisions of Section 10.22 of the Indenture, and the terms and conditions hereof shall be deemed to be part of the Indenture for all purposes of the Notes. The Indenture, as supplemented by this Supplemental Indenture, is in all respects hereby adopted, ratified and confirmed 4. AGREEMENT TO GUARANTEE. The New Subsidiary Guarantor hereby unconditionally and irrevocably guarantees, jointly and severally with the Existing Subsidiary Guarantors, to each Holder and to the Trustee, the full and punctual payment of principal of, premium, if any, and interest on the Notes when due, whether at maturity, by acceleration, by redemption, by repurchase or otherwise, and all other obligations of the Company under the Indenture and the Notes, on the terms and subject to the conditions set forth in Article Thirteen of the Indenture. From and after the date hereof, the New Subsidiary Guarantor shall be a Subsidiary Guarantor for all purposes under the Indenture and the Notes. 5. RELEASE UNDER CERTAIN CIRCUMSTANCES. The New Subsidiary Guarantor shall be released from its obligations under its Subsidiary Guarantee under the circumstances set forth in Section 13.04 of the Indenture. 6. GOVERNING LAW. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 7. TRUSTEE MAKES NO REPRESENTATION. The Trustee makes no representation as to the validity or sufficiency of this Supplemental Indenture and shall not be responsible for any statement herein contained.. 8. COUNTERPARTS. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. F-2 9. EFFECT OF HEADINGS. The Section headings herein are for convenience only and shall not affect the construction hereof. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed as of the day and year first above written. [Name of New Subsidiary Guarantor] By: ------------------------------- Name: Title: WAM!NET, INC. By: ------------------------------- Name: Title: [Name of Existing Subsidiary Guarantors] By: ------------------------------- Name: Title: FIRST TRUST NATIONAL ASSOCIATION, as Trustee By: ------------------------------- Name: Title: F-3 SCHEDULE TO INDENTURE, DATED AS OF MARCH 5, 1998, BETWEEN WAM!NET INC. AND FIRST TRUST NATIONAL ASSOCIATION PERMITTED INDEBTEDNESS 1. Indebtedness incurred pursuant to the Company's 8% Convertible Subordinated Debentures due December 31, 1999, of which $75,000 aggregate principal amount is currently outstanding. 2. Indebtedness incurred pursuant to the Company's 7% Subordinated Note due December 31, 2003 in favor of WorldCom Inc. in the aggregate principal amount of $28,500,000, of which $20,363,250 aggregate principal amount is currently outstanding. 3. Indebtedness incurred pursuant to the Company's 10% Convertible Subordinated Note due September 30, 1999 in favor of WorldCom Inc. in the aggregate principal amount of $5,000,000. 4. Indebtedness incurred pursuant to the Company's $25,000,000 revolving credit facility with The First National Bank of Chicago, under which $24,003,313.00 aggregate principal amount is currently outstanding. 5. An equipment leasing arrangement dated as of May 1, 1996 in the aggregate amount of $245,396.60 entered into pursuant to the Master Lease Agreement, dated as of March 12, 1996, between the Company and Leasing Technologies International, Inc. 6. An installment note dated as of September 30, 1997 in the aggregate principal amount of $1,613,030.17 and an installment note dated as of October 22, 1997 in the aggregate principal amount of $3,393,679.96, each issued pursuant to the Master Loan and Security Agreement, dated as of September 5, 1997, between the Company and FINOVA Technology Finance Inc., relating to the purchase of certain equipment. 7. An installment note dated as of December 15, 1997 in the aggregate principal amount of $1,652,417.94, an installment note dated as of December 30, 1997 in the aggregate principal amount of $1,498,794.63, an installment note dated as of January 30, 1998 in the aggregate principal amount of $1,428,703.33 and an installment note dated as of February 13, 1998 in the aggregate principal amount of $369,517.21, each issued pursuant to the Master Loan and Security Agreement, dated as of November 26, 1997, between the Company and Transamerica Business Credit Corporation, relating to the purchase by the Company of certain equipment. 8. An installment note bearing monthly payments of $46,667, due December 1998 and an installment note bearing monthly payments of $82,690, due April 1999, each in favor of Leasetec Corporation ("Leasetec") and each issued pursuant to the Master Finance Agreement, dated as of September 24, 1997, between the Company and Informix Credit Company, as amended and assigned to Leasetec, relating to the licensing of certain proprietary software by the Company. 9. Pursuant to a letter dated as of February 11, 1998 from the Company to WorldCom, WorldCom has agreed to subordinate certain of its indebtedness of the Company. 10. Any other Permitted Indebtedness referenced in the Offering Memorandum, dated February 26, 1998, of the Company. -2- SCHEDULE 10.14 TO INDENTURE, DATED AS OF MARCH 5, 1998, BETWEEN WAM!NET INC. AND FIRST TRUST NATIONAL ASSOCIATION AFFILIATE TRANSACTIONS 1. The Company has issued its 10% Convertible Subordinated Note due September 30, 1999 in favor of WorldCom Inc. ("WorldCom") in the aggregate principal amount of $5,000,000. 2. On November 14, 1996, the Company and WorldCom executed the Preferred Stock, Subordinated Note and Warrant Purchase Agreement (the "WorldCom Agreement"), pursuant to which, among other things: (i) the Company issued 100,000 shares of its Class A Preferred Stock, par value $10.00 per share, to WorldCom and granted WorldCom the right to elect a majority of the Board of Directors of the Company; (ii) the Company has issued its 7% Subordinated Note due December 31, 2003 in favor of WorldCom in the aggregate principal amount of $28,500,000, of which $[20,363,250] aggregate principal amount is currently outstanding; (iii) the Company has issued to WorldCom warrants to purchase, on or before to December 31, 2000, up to 20,787,500 shares of the Company's common stock, par value $.01 per share (the "Common Stock"), at an initial exercise price of $0.092 per share; and (iv) the Company and WorldCom entered into certain arrangements with respect to the tender and/or put by WorldCom of its Common Stock and WorldCom granted a certain limited proxy in connection therewith. 3. In connection with a guarantee agreement, dated as of September 26, 1997, between the Company and WorldCom, the Company issued to WorldCom warrants to purchase up to 22,601,005 shares of Common Stock. 4. WorldCom has guaranteed the performance of the Company's obligations under a Service Provision Agreement, dated as of July 18, 1997, between the Company and Time Inc. 5. Pursuant to a letter dated as of February 11, 1998 from the Company to WorldCom, WorldCom has agreed to subordinate certain of its indebtedness of the Company. -3- 6. Pursuant to a letter dated as of February 25, 1998 from the Company to WorldCom, WorldCom has agreed to waive certain of its registration rights. 7. Any other Affiliated Transactions referenced in the Offering Memorandum, dated February 26, 1998, of the Company. -4- EX-4.2(A) 6 RULE 144A NOTE CERTIFICATE Exhibit 4.2(A) RULE 144A NOTE CERTIFICATE THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS NOTE IS NOT EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 903 OR 904 OF REGULATION S, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, PURSUANT TO RULE 904 OF REGULATION S, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE COMPANY, THE TRUSTEE, THE TRANSFER AGENT AND THE REGISTRAR SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. This Note is issued with original issue discount for purposes of Section 1271 et seq. of the Internal Revenue Code of 1986, as amended. For each $1,000 principal face amount of this Note, the issue price is $539.37 and the amount of original issue discount is $460.63. The issue date of this Note is March 5, 1998 and the yield to maturity is 14.59%. 2 WAM!NET INC. --------------- GLOBAL NOTE 13 1/4% SENIOR DISCOUNT NOTES DUE 2005, SERIES A CUSIP No. 933590 AA 9 $ 200,000,000 REGISTERED No. WAM!NET INC., a corporation incorporated under the laws of the State of Minnesota (herein called the "Company," which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of Two Hundred Million Dollars ($200,000,000) on March 1, 2005, at the office or agency of the Company referred to below, and to pay interest thereon on March 1 and September 1 (each an "Interest Payment Date"), of each year, commencing on September 1, 2002, accruing from March 1, 2002 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of 13 1/4% per annum, until the principal hereof is paid or duly provided for. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on the February 15 or August 15 (each a "Regular Record Date"), whether or not a Business Day, as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the then applicable interest rate borne by the Notes, to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice of which shall be given to Holders of Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. Payment of the principal of, premium, if any, and interest on this Note will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that 3 payment of interest may be made at the option of the Company by check mailed to the address of the person entitled thereto as such address shall appear on the Note Register. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Note shall not be entitled to any benefit under this Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: March 5, 1998 WAM!NET INC. By: /s/ Edward J. Driscoll III ------------------------------- Name: Edward J. Driscoll III Title: President and CEO By: /s/ Mark Marlow ------------------------------- Name: Mark Marlow Title: Vice President and Finance Director TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 13 1/4% Senior Discount Notes due 2005, Series A, referred to in the within-mentioned Indenture. FIRST TRUST NATIONAL ASSOCIATION, as Trustee By: /s/ Kathe Barrett ------------------------------- Authorized Signatory 4 [REVERSE OF NOTE] 1. Indenture; Guaranties. This Note is one of a duly authorized issue of --------------------- Notes of the Company designated as its 13 1/4% Senior Discount Notes due 2005, Series A (herein called the "Initial Notes"). The Notes are limited (except as otherwise provided in the Indenture referred to below) in aggregate principal face amount to $208,530,000, which may be issued under an indenture (herein called the "Indenture") dated as of March 5, 1998, by and between the Company and First Trust National Association, as trustee (herein called the "Trustee," which term includes any successor Trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Trustee and the Holders of the Notes, and of the terms upon which the Notes are, and are to be, authenticated and delivered. The Notes include the Initial Notes, the Private Exchange Notes and the Unrestricted Notes (including the Exchange Notes referred to below), issued in exchange for the Initial Notes pursuant to the Registration Rights Agreement. The Initial Notes, the Private Exchange Notes and the Unrestricted Notes are treated as a single class of securities under the Indenture. All capitalized terms used in this Note which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture. Notwithstanding anything to the contrary herein, the Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and the TIA for a statement of such terms. No reference herein to the Indenture and no provisions of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Note at the times, place, and rate, and in the coin or currency, herein prescribed. To guarantee the due and punctual payment of the principal, premium, if any, and interest on the Notes and all other amounts payable by the Company under the Indenture and the Notes when and as the same may be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Indenture and the Notes, the Subsidiary Guarantors, if any, have unconditionally guaranteed the obligations of the Company under the Indenture and the Notes on a senior basis pursuant to the terms of the Indenture. Pursuant to the Indenture, a Subsidiary Guarantor may be released from its obligations under its Subsidiary Guarantee under certain circumstances. 2. Units. This Note has initially been issued as part of a unit ----- ("Unit"), each Unit consisting of $1,000 principal face amount of Notes and three Warrants, each Warrant entitling the holder to purchase 2.01 shares of the Company's Common Stock, subject to certain adjustments. 5 The Warrants have been issued pursuant to a Warrant Agreement dated as of March 5, 1998 (as amended from time to time, the "Warrant Agreement"), between the Company and First Trust National Association, as warrant agent. Pursuant to the Indenture and the Warrant Agreement, the Warrants and the Notes will not be separately transferable until the "Separability Date," which means the earliest to occur of: (i) September 1, 1998, (ii) the occurrence of an Exercise Event (as defined in the Warrant Agreement), (iii) the occurrence of an Event of Default, (iv) the date on which a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to a registered exchange offer for the Notes or covering the sale by holders of the Notes is declared effective under the Securities Act, (v) immediately prior to any redemption of Notes by the Company from the net proceeds of an Initial Public Equity Offering, (vi) immediately prior to the occurrence of a Warrant Change of Control (as defined in the Warrant Agreement) or (v) such earlier date as determined by Merrill Lynch & Co. in its sole discretion. 3. Registration Rights. The Holder of this Note is entitled to the ------------------- benefits of a Registration Rights Agreement, dated March 5, 1998, between the Company and the Initial Purchasers (as amended from time to time, the "Registration Rights Agreement"). Pursuant to the Registration Rights Agreement, the Company is obligated to consummate an exchange offer pursuant to which the Holders of Initial Notes shall have the right to exchange the Initial Notes for 13 1/4% Senior Discount Notes due 2005, Series B, of the Company (herein called the "Exchange Notes"), which have been registered under the Securities Act, in like principal amount and having identical terms as the Initial Notes (other than as set forth in this paragraph and paragraph 2 above). The Holders of Initial Notes shall be entitled to receive, as liquidated damages, certain cash interest payments in the event such exchange offer is not consummated within a specified period and upon certain other conditions, all pursuant to and in accordance with the terms of the Registration Rights Agreement and the Indenture. 4. Redemption. The Notes will be redeemable, at the option of the ---------- Company, in whole or in part, on or after March 1, 2002 upon not less than 30 nor more than 60 days' written notice at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on March 1 of each of the years indicated below: Year Percentage ---- ---------- 2002................ 106.6250% 2003................ 103.3125% 2004................ 100.0000% In addition, at any time on or prior to March 1, 2001, the Company may, other than in any circumstances resulting in a Change of Control, redeem, at its option, up to a maximum of 25% of 6 the originally-issued aggregate principal face amount of Notes at a redemption price equal to 113.25% of the Accreted Value of the Notes so redeemed, with the net cash proceeds of an Initial Public Equity Offering resulting in gross cash proceeds to the Issuer of at least $35 million in the aggregate; provided that not less than 75% of the originally-issued aggregate principal face amount of Notes is outstanding immediately following such redemption. Any such redemption must be effected upon not less than 30 nor more than 60 days' notice given within 30 days after the consummation of such Initial Public Equity Offering. 5. Offers to Purchase. Sections 10.10 and 10.15 of the Indenture provide ------------------ that upon the occurrence of a Change of Control and following certain Asset Sales, and subject to certain conditions and limitations contained therein, the Company shall make an offer to purchase all or a portion of the Notes at the purchase prices and in accordance with the procedures set forth in the Indenture. 6. Defaults and Remedies. If an Event of Default occurs and is --------------------- continuing, the Default Amount of all outstanding Notes may be declared due and payable in the manner and with the effect provided in this Indenture. 7. Defeasance. The Indenture contains provisions (which provisions apply ---------- to this Note) for defeasance at any time of (a) the entire indebtedness of the Company on this Note and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance by the Company with certain conditions set forth therein. 8. Amendments and Waivers. The Indenture permits, with certain ---------------------- exceptions as provided therein, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal face amount of the Notes at the time Outstanding. This Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal face amount of the Notes at the time Outstanding, on behalf of the Holders of all the Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past Defaults under the Indenture and this Note and their consequences. Any such consent or waiver by or on behalf of the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. 9. Denominations, Transfer and Exchange. The Notes are issuable only in ------------------------------------ registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Notes are exchangeable for a like aggregate principal amount of Notes of a different authorized denomination, as requested by the Holder surrendering the same. 7 As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note is registrable on the Note Register, upon surrender of this Note for registration of transfer at the office or agency of the Company maintained for such purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal face amount, will be issued to the designated transferee or transferees. No service charge shall be made for any registration of transfer or exchange or redemption of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. 10. Persons Deemed Owners. Prior to and at the time of due presentment of --------------------- this Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note shall be overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. 11. GOVERNING LAW. THE INDENTURE, THIS NOTE AND EACH SUBSIDIARY GUARANTEE ------------- SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. The Company will furnish to any Holder of a Note upon written request and without charge a copy of the Indenture and the Registration Rights Agreement. Requests may be made to: WAM!NET Inc., 6100 West 110th Street, Minneapolis, Minnesota 55438; Attention: Secretary. ASSIGNMENT FORM If you the holder want to assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 8 ______________________________________________________________________________ (Print or type assignee's name and address (including zip code) and social security or tax ID number) and irrevocably appoint_______________________________________________________ ______________________________________________________________________________ agent to transfer this Note on the books of the Company. The agent may substitute another to act for such agent. In connection with any transfer of this Note occurring prior to the date which is the earlier of (i) the date of the declaration by the SEC of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering resales of this Note (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) the date two years (or such shorter period of time as permitted by Rule 144 under the Securities Act or any successor provision thereunder) after the later of the original issuance date appearing on the face of this Note (or any Predecessor Note) or the last date on which the Company or any Affiliate of the Company was the owner of this Note (or any Predecessor Note), the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that: 9 [Check One] --------- [ ] (1) this Note is being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. or -- [ ] (2) this Note is being transferred other than in accordance with (a) above and documents, including (i) a transferee certificate substantially in the form of Exhibit D to the Indenture in the case of a transfer to non-QIB Accredited Investors or (ii) a transferor certificate substantially in the form of Exhibit E to the Indenture in the case of a transfer pursuant to Regulation S, are being furnished which comply with the conditions of transfer set forth in this Note and the Indenture. If none of the foregoing boxes is checked and, in the case of (b) above, if the appropriate document is not attached or otherwise furnished to the Trustee, the Trustee or Registrar shall not be obligated to register this Note in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Sections 3.16 and 3.17 of the Indenture shall have been satisfied. ______________________________________________________________________________ Date:____________ Your signature: ____________________________________________ (Sign exactly as your name appears on the other side of this Note) By:_________________________________________ NOTICE: To be executed by an executive officer Signature Guarantee:__________________________ 10 TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A (including the information specified in Rule 144A(d)(4)) or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: _________________________ Name of Purchaser: _______________________________________ NOTICE: To be executed by an executive officer 11 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Note purchased by the Company pursuant to Section 10.10 or 10.15 of this Indenture, check the appropriate box: Section 10.10 [ ] Section 10.15 [ ] If you wish to have a portion of this Note purchased by the Company pursuant to Section 10.10 or 10.15 of this Indenture, state the Accreted Value (or percentage of principal amount at maturity): $_________________ or ___% Date:____________ Your signature: ____________________________________________ (Sign exactly as your name appears on the other side of this Note) By:_________________________________________ NOTICE: To be executed by an executive officer Signature Guarantee:__________________________ D-1 EX-4.2(B) 7 CERT. FOR RULE 144A ORIG NOTES ($8,030,000) Exhibit 4.2(B) RULE 144A NOTE CERTIFICATE THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS NOTE IS NOT EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 903 OR 904 OF REGULATION S, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, PURSUANT TO RULE 904 OF REGULATION S, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE COMPANY, THE TRUSTEE, THE TRANSFER AGENT AND THE REGISTRAR SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. This Note is issued with original issue discount for purposes of Section 1271 et seq. of the Internal Revenue Code of 1986, as amended. For each $1,000 principal face amount of this Note, the issue price is $539.37 and the amount of original issue discount is $460.63. The issue date of this Note is March 5, 1998 and the yield to maturity is 14.59%. 2 WAM!NET INC. --------------- GLOBAL NOTE 13 1/4% SENIOR DISCOUNT NOTES DUE 2005, SERIES A CUSIP No. 933590 AA 9 $ 8,030,000 REGISTERED No. WAM!NET INC., a corporation incorporated under the laws of the State of Minnesota (herein called the "Company," which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of Eight Million Thirty Thousand Dollars ($8,030,000) on March 1, 2005, at the office or agency of the Company referred to below, and to pay interest thereon on March 1 and September 1 (each an "Interest Payment Date"), of each year, commencing on September 1, 2002, accruing from March 1, 2002 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of 13 1/4% per annum, until the principal hereof is paid or duly provided for. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on the February 15 or August 15 (each a "Regular Record Date"), whether or not a Business Day, as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the then applicable interest rate borne by the Notes, to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice of which shall be given to Holders of Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. Payment of the principal of, premium, if any, and interest on this Note will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that 3 payment of interest may be made at the option of the Company by check mailed to the address of the person entitled thereto as such address shall appear on the Note Register. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Note shall not be entitled to any benefit under this Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: March 5, 1998 WAM!NET INC. By: /s/ Edward J. Driscoll III --------------------------------- Name: Edward J. Driscoll III Title: President and CEO By: /s/ Mark Marlow ---------------------------------- Name: Mark Marlow Title: Vice President and Finance Director TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 13 1/4% Senior Discount Notes due 2005, Series A, referred to in the within-mentioned Indenture. FIRST TRUST NATIONAL ASSOCIATION, as Trustee By: /s/ Kathe Barrett ---------------------------------- Authorized Signatory 4 [REVERSE OF NOTE] 1. Indenture; Guaranties. This Note is one of a duly authorized issue of --------------------- Notes of the Company designated as its 13 1/4% Senior Discount Notes due 2005, Series A (herein called the "Initial Notes"). The Notes are limited (except as otherwise provided in the Indenture referred to below) in aggregate principal face amount to $208,530,000, which may be issued under an indenture (herein called the "Indenture") dated as of March 5, 1998, by and between the Company and First Trust National Association, as trustee (herein called the "Trustee," which term includes any successor Trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Trustee and the Holders of the Notes, and of the terms upon which the Notes are, and are to be, authenticated and delivered. The Notes include the Initial Notes, the Private Exchange Notes and the Unrestricted Notes (including the Exchange Notes referred to below), issued in exchange for the Initial Notes pursuant to the Registration Rights Agreement. The Initial Notes, the Private Exchange Notes and the Unrestricted Notes are treated as a single class of securities under the Indenture. All capitalized terms used in this Note which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture. Notwithstanding anything to the contrary herein, the Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and the TIA for a statement of such terms. No reference herein to the Indenture and no provisions of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Note at the times, place, and rate, and in the coin or currency, herein prescribed. To guarantee the due and punctual payment of the principal, premium, if any, and interest on the Notes and all other amounts payable by the Company under the Indenture and the Notes when and as the same may be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Indenture and the Notes, the Subsidiary Guarantors, if any, have unconditionally guaranteed the obligations of the Company under the Indenture and the Notes on a senior basis pursuant to the terms of the Indenture. Pursuant to the Indenture, a Subsidiary Guarantor may be released from its obligations under its Subsidiary Guarantee under certain circumstances. 2. Units. This Note has initially been issued as part of a unit ----- ("Unit"), each Unit consisting of $1,000 principal face amount of Notes and three Warrants, each Warrant entitling the holder to purchase 2.01 shares of the Company's Common Stock, subject to certain adjustments. 5 The Warrants have been issued pursuant to a Warrant Agreement dated as of March 5, 1998 (as amended from time to time, the "Warrant Agreement"), between the Company and First Trust National Association, as warrant agent. Pursuant to the Indenture and the Warrant Agreement, the Warrants and the Notes will not be separately transferable until the "Separability Date," which means the earliest to occur of: (i) September 1, 1998, (ii) the occurrence of an Exercise Event (as defined in the Warrant Agreement), (iii) the occurrence of an Event of Default, (iv) the date on which a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to a registered exchange offer for the Notes or covering the sale by holders of the Notes is declared effective under the Securities Act, (v) immediately prior to any redemption of Notes by the Company from the net proceeds of an Initial Public Equity Offering, (vi) immediately prior to the occurrence of a Warrant Change of Control (as defined in the Warrant Agreement) or (v) such earlier date as determined by Merrill Lynch & Co. in its sole discretion. 3. Registration Rights. The Holder of this Note is entitled to the ------------------- benefits of a Registration Rights Agreement, dated March 5, 1998, between the Company and the Initial Purchasers (as amended from time to time, the "Registration Rights Agreement"). Pursuant to the Registration Rights Agreement, the Company is obligated to consummate an exchange offer pursuant to which the Holders of Initial Notes shall have the right to exchange the Initial Notes for 13 1/4% Senior Discount Notes due 2005, Series B, of the Company (herein called the "Exchange Notes"), which have been registered under the Securities Act, in like principal amount and having identical terms as the Initial Notes (other than as set forth in this paragraph and paragraph 2 above). The Holders of Initial Notes shall be entitled to receive, as liquidated damages, certain cash interest payments in the event such exchange offer is not consummated within a specified period and upon certain other conditions, all pursuant to and in accordance with the terms of the Registration Rights Agreement and the Indenture. 4. Redemption. The Notes will be redeemable, at the option of the ---------- Company, in whole or in part, on or after March 1, 2002 upon not less than 30 nor more than 60 days' written notice at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on March 1 of each of the years indicated below: Year Percentage ---- ---------- 2002.................. 106.6250% 2003.................. 103.3125% 2004.................. 100.0000% In addition, at any time on or prior to March 1, 2001, the Company may, other than in any circumstances resulting in a Change of Control, redeem, at its option, up to a maximum of 25% of 6 the originally-issued aggregate principal face amount of Notes at a redemption price equal to 113.25% of the Accreted Value of the Notes so redeemed, with the net cash proceeds of an Initial Public Equity Offering resulting in gross cash proceeds to the Issuer of at least $35 million in the aggregate; provided that not less than 75% of the originally-issued aggregate principal face amount of Notes is outstanding immediately following such redemption. Any such redemption must be effected upon not less than 30 nor more than 60 days' notice given within 30 days after the consummation of such Initial Public Equity Offering. 5. Offers to Purchase. Sections 10.10 and 10.15 of the Indenture provide ------------------ that upon the occurrence of a Change of Control and following certain Asset Sales, and subject to certain conditions and limitations contained therein, the Company shall make an offer to purchase all or a portion of the Notes at the purchase prices and in accordance with the procedures set forth in the Indenture. 6. Defaults and Remedies. If an Event of Default occurs and is --------------------- continuing, the Default Amount of all outstanding Notes may be declared due and payable in the manner and with the effect provided in this Indenture. 7. Defeasance. The Indenture contains provisions (which provisions apply ---------- to this Note) for defeasance at any time of (a) the entire indebtedness of the Company on this Note and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance by the Company with certain conditions set forth therein. 8. Amendments and Waivers. The Indenture permits, with certain ---------------------- exceptions as provided therein, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal face amount of the Notes at the time Outstanding. This Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal face amount of the Notes at the time Outstanding, on behalf of the Holders of all the Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past Defaults under the Indenture and this Note and their consequences. Any such consent or waiver by or on behalf of the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. 9. Denominations, Transfer and Exchange. The Notes are issuable only in ------------------------------------ registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Notes are exchangeable for a like aggregate principal amount of Notes of a different authorized denomination, as requested by the Holder surrendering the same. 7 As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note is registrable on the Note Register, upon surrender of this Note for registration of transfer at the office or agency of the Company maintained for such purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal face amount, will be issued to the designated transferee or transferees. No service charge shall be made for any registration of transfer or exchange or redemption of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. 10. Persons Deemed Owners. Prior to and at the time of due presentment of --------------------- this Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note shall be overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. 11. GOVERNING LAW. THE INDENTURE, THIS NOTE AND EACH SUBSIDIARY GUARANTEE ------------- SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. The Company will furnish to any Holder of a Note upon written request and without charge a copy of the Indenture and the Registration Rights Agreement. Requests may be made to: WAM!NET Inc., 6100 West 110th Street, Minneapolis, Minnesota 55438; Attention: Secretary. ASSIGNMENT FORM If you the holder want to assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 8 ______________________________________________________________________________ (Print or type assignee's name and address (including zip code) and social security or tax ID number) and irrevocably appoint_______________________________________________________ ______________________________________________________________________________ agent to transfer this Note on the books of the Company. The agent may substitute another to act for such agent. In connection with any transfer of this Note occurring prior to the date which is the earlier of (i) the date of the declaration by the SEC of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering resales of this Note (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) the date two years (or such shorter period of time as permitted by Rule 144 under the Securities Act or any successor provision thereunder) after the later of the original issuance date appearing on the face of this Note (or any Predecessor Note) or the last date on which the Company or any Affiliate of the Company was the owner of this Note (or any Predecessor Note), the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that: 9 [Check One] --------- [ ] (1) this Note is being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. or -- [ ] (2) this Note is being transferred other than in accordance with (a) above and documents, including (i) a transferee certificate substantially in the form of Exhibit D to the Indenture in the case of a transfer to non-QIB Accredited Investors or (ii) a transferor certificate substantially in the form of Exhibit E to the Indenture in the case of a transfer pursuant to Regulation S, are being furnished which comply with the conditions of transfer set forth in this Note and the Indenture. If none of the foregoing boxes is checked and, in the case of (b) above, if the appropriate document is not attached or otherwise furnished to the Trustee, the Trustee or Registrar shall not be obligated to register this Note in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Sections 3.16 and 3.17 of the Indenture shall have been satisfied. ______________________________________________________________________________ Date:____________ Your signature:_____________________________________________ (Sign exactly as your name appears on the other side of this Note) By:__________________________________________ NOTICE: To be executed by an executive officer Signature Guarantee:__________________________ 10 TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A (including the information specified in Rule 144A(d)(4)) or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ______________ Name of Purchaser: _________________________________________ NOTICE: To be executed by an executive officer 11 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Note purchased by the Company pursuant to Section 10.10 or 10.15 of this Indenture, check the appropriate box: Section 10.10 [ ] Section 10.15 [ ] If you wish to have a portion of this Note purchased by the Company pursuant to Section 10.10 or 10.15 of this Indenture, state the Accreted Value (or percentage of principal amount at maturity): $_________________ or ___% Date:____________ Your signature:_____________________________________________ (Sign exactly as your name appears on the other side of this Note) By:__________________________________________ NOTICE: To be executed by an executive officer Signature Guarantee:__________________________ D-1 EX-4.3 8 REGULATION S NOTE CERTIFICATE Exhibit 4.3 REGULATION S NOTE CERTIFICATE THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS NOTE IS NOT EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 903 OR 904 OF REGULATION S, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, PURSUANT TO RULE 904 OF REGULATION S, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE COMPANY, THE TRUSTEE, THE TRANSFER AGENT AND THE REGISTRAR SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. This Note is issued with original issue discount for purposes of Section 1271 et seq. of the Internal Revenue Code of 1986, as amended. For each $1,000 principal face amount of this Note, the issue price is $539.37 and the amount of original issue discount is $460.63. The issue date of this Note is March 5, 1998 and the yield to maturity is 14.59%. 2 WAM!NET INC. --------------- GLOBAL NOTE 13 1/4% SENIOR DISCOUNT NOTES DUE 2005, SERIES A CUSIP No. U25540 AB 8 $ 500,000 REGISTERED No. WAM!NET INC., a corporation incorporated under the laws of the State of Minnesota (herein called the "Company," which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of Five Hundred Thousand Dollars ($500,000) on March 1, 2005, at the office or agency of the Company referred to below, and to pay interest thereon on March 1 and September 1 (each an "Interest Payment Date"), of each year, commencing on September 1, 2002, accruing from March 1, 2002 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of 13 1/4% per annum, until the principal hereof is paid or duly provided for. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on the February 15 or August 15 (each a "Regular Record Date"), whether or not a Business Day, as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the then applicable interest rate borne by the Notes, to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice of which shall be given to Holders of Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. Payment of the principal of, premium, if any, and interest on this Note will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that 3 payment of interest may be made at the option of the Company by check mailed to the address of the person entitled thereto as such address shall appear on the Note Register. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Note shall not be entitled to any benefit under this Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: March 5, 1998 WAM!NET INC. By: /s/ Edward J. Driscoll III --------------------------------- Name: Edward J. Driscoll III Title: President and CEO By: /s/ Mark Marlow --------------------------------- Name: Mark Marlow Title: Vice President and Finance Director TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 13 1/4% Senior Discount Notes due 2005, Series A, referred to in the within-mentioned Indenture. FIRST TRUST NATIONAL ASSOCIATION, as Trustee By: /s/ Kathe Barrett --------------------------------- Authorized Signatory 4 [REVERSE OF NOTE] 1. Indenture; Guaranties. This Note is one of a duly authorized issue of Notes of the Company designated as its 13 1/4% Senior Discount Notes due 2005, Series A (herein called the "Initial Notes"). The Notes are limited (except as otherwise provided in the Indenture referred to below) in aggregate principal face amount to $208,530,000, which may be issued under an indenture (herein called the "Indenture") dated as of March 5, 1998, by and between the Company and First Trust National Association, as trustee (herein called the "Trustee," which term includes any successor Trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Trustee and the Holders of the Notes, and of the terms upon which the Notes are, and are to be, authenticated and delivered. The Notes include the Initial Notes, the Private Exchange Notes and the Unrestricted Notes (including the Exchange Notes referred to below), issued in exchange for the Initial Notes pursuant to the Registration Rights Agreement. The Initial Notes, the Private Exchange Notes and the Unrestricted Notes are treated as a single class of securities under the Indenture. All capitalized terms used in this Note which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture. Notwithstanding anything to the contrary herein, the Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and the TIA for a statement of such terms. No reference herein to the Indenture and no provisions of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Note at the times, place, and rate, and in the coin or currency, herein prescribed. To guarantee the due and punctual payment of the principal, premium, if any, and interest on the Notes and all other amounts payable by the Company under the Indenture and the Notes when and as the same may be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Indenture and the Notes, the Subsidiary Guarantors, if any, have unconditionally guaranteed the obligations of the Company under the Indenture and the Notes on a senior basis pursuant to the terms of the Indenture. Pursuant to the Indenture, a Subsidiary Guarantor may be released from its obligations under its Subsidiary Guarantee under certain circumstances. 2. Units. This Note has initially been issued as part of a unit ("Unit"), each Unit consisting of $1,000 principal face amount of Notes and three Warrants, each Warrant entitling the holder to purchase 2.01 shares of the Company's Common Stock, subject to certain adjustments. 5 The Warrants have been issued pursuant to a Warrant Agreement dated as of March 5, 1998 (as amended from time to time, the "Warrant Agreement"), between the Company and First Trust National Association, as warrant agent. Pursuant to the Indenture and the Warrant Agreement, the Warrants and the Notes will not be separately transferable until the "Separability Date," which means the earliest to occur of: (i) September 1, 1998, (ii) the occurrence of an Exercise Event (as defined in the Warrant Agreement), (iii) the occurrence of an Event of Default, (iv) the date on which a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to a registered exchange offer for the Notes or covering the sale by holders of the Notes is declared effective under the Securities Act, (v) immediately prior to any redemption of Notes by the Company from the net proceeds of an Initial Public Equity Offering, (vi) immediately prior to the occurrence of a Warrant Change of Control (as defined in the Warrant Agreement) or (v) such earlier date as determined by Merrill Lynch & Co. in its sole discretion. 3. Registration Rights. The Holder of this Note is entitled to the benefits of a Registration Rights Agreement, dated March 5, 1998, between the Company and the Initial Purchasers (as amended from time to time, the "Registration Rights Agreement"). Pursuant to the Registration Rights Agreement, the Company is obligated to consummate an exchange offer pursuant to which the Holders of Initial Notes shall have the right to exchange the Initial Notes for 13 1/4% Senior Discount Notes due 2005, Series B, of the Company (herein called the "Exchange Notes"), which have been registered under the Securities Act, in like principal amount and having identical terms as the Initial Notes (other than as set forth in this paragraph and paragraph 2 above). The Holders of Initial Notes shall be entitled to receive, as liquidated damages, certain cash interest payments in the event such exchange offer is not consummated within a specified period and upon certain other conditions, all pursuant to and in accordance with the terms of the Registration Rights Agreement and the Indenture. 4. Redemption. The Notes will be redeemable, at the option of the Company, in whole or in part, on or after March 1, 2002 upon not less than 30 nor more than 60 days' written notice at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on March 1 of each of the years indicated below: Year Percentage ---- ---------- 2002................... 106.6250% 2003................... 103.3125% 2004................... 100.0000% In addition, at any time on or prior to March 1, 2001, the Company may, other than in any circumstances resulting in a Change of Control, redeem, at its option, up to a maximum of 25% of 6 the originally-issued aggregate principal face amount of Notes at a redemption price equal to 113.25% of the Accreted Value of the Notes so redeemed, with the net cash proceeds of an Initial Public Equity Offering resulting in gross cash proceeds to the Issuer of at least $35 million in the aggregate; provided that not less than 75% of the originally-issued aggregate principal face amount of Notes is outstanding immediately following such redemption. Any such redemption must be effected upon not less than 30 nor more than 60 days' notice given within 30 days after the consummation of such Initial Public Equity Offering. 5. Offers to Purchase. Sections 10.10 and 10.15 of the Indenture provide that upon the occurrence of a Change of Control and following certain Asset Sales, and subject to certain conditions and limitations contained therein, the Company shall make an offer to purchase all or a portion of the Notes at the purchase prices and in accordance with the procedures set forth in the Indenture. 6. Defaults and Remedies. If an Event of Default occurs and is continuing, the Default Amount of all outstanding Notes may be declared due and payable in the manner and with the effect provided in this Indenture. 7. Defeasance. The Indenture contains provisions (which provisions apply to this Note) for defeasance at any time of (a) the entire indebtedness of the Company on this Note and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance by the Company with certain conditions set forth therein. 8. Amendments and Waivers. The Indenture permits, with certain exceptions as provided therein, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal face amount of the Notes at the time Outstanding. This Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal face amount of the Notes at the time Outstanding, on behalf of the Holders of all the Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past Defaults under the Indenture and this Note and their consequences. Any such consent or waiver by or on behalf of the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. 9. Denominations, Transfer and Exchange. The Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Notes are exchangeable for a like aggregate principal amount of Notes of a different authorized denomination, as requested by the Holder surrendering the same. 7 As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note is registrable on the Note Register, upon surrender of this Note for registration of transfer at the office or agency of the Company maintained for such purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal face amount, will be issued to the designated transferee or transferees. No service charge shall be made for any registration of transfer or exchange or redemption of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. 10. Persons Deemed Owners. Prior to and at the time of due presentment of this Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note shall be overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. 11. GOVERNING LAW. THE INDENTURE, THIS NOTE AND EACH SUBSIDIARY GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. The Company will furnish to any Holder of a Note upon written request and without charge a copy of the Indenture and the Registration Rights Agreement. Requests may be made to: WAM!NET Inc., 6100 West 110th Street, Minneapolis, Minnesota 55438; Attention: Secretary. ASSIGNMENT FORM If you the holder want to assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ 8 _______________________________________________________________________________ (Print or type assignee's name and address (including zip code) and social security or tax ID number) and irrevocably appoint________________________________________________________ _______________________________________________________________________________ agent to transfer this Note on the books of the Company. The agent may substitute another to act for such agent. In connection with any transfer of this Note occurring prior to the date which is the earlier of (i) the date of the declaration by the SEC of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering resales of this Note (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) the date two years (or such shorter period of time as permitted by Rule 144 under the Securities Act or any successor provision thereunder) after the later of the original issuance date appearing on the face of this Note (or any Predecessor Note) or the last date on which the Company or any Affiliate of the Company was the owner of this Note (or any Predecessor Note), the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that: 9 [Check One] --------- [ ] (1) this Note is being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. or -- [ ] (2) this Note is being transferred other than in accordance with (a) above and documents, including (i) a transferee certificate substantially in the form of Exhibit D to the Indenture in the case of a transfer to non-QIB Accredited Investors or (ii) a transferor certificate substantially in the form of Exhibit E to the Indenture in the case of a transfer pursuant to Regulation S, are being furnished which comply with the conditions of transfer set forth in this Note and the Indenture. If none of the foregoing boxes is checked and, in the case of (b) above, if the appropriate document is not attached or otherwise furnished to the Trustee, the Trustee or Registrar shall not be obligated to register this Note in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Sections 3.16 and 3.17 of the Indenture shall have been satisfied. _______________________________________________________________________________ Date:_____________Your signature:______________________________________________ (Sign exactly as your name appears on the other side of this Note) By: __________________________________________ NOTICE: To be executed by an executive officer Signature Guarantee:_______________________________ 10 TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A (including the information specified in Rule 144A(d)(4)) or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: __________________ Name of Purchaser: __________________________________________ NOTICE: To be executed by an executive officer 11 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Note purchased by the Company pursuant to Section 10.10 or 10.15 of this Indenture, check the appropriate box: Section 10.10 [ ] Section 10.15 [ ] If you wish to have a portion of this Note purchased by the Company pursuant to Section 10.10 or 10.15 of this Indenture, state the Accreted Value (or percentage of principal amount at maturity): $_________________ or ___% Date:_____________Your signature:______________________________________________ (Sign exactly as your name appears on the other side of this Note) By: __________________________________________ NOTICE: To be executed by an executive officer Signature Guarantee:_______________________________ D-1 EX-4.4 9 RULE 144A WARRANT CERTIFICATE Exhibit 4.4 RULE 144A WARRANT CERTIFICATE THIS SECURITY IS A GLOBAL WARRANT WITHIN THE MEANING OF THE WARRANT AGREEMENT HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT AGREEMENT, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT AGREEMENT. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OF OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OF OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECU RITIES ACT ("RULE 144A")) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT ("REGULATION S"), (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S, PURSUANT TO RULE 904 OF REGULATION S OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM IN REGULATION S. REGISTERED No. CUSIP 933590 11 9 624,090 WARRANTS WARRANT CERTIFICATE WAM!NET INC. This Warrant Certificate certifies that CEDE & CO., or registered assigns, is the registered holder of 624,090 Warrants (the "Warrants") to purchase shares of Common Stock, par value $0.01 per share (the "Common Stock"), of WAM!NET INC., a Minnesota corporation (the "Company," which term includes its successors and assigns). Each Warrant entitles the holder to purchase from the Company at any time from 9:00 a.m. New York City time on or after the Exercisability Date until 5:00 p.m., New York City time, on March 1, 2005 (the "Expiration Date"), 2.01 fully paid, registered and non-assessable shares of Common Stock, subject to adjustment as provided in Article V of the Warrant Agreement (the "Exercise Rate"), at the exercise price of $0.01 for each share purchased (the "Exercise Price") (the shares of Common Stock purchasable upon exercise of a Warrant being herein referred to as the "Shares" and, unless the context otherwise requires, such term shall also mean all other securities or property purchasable and deliverable upon exercise of a Warrant as provided in the Warrant Agreement), upon surrender of this Warrant 2 Certificate and payment of the Exercise Price (i) in United States dollars or by certified check or official bank check, (ii) pursuant to the next sentence or (iii) in any combination of (i) and (ii), at any office or agency maintained for that purpose by the Company (the "Warrant Agent Office"), subject to the conditions set forth herein and in the Warrant Agreement. In addition to payment by cash or check, a Warrant may be exercised solely by the surrender of the Warrant, and without the payment of the Exercise Price in cash, for such number of Shares equal to the product of (1) the number of Shares for which such Warrant is exercisable with payment of the Exercise Price as in cash of the date of exercise and (2) the Cashless Exercise Ratio. For purposes of this Warrant, the "Cashless Exercise Ratio" shall equal a fraction, the numerator of which is the excess of the Current Market Value per share of the Common Stock on the date of exercise over the Exercise Price per share as of the date of exercise and the denominator of which is the Current Market Value per share of the Common Stock on the date of exercise. An exercise of a Warrant in accordance with the immediately preceding sentences is herein called a "Cashless Exercise." Upon surrender of a Warrant Certificate representing more than one Warrant in connection with the Holder's option to elect a Cashless Exercise, the number of Shares deliverable upon a Cashless Exercise shall be equal to the Cashless Exercise Ratio multiplied by the product of (a) the number of Warrants that the holder specifies is to be exercised pursuant to a Cashless Exercise and (b) the aggregate number of Shares for which such Warrants are then exercisable (without giving effect to the Cashless Exercise option). If the Company has not effected the registration under the Securities Act of the offer and sale of the Shares by the Company to the holders of the Warrants upon the exercise thereof, the Company may elect to require that holders of the Warrants effect the exercise of the Warrants solely pursuant to the Cashless Exercise option and may also amend the Warrants to eliminate the requirements for payment of the Exercise Price with respect tp such Cashless Exercise option. A Warrant may not be exercised in part. All provisions of the Warrant Agreement shall be applicable with respect to an exercise of a Warrant Certificate pursuant to a Cashless Exercise for less than the full number of Warrants represented thereby. Capitalized terms used herein without being defined herein shall have the definitions ascribed to such terms in the Warrant Agreement. This Warrant has initially been issued as part of a unit ("Unit"), each Unit consisting of three Warrants and $1,000 principal amount at maturity of the Company's 13 1/4% Senior Discount Notes due 2005 (the "Notes"). As set forth in the Warrant Agreement and the Indenture, dated as of March 5, 1998 (the "Indenture"), between the Company and First Trust National Association, as Trustee, pursuant to which the Notes have been issued, the Warrants and the Notes will not be separately transferable until the "Separability Date", which means the earliest to occur of: (i) September 1, 1998, (ii) the occurrence of an Exercise Event (as defined herein), (iii) the occurrence of an Event of Default (as defined in the Indenture), (iv) the date on which a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to a registered exchange offer for the Notes or covering the sale by holders of the Notes is declared effective under the Securities Act, (v) immediately prior to any redemption of Notes by the Company from the net proceeds of an Initial Public Equity Offering (as defined in the Indenture), (vi) immediately prior to the occurrence of a Warrant Change of Control (as defined in the Warrant Agreement) or (v) such earlier date as determined by Merrill Lynch & Co. in its sole discretion. 3 "Current Market Value" per share of Common Stock or any other security at any date of determination means (i) if the security is not traded on a national or regional securities exchange, The Nasdaq Stock Market or in a recognized over-the-counter market (a "Quoted Security"), (a) the fair market value of the security, as determined in good faith by the Board of Directors of the Company and certified in a board resolution delivered to the Warrant Agent, which shall be based on the most recently completed arms-length transaction between the Company and a person other than an Affiliate of the Company, the closing of which shall have occurred within the six-month period preceding such determination, or (b) if no such transaction shall have occurred within such six-month period, the fair market value of the security as determined by a nationally or regionally recognized independent financial expert (provided that, in the case of the calculation of Current Market Value solely for determining the cash value of fractional shares, the last determination of Current Market Value pursuant to this clause (i), if made within the preceding six months, may be utilized), which determination shall be set forth in an officers' certificate delivered to the Warrant Agent, or (ii) (a) if the security is a Quoted Security, the average of the daily closing sales prices of such security for the 20 consecutive trading days immediately preceding such date, or (b) if the security has been a Quoted Security for less than 20 consecutive trading days before such date, then the average of the daily closing sales prices for all of the trading days before such date for which closing sales prices are available. The closing sales price of a security for each such trading day shall be: (A) in the case of a security listed or admitted to trading on any United States national or regional securities exchange or on The Nasdaq Stock Market, the closing sales price, regular way, on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day or (B) in the case of a security not then listed or admitted to trading on any national or regional securities exchange or The Nasdaq Stock Market, the average of the closing bid and asked prices on such day, as reported by a reputable quotation source designated by the Company, or in the case of a security as to which no such reported bid and asked prices are available on such day, the average of the reported high bid and low asked prices on such day, as reported by a reputable quotation service, or a newspaper of general circulation in the Borough of Manhattan, City and State of New York, customarily published on each business day, designated by the Company, or, if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than two days prior to the date in question) for which prices have been so reported; provided, however, that if there are no bid and asked prices reported for such security during such two-day period, Current Market Value shall be determined as if the security were not a Quoted Security. "Exercisability Date" means, with respect to each Warrant, the date as of which both of the following shall have occurred (whether before or on such date): (i) the Separability Date and (ii) an Exercise Event. "Exercise Event" means, with respect to each Warrant, the date of the occurrence of the earliest of: (1) immediately prior to the occurrence of a Warrant Change of Control, (2 )(a) the 90th day (or such earlier date as determined by the Company in its sole discretion) following an Initial Public Equity Offering (as defined in the Warrant Agreement) or (b) upon the closing of the Initial Public Equity Offering but only in respect of Warrants, if any, required to be exercised to 4 permit the holders thereof to sell Shares pursuant to their registration rights, (3) a class of equity securities of the Company is listed on a national securities exchange or authorized for quotation on The Nasdaq Stock Market or is otherwise registered under the Exchange Act, or (4) September 1, 2000. "Independent Financial Expert" means a United States investment banking firm of national or regional standing in the United States (i) which does not, and whose directors and executive officers or Affiliates (as defined in the Warrant Agreement) do not, have a direct or indirect material financial interest for its or their proprietary account in the Company or any of its Affiliates and (ii) which, in the judgment of the Board of Directors of the Company, is otherwise independent with respect to the Company and its Affiliates and qualified to perform the task for which it is to be engaged. The Company has initially designated the principal corporate trust office of the Warrant Agent in the Borough of Manhattan, The City of New York, as the initial Warrant Agent Office. Any Warrants not exercised on or prior to 5:00 p.m., New York City time, on March 1, 2005 shall thereafter be void. If the Company merges, amalgamates or consolidates with or into, or sells all or substantially all of its property and assets to, another Person solely for cash, the holders of Warrants shall be entitled to such cash on the date of consummation of such transaction on an equal basis with holders of Shares (or other securities issuable upon exercise of the Warrants) as if the Warrants had been exercised immediately prior to such event, less the Exercise Price. Upon receipt of such cash the rights of a holder of a Warrant shall terminate and cease and such holder's Warrants shall expire. Reference is hereby made to the further provisions on the reverse hereof which provisions shall for all purposes have the same effect as though fully set forth at this place. This Warrant Certificate shall not be valid unless authenticated by the Warrant Agent, as such term is used in the Warrant Agreement. THIS WARRANT CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PROVISIONS THEREOF. 5 WITNESS the seal of the Company and signatures of its duly authorized officers. Dated: WAM!NET INC. By: /s/ Edward J. Driscoll III ----------------------------------- Name: Edward J. Driscoll III Title: President and CEO Attest: By: /s/ Mark Marlow ---------------------------- Name: Mark Marlow Title: Vice President and Finance Director Certificate of Authentication: This is one of the Warrants referred to in the within-mentioned Warrant Agreement: FIRST TRUST NATIONAL ASSOCIATION, as Warrant Agent By: /s/ Kathe Barrett ----------------------------- Authorized Signatory 6 WAM!NET INC. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants expiring at 5:00 p.m., New York City time, on the Expiration Date, each of which represents the right to purchase, at any time on or after the Exercisability Date and on or prior to the Expiration Date, 2.01 shares of Common Stock, subject to adjustment as set forth in the Warrant Agreement. The Warrants are issued pursuant to a Warrant Agreement dated as of March 5, 1998 (as amended from time to time, the "Warrant Agreement"), duly executed and delivered by the Company to First Trust National Association, as Warrant Agent (the "Warrant Agent"), which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Warrant Agent, the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. Warrants may be exercised by (i) surrendering at any Warrant Agent Office this Warrant Certificate with the form of Election to Exercise set forth hereon duly completed and executed and (ii) to the extent such exercise is not being effected through a Cashless Exercise, by paying in full the Exercise Price for each Warrant exercised and any other amounts required to be paid pursuant to the Warrant Agreement. If all of the items referred to in the preceding paragraph are received by the Warrant Agent at or prior to 11:00 a.m., New York City time, on a Business Day, the exercise of the Warrant to which such items relate will be effective on such Business Day. If all items referred to in the preceding paragraph are not received until after 11:00 a.m., New York City time, on a Business Day, the exercise of the Warrants to which such items relate will be deemed to be effective on the next succeeding Business Day. Notwithstanding the foregoing, in the case of an exercise of Warrants on the Expiration Date, if all of the items referred to in the preceding paragraph are received by the Warrant Agent at or prior to 5:00 p.m., New York City time, on the Expiration Date, the exercise of the Warrant to which such items relate will be effective on the Expiration Date and prior to the expiration of such Warrant. As soon as practicable after the exercise of any Warrant or Warrants, the Company shall issue or cause to be issued to or upon the written order of the registered holder of this Warrant Certificate, a certificate or certificates evidencing the Share or Shares to which such holder is entitled, in fully registered form, registered in such name or names as may be directed by such holder pursuant to the form of Election to Exercise, as set forth hereon. Such certificate or certificates evidencing the Share or Shares shall be deemed to have been issued and any persons who are designated to be named therein shall be deemed to have become the holder of record of such Share or Shares as of the close of business on the date upon which the exercise of this Warrant was deemed to be effective as provided in the preceding paragraph. The Company will not be required to issue fractional shares of Common Stock upon exercise of Warrants or distribute Share certificates that evidence fractional shares of Common 7 Stock. In lieu of fractional shares of Common Stock, there shall be paid to the holder of this Warrant Certificate at the time such Warrant Certificate is exercised an amount in cash equal to the same fraction of the Current Market Value per share of Common Stock on the Business Day preceding the date this Warrant Certificate is surrendered for exercise. Warrant Certificates, when surrendered at any office or agency maintained by the Company for that purpose by the registered holder thereof in person or by legal representative or attorney duly authorized in writing, may be exchanged for a new Warrant Certificate or new Warrant Certificates evidencing in the aggregate a like number of Warrants, in the manner and subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at any office or agency maintained by the Company for that purpose, a new Warrant Certificate evidencing in the aggregate a like number of Warrants shall be issued to the transferee in exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. The Company and the Warrant Agent may deem and treat the registered holder hereof as the absolute owner of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone) for the purpose of any exercise hereof and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. The term "Business Day" shall mean any day on which (i) banks in New York City, (ii) the principal U.S. securities exchange or market, if any, on which the Common Stock is listed or admitted to trading and (iii) the principal U.S. securities exchange or market, if any, on which any other securities underlying the Warrants are listed or admitted to trading are open for business. The Warrants and the Shares issuable upon exercise thereof are entitled to the benefits of a registration rights agreement (as amended from time to time, the "Registration Rights Agreement"), pursuant to which the holders representing not less than a majority of Registrable Securities (as defined in the Registration Rights Agreement) have the right under certain circumstances to require the Company to effect one demand registration of the Registrable Securities. The Registration Rights Agreement also provides the holders of Registrable Securities with the right, subject to the conditions and limitations contained therein, to include the Registrable Securities in certain registration statements filed by the Company for its account or for the account of any of its other securityholders. The Registration Rights Agreement further provides, among other things, that (i) prior to the Triggering Date (as defined in the Registration Rights Agreement), if WorldCom Inc, a Georgia corporation ("WorldCom") or its Affiliates (as defined in the Registration Rights Agreement) effect a direct or indirect sale or other disposition of capital stock of the Company to any proposed purchaser in any transaction or a series of related transactions resulting in a Warrant Change of Control, the holders of Warrants and Shares will have the right to sell all of such securities to the proposed purchaser at the same price as received by WorldCom or its Affiliates 8 and (ii) prior to an Initial Public Equity Offering, WorldCom or its Affiliates may require the holders of Warrants and Shares to sell such securities to any person to whom WorldCom and such Affiliates sell all of their capital stock in the Company in a transaction that results in a Warrant Change of Control, at the same price as that received by WorldCom and such Affiliates. The Company will furnish to any holder of a Warrant upon written request and without charge a copy of the Warrant Agreement and the Registration Rights Agreement. Requests may be made to: WAM!NET Inc., 6100 West 110th Street, Minneapolis, Minnesota 55438; Attention: Secretary. 9 (ELECTION TO EXERCISE) (To be executed upon exercise of Warrants on the Exercise Date) The undersigned hereby irrevocably elects to exercise this Warrant Certificate as to ____ Warrants and to purchase the whole number of Shares issuable upon exercise thereof and herewith tenders payment for such Shares as follows: $_________________ in cash or by certified or official bank check; or by surrender of _____ Warrants pursuant to a Cashless Exercise at the current Cashless Exercise Ratio. The undersigned requests that a certificate representing such Shares be registered in the name of________whose address is____________and that such Shares be delivered to______________whose address is_________________________. Any cash payments to be paid in lieu of a fractional Share should be made to__________whose address is________and the check representing payment thereof should be delivered to____________whose address is_____________. Dated_____________________,_____ Name of holder of Warrant Certificate:_______________________________ (Please Print) Tax Identification or Social Security Number:____________________________ Address:___________________________________________ ___________________________________________ Signature:_________________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever and if the certificate representing the Shares is to be registered in a name other than that in which this Warrant Certificate is registered, or if any cash payment to be paid in lieu of a fractional share is to be made to a person other than the registered holder of this Warrant Certificate, the signature of the holder hereof must be guaranteed. 10 Dated______________,_____ Signature:_________________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed:______________________________ [FORM OF ASSIGNMENT] For value received__________________hereby sells, assigns and transfers unto__________________the within Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint____________attorney, to transfer said Warrant Certificate on the books of the within-named Company, with full power of substitution in the premises. Dated_______________, 199_ Signature:__________________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed:_______________________________ In connection with any transfer of Warrants represented by this Warrant Certificate occurring prior to the date which is the earlier of (i) the date of the declaration by the Securities and Exchange Commission of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act") covering resales of the Warrants (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) the Resale Restriction Termination Date, the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that: 11 [Check One] --------- [ ] (a) the Warrants are being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. or -- [ ] (b) this Warrant Certificate is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in Section 1.08 of the Warrant Agreement. If none of the foregoing boxes is checked, the Unit Agent shall not be obligated to register this Warrant Certificate in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth Section 1.08 of the Warrant Agreement shall have been satisfied. _______________________________________________________________________________ Date:______________________________ Your signature:________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee:___________________________________________________________ TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing the Warrants for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: __________________ __________________________________________ NOTICE: To be executed by an executive officer 12 SCHEDULE OF EXCHANGES OF DEFINITIVE AND GLOBAL WARRANTS ------------------------------------------------------- The following exchanges made in respect of certified Warrants or another Global Warrant have been made:
Date of Exchange Amount of Decrease in Amount of Increase in Number of Warrants of this Signature of authorized Number of Warrants Number of Warrants Global Warrant following officer of Warrant Agent Subject to this Global Subject to this Global such decrease (or increase) Warrant Warrant
13 EX-4.5 10 REGULATION S WARRANT CERTIFICATE Exhibit 4.5 REGULATION S WARRANT CERTIFICATE THIS SECURITY IS A GLOBAL WARRANT WITHIN THE MEANING OF THE WARRANT AGREEMENT HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT AGREEMENT, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT AGREEMENT. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OF OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OF OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECU RITIES ACT ("RULE 144A")) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT ("REGULATION S"), (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S, PURSUANT TO RULE 904 OF REGULATION S OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM IN REGULATION S. REGISTERED No. CUSIP U25540 11 0 1,500 WARRANTS WARRANT CERTIFICATE WAM!NET INC. This Warrant Certificate certifies that CEDE & CO., or registered assigns, is the registered holder of 1,500 Warrants (the "Warrants") to purchase shares of Common Stock, par value $0.01 per share (the "Common Stock"), of WAM!NET INC., a Minnesota corporation (the "Company," which term includes its successors and assigns). Each Warrant entitles the holder to purchase from the Company at any time from 9:00 a.m. New York City time on or after the Exercisability Date until 5:00 p.m., New York City time, on March 1, 2005 (the "Expiration Date"), 2.01 fully paid, registered and non-assessable shares of Common Stock, subject to adjustment as provided in Article V of the Warrant Agreement (the "Exercise Rate"), at the exercise price of $0.01 for each share purchased (the "Exercise Price") (the shares of Common Stock purchasable upon exercise of a Warrant being herein referred to as the "Shares" and, unless the context otherwise requires, such term shall also mean all other securities or property purchasable and deliverable upon exercise of a Warrant as provided in the Warrant Agreement), upon surrender of this Warrant 2 Certificate and payment of the Exercise Price (i) in United States dollars or by certified check or official bank check, (ii) pursuant to the next sentence or (iii) in any combination of (i) and (ii), at any office or agency maintained for that purpose by the Company (the "Warrant Agent Office"), subject to the conditions set forth herein and in the Warrant Agreement. In addition to payment by cash or check, a Warrant may be exercised solely by the surrender of the Warrant, and without the payment of the Exercise Price in cash, for such number of Shares equal to the product of (1) the number of Shares for which such Warrant is exercisable with payment of the Exercise Price as in cash of the date of exercise and (2) the Cashless Exercise Ratio. For purposes of this Warrant, the "Cashless Exercise Ratio" shall equal a fraction, the numerator of which is the excess of the Current Market Value per share of the Common Stock on the date of exercise over the Exercise Price per share as of the date of exercise and the denominator of which is the Current Market Value per share of the Common Stock on the date of exercise. An exercise of a Warrant in accordance with the immediately preceding sentences is herein called a "Cashless Exercise." Upon surrender of a Warrant Certificate representing more than one Warrant in connection with the Holder's option to elect a Cashless Exercise, the number of Shares deliverable upon a Cashless Exercise shall be equal to the Cashless Exercise Ratio multiplied by the product of (a) the number of Warrants that the holder specifies is to be exercised pursuant to a Cashless Exercise and (b) the aggregate number of Shares for which such Warrants are then exercisable (without giving effect to the Cashless Exercise option). If the Company has not effected the registration under the Securities Act of the offer and sale of the Shares by the Company to the holders of the Warrants upon the exercise thereof, the Company may elect to require that holders of the Warrants effect the exercise of the Warrants solely pursuant to the Cashless Exercise option and may also amend the Warrants to eliminate the requirements for payment of the Exercise Price with respect tp such Cashless Exercise option. A Warrant may not be exercised in part. All provisions of the Warrant Agreement shall be applicable with respect to an exercise of a Warrant Certificate pursuant to a Cashless Exercise for less than the full number of Warrants represented thereby. Capitalized terms used herein without being defined herein shall have the definitions ascribed to such terms in the Warrant Agreement. This Warrant has initially been issued as part of a unit ("Unit"), each Unit consisting of three Warrants and $1,000 principal amount at maturity of the Company's 13 1/4% Senior Discount Notes due 2005 (the "Notes"). As set forth in the Warrant Agreement and the Indenture, dated as of March 5, 1998 (the "Indenture"), between the Company and First Trust National Association, as Trustee, pursuant to which the Notes have been issued, the Warrants and the Notes will not be separately transferable until the "Separability Date", which means the earliest to occur of: (i) September 1, 1998, (ii) the occurrence of an Exercise Event (as defined herein), (iii) the occurrence of an Event of Default (as defined in the Indenture), (iv) the date on which a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to a registered exchange offer for the Notes or covering the sale by holders of the Notes is declared effective under the Securities Act, (v) immediately prior to any redemption of Notes by the Company from the net proceeds of an Initial Public Equity Offering (as defined in the Indenture), (vi) immediately prior to the occurrence of a Warrant Change of Control (as defined in the Warrant Agreement) or (v) such earlier date as determined by Merrill Lynch & Co. in its sole discretion. 3 "Current Market Value" per share of Common Stock or any other security at any date of determination means (i) if the security is not traded on a national or regional securities exchange, The Nasdaq Stock Market or in a recognized over-the-counter market (a "Quoted Security"), (a) the fair market value of the security, as determined in good faith by the Board of Directors of the Company and certified in a board resolution delivered to the Warrant Agent, which shall be based on the most recently completed arms-length transaction between the Company and a person other than an Affiliate of the Company, the closing of which shall have occurred within the six-month period preceding such determination, or (b) if no such transaction shall have occurred within such six-month period, the fair market value of the security as determined by a nationally or regionally recognized independent financial expert (provided that, in the case of the calculation of Current Market Value solely for determining the cash value of fractional shares, the last determination of Current Market Value pursuant to this clause (i), if made within the preceding six months, may be utilized), which determination shall be set forth in an officers' certificate delivered to the Warrant Agent, or (ii) (a) if the security is a Quoted Security, the average of the daily closing sales prices of such security for the 20 consecutive trading days immediately preceding such date, or (b) if the security has been a Quoted Security for less than 20 consecutive trading days before such date, then the average of the daily closing sales prices for all of the trading days before such date for which closing sales prices are available. The closing sales price of a security for each such trading day shall be: (A) in the case of a security listed or admitted to trading on any United States national or regional securities exchange or on The Nasdaq Stock Market, the closing sales price, regular way, on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day or (B) in the case of a security not then listed or admitted to trading on any national or regional securities exchange or The Nasdaq Stock Market, the average of the closing bid and asked prices on such day, as reported by a reputable quotation source designated by the Company, or in the case of a security as to which no such reported bid and asked prices are available on such day, the average of the reported high bid and low asked prices on such day, as reported by a reputable quotation service, or a newspaper of general circulation in the Borough of Manhattan, City and State of New York, customarily published on each business day, designated by the Company, or, if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than two days prior to the date in question) for which prices have been so reported; provided, however, that if there are no bid and asked prices reported for such security during such two-day period, Current Market Value shall be determined as if the security were not a Quoted Security. "Exercisability Date" means, with respect to each Warrant, the date as of which both of the following shall have occurred (whether before or on such date): (i) the Separability Date and (ii) an Exercise Event. "Exercise Event" means, with respect to each Warrant, the date of the occurrence of the earliest of: (1) immediately prior to the occurrence of a Warrant Change of Control, (2 )(a) the 90th day (or such earlier date as determined by the Company in its sole discretion) following an Initial Public Equity Offering (as defined in the Warrant Agreement) or (b) upon the closing of the Initial Public Equity Offering but only in respect of Warrants, if any, required to be exercised to 4 permit the holders thereof to sell Shares pursuant to their registration rights, (3) a class of equity securities of the Company is listed on a national securities exchange or authorized for quotation on The Nasdaq Stock Market or is otherwise registered under the Exchange Act, or (4) September 1, 2000. "Independent Financial Expert" means a United States investment banking firm of national or regional standing in the United States (i) which does not, and whose directors and executive officers or Affiliates (as defined in the Warrant Agreement) do not, have a direct or indirect material financial interest for its or their proprietary account in the Company or any of its Affiliates and (ii) which, in the judgment of the Board of Directors of the Company, is otherwise independent with respect to the Company and its Affiliates and qualified to perform the task for which it is to be engaged. The Company has initially designated the principal corporate trust office of the Warrant Agent in the Borough of Manhattan, The City of New York, as the initial Warrant Agent Office. Any Warrants not exercised on or prior to 5:00 p.m., New York City time, on March 1, 2005 shall thereafter be void. If the Company merges, amalgamates or consolidates with or into, or sells all or substantially all of its property and assets to, another Person solely for cash, the holders of Warrants shall be entitled to such cash on the date of consummation of such transaction on an equal basis with holders of Shares (or other securities issuable upon exercise of the Warrants) as if the Warrants had been exercised immediately prior to such event, less the Exercise Price. Upon receipt of such cash the rights of a holder of a Warrant shall terminate and cease and such holder's Warrants shall expire. Reference is hereby made to the further provisions on the reverse hereof which provisions shall for all purposes have the same effect as though fully set forth at this place. This Warrant Certificate shall not be valid unless authenticated by the Warrant Agent, as such term is used in the Warrant Agreement. THIS WARRANT CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PROVISIONS THEREOF. 5 WITNESS the seal of the Company and signatures of its duly authorized officers. Dated: WAM!NET INC. By: /s/ Edward J. Driscoll III ----------------------------------- Name: Edward J. Driscoll III Title: President and CEO Attest: By: /s/ Mark Marlow ---------------------------- Name: Mark Marlow Title: Vice President and Finance Director Certificate of Authentication: This is one of the Warrants referred to in the within-mentioned Warrant Agreement: FIRST TRUST NATIONAL ASSOCIATION, as Warrant Agent By: /s/ Kathe Barrett ----------------------------- Authorized Signatory 6 WAM!NET INC. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants expiring at 5:00 p.m., New York City time, on the Expiration Date, each of which represents the right to purchase, at any time on or after the Exercisability Date and on or prior to the Expiration Date, 2.01 shares of Common Stock, subject to adjustment as set forth in the Warrant Agreement. The Warrants are issued pursuant to a Warrant Agreement dated as of March 5, 1998 (as amended from time to time, the "Warrant Agreement"), duly executed and delivered by the Company to First Trust National Association, as Warrant Agent (the "Warrant Agent"), which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Warrant Agent, the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. Warrants may be exercised by (i) surrendering at any Warrant Agent Office this Warrant Certificate with the form of Election to Exercise set forth hereon duly completed and executed and (ii) to the extent such exercise is not being effected through a Cashless Exercise, by paying in full the Exercise Price for each Warrant exercised and any other amounts required to be paid pursuant to the Warrant Agreement. If all of the items referred to in the preceding paragraph are received by the Warrant Agent at or prior to 11:00 a.m., New York City time, on a Business Day, the exercise of the Warrant to which such items relate will be effective on such Business Day. If all items referred to in the preceding paragraph are not received until after 11:00 a.m., New York City time, on a Business Day, the exercise of the Warrants to which such items relate will be deemed to be effective on the next succeeding Business Day. Notwithstanding the foregoing, in the case of an exercise of Warrants on the Expiration Date, if all of the items referred to in the preceding paragraph are received by the Warrant Agent at or prior to 5:00 p.m., New York City time, on the Expiration Date, the exercise of the Warrant to which such items relate will be effective on the Expiration Date and prior to the expiration of such Warrant. As soon as practicable after the exercise of any Warrant or Warrants, the Company shall issue or cause to be issued to or upon the written order of the registered holder of this Warrant Certificate, a certificate or certificates evidencing the Share or Shares to which such holder is entitled, in fully registered form, registered in such name or names as may be directed by such holder pursuant to the form of Election to Exercise, as set forth hereon. Such certificate or certificates evidencing the Share or Shares shall be deemed to have been issued and any persons who are designated to be named therein shall be deemed to have become the holder of record of such Share or Shares as of the close of business on the date upon which the exercise of this Warrant was deemed to be effective as provided in the preceding paragraph. The Company will not be required to issue fractional shares of Common Stock upon exercise of Warrants or distribute Share certificates that evidence fractional shares of Common 7 Stock. In lieu of fractional shares of Common Stock, there shall be paid to the holder of this Warrant Certificate at the time such Warrant Certificate is exercised an amount in cash equal to the same fraction of the Current Market Value per share of Common Stock on the Business Day preceding the date this Warrant Certificate is surrendered for exercise. Warrant Certificates, when surrendered at any office or agency maintained by the Company for that purpose by the registered holder thereof in person or by legal representative or attorney duly authorized in writing, may be exchanged for a new Warrant Certificate or new Warrant Certificates evidencing in the aggregate a like number of Warrants, in the manner and subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at any office or agency maintained by the Company for that purpose, a new Warrant Certificate evidencing in the aggregate a like number of Warrants shall be issued to the transferee in exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. The Company and the Warrant Agent may deem and treat the registered holder hereof as the absolute owner of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone) for the purpose of any exercise hereof and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. The term "Business Day" shall mean any day on which (i) banks in New York City, (ii) the principal U.S. securities exchange or market, if any, on which the Common Stock is listed or admitted to trading and (iii) the principal U.S. securities exchange or market, if any, on which any other securities underlying the Warrants are listed or admitted to trading are open for business. The Warrants and the Shares issuable upon exercise thereof are entitled to the benefits of a registration rights agreement (as amended from time to time, the "Registration Rights Agreement"), pursuant to which the holders representing not less than a majority of Registrable Securities (as defined in the Registration Rights Agreement) have the right under certain circumstances to require the Company to effect one demand registration of the Registrable Securities. The Registration Rights Agreement also provides the holders of Registrable Securities with the right, subject to the conditions and limitations contained therein, to include the Registrable Securities in certain registration statements filed by the Company for its account or for the account of any of its other securityholders. The Registration Rights Agreement further provides, among other things, that (i) prior to the Triggering Date (as defined in the Registration Rights Agreement), if WorldCom Inc, a Georgia corporation ("WorldCom") or its Affiliates (as defined in the Registration Rights Agreement) effect a direct or indirect sale or other disposition of capital stock of the Company to any proposed purchaser in any transaction or a series of related transactions resulting in a Warrant Change of Control, the holders of Warrants and Shares will have the right to sell all of such securities to the proposed purchaser at the same price as received by WorldCom or its Affiliates 8 and (ii) prior to an Initial Public Equity Offering, WorldCom or its Affiliates may require the holders of Warrants and Shares to sell such securities to any person to whom WorldCom and such Affiliates sell all of their capital stock in the Company in a transaction that results in a Warrant Change of Control, at the same price as that received by WorldCom and such Affiliates. The Company will furnish to any holder of a Warrant upon written request and without charge a copy of the Warrant Agreement and the Registration Rights Agreement. Requests may be made to: WAM!NET Inc., 6100 West 110th Street, Minneapolis, Minnesota 55438; Attention: Secretary. 9 (ELECTION TO EXERCISE) (To be executed upon exercise of Warrants on the Exercise Date) The undersigned hereby irrevocably elects to exercise this Warrant Certificate as to ____ Warrants and to purchase the whole number of Shares issuable upon exercise thereof and herewith tenders payment for such Shares as follows: $_________________ in cash or by certified or official bank check; or by surrender of _____ Warrants pursuant to a Cashless Exercise at the current Cashless Exercise Ratio. The undersigned requests that a certificate representing such Shares be registered in the name of________whose address is____________and that such Shares be delivered to______________whose address is_________________________. Any cash payments to be paid in lieu of a fractional Share should be made to__________whose address is________and the check representing payment thereof should be delivered to____________whose address is_____________. Dated_____________________,____ Name of holder of Warrant Certificate:____________________________ (Please Print) Tax Identification or Social Security Number:_________________________ Address:________________________________________ ________________________________________ Signature:______________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever and if the certificate representing the Shares is to be registered in a name other than that in which this Warrant Certificate is registered, or if any cash payment to be paid in lieu of a fractional share is to be made to a person other than the registered holder of this Warrant Certificate, the signature of the holder hereof must be guaranteed. 10 Dated_____________,____ Signature:______________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed:___________________________ [FORM OF ASSIGNMENT] For value received___________________hereby sells, assigns and transfers unto__________________the within Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint____________attorney, to transfer said Warrant Certificate on the books of the within-named Company, with full power of substitution in the premises. Dated_______________, 199_ Signature:___________________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed:_________________________________ In connection with any transfer of Warrants represented by this Warrant Certificate occurring prior to the date which is the earlier of (i) the date of the declaration by the Securities and Exchange Commission of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act") covering resales of the Warrants (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) the Resale Restriction Termination Date, the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that: 11 [Check One] --------- [ ] (a) the Warrants are being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. or -- [ ] (b) this Warrant Certificate is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in Section 1.08 of the Warrant Agreement. If none of the foregoing boxes is checked, the Unit Agent shall not be obligated to register this Warrant Certificate in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth Section 1.08 of the Warrant Agreement shall have been satisfied. _______________________________________________________________________________ Date:__________________ Your signature:______________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee:___________________________________________________________ TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing the Warrants for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ____________________ ______________________________________ NOTICE: To be executed by an executive officer 12 SCHEDULE OF EXCHANGES OF DEFINITIVE AND GLOBAL WARRANTS ------------------------------------------------------- The following exchanges made in respect of certified Warrants or another Global Warrant have been made:
Date of Exchange Amount of Decrease in Amount of Increase in Number of Warrants of this Signature of authorized Number of Warrants Number of Warrants Global Warrant following officer of Warrant Agent Subject to this Global Subject to this Global such decrease (or increase) Warrant Warrant
13 EX-4.6(A) 11 RULE 144A UNIT CERTIFICATE (200,000 UNITS) Exhibit 4.6(A) RULE 144A UNIT CERTIFICATE THIS UNIT IS A GLOBAL UNIT AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS UNIT IS NOT EXCHANGEABLE FOR UNITS REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND THE WARRANT AGREEMENT HEREINAFTER REFERRED TO, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND THE WARRANT AGREEMENT. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE 144A")) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT ("REGULATION S"), (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD AS MAY BE PRESCRIBED BY RULE 144(k) UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S, PURSUANT TO RULE 904 OF REGULATION S OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM IN REGULATION S. WAM!NET INC. ----------------------- GLOBAL UNIT 200,000 Units Consisting of $200,000,000 Aggregate Principal at Maturity of 13 1/4% Senior Discount Notes due 2005 and 600,000 Warrants To Purchase Common Stock CUSIP No. 933590 AC 5 REGISTERED No. WAM!NET Inc., a Minnesota corporation (the "Company"), hereby certifies that CEDE & CO., or registered assigns, is the owner of 200,000 Units. Each Unit consists of (i) $1,000 principal amount at maturity of 13 1/4% Senior Discount Notes due 2005 of the Company (the "Notes"), and (ii) three Warrants (the "Warrants"), each Warrant initially entitling the holder thereof to purchase 2.01 shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company. The terms of the Notes are governed by an Indenture (as amended from time to time, the "Indenture") dated as of March 5, 1998 between the Company and First Trust National Association, a national banking corporation, as trustee (the "Trustee"), and are subject to the terms and provisions contained therein. The terms of the Warrants are governed by a Warrant Agreement (as amended from time to time, the "Warrant Agreement") dated as of March 5, 1998 between the Company and First Trust National Association, a national banking corporation, as warrant agent (the "Warrant Agent"), and are subject to the terms and provisions contained therein. The holder of this Unit Certificate consents to all of the terms and provisions of the Indenture and the Warrant Agreement by acceptance hereof. The Company will furnish to any Holder of this Unit Certificate upon written request and without charge a copy of the Indenture and/or the Warrant Agreement. Requests may be made to: WAM!NET Inc., 6100 West 110th Street, Minneapolis, Minnesota 55438, attention: Secretary. The Company hereby appoints First Trust National Association, a national banking corporation, as Unit Agent (the "Unit Agent") with respect to the Units. Transfers of this Unit shall be made by the Unit Agent in accordance with the restrictions set forth in Section 3.17 and Section 3.16 of the Indenture and Section 1.08 of the Warrant Agreement. The Unit Agent shall be entitled to the benefits and privileges of the Trustee under the Indenture and the Warrant Agent under the Warrant Agreement. The Notes and the Warrants represented by this Unit Certificate will not be separately transferable until the earliest to occur of: (i) September 1, 1998, (ii) the occurrence of an Exercise Event (as defined in the Warrant Agreement), (iii) the occurrence of an Event of Default (as defined in the Indenture), (iv) the date on which a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to a registered exchange offer for the Notes or covering the sale by holders of the Notes is declared effective under the Securities Act, (v) immediately prior to any redemption of Notes by the Company from the net proceeds of an Initial Public Equity Offering (as defined in the Indenture), (vi) upon the occurrence of a Warrant Change of Control (as defined in the Warrant Agreement) or (vii) such earlier date as may be determined by Merrill Lynch & Co. in its sole discretion. Dated: March 5, 1998 WAM!NET INC. By: /s/ Edward J. Driscoll III --------------------------------- Name: Edward J. Driscoll III Title: President and CEO Appointment as Unit Agent accepted and agreed to on the terms set forth above: FIRST TRUST NATIONAL ASSOCIATION, as Unit Agent By: /s/ Kathe Barrett -------------------------------- Authorized Signatory ASSIGNMENT FORM If you the holder want to assign this Security, fill in the form below and have your signature guaranteed: I or we assign and transfer this Security to ------------------------------------ - -------------------------------------------------------------------------------- (Insert assignee's social security or tax ID number) ---------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint - -------------------------------------------------------------------------------- agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. In connection with any transfer of this Security occurring prior to the date which is the earlier of (i) the date of the declaration by the Securities and Exchange Commission of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act") covering resales of this Security (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) the Resale Restriction Termination Date, the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that: [CHECK ONE] [ ] (a) this Security is being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. OR [ ] (b) this Security is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Security, the Indenture and the Warrant Agreement. If none of the foregoing boxes is checked, the Unit Agent shall not be obligated to register this Security in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Sections 3.16 and 3.17 of the Indenture and Section 1.08 of the Warrant Agreement shall have been satisfied. - -------------------------------------------------------------------------------- Date: Your signature: --------------- ----------------------------- (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: ------------------------ TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Name of Purchaser: Dated: By: -------------- ---------------------------------- NOTICE: To be executed by an executive officer EX-4.6(B) 12 RULE 144A UNIT CERTIFICATE (8,030 UNITS) Exhibit 4.6(B) RULE 144A UNIT CERTIFICATE THIS UNIT IS A GLOBAL UNIT AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS UNIT IS NOT EXCHANGEABLE FOR UNITS REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND THE WARRANT AGREEMENT HEREINAFTER REFERRED TO, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND THE WARRANT AGREEMENT. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE 144A")) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT ("REGULATION S"), (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD AS MAY BE PRESCRIBED BY RULE 144(k) UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S, PURSUANT TO RULE 904 OF REGULATION S OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM IN REGULATION S. WAM!NET INC. ------------------------- GLOBAL UNIT 8,030 Units Consisting of $8,030,000 Aggregate Principal at Maturity of 13 1/4% Senior Discount Notes due 2005 and 24,090 Warrants To Purchase Common Stock CUSIP No. 933590 AC 5 REGISTERED No. WAM!NET Inc., a Minnesota corporation (the "Company"), hereby certifies that CEDE & CO., or registered assigns, is the owner of 8,030 Units. Each Unit consists of (i) $1,000 principal amount at maturity of 13 1/4% Senior Discount Notes due 2005 of the Company (the "Notes"), and (ii) three Warrants (the "Warrants"), each Warrant initially entitling the holder thereof to purchase 2.01 shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company. The terms of the Notes are governed by an Indenture (as amended from time to time, the "Indenture") dated as of March 5, 1998 between the Company and First Trust National Association, a national banking corporation, as trustee (the "Trustee"), and are subject to the terms and provisions contained therein. The terms of the Warrants are governed by a Warrant Agreement (as amended from time to time, the "Warrant Agreement") dated as of March 5, 1998 between the Company and First Trust National Association, a national banking corporation, as warrant agent (the "Warrant Agent"), and are subject to the terms and provisions contained therein. The holder of this Unit Certificate consents to all of the terms and provisions of the Indenture and the Warrant Agreement by acceptance hereof. The Company will furnish to any Holder of this Unit Certificate upon written request and without charge a copy of the Indenture and/or the Warrant Agreement. Requests may be made to: WAM!NET Inc., 6100 West 110th Street, Minneapolis, Minnesota 55438, attention: Secretary. The Company hereby appoints First Trust National Association, a national banking corporation, as Unit Agent (the "Unit Agent") with respect to the Units. Transfers of this Unit shall be made by the Unit Agent in accordance with the restrictions set forth in Section 3.17 and Section 3.16 of the Indenture and Section 1.08 of the Warrant Agreement. The Unit Agent shall be entitled to the benefits and privileges of the Trustee under the Indenture and the Warrant Agent under the Warrant Agreement. The Notes and the Warrants represented by this Unit Certificate will not be separately transferable until the earliest to occur of: (i) September 1, 1998, (ii) the occurrence of an Exercise Event (as defined in the Warrant Agreement), (iii) the occurrence of an Event of Default (as defined in the Indenture), (iv) the date on which a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to a registered exchange offer for the Notes or covering the sale by holders of the Notes is declared effective under the Securities Act, (v) immediately prior to any redemption of Notes by the Company from the net proceeds of an Initial Public Equity Offering (as defined in the Indenture), (vi) upon the occurrence of a Warrant Change of Control (as defined in the Warrant Agreement) or (vii) such earlier date as may be determined by Merrill Lynch & Co. in its sole discretion. Dated: March 5, 1998 WAM!NET INC. By: /s/ Edward J. Driscoll III -------------------------------- Name: Edward J. Driscoll III Title: President and CEO Appointment as Unit Agent accepted and agreed to on the terms set forth above: FIRST TRUST NATIONAL ASSOCIATION, as Unit Agent By: /s/ Kathe Barrett -------------------------------- Authorized Signatory ASSIGNMENT FORM If you the holder want to assign this Security, fill in the form below and have your signature guaranteed: I or we assign and transfer this Security to ------------------------------------ - -------------------------------------------------------------------------------- (Insert assignee's social security or tax ID number) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint - -------------------------------------------------------------------------------- agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. In connection with any transfer of this Security occurring prior to the date which is the earlier of (i) the date of the declaration by the Securities and Exchange Commission of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act") covering resales of this Security (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) the Resale Restriction Termination Date, the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that: [CHECK ONE] [ ] (a) this Security is being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. OR [ ] (b) this Security is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Security, the Indenture and the Warrant Agreement. If none of the foregoing boxes is checked, the Unit Agent shall not be obligated to register this Security in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Sections 3.16 and 3.17 of the Indenture and Section 1.08 of the Warrant Agreement shall have been satisfied. - -------------------------------------------------------------------------------- Date: Your signature: ------------- ----------------------------- (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: ---------------------------- TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Name of Purchaser: Dated: By: ----------------- -------------------------- NOTICE: To be executed by an executive officer EX-4.7 13 REGULATION S UNIT CERTIFICATE Exhibit 4.7 REGULATION S UNIT CERTIFICATE THIS UNIT IS A GLOBAL UNIT AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS UNIT IS NOT EXCHANGEABLE FOR UNITS REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND THE WARRANT AGREEMENT HEREINAFTER REFERRED TO, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND THE WARRANT AGREEMENT. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE 144A")) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT ("REGULATION S"), (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD AS MAY BE PRESCRIBED BY RULE 144(k) UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S, PURSUANT TO RULE 904 OF REGULATION S OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM IN REGULATION S. WAM!NET INC. -------------------- GLOBAL UNIT 500 Units Consisting of $500,000 Aggregate Principal at Maturity of 13 1/4% Senior Discount Notes due 2005 and 1,500 Warrants To Purchase Common Stock CUSIP No. U25540 AA 0 REGISTERED No. WAM!NET Inc., a Minnesota corporation (the "Company"), hereby certifies that CEDE & CO., or registered assigns, is the owner of 500 Units. Each Unit consists of (i) $1,000 principal amount at maturity of 13 1/4% Senior Discount Notes due 2005 of the Company (the "Notes"), and (ii) three Warrants (the "Warrants"), each Warrant initially entitling the holder thereof to purchase 2.01 shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company. The terms of the Notes are governed by an Indenture (as amended from time to time, the "Indenture") dated as of March 5, 1998 between the Company and First Trust National Association, a national banking corporation, as trustee (the "Trustee"), and are subject to the terms and provisions contained therein. The terms of the Warrants are governed by a Warrant Agreement (as amended from time to time, the "Warrant Agreement") dated as of March 5, 1998 between the Company and First Trust National Association, a national banking corporation, as warrant agent (the "Warrant Agent"), and are subject to the terms and provisions contained therein. The holder of this Unit Certificate consents to all of the terms and provisions of the Indenture and the Warrant Agreement by acceptance hereof. The Company will furnish to any Holder of this Unit Certificate upon written request and without charge a copy of the Indenture and/or the Warrant Agreement. Requests may be made to: WAM!NET Inc., 6100 West 110th Street, Minneapolis, Minnesota 55438, attention: Secretary. The Company hereby appoints First Trust National Association, a national banking corporation, as Unit Agent (the "Unit Agent") with respect to the Units. Transfers of this Unit shall be made by the Unit Agent in accordance with the restrictions set forth in Section 3.17 and Section 3.16 of the Indenture and Section 1.08 of the Warrant Agreement. The Unit Agent shall be entitled to the benefits and privileges of the Trustee under the Indenture and the Warrant Agent under the Warrant Agreement. The Notes and the Warrants represented by this Unit Certificate will not be separately transferable until the earliest to occur of: (i) September 1, 1998, (ii) the occurrence of an Exercise Event (as defined in the Warrant Agreement), (iii) the occurrence of an Event of Default (as defined in the Indenture), (iv) the date on which a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to a registered exchange offer for the Notes or covering the sale by holders of the Notes is declared effective under the Securities Act, (v) immediately prior to any redemption of Notes by the Company from the net proceeds of an Initial Public Equity Offering (as defined in the Indenture), (vi) upon the occurrence of a Warrant Change of Control (as defined in the Warrant Agreement) or (vii) such earlier date as may be determined by Merrill Lynch & Co. in its sole discretion. Dated: March 5, 1998 WAM!NET INC. By: /s/ Edward J. Driscoll III --------------------------------- Name: Edward J. Driscoll III Title: President & CEO Appointment as Unit Agent accepted and agreed to on the terms set forth above: FIRST TRUST NATIONAL ASSOCIATION, as Unit Agent By: /s/ Kathe Barrett --------------------------------- Authorized Signatory ASSIGNMENT FORM If you the holder want to assign this Security, fill in the form below and have your signature guaranteed: I or we assign and transfer this Security to __________________________________ _______________________________________________________________________________ (Insert assignee's social security or tax ID number)___________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint__ _______________________________________________________________________________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. In connection with any transfer of this Security occurring prior to the date which is the earlier of (i) the date of the declaration by the Securities and Exchange Commission of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act") covering resales of this Security (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) the Resale Restriction Termination Date, the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that: [Check One] --------- [ ] (a) this Security is being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. or -- [ ] (b) this Security is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Security, the Indenture and the Warrant Agreement. If none of the foregoing boxes is checked, the Unit Agent shall not be obligated to register this Security in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Sections 3.16 and 3.17 of the Indenture and Section 1.08 of the Warrant Agreement shall have been satisfied. _______________________________________________________________________________ Date:________________ Your signature:________________________________ ________________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee:___________________________________________________________ TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Name of Purchaser: Dated: ____________________ By:________________________________________ NOTICE: To be executed by an executive officer EX-4.9 14 COMMON STOCK CERTIFICATE EXHIBIT 4.9 NUMBER SHARES ---------------- ---------------- [LOGO OF WAM!NET APPEARS HERE] ---------------- ---------------- INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA This Certifies that _______________________________________________________ is the registered holder of ____________________________________________________ Shares of Common Stock of WAM!NET INC. a Minnesota Corporation, 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 ________________ day of ____________ A.D. _____ __________________________________ ___________________________________ For Value Received, _____________ hereby sell, assign and transfer unto _______ _______________________________________________________________________________ Shares represented by the within Certificate, and do 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 _______________________ In presence of _____________________________________________ _________________________________________________ NOTICE. THE SIGNATURE OF 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. EX-4.10 15 REGISTRATION RIGHTS AGREEMENT DATED 3/5/98 Exhibit 4.10 ---------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT DATED MARCH 5, 1998 AMONG WAM!NET INC. AND MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, CREDIT SUISSE FIRST BOSTON CORPORATION AND FIRST CHICAGO CAPITAL MARKETS, INC. ---------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into this 5th day of March, 1998, by and among WAM!NET Inc., a Minnesota corporation (the "Company"), and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. (collectively, the "Initial Purchasers"). This Agreement is made pursuant to the Purchase Agreement, dated February 26, 1998, among the Company and the Initial Purchasers (the "Purchase Agreement"), which provides for the sale by the Company to the Initial Purchasers of an aggregate of 208,530 Units. The Units include $208,530,000 principal face amount of the Company's 13 1/4% Senior Discount Notes due 2005, Series A (the "Notes"). In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide to the Initial Purchasers and their direct and indirect transferees of Notes the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the meanings specified below: "1933 ACT" shall mean the Securities Act of 1933, as amended from time to time. "1934 ACT" shall mean the Securities Exchange Act of 1934, as amended from time to time. "CLOSING DATE" shall mean the Closing Time as defined in the Purchase Agreement. "COMPANY" shall have the meaning set forth in the preamble and shall also include the Company's successors. "DEPOSITARY" shall mean The Depository Trust Company and its nominees and successors. "EXCHANGE OFFER" shall mean the exchange offer by the Company of Exchange Notes for Registrable Notes pursuant to Section 2.1 hereof. "EXCHANGE OFFER REGISTRATION" shall mean a registration under the 1933 Act effected pursuant to Section 2.1 hereof. "EXCHANGE OFFER REGISTRATION STATEMENT" shall mean an exchange offer registration statement on Form S-4 (or, if applicable, on another appropriate form), and all amendments and supplements to such registration statement, including the Prospectus contained therein, all exhibits thereto and all documents incorporated by reference therein. "EXCHANGE PERIOD" shall have the meaning set forth in Section 2.1 hereof. "EXCHANGE NOTES" shall mean the 13 1/4% Senior Discount Notes due 2005, Series B, issued by the Company under the Indenture containing terms identical to the Notes in all material respects (except for references to certain liquidated damages interest rate provisions, restrictions on transfers and trading as unit with warrants of the Company and restrictive legends), to be offered to Holders of Securities in exchange for Registrable Notes pursuant to the Exchange Offer. "HOLDER" shall mean an Initial Purchaser, for so long as it owns any Registrable Notes, and each of its successors, assigns and direct and indirect transferees who become registered owners of Registrable Notes under the Indenture and each Participating Broker-Dealer that holds Exchange Notes for so long as such Participating Broker-Dealer is required to deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchange Notes. "INDENTURE" shall mean the Indenture relating to the Notes, dated as of March 5, 1998, among the Company, the Subsidiary Guarantors that become parties thereto from time to time, and First Trust National Association, as trustee, as the same may be amended, supplemented, waived or otherwise modified from time to time in accordance with the terms thereof. "INITIAL PURCHASER" or "INITIAL PURCHASERS" shall have the meaning set forth in the preamble and their successors. "MAJORITY HOLDERS" shall mean (i), with respect to actions in respect of the Exchange Registration Statement, the Holders of a majority of the aggregate principal amount of Outstanding (as defined in the Indenture) Registrable Notes that are eligible to participate in the Exchange Offer and (ii), with respect to actions in respect of a Shelf Registration Statement, the Holders of a majority of the aggregate principal amount of Outstanding Registrable Notes that are covered by such Shelf Registration Statement. Whenever the consent or approval of Holders of a specified percentage of Registrable Notes is required hereunder, Notes held by the Company, any Subsidiary Guarantor or any other obligor on the Notes or any Affiliate (as defined in the Indenture) of the Company shall be disregarded in determining whether such consent or approval was given by the Holders of such required percentage amount. "PARTICIPATING BROKER-DEALER" shall mean any of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. and any other broker-dealer which makes a market in the Notes and exchanges Registrable Notes in the Exchange Offer for Exchange Notes. 2 "PERSON" shall mean an individual, partnership (general or limited), corporation, limited liability company, trust or unincorporated organization, or a government or agency or political subdivision thereof. "PRIVATE EXCHANGE" shall have the meaning set forth in Section 2.1 hereof. "PRIVATE EXCHANGE NOTES" shall have the meaning set forth in Section 2.1 hereof. "PROSPECTUS" shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including any such prospectus supplement with respect to the terms of the offering of any portion of the Registrable Notes covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "PURCHASE AGREEMENT" shall have the meaning set forth in the preamble. "REGISTRABLE NOTES" shall mean the Notes and, if issued, the Private Exchange Notes; provided, however, that any Note and, if issued, any Private Exchange Note shall cease to be a Registrable Note on (i) the date on which such Note is exchanged by a Person, other than a Participating Broker-Dealer, for an Exchange Note in the Exchange Offer, (ii) as to any Exchange Note received by a Participating Broker-Dealer in the Exchange Offer, the date on which such Exchange Note is sold to a purchaser who receives from such Participating Broker-Dealer on or prior to the date of such sale a copy of the Prospectus contained in the Exchange Offer Registration Statement, as amended or supplemented, (iii) the date on which the offer and sale of such Note or Private Exchange Note, as the case may be, has been effectively registered under the 1933 Act, and such Note or Private Exchange Note has been disposed of under the Shelf Registration Statement, (iv) the date on which such Note or Private Exchange Note, as the case may be, is eligible for distribution to the public pursuant to Rule 144(k) under the 1933 Act (or any similar provision then in effect, but not Rule 144A), (v) the date on which such Note or Private Exchange Note, as the case may be, shall have otherwise been sold by the holder thereof and a new Note, executed by the Company and authenticated by the Trustee and not containing a legend restricting further transfer, shall have been delivered to the purchaser and subsequent sales of such Note to the public shall not require registration or qualification under the 1933 Act or any similar state law then in effect, or (vi) such Note or Private Exchange Note, as the case may be, ceases to be outstanding. "REGISTRATION EXPENSES" shall mean any and all expenses incident to performance of or compliance by the Company with this Agreement, including without limitation: (i) all SEC, stock exchange or National Association of Securities Dealers, Inc. (the "NASD") registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws and compliance with the rules of the NASD (including reasonable fees and disbursements of counsel for any underwriters or Holders in connection with blue sky qualification of any of the Exchange Notes or Registrable Notes and any filings with the NASD), (iii) all expenses of any 3 Persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all fees and expenses incurred in connection with the listing, if any, of any of the Registrable Notes on any securities exchange or exchanges, (v) all rating agency fees, (vi) the fees and disbursements of counsel for the Company and of the independent public accountants of the Company, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, (vii) the fees and expenses of the Trustee, and any escrow agent or custodian, (viii) the reasonable fees and expenses of the Initial Purchasers in connection with the Exchange Offer, including the reasonable fees and expenses of counsel to the Initial Purchasers in connection therewith, (ix) the reasonable fees and disbursements of special counsel selected by Merrill Lynch to represent the Holders of Registrable Notes in connection with any Shelf Registration and (x) any fees and disbursements of the underwriters customarily required to be paid by issuers or sellers of securities and the fees and expenses of any special experts retained by the Company in connection with any Registration Statement, but excluding underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Notes by a Holder pursuant to a Shelf Registration Statement. "REGISTRATION STATEMENT" shall mean any registration statement of the Company which covers any of the Exchange Notes or Registrable Notes pursuant to the provisions of this Agreement, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "SEC" shall mean the Securities and Exchange Commission or any successor agency or government body performing the functions currently performed by the United States Securities and Exchange Commission. "SHELF REGISTRATION" shall mean a registration effected pursuant to Section 2.2 hereof. "SHELF REGISTRATION STATEMENT" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2.2 of this Agreement which covers all of the Registrable Notes or all of the Private Exchange Notes on an appropriate form under Rule 415 under the 1933 Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "SUBSIDIARY GUARANTORS" shall have the meaning assigned thereto in the Indenture. "TRUSTEE" shall mean the trustee with respect to the Notes and the Exchange Notes under the Indenture. 4 2. REGISTRATION UNDER THE 1933 ACT. 2.1 EXCHANGE OFFER. The Company shall, for the benefit of the Holders, at the Company's cost, (A) prepare and, as soon as practicable but not later than 90 days following the Closing Date, file with the SEC under the 1933 Act an Exchange Offer Registration Statement on an appropriate form with respect to the offer of the Company to the Holders to exchange all of the Registrable Notes (other than Private Exchange Notes) for a like principal amount of Exchange Notes, (B) use its best efforts to cause the Exchange Offer Registration Statement to be declared effective under the 1933 Act within 150 days of the Closing Date, (C) use its best efforts to keep the Exchange Offer Registration Statement effective until the closing of the Exchange Offer and (D) use its best efforts to cause the Exchange Offer to be consummated not later than 30 days following the date on which the Exchange Offer Registration Statement is declared effective. The Exchange Notes will be issued under the Indenture. Upon the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Exchange Offer, it being the objective of such Exchange Offer to enable each Holder eligible and electing to exchange Registrable Notes for Exchange Notes (assuming that such Holder (a) is not an affiliate of the Company within the meaning of Rule 405 under the 1933 Act, (b) is not a broker-dealer tendering Registrable Notes acquired directly from the Company for its own account, (c) acquired the Exchange Notes in the ordinary course of such Holder's business and (d) has no arrangements or understandings with any Person to participate in the Exchange Offer for the purpose of distributing the Exchange Notes) to transfer such Exchange Notes from and after their receipt without any limitations or restrictions under the 1933 Act and under state securities or blue sky laws. In connection with the Exchange Offer, the Company shall: (a) mail as promptly as practicable to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (b) keep the Exchange Offer open for acceptance for a period of not less than 30 calendar days after the date notice thereof is mailed to the Holders (or longer if required by applicable law) (such period referred to herein as the "Exchange Period"); (c) utilize the services of the Depositary for the Exchange Offer; (d) permit Holders to withdraw tendered Registrable Notes at any time prior to 5:00 p.m. (Eastern Time) on the last business day of the Exchange Period, by sending to the institution specified in the Prospectus forming part of the Exchange Offer Registration Statement and in the letter of transmittal, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Registrable Notes delivered for exchange, and a statement that such Holder is withdrawing such Holder's election to have such Securities exchanged; 5 (e) notify each Holder that any Registrable Security not tendered will remain outstanding and continue to accrue interest, but will not retain any rights under this Agreement (except in the case of the Initial Purchasers and Participating Broker-Dealers as provided herein); and (f) otherwise comply in all respects with all applicable laws relating to the Exchange Offer. If, prior to consummation of the Exchange Offer, the Initial Purchasers hold any Securities acquired by them and having the status of an unsold allotment in the initial distribution, the Company, upon the request of any Initial Purchaser, shall simultaneously with the delivery of the Exchange Notes in the Exchange Offer issue and deliver to such Initial Purchaser in exchange (the "Private Exchange") for the Notes held by such Initial Purchaser, a like principal amount of debt securities of the Company, on a senior basis, that are identical (except that such securities shall bear appropriate transfer restrictions) to the Exchange Notes (the "Private Exchange Notes"). The Exchange Notes and the Private Exchange Notes shall be issued under (i) the Indenture or (ii) an indenture identical in all material respects to the Indenture and which, in either case, has been qualified under the Trust Indenture Act of 1939, as amended (the "TIA"), and which does not place the transfer restrictions (or similar restrictions) set forth in Section 3.17 of the Indenture or on the face of the Notes on the Exchange Notes; provided, however, the Private Exchange Notes shall be subject to such transfer restrictions. The Indenture or such indenture shall provide that the Exchange Notes, the Private Exchange Notes and the Notes shall vote and consent together on all matters as one class and that none of the Exchange Notes, the Private Exchange Notes or the Notes will have the right to vote or consent as a separate class on any matter. The Private Exchange Notes shall be of the same series as, and the Company shall use its best efforts to have the Private Exchange Notes bear the same CUSIP number as, the Exchange Notes. As soon as practicable after the close of the Exchange Offer and/or the Private Exchange, as the case may be, the Company shall: (i) accept for exchange all Registrable Notes properly tendered and not validly withdrawn pursuant to the Exchange Offer in accordance with the terms of the Exchange Offer Registration Statement; (ii) accept for exchange all Notes properly tendered pursuant to the Private Exchange; (iii) deliver to the Trustee for cancellation all Registrable Notes so accepted for exchange; and (iv) cause the Trustee promptly to authenticate and deliver Exchange Notes or Private Exchange Notes, as the case may be, to each Holder of Registrable Notes so accepted 6 for exchange in a principal face amount equal to the principal face amount of the Registrable Notes of such Holder so accepted for exchange. The Accreted Value of each Exchange Note and Private Exchange Note shall be equal to the Accreted Value of the Registrable Note surrendered in exchange therefor, and interest on each Exchange Note and Private Exchange Note will accrue from March 1, 2002 or, if later, the date on which interest was last paid on the Registrable Note surrendered in exchange therefor. The Exchange Offer and the Private Exchange shall not be subject to any conditions, other than (i) that the Exchange Offer or the Private Exchange, or the making of any exchange by a Holder, does not violate applicable law or any applicable interpretation of the staff of the SEC, (ii) the due tendering of Registrable Notes in accordance with the Exchange Offer and the Private Exchange, (iii) that each Holder of Registrable Notes exchanged in the Exchange Offer shall have represented that all Exchange Notes to be received by it shall be acquired in the ordinary course of its business and that at the time of the consummation of the Exchange Offer it shall have no arrangement or understanding with any person to participate in the distribution (within the meaning of the 1933 Act) of the Exchange Notes and shall have made such other representations as may be reasonably necessary under applicable SEC rules, regulations or interpretations to render the use of Form S-4 or other appropriate form under the 1933 Act available and (iv) that no action or proceeding shall have been instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer or the Private Exchange which, in the Company's judgment, would reasonably be expected to impair the ability of the Company to proceed with the Exchange Offer or the Private Exchange. The Company shall inform the Initial Purchasers of the names and addresses of the Holders to whom the Exchange Offer is made, and the Initial Purchasers shall have the right to contact such Holders and otherwise facilitate the tender of Registrable Notes in the Exchange Offer. 2.2 SHELF REGISTRATION. If (i) the Company is not permitted to file the Exchange Offer Registration Statement or to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or SEC policy, (ii) the Exchange Offer is not for any other reason consummated within 180 days after the Closing Date, (iii) any Holder of Registrable Notes notifies the Company within 30 days after the commencement of the Exchange Offer that (a) due to a change in law or policy it is not entitled to participate in the Exchange Offer, (b) due to a change in law or policy it may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder or (c) it is a broker-dealer and owns Registrable Notes acquired directly from the Company or an affiliate of the Company or (iv) the Holders of a majority in aggregate principal amount of the Registrable Notes may not resell the Exchange Notes acquired by them in the Exchange Offer to the public without restriction under the Securities Act and under applicable blue sky or state securities laws, then the Company will, at its cost: (A) Use its best efforts to, prior to the later of (x) the 90th day after the Closing Date or (y) the 60th day after such filing obligation arises, file with the SEC a Shelf 7 Registration Statement relating to the offer and sale of the Registrable Notes by the Holders from time to time in accordance with the methods of distribution elected by the Majority Holders participating in the Shelf Registration and set forth in such Shelf Registration Statement, and thereafter shall use its best efforts to cause such Shelf Registration Statement to be declared effective as promptly as practicable but no later than 60 days after the obligation to file the Shelf Registration Statement arises; provided, that if the Company has not consummated the Exchange Offer within 180 days after the Closing Date, than the Issuer will file the Shelf Registration Statement with the SEC on or prior to the 30th day after such date. (B) Use its best efforts to keep the Shelf Registration Statement continuously effective, supplemented and amended in order to permit the Prospectus forming part thereof to be usable by Holders for a period of two years from the date the Shelf Registration Statement is declared effective by the SEC, or for such shorter period that will terminate when all Registrable Notes covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement or cease to be outstanding or otherwise to be Registrable Notes (the "Effectiveness Period"); (C) Notwithstanding any other provisions hereof, use its best efforts to ensure that (i) any Shelf Registration Statement and any amendment thereto and any Prospectus forming part thereof and any supplement thereto complies in all material respects with the 1933 Act and the rules and regulations thereunder, (ii) any Shelf Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Shelf Registration Statement, and any supplement to such Prospectus (as amended or supplemented from time to time), does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading. The Company shall not permit any securities other than Registrable Notes to be included in the Shelf Registration Statement. The Company further agrees, if necessary, to supplement or amend the Shelf Registration Statement, as required by Section 3(b) below, and to furnish to the Holders of Registrable Notes copies of any such supplement or amendment promptly after its being used or filed with the SEC. 2.3 EXPENSES. The Company shall pay all Registration Expenses in connection with a registration pursuant to Section 2.1 or 2.2. Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Notes pursuant to the Shelf Registration Statement. 2.4 EFFECTIVENESS. (a) The Company will be deemed not have used its best efforts to cause the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case 8 may be, to become, or to remain, effective during the requisite period set forth in Section 2.1 or 2.2 if the Company voluntarily takes any action that would, or omits to take any action which omission would, result in any such Registration Statement not being declared effective or in the Holders of Registrable Notes covered thereby not being able to exchange or offer and sell such Registrable Notes during such period as and to the extent contemplated hereby, unless such action is required by applicable law. (b) An Exchange Offer Registration Statement pursuant to Section 2.1 hereof or a Shelf Registration Statement pursuant to Section 2.2 hereof will not be deemed to have become effective unless it has been declared effective by the SEC; provided, however, that if, after it has been declared effective, the offering of Exchange Notes pursuant to an Exchange Offer Registration Statement or Registrable Notes pursuant to a Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have become effective during the period of such interference, until the offering of Exchange Notes or Registrable Notes, as the case may be, pursuant to such Registration Statement may legally resume. 2.5 INTEREST. The Indenture executed in connection with the Notes will provide that in the event that either (a) the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 90th calendar day following the Closing Date, (b) the Exchange Offer Registration Statement has not been declared effective on or prior to the 150th calendar day following the Closing Date or (c) the Exchange Offer is not consummated on or prior to the 180th calendar day following the Closing Date or a Shelf Registration Statement is not declared effective within the period specified in Section 2.2(A), (each such event referred to in clauses (a) through (c) above, a "Registration Default"), the Registrable Notes shall accrue interest, as liquidated damages ("Additional Interest"), at a rate of one-half of one percent per annum of the Accreted Value of the Registrable Notes upon the occurrence of each Registration Default, which rate will increase by one-half of one percent each 90-day period that such Additional Interest continues to accrue as a result of such Registration Default, provided that the maximum aggregate interest rate that accrues on the Accreted Value of the Registrable Notes will in no event exceed one and one-half percent (1.5%) per annum. Following the cure of a Registration Default the accrual of Additional Interest on the Registrable Notes will respect to such Registration Default shall cease. If the Shelf Registration Statement is declared effective but becomes unusable by the Holders of Notes covered by such Shelf Registration Statement ("Shelf Registered Notes") for any reason, and the aggregate number of days in any consecutive twelve-month period for which the Shelf Registration Statement shall not be usable exceeds 30 days in the aggregate, then commencing on such 30th day the Shelf Registered Notes shall accrue Additional Interest (in addition to any interest then accruing in accordance with the immediately preceding paragraph), as liquidated damages, at a rate of one-half of one percent per annum of the Accreted Value of the Shelf Registered Notes, which rate will increase by one-half of one percent at the end of each 90-day period in which such Shelf Registration Statement is not usable, provided that the maximum aggregate interest rate that accrues on the Accreted Value of the Shelf Registered Notes as a result 9 of a Shelf Registration Statement being unusable (inclusive of any interest that accrues on such Shelf Registered Notes pursuant to the first paragraph of this Section 2.5) will in no event exceed one and one-half percent (1.5%) per annum. Upon the Shelf Registration Statement once again becoming usable, the accrual of Additional Interest on the Shelf Registered Notes due to such Shelf Registration Statement not being usable will cease. 3. REGISTRATION PROCEDURES. In connection with the obligations of the Company with respect to Registration Statements pursuant to Sections 2.1 and 2.2 hereof, the Company shall: (a) prepare and file with the SEC a Registration Statement or Registration Statements, within the relevant time period specified in Section 2.1 or 2.2, as applicable, on the appropriate form under the 1933 Act, which form (i) shall be selected by the Company, (ii) shall, in the case of a Shelf Registration, be available for the sale of the Registrable Notes by the selling Holders thereof, and (iii) shall comply as to form in all material respects with the requirements of the applicable form and include or incorporate by reference all financial statements required by the SEC to be filed therewith or incorporated by reference therein; (b) use its best efforts to cause such Registration Statement(s) to become effective and remain effective within the time periods specified in Section 2.1 or Section 2.2 hereof, as the case may be, and prepare and file with the SEC such post-effective amendments to each Registration Statement as may be necessary under applicable law to keep such Registration Statement effective for the applicable period; and cause each Prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force) under the 1933 Act and comply with the provisions of the 1933 Act, the 1934 Act and the rules and regulations thereunder applicable to them with respect to the disposition of all securities covered by each Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the selling Holders thereof (including sales by any Participating Broker-Dealer); (c) in the case of a Shelf Registration, (i) notify each Holder of Registrable Notes, at least five business days prior to filing, that a Shelf Registration Statement with respect to the Registrable Notes is being filed and advising such Holder that the distribution of Registrable Notes will be made in accordance with the method selected by the Majority Holders participating in the Shelf Registration; (ii) furnish to each Holder of Registrable Notes and to each underwriter of an underwritten offering of Registrable Notes, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto and such other documents as such Holder or underwriter may reasonably request, including financial statements and schedules and, if the Holder so requests, all exhibits in order to facilitate the public sale or other disposition of the Registrable Notes, and (iii) hereby consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of Registrable 10 Notes in connection with the offering and sale of the Registrable Notes covered by the Prospectus or any amendment or supplement thereto; (d) use its best efforts to register or qualify the Registrable Notes under all applicable state securities or "blue sky" laws of such jurisdictions as any Holder of Registrable Notes covered by a Registration Statement and each underwriter of an underwritten offering of Registrable Notes shall reasonably request by the time the applicable Registration Statement is declared effective by the SEC, and do any and all other acts and things which may be reasonably necessary or advisable to enable each such Holder and underwriter to consummate the disposition in each such jurisdiction of such Registrable Notes owned by such Holder; provided, however, that the Company shall not be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), or (ii) take any action which would subject it to general service of process or taxation in any such jurisdiction where it is not then so subject; (e) notify promptly each Holder of Registrable Notes under a Shelf Registration or any Participating Broker-Dealer who has notified the Company that it utilizing the Exchange Offer Registration Statement as provided in paragraph (f) below and, if requested by such Holder or Participating Broker-Dealer, confirm such advice in writing promptly (i) when a Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of any request by the SEC or any state securities authority for post-effective amendments or supplements to a Registration Statement and Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) in the case of a Shelf Registration, if, between the effective date of a Registration Statement and the closing of any sale of Registrable Notes covered thereby, the representations and warranties of the Company contained in any underwriting agreement, securities sales agreement or other similar agreement, if any, relating to the offering cease to be true and correct in all material respects, (v) of the happening of any event or the discovery of any facts during the period a Shelf Registration Statement is effective which makes any statement made in such Registration Statement or the related Prospectus untrue in any material respect or which requires the making of any changes in such Registration Statement or Prospectus in order to make the statements therein not misleading, (vi) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Notes or the Exchange Notes, as the case may be, for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (vii) of any determination by the Company that a post-effective amendment to such Registration Statement would be appropriate, (f) (A) in the case of the Exchange Offer Registration Statement, (i) include in the Exchange Offer Registration Statement a section entitled "Plan of Distribution" which section shall be reasonably acceptable to Merrill Lynch on behalf of the Participating Broker-Dealers, and which shall contain a summary statement of the positions taken or policies made by the staff of the SEC with respect to the potential "underwriter" status of any broker-dealer that holds Registrable 11 Notes acquired for its own account as a result of market-making activities or other trading activities and that will be the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange Notes to be received by such broker-dealer in the Exchange Offer, whether such positions or policies have been publicly disseminated by the staff of the SEC or such positions or policies, in the reasonable judgment of Merrill Lynch on behalf of the Participating Broker-Dealers and its counsel, represent the prevailing views of the staff of the SEC, including a statement that any such broker-dealer who receives Exchange Notes for Registrable Notes pursuant to the Exchange Offer may be deemed a statutory underwriter and must deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchange Notes, (ii) furnish to each Participating Broker-Dealer who has delivered to the Company the notice referred to in Section 3(e), without charge, as many copies of each Prospectus included in the Exchange Offer Registration Statement, including any preliminary prospectus, and any amendment or supplement thereto, as such Participating Broker-Dealer may reasonably request, (iii) hereby consent to the use of the Prospectus forming part of the Exchange Offer Registration Statement or any amendment or supplement thereto, by any Person subject to the prospectus delivery requirements of the SEC, including all Participating Broker-Dealers, in connection with the sale or transfer of the Exchange Notes covered by the Prospectus or any amendment or supplement thereto, and (iv) include in the transmittal letter or similar documentation to be executed by an exchange offeree in order to participate in the Exchange Offer (x) the following provision: "If the exchange offeree is a broker-dealer holding Registrable Notes acquired for its own account as a result of market-making activities or other trading activities, it will deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of Exchange Notes received in respect of such Registrable Notes pursuant to the Exchange Offer" and (y) a statement to the effect that by a broker-dealer making the acknowledgment described in clause (x) and by delivering a Prospectus in connection with the exchange of Registrable Notes, the broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the 1933 Act; and (B) in the case of any Exchange Offer Registration Statement involving Participating Broker-Dealers, if in the opinion of counsel to the Initial Purchasers such Participating Broker-Dealers would have liability under the 1933 Act or the 1934 Act with respect to any untrue statement of a material fact contained in such Exchange Offer Registration Statement or the related Prospectus, or with respect to any omission to state a material fact therein necessary (in the case of the Prospectus, in light of the circumstances under which they were made) to make the statements made therein not misleading, the Company shall cause to be delivered to the Initial Purchasers, on behalf of the Participating Broker-Dealers, upon the effectiveness of the Exchange Offer Registration Statement: (i) an opinion of counsel or opinions of counsel substantially in the form attached hereto as Exhibit A, (ii) officers' certificates substantially in the form customarily delivered in a public offering of debt securities and (iii) a comfort letter or comfort letters in customary form to the extent permitted by Statement on Auditing Standards No. 72 of the American Institute of Certified Public 12 Accountants (or if such a comfort letter is not permitted, an agreed upon procedures letter in customary form) from the Company's independent certified public accountants (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired or proposed to be acquired by the Company for which financial statements are, or are required to be, included in the Registration Statement) at least as broad in scope and coverage as the comfort letter or comfort letters delivered to the Initial Purchasers in connection with the initial sale of the Notes to the Initial Purchasers; (g) (i) in the case of an Exchange Offer, furnish counsel for the Initial Purchasers and (ii) in the case of a Shelf Registration, furnish special counsel for the Holders of Registrable Notes participating in such Shelf Registration copies of any comment letters received from the SEC or any other request by the SEC or any state securities authority for amendments or supplements to any Registration Statement or Prospectus or for additional information; (h) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment; (i) in the case of a Shelf Registration, furnish to each Holder of Registrable Notes, and each underwriter, if any, without charge, at least one conformed copy of each Registration Statement and any post-effective amendment thereto, including financial statements and schedules (but without documents incorporated therein by reference or exhibits, unless requested); (j) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Notes to facilitate the timely preparation and delivery of physical certificates representing Registrable Notes to be sold and not bearing any restrictive legends; and enable such Registrable Notes to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Holders or the underwriters, if any, may reasonably request at least one business day prior to the closing of any sale of Registrable Notes; (k) in the case of a Shelf Registration, upon the occurrence of any event or the discovery of any facts, each as contemplated by Sections 3(e)(v) and 3(e)(vii) hereof, as promptly as practicable after the occurrence of such an event, use its best efforts to prepare a post-effective amendment to the Registration Statement or a supplement to the related Prospectus or amend any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Notes or Participating Broker-Dealers, such Prospectus will not contain at the time of such delivery any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. At such time as such public disclosure is otherwise made or the Company determines that such disclosure is not necessary, in each case to correct any misstatement of a material fact or to include any omitted material fact, the Company agrees promptly to notify each Holder of such determination and to furnish each Holder such number of copies of the Prospectus as amended or supplemented, as such Holder may reasonably request; 13 (l) in the case of a Shelf Registration, a reasonable time prior to the filing of any Shelf Registration Statement, any Prospectus contained therein, any amendment (including any post-effective amendment) to such Shelf Registration Statement or any supplement to such Prospectus or any filing of, or amendment to, any document which is to be incorporated by reference into such Registration Statement or Prospectus after the initial filing of such Registration Statement, provide copies of such documents to the Initial Purchasers on behalf of the Holders of Registrable Notes participating in such Shelf Registration; and make representatives of the Company as shall be reasonably requested by Holders of Registrable Notes, or the Initial Purchasers on behalf of such Holders, available for discussion of such documents; (m) obtain a CUSIP number for all Exchange Notes, Private Exchange Notes or Registrable Notes, as the case may be, not later than the effective date of a Registration Statement, and provide the Trustee with printed certificates for the Exchange Notes, Private Exchange Notes or the Registrable Notes, as the case may be, in a form eligible for deposit with the Depositary; (n) (i) cause the Indenture to be qualified under the TIA in connection with the registration pursuant to Section 2.1 or Section 2.2 of the offer of the Exchange Notes, the Private Exchange Notes or the Registrable Notes , as the case may be, (ii) cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the TIA and (iii) execute, and use its best efforts to cause any Subsidiary Guarantor and the Trustee to execute, all documents as may be required to effect such changes, and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner; (o) in the case of a Shelf Registration, enter into agreements (including underwriting agreements) and take all other customary and appropriate actions in order to expedite or facilitate the disposition of the Registrable Notes of the Holders participating therein, and in such connection, and whether or not the offering is an underwritten offering: (i) make such representations and warranties to the Holders of such Registrable Notes and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in similar underwritten offerings as may be reasonably requested by them; (ii) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the Majority Holders participating in such Shelf Registration, addressed to each selling Holder and the underwriters, if any, covering the matters customarily covered in opinions requested in sales of securities or underwritten offerings and such other matters as may be reasonably requested by such Holders and underwriters, if any; 14 (iii) obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants (and any other independent certified public accountants of any subsidiary of the Company or of any business acquired or proposed to be acquired by the Company for which financial statements are, or are required to be, included in the Registration Statement) addressed to the underwriters, if any, and use reasonable efforts to have such letter addressed to the selling Holders of Registrable Notes (to the extent consistent with Statement on Auditing Standards No. 72 of the American Institute of Certified Public Accounts), such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters to underwriters in connection with similar underwritten offerings; (iv) if requested by the Majority Holders, enter into a securities sales agreement with the selling Holders of Registrable Notes and an agent of such Holders providing for, among other things, the appointment of such agent for the selling Holders for the purpose of soliciting purchases of Registrable Notes, which agreement shall be in form, substance and scope customary for similar offerings; (v) if an underwriting agreement is to be entered into, cause the same to set forth indemnification provisions and procedures substantially equivalent to the indemnification provisions and procedures set forth in Section 4 hereof with respect to the underwriters and all other parties to be indemnified pursuant to said Section or, at the request of any underwriters, in the form customarily provided to such underwriters in similar types of transactions; and (vi) deliver such documents and certificates as may be reasonably requested and as are customarily delivered in similar offerings to the Holders of a majority in principal amount of the Registrable Notes being sold and the managing underwriters, if any. The above shall be done at (i) the effectiveness of such Registration Statement (and each post-effective amendment thereto) and (ii) each closing under any underwriting or similar agreement as and to the extent required thereunder; (p) in the case of a Shelf Registration or if a Prospectus is required to be delivered by any Participating Broker-Dealer in the case of an Exchange Offer, make available for inspection by representatives of the Holders of the Registrable Notes, any underwriters participating in any disposition pursuant to a Shelf Registration Statement, any Participating Broker-Dealer and any counsel or accountant retained by any of the foregoing, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries reasonably requested by any such persons, and cause the respective officers, directors, employees, and any other agents of the Company and such subsidiaries to supply all information reasonably requested by any such representative, underwriter, special counsel or accountant in connection with any such Registration Statement, and make such representatives of the Company available for discussion of such documents as shall be reasonably requested by the Initial Purchasers; 15 (q) (i) in the case of an Exchange Offer Registration Statement, a reasonable time prior to the filing of any Exchange Offer Registration Statement, any Prospectus forming a part thereof, any amendment to an Exchange Offer Registration Statement or amendment or supplement to such Prospectus, provide copies of such documents to the Initial Purchasers and its counsel and make such changes in any such document prior to the filing thereof as the Initial Purchasers or its counsel may reasonably request and, except as otherwise required by applicable law, not file any such document in a form to which the Initial Purchasers or its counsel shall not have previously been advised and furnished a copy of or to which the Initial Purchasers or its counsel shall reasonably object, and make representatives of the Company and its counsel available for discussion of such documents as shall be reasonably requested by the Initial Purchasers (all such actions being taken by the Initial Purchasers for the benefit of the Holders of Registrable Securities); and (ii) in the case of a Shelf Registration, a reasonable time prior to filing any Shelf Registration Statement, any Prospectus forming a part thereof, any amendment to such Shelf Registration Statement (including any post-effective amendment) or any supplement to such Prospectus, provide copies of such document to the Holders of Registrable Notes to be registered thereon, to the Initial Purchasers, to special counsel for the Holders (who shall be appointed by the Majority Holders participating in such Shelf Registration) and to the underwriter or underwriters of an underwritten offering of Registrable Notes, if any; make such changes in any such document prior to the filing thereof as the Initial Purchasers, special counsel to such Holders or the underwriter or underwriters reasonably request and not file any such document in a form to which the Majority Holders, the Initial Purchasers, special counsel for the Holders of Registrable Notes or any underwriter shall not have previously been advised and furnished a copy of or to which the Majority Holders, the Initial Purchasers, special counsel to the Holders of Registrable Notes or any underwriter shall reasonably object, and make the representatives of the Company and its subsidiaries available for discussion of such document as shall be reasonably requested by the Holders of Registrable Notes, the Initial Purchasers, special counsel for the Holders of Registrable Notes or any underwriter (all actions by the Initial Purchasers pursuant to clause (ii) being taken by the Initial Purchasers for the benefit of the Holders of Registrable Notes). (r) in the case of a Shelf Registration, use its best efforts to cause all Registrable Notes to be listed on any securities exchange on which similar debt securities issued by the Company are then listed, or if not then listed, on any national securities exchange requested by the underwriter or underwriters of an underwritten offering of Registrable Notes, if any; (s) in the case of a Shelf Registration, use its best efforts to cause the Registrable Notes to be rated by the appropriate rating agencies; (t) otherwise comply with all applicable rules and regulations of the SEC and make available to its security holders an earnings statement which shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 thereunder (or any similar rule of the SEC then in effect) no later than 45 days after the end of any 12-month period (or 90 days after the end of any 12 month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which 16 Registrable Notes are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of a Registration Statement; (u) cooperate and assist in any filings required to be made with the NASD and, in the case of a Shelf Registration, in the performance of any due diligence investigation by any underwriter and its counsel (including any "qualified independent underwriter" that is required to be retained in accordance with the rules and regulations of the NASD); (v) upon consummation of an Exchange Offer or a Private Exchange, obtain a customary opinion of counsel to the Company addressed to the Trustee for the benefit of all Holders of Registrable Notes participating in the Exchange Offer or Private Exchange, and which includes an opinion that (i) the Company has duly authorized, executed and delivered the Exchange Notes and/or Private Exchange Notes, as applicable, and the related indenture, and (ii) each of the Exchange Notes and related indenture constitute a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its respective terms (with customary exceptions); and (w) use its best efforts to take all other steps necessary to effect the registration of the Registrable Notes and the Exchange Notes covered by a Registration Statement contemplated hereby. In the case of a Shelf Registration Statement, the Company may require each Holder of Registrable Notes (as a condition to such Holder's participation in the Shelf Registration) to furnish to the Company such information regarding the Holder and the proposed distribution by such Holder of such Registrable Notes as the Company may from time to time reasonably request in writing. In the case of a Shelf Registration Statement, each Holder agrees that, upon receipt of any notice from the Company of the happening of any event or the discovery of any facts, each of the kind described in Section 3(e)(v) hereof, such Holder will forthwith discontinue disposition of Registrable Notes pursuant to a Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(k) hereof, and, if so directed by the Company, such Holder will deliver to the Company (at its expense) all copies in such Holder's possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Notes current at the time of receipt of such notice. In the event that the Company falls to effect the Exchange Offer or file any Shelf Registration Statement and maintain the effectiveness of any Shelf Registration Statement as provided herein, the Company shall not file any Registration Statement with respect to any securities (within the meaning of Section 2(l) of the 1933 Act) of the Company other than Registrable Notes. 17 If any of the Registrable Notes covered by any Shelf Registration Statement are to be sold in an underwritten offering, the underwriter or underwriters and manager or managers that will manage such offering will be selected by the Majority Holders participating in such Shelf Registration. No Holder of Registrable Notes may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder's Registrable Notes on the basis provided in any underwriting arrangements approved by the Majority Holders participating in the Shelf Registration and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 4. INDEMNIFICATION, CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless the Initial Purchasers, each Holder, each Participating Broker-Dealer, each Person who participates as an underwriter (any such Person being an "Underwriter") and each Person, if any, who controls any Holder or Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment or supplement thereto) pursuant to which the offer or sale of Exchange Notes or Registrable Notes were registered under the 1933 Act, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 4(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the reasonable fees and disbursements of counsel chosen by any indemnified party), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue 18 statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by the Holder or Underwriter expressly for use in a Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto). (b) Each Holder by participating in the Exchange Offer or a Shelf Registration severally, but not jointly, agrees to indemnify and hold harmless the Company, the Initial Purchasers, each Underwriter and the other selling Holders, and each of their respective directors and officers, and each Person, if any, who controls the Company, any Initial Purchaser, any Underwriter or any other selling Holder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in Section 4(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Shelf Registration Statement (or any amendment thereto) or any Prospectus included therein (or any amendment or supplement thereto) in reliance upon and in conformity with written information with respect to such Holder furnished to the Company by such Holder expressly for use in the Shelf Registration Statement (or any amendment thereto) or such Prospectus (or any amendment or supplement thereto); provided, however, that no such Holder shall be liable for any claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Registrable Notes pursuant to such Shelf Registration Statement. (c) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action or proceeding commenced against it in respect of which indemnity may be sought hereunder, but failure so to notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying party or parties be liable for the fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 4 (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out 19 of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 4(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) If the indemnification provided for in this Section 4 is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and the Holders and the Initial Purchasers on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and the Holders and the Initial Purchasers on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, the Holders or the Initial Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Holders and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 4. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 4 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 4, no Initial Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Notes sold by it were offered exceeds the amount of any damages which such Initial Purchaser has 20 otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 4, each Person, if any, who controls an Initial Purchaser or Holder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Initial Purchaser or Holder, and each director of the Company, and each Person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The Initial Purchasers' respective obligations to contribute pursuant to this Section 4 are several in proportion to the principal amount of Securities set forth opposite their respective names in Schedule A to the Purchase Agreement and not joint. 5. MISCELLANEOUS. 5.1 RULE 144 AND RULE 144A. For so long as the Company is subject to the reporting requirements of Section 13 or 15 of the 1934 Act, the Company covenants that it will file the reports required to be filed by it under the 1933 Act and Section 13(a) or 15(d) of the 1934 Act and the rules and regulations adopted by the SEC thereunder. If the Company ceases to be so required to file such reports, the Company covenants that it will upon the request of any Holder of Registrable Notes (a) make publicly available such information as is necessary to permit sales pursuant to Rule 144 under the 1933 Act, (b) deliver such information to a prospective purchaser as is necessary to permit sales pursuant to Rule 144A under the 1933 Act, and (c) take such further action that is reasonable in the circumstances, in each case, to the extent required from time to time to enable such Holder to sell its Registrable Notes without registration under the 1933 Act within the limitation of the exemptions provided by (i) Rule 144 under the 1933 Act, as such Rule may be amended from time to time, (ii) Rule 144A under the 1933 Act, as such Rule may be amended from time to time, or (iii) any similar rules or regulations hereafter adopted by the SEC. Upon the request of any Holder of Registrable Notes, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements. 5.2 NO INCONSISTENT AGREEMENTS. The Company has not entered into and the Company will not after the date of this Agreement enter into any agreement which is inconsistent with the rights granted to the Holders of Registrable Notes in this Agreement or which otherwise conflicts with the provisions hereof. The Company covenants and agrees that the rights granted to the Holders hereunder do not, and will not for the term of this Agreement, in any way conflict with the rights (including registration rights) granted to the holders of the Company's other issued and outstanding securities. 21 5.3 AMENDMENTS AND WAIVERS. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of Holders of at least a majority in aggregate principal amount of the outstanding Registrable Notes affected by such amendment, modification, supplement, waiver or departure. 5.4 NOTICES. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery (a) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 5.4, which address initially is the address set forth in the Purchase Agreement with respect to the Initial Purchasers; and (b) if to the Company, initially at the Company's address set forth in the Purchase Agreement, and thereafter at such other address of which notice is given in accordance with the provisions of this Section 5.4. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; two business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands, or other communications shall be concurrently delivered by the person giving the same to the Trustee under the Indenture, at the address specified in such Indenture. 5.5 SUCCESSOR AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Notes in violation of the terms of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Registrable Notes, in any manner, whether by operation of law or otherwise, such Registrable Notes shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Notes such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement applicable to Holders of Registrable Notes, and such person shall be entitled to receive the benefits hereof. 5.6 THIRD PARTY BENEFICIARIES. The Initial Purchasers (even if the Initial Purchasers are not Holders of Registrable Notes) shall be third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Holders, on the other hand, and shall have the right to enforce such agreements directly to the extent they deem such enforcement necessary or advisable to protect their rights or the rights of Holders hereunder. Each Holder of Registrable Notes shall be a third party beneficiary to the agreements made hereunder between the Company, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to 22 enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights hereunder. 5.7 SPECIFIC ENFORCEMENT. Without limiting the remedies available to the Initial Purchasers and the Holders, the Company acknowledges that any failure by the Company to comply with its obligations under Sections 2.1 through 2.4 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it would not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's obligations under Sections 2.1 through 2.4 hereof. 5.8 RESTRICTION ON RESALES. Until the expiration of two years after the original issuance of the Notes, the Company will not, and will cause its "affiliates" (as such Term is defined in Rule 144(a)(1) under the 1933 Act) not to, resell any Notes which are "restricted securities" (as such term is defined under Rule 144(a)(3) under the 1933 Act) that have been reacquired by any the Company or any of its affiliates and shall immediately upon any purchase of any such Notes submit such the same to the Trustee for cancellation. 5.9 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 5.10 HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof 5.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF. 5.12 SEVERABILITY. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity , legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. 5.13 SUBSIDIARY GUARANTORS. If any Subsidiary (as such term is defined in the Indenture) become a Subsidiary Guarantor pursuant to Section10.22 of the Indenture, the Company shall cause such Subsidiary to take all actions that may be required under applicable law and SEC policy to cause the guarantee of such Subsidiary to be registered under the 1933 Act as part of the Exchange Offer Registration Statement and any Shelf Registration Statement. Any actions by a Subsidiary taken in compliance with this Section 5.13 shall be taken within the periods required for actions to be taken by the Company hereunder (including without limitation within the periods 23 specified in Sections 2.1 and 2.2 hereof). At the request of any Initial Purchaser, the Company shall cause each Subsidiary Guarantor to execute, acknowledge and deliver such instruments and documents, and take all such other actions, as may be reasonably required in order to effectuate the purposes of this Agreement (including, without limitation, the joining by such Subsidiary Guarantor with the Company, on a joint and several basis, in all of the obligations of the Company hereunder). 24 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. WAM!NET INC By: /s/ Edward J. Driscoll III ----------------------------- Name: Edward J. Driscoll III Title: President and CEO Confirmed and accepted as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED CREDIT SUISSE FIRST BOSTON CORPORATION FIRST CHICAGO CAPITAL MARKETS, INC. BY: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ Barbara Daniel ------------------------- Name: Barbara Daniel Title: Vice President 25 EXHIBIT A FORM OF OPINION OF COUNSEL Merrill Lynch, Pierce, Fenner & Smith Incorporated Credit Suisse First Boston Corporation First Chicago Capital Markets, Inc. c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: We have acted as counsel for WAM!NET Inc., a Minnesota corporation (the "Company"), in connection with the sale by the Company to you (the "Initial Purchasers") of $___________ aggregate principal amount at maturity of ___% Senior Discount Notes due 2005 (the "Notes") of the Company pursuant to the Purchase Agreement dated February 26, 1998 (the "Purchase Agreement") among the Company and the Initial Purchasers and the filing by the Company of an Exchange Offer Registration Statement (the "Registration Statement") in connection with an Exchange Offer to be effected pursuant to the Registration Rights Agreement (the "Registration Rights Agreement"), dated March ___, 1998 between the Company and the Initial Purchasers. This opinion is furnished to you pursuant to Section 3(f)(B) of the Registration Rights Agreement. Unless otherwise defined herein, capitalized terms used in this opinion that are defined in the Registration Rights Agreement are used herein as so defined. We have examined such documents, records and matters of law as we have deemed necessary for purposes of this opinion. In rendering this opinion, as to all matters of fact relevant to this opinion, we have assumed the completeness and accuracy of, and are relying solely upon, the representations and warranties of the Company set forth in the Purchase Agreement and the statements set forth in certificates of public officials and officers of the Company, without making any independent investigation or inquiry with respect to the completeness or accuracy of such representations, warranties or statements, other than a review of the certificate of incorporation, by-laws and relevant minute books of the Company. Based on and subject to the foregoing, we are of the opinion that: 1. The Exchange Offer Registration Statement and the Prospectus (other than the financial statements, notes or schedules thereto and other financial data and supplemental 26 schedules included or incorporated by reference therein or omitted therefrom and the Form T-1, as to which such counsel need express no opinion), comply as to form in all material respects with the requirements of the 1933 Act and the applicable rules and regulations promulgated under the 1933 Act. 2. We have participated in the preparation of the Registration Statement and the Prospectus and in the course thereof have had discussions with representatives of the Underwriters, officers and other representatives of the Company and Ernest & Young, the Company's independent public accountants, during which the contents of the Registration Statement and the Prospectus were discussed. We have not, however, independently verified and are not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus. Based on our participation as described above, nothing has come to our attention that would lead us to believe that the Registration Statement (except for financial statements and schedules and other financial data included therein as to which we make no statement) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto (except for financial statements and schedules and other financial data included therein, as to which such counsel need make no statement), at the time the Prospectus was issued, at the time any such amended or supplemented Prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. This opinion is being furnished to you solely for your benefit in connection with the transactions contemplated by the Registration Rights Agreement, and may not be used for any other purpose or relied upon by any person other than you. Except with our prior written consent, the opinions herein expressed are not to be used, circulated, quoted or otherwise referred to in connection with any transactions other than those contemplated by the Registration Rights Agreement by or to any other person. Very truly yours, 27 EX-4.11 16 COMMON STOCK REGISTRATION RIGHTS AGREEMENT Exhibit 4.11 ================================================================================ COMMON STOCK REGISTRATION RIGHTS AGREEMENT Dated as of March 5, 1998 Among WAM!NET INC., WORLDCOM INC., MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, CREDIT SUISSE FIRST BOSTON CORPORATION AND FIRST CHICAGO CAPITAL MARKETS, INC. ================================================================================ TABLE OF CONTENTS PAGE ---- Section 1. Definitions........................................................1 Section 2. Registration Rights................................................7 2.1 Demand Registration................................................7 2.2 Piggy-Back Registration...........................................10 2.3 Rule 144 and Rule 144A............................................12 Section 3. Transfers by WorldCom.............................................12 3.1 Generally.........................................................12 3.2 Tag-Along Rights..................................................12 3.3 Drag-Along Rights.................................................14 Section 4. Registration Procedures...........................................14 Section 5. Indemnification and Contribution..................................19 Section 6. Miscellaneous.....................................................22 6.1 No Inconsistent Agreements........................................22 6.2 Amendments and Waivers............................................22 6.3 Notices...........................................................23 6.4 Successors and Assigns............................................23 6.5 Counterparts......................................................23 6.6 Headings..........................................................23 6.7 Governing Law; Jurisdiction.......................................24 6.8 Severability......................................................24 6.9 Entire Agreement..................................................24 6.10 Attorneys' Fees...................................................24 6.11 Securities Held by the Company or Its Affiliates..................24 6.12 Remedies..........................................................24 i COMMON STOCK REGISTRATION RIGHTS AGREEMENT THIS COMMON STOCK WARRANT REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered into as of March 5, 1998, among WAM!NET Inc., a Minnesota corporation (the "Company"), WorldCom Inc., a Georgia corporation ("WorldCom"), Merrill, Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. (together with Merrill Lynch, the "Initial Purchasers"). This Agreement is made pursuant to the Purchase Agreement, dated as of February 26, 1998, among the Company and the Initial Purchasers (the "Purchase Agreement"), relating to, among other things, the sale by the Company to the Initial Purchasers of an aggregate of 208,530 units ("Units"), each Unit consisting of $1,000 principal amount at maturity of 13 1/4% Senior Discount Notes due 2005 ("Notes") and three warrants ("Warrants"), each initially exercisable for 2.01 shares of Common Stock, par value $.01 per share, of the Company at an initial exercise price of $.01 per share. In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide to the Initial Purchasers and the Holders (as defined herein), among other things, the registration rights for the Warrant Shares (as defined herein) set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Initial Purchasers under the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: Section 1. DEFINITIONS. As used in this Agreement, the following defined terms shall have the following meanings: "ADVICE" has the meaning ascribed to such term in the last paragraph of Section 4(o) hereof. "AFFILIATE" of any specified Person shall mean any other Person which, directly or indirectly, controls, is controlled by or is under direct or indirect common control with such specified Person. For purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "affiliated," "controlling" and "controlled" have meanings correlative of the foregoing. None of the Initial Purchasers or any of their Affiliates shall be deemed to be an Affiliate of the Company or of any of its subsidiaries or Affiliates. "BUSINESS DAY" shall mean any day on which (i) banks in New York City, (ii) the principal U.S. securities exchange or market, if any, on which any Common Stock is listed or admitted to trading and (iii) the principal U.S. securities exchange or market, if any, on which any other securities underlying the Warrants are listed or admitted to trading are open for business. "CAPITAL STOCK" means, with respect to any Person, any and all shares, interests, participations, rights in, or other equivalents (however designated and whether voting or non-voting) of, such Person's capital stock, whether outstanding on the date hereof or issued after the date hereof, and any and all rights, warrants or options or other securities exchangeable or exercisable for or convertible into such capital stock. "COMMON STOCK" shall mean the Common Stock, par value $.01 per share, of the Company and any options, warrants or securities convertible into or exchangeable or exercisable for such common stock. "COMPANY" shall have the meaning ascribed to that term in the preamble of this Agreement and shall also include the Company's successors. "CURRENT MARKET VALUE" per share of Common Stock or any other security at any date of determination means (i) if the security is not traded on a national or regional securities exchange, The Nasdaq Stock Market or in a recognized over-the-counter market (a "Quoted Security"), (a) the fair market value of the security, as determined in good faith by the Board of Directors of the Company and certified in a board resolution delivered to the Warrant Agent, which shall be based on the most recently competed arms-length transaction between the Company and a person other than an Affiliate of the Company, the closing of which shall have occurred within the six-month period preceding such determination, or (b) if no such transaction shall have occurred within such six-month period, the fair market value of the security as determined by a nationally or regionally recognized independent financial expert (provided that, in the case of the calculation of Current Market Value solely for determining the cash value of fractional shares, the last determination of Current Market Value pursuant to this clause (i), if made within the preceding six months, may be utilized), which determination shall be set forth in an officers' certificate delivered to the Warrant Agent, or (ii) (a) if the security is a Quoted Security, the average of the daily closing sales prices of such security for the 20 consecutive trading days immediately preceding such date, or (b) if the security has been a Quoted Security for less than 20 consecutive trading days before such date, then the average of the daily closing sales prices for all of the trading days before such date for which closing sales prices are available. The closing sales price of a security for each such trading day shall be: (A) in the case of a security listed or admitted to trading on any United States national or regional securities exchange or on The Nasdaq Stock Market, the closing sales price, regular way, on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day or (B) in the case of a security not then listed or admitted to trading on any national or regional securities exchange or The Nasdaq Stock Market, the average of the closing bid and asked prices on such day, as reported by a reputable quotation source designated by the Company, or in the case of a security as to which no such reported bid and asked prices are available on such day, the average of the reported high bid and low asked prices on such day, as reported by a reputable quotation service, or a newspaper of general circulation in the Borough of Manhattan, City and State of New York, customarily published on each Business Day, designated by the Company, or, if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the 2 most recent day (not more than two days prior to the date in question) for which prices have been so reported; provided, however, that if there are no bid and asked prices reported for such security during such two-day period, Current Market Value shall be determined as if the security were not a Quoted Security. "DEMAND REGISTRATION" shall have the meaning ascribed to that term in Section 2.1(a). "DTC" has the meaning ascribed to such term in Section 4(i) hereof. "EFFECTIVENESS PERIOD" shall have the meaning ascribed to that term in Section 2.1(a). "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended from time to time. "EXERCISE EVENT" has the meaning set forth in the Warrant Agreement. "FAIR MARKET VALUE", in respect of any security, shall mean the private market value of such security as determined (without any discount for lack of liquidity, the amount of such securities proposed to be sold or the fact that such securities held by any Holder of such security may represent a minority interest in a private company) by a nationally or regionally recognized investment banking firm selected by the Company for the determination of such value. "HOLDER" shall mean any Person in whose name a Warrant or Warrant Share is registered on the books of the Company or any transfer agent or registrar for the Warrants or Warrant Shares. "INCLUDED SECURITIES" shall mean all Registrable Securities that the Company has been timely requested to include in a Demand Registration pursuant to Section 2.1 or a Piggyback Registration pursuant to Section 2.2. "INITIAL PUBLIC EQUITY OFFERING" shall mean an initial public offering of equity securities of the Company (whether or not underwritten and whether or not pursuant to a primary or secondary offering but excluding any offering pursuant to Form S-8 under the Securities Act or any other publicly registered offering pursuant to an issuance of shares of Common Stock or securities exercisable therefor under any benefit plan, employee compensation plan, or employee or director stock purchase plan) pursuant to an effective registration statement under the Securities Act. "INITIAL PURCHASERS" has the meaning ascribed to such term in the preamble hereof. "INDENTURE" means the Indenture, of even date herewith, between the Company and First Trust National Association, as Trustee, pursuant to which the Notes were issued. "INSPECTORS" has the meaning ascribed to such term in Section 4(m) hereof. 3 "MERRILL LYNCH" shall have the meaning ascribed to that term in the preamble hereto, and any successor. "NOTES" shall have the meaning ascribed to that term in the preamble hereto. "PARTICIPATING HOLDERS" shall have the meaning ascribed to that term in Section 3.2(a). "PERSON" shall mean any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity, including any predecessor of any such entity. "PIGGY-BACK REGISTRATION" shall have the meaning ascribed to that term in Section 2.2(a) hereof. "PROPOSED PURCHASER" shall have the meaning ascribed to that term in Section 3.2(a) hereof. "PROSPECTUS" shall mean the prospectus included in any Registration Statement (including, without limitation, any preliminary prospectus subject to completion and a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "PURCHASE AGREEMENT" shall have the meaning ascribed to that term in the preamble hereof. "REGISTRABLE SECURITIES" shall mean (i) Warrant Shares that are issuable upon exercise of Warrants, (ii) Warrant Shares that have been issued upon exercise of Warrants, (iii) any securities issued or delivered to the Holders of Warrants pursuant to Section 5.03 of the Warrant Agreement (in connection with a pro rata dividend or distribution made by the Company to holders of its Common Stock) and (iv) any securities issued or issuable upon exercise of the Warrants as a result of a "Fundamental Transaction" pursuant to Section 5.01(d) of the Warrant Agreement. As to any particular Registrable Security of a Holder, such security shall cease to be a Registrable Security when (i) a Registration Statement with respect to the offering of such security by the Holder thereof shall have been declared effective under the Securities Act and such security shall have been disposed of by such Holder pursuant to such Registration Statement, (ii) such security shall have been sold to the public pursuant to, or is eligible for sale to the public without volume or manner of sale restrictions under, Rule 144(k) (or any similar provision then in force, but not Rule 144(A)) promulgated under the Securities Act, (iii) such security shall have been otherwise transferred and a new certificate for the successor security not bearing a legend restricting further transfer shall have been delivered by the Company or its transfer agent and subsequent disposition of such security shall not require registration or qualification under the Securities Act or any 4 similar state law then in force or (iv) such security shall have ceased to be outstanding. Registrable Securities shall not include any Warrant Shares that are issued pursuant to an effective registration statement filed in accordance with Section 4.02 of the Warrant Agreement. "REGISTRATION EXPENSES" shall mean all expenses incident to the Company's performance of or compliance with Section 2 and Section 4 of this Agreement, including, without limitation, all SEC and stock exchange or National Association of Securities Dealers, Inc. registration and filing fees and expenses, fees and expenses of compliance with securities or blue sky laws (including, without limitation, reasonable fees and disbursements of counsel for any underwriters in connection with blue sky qualifications of the Registrable Securities), printing expenses, messenger, telephone and delivery expenses, fees and disbursements of counsel for the Company and all independent certified public accountants, the fees and disbursements of underwriters customarily paid by issuers in underwritten offerings (but not including any underwriting discounts or commissions or transfer taxes, if any, attributable to the sale of Registrable Securities by Holders of such Registrable Securities) and other reasonable out-of-pocket expenses incurred by Holders of Registrable Securities in connection with the registration of such securities pursuant to this Agreement (it being understood that Registration Expenses shall not include, as to the fees and expenses of counsel, the fees and expenses of more than one counsel for all Holders). "REGISTRATION STATEMENT" shall mean any appropriate registration statement of the Company filed with the SEC pursuant to the Securities Act which covers any of the Registrable Securities pursuant to the provisions of this Agreement and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "REQUISITE SECURITIES" shall mean a number of Registrable Securities equal to not less than 50% of the Warrant Shares subject to the originally issued Warrants; provided, however, that with respect to any action to be taken at the request of the Holders of the Registrable Securities prior to such time as the Warrants have expired pursuant to the terms thereof, each Warrant outstanding shall be deemed to represent that number of Registrable Securities for which such Warrant would be then exercisable (without giving effect to the Cashless Exercise (as defined in the Warrant Agreement)). "RULE 144" shall mean Rule 144 promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144A) or regulation hereafter adopted by the SEC providing for offers and sales of securities made in compliance therewith resulting in offers and sales by subsequent holders that are not affiliates of an issuer of such securities being free of the registration and prospectus delivery requirements of the Securities Act. "RULE 144A" shall mean Rule 144A promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144) or regulation hereafter adopted by the SEC. 5 "SEC" shall mean the Securities and Exchange Commission. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended from time to time. "SELLING HOLDER" shall mean a Holder who is selling Registrable Securities in accordance with the provisions of Section 2.1 or 2.2. "SUBJECT EQUITY" means all outstanding Warrants and Warrant Shares. "SUSPENSION PERIOD" shall have the meaning ascribed to that term in Section 2.1(a). "TAG-ALONG NOTICE" shall have the meaning ascribed to that term in Section 3.2(a). "TAG-ALONG RIGHT" shall have the meaning ascribed to that term in Section 3.2(a). "TRANSFER" shall have the meaning ascribed to the term in Section 3.2(a). "TRANSFER NOTICE" shall have the meaning ascribed to that term in Section 3.2(a). "TRIGGERING DATE" shall mean the date of the consummation of a bona fide underwritten public offering of Common Stock as a result of which at least 20% of the outstanding shares of Common Stock are listed on a United States national securities exchange or the National Market tier of The Nasdaq Stock Market. "VOTING STOCK" means, with respect to any Person, the Capital Stock of any class or kind ordinarily having the power to vote for the election of directors or other members of the governing body of such Person. "WARRANT CHANGE OF CONTROL" shall mean the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), excluding WorldCom and its Affiliates, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has or acquires the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total voting power of all Voting Stock of the Company or has, directly or indirectly, the right to elect or designate a majority of the Board of Directors; or (b) the Company consolidates with, or merges with or into, another Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into, the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where (i) the outstanding Voting Stock of the Company is converted into or exchanged for Voting Stock of the surviving or transferee corporation or its parent corporation, (ii) the "beneficial owners" (as defined in Rules 13d-3 and 6 13d-5 under the Exchange Act, except that a Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time) of the Voting Stock of the Company immediately before such transaction own, directly or indirectly, immediately after such transaction, at least a majority of the voting power of all Voting Stock of the surviving or transferee corporation or its parent corporation immediately after such transaction, as applicable, and (iii) no "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), excluding WorldCom and its Affiliates, is the "beneficial owner" directly or indirectly, of more than 50% of the total voting power of the Voting Stock of the surviving or transferee corporation or its parent corporation, as applicable, or has, directly or indirectly, the right to elect or designate a majority of the board of directors of the surviving or transferee corporation or its parent corporation, as applicable. The good faith determination by the Board of Directors of the Company, based upon advice of outside counsel, of the beneficial ownership of securities of the Company within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act shall be conclusive, absent contrary controlling judicial precedent or contrary written interpretation published by the SEC. "WARRANT AGENT" means First Trust National Association and any successor Warrant Agent for the Warrants appointed pursuant to the Warrant Agreement. "WARRANT AGREEMENT" means the Warrant Agreement dated as of March 5, 1998 between the Company and the Warrant Agent, as amended or supplemented from time to time in accordance with the terms thereof. "WARRANTS" means, at any time, all warrants of the Company issued pursuant to the Warrant Agreement then outstanding. "WARRANT SHARES" means (i) shares of Common Stock or other securities deliverable upon exercise of unexercised Warrants (including without limitation securities deliverable as a result of a Fundamental Transaction (as such term is defined in the Warrant Agreement)), (ii) shares of Common Stock delivered upon exercise of Warrants, including any successor shares of Common Stock, and (iii) shares of Common Stock and any other securities issued or delivered to the Holders of Warrants pursuant to Section 5.03 of the Warrant Agreement in connection with a pro rata distribution made by the Company to its holders of Common Stock. Section 2. REGISTRATION RIGHTS. 2.1 DEMAND REGISTRATION. (a) REQUEST FOR REGISTRATION. At any time and from time to time after the occurrence of an Exercise Event, Holders owning, individually or in the aggregate, at least the Requisite Securities may require the Company to effect one registration (a "DEMAND REGISTRATION") under the Securities Act of Registrable Securities. Any such demand shall specify the number and type of Registrable Securities proposed to be sold and shall also specify the intended method of disposition thereof. The Company shall give written notice of such 7 registration request within 10 days after the receipt thereof to all other Holders of Registrable Securities. Within 30 days after receipt of such notice by any such Holder, such Holder may request in writing that its Registrable Securities be included in such registration and the Company shall include in the Demand Registration the Registrable Securities of any such Holder requested to be so included. Each such request by such other selling Holders shall specify the number and type of Registrable Securities proposed to be sold and the intended method of disposition thereof. Upon a demand, the Company will prepare, file and cause to become effective within 150 days of such demand a Registration Statement in respect of all Included Securities and keep such Registration Statement continuously effective for the shorter of (a) 180 days or (b) such period of time as all of the Included Securities shall have been sold thereunder (the "EFFECTIVENESS PERIOD"); PROVIDED, HOWEVER, that if such demand occurs during the "lock up" or "black out" period (not to exceed 180 days) imposed on the Company pursuant to or in connection with any underwriting or purchase agreement relating to an underwritten Rule 144A or registered public offering of securities of the Company of the same class or series as any of the Registrable Securities or securities convertible into or exchangeable or exercisable for any such securities, the Company shall not be required to so notify Holders of Registrable Securities and file such demand registration statement prior to the end of such "lock up" or "black out" period, in which event the Company will use its best efforts to cause such Demand Registration to become effective no later than the later of (i) 120 days after such demand or (ii) 30 days after the end of such "lock up" or "black out" period; PROVIDED, FURTHER, that the Company may postpone the filing of, or suspend the effectiveness of, any registration statement or amendment thereto, suspend the use of any Prospectus and shall not be required to amend or supplement the Registration Statement, any related Prospectus or any document incorporated therein by reference (other than an effective registration statement being used for an underwritten offering) in the event that, and for a period (a "SUSPENSION PERIOD") not to exceed an aggregate of 60 days with respect to the Demand Registration if, (i) an event or circumstance occurs and is continuing as a result of which the Registration Statement, any related Prospectus or any document incorporated therein by reference as then amended or supplemented or proposed to be filed would, in the Company's good faith judgment, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and (ii) the Company determines in its good faith judgment that (A), the disclosure of such event at such time would have a material adverse effect on the business, operations or prospects of the Company or (B) such disclosure relates to a business transaction which has not yet been publicly disclosed, and disclosure at that time would jeopardize the success of such transaction (subject, in each case, to such disclosure not being otherwise required under applicable Federal securities laws or any listing agreement with The Nasdaq Stock Market or any stock exchange on which securities of the Company are then listed or quoted); PROVIDED, FURTHER that the Effectiveness Period shall be extended by the number of days in any Suspension Period. In the event of any "lock up" or "black out" period in any underwriting or purchase agreement, the Company will so notify the Holders of Registrable Securities. The Company shall not be entitled to more than one Suspension Period in any twelve month period. Notwithstanding the foregoing, in lieu of filing and causing to become effective a Demand Registration, the Company may satisfy it obligation with respect to such Demand Registration by making (or having its designee make), 8 an offer to purchase all Subject Equity at a price at least equal to Current Market Value (without giving effect to clause (i)(a) of the definition of such term) less any applicable Exercise Price and consummating (or having its designee consummate), prior to the time a Demand Registration would have otherwise been required to be made effective, the purchase of Subject Equity as to which Holders accept such offer. (b) EFFECTIVE REGISTRATION. A Registration Statement will not be deemed to have been effected as a Demand Registration unless it has been declared effective by the SEC and the Company has complied in all material respects with all of its obligations under this Agreement with respect thereto. If (i) a registration requested pursuant to this Section 2.1 is deemed not to have been effected pursuant to the preceding sentence or (ii) a Demand Registration does not remain effective for the Effectiveness Period, then the Company shall be continue to be obligated to effect a Demand Registration pursuant to this Section 2.1. A Holder of Included Securities shall be permitted to withdraw all or any part of its Included Securities from a Demand Registration at any time prior to the effective date of such Demand Registration. If the Company is required to effect a Demand Registration and subsequently a sufficient amount of the Included Securities is withdrawn from the Demand Registration so that such Demand Registration does not cover at least the amount of Requisite Securities, then the Company may, upon notice to the Holders of all Included Securities that have not withdrawn such securities from such Demand Registration, terminate such Demand Registration; provided, however, that such terminated registration will not count as a Demand Registration and the Company shall continue to be obligated to effect a Demand Registration pursuant to this Section 2.1. Notwithstanding the foregoing, if the Company effects a Suspension Period following a demand and prior to the effectiveness of a Demand Registration, the Holders of Included Securities in an amount equal to the Requisite Shares may withdraw such demand, in which case the Demand Registration shall be terminated and the Company shall continue to be obligated to effect a Demand Registration pursuant to this Section 2.1 following another demand made in accordance with this Section 2.1. (c) UNDERWRITTEN REGISTRATIONS. If Holders of Included Securities comprising an amount equal to the Requisite Shares request that the Demand Registration be effected as an underwritten offering, the investment banker or investment bankers and manager or managers that will manage the offering will be selected by such Holders, subject to such investment banker(s) and manager(s) being reasonably acceptable to the Company. No Holder of Included Securities may participate in an underwritten Demand Registration unless such Holder (a) agrees to (i) sell such Holder's Included Securities in compliance with underwriting arrangements approved by the Holders of not less than a majority of the Included Securities and (ii) comply with Regulation M under the Exchange Act and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. (d) EXPENSES. The Company will pay all Registration Expenses in connection with any Demand Registration. Each Holder of Included Securities shall pay all underwriting 9 discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Included Securities pursuant to a Demand Registration. (e) PRIORITY IN DEMAND REGISTRATION. If a Demand Registration involves an underwritten offering and the lead managing underwriter of such offering advises the Holders of Included Securities and the Company in writing that in its view the total number of securities which the selling Holders, the Company and any other Persons that have the contractual right to participate in such registration intend to include in such offering exceeds the number which can be sold in such offering without materially and adversely affecting the success of the offering (including the initial offering price at which such securities can be sold), then there shall be included in such registration only the amount and type of securities that the lead managing underwriter advises should be included in such registration. In such event, securities shall be included in such registration in the following order of priority: (i) first, the Included Securities (if necessary, such Included Securities to be cut back pro rata based on the amount of Registrable Securities sought to be registered by each Holder participating in the Demand Registration) and (ii) second, provided that no Included Securities have been cut back from such registration, securities to be sold for the account of the Company and the securities of other Persons entitled to register such securities on the Demand Registration pursuant to contractual commitments of the Company in the order of priority determined in accordance with agreements between the Company and such other Persons, if any. 2.2 PIGGY-BACK REGISTRATION. (a) GENERAL. If at any time following an Exercise Event the Company proposes to file a Registration Statement under the Securities Act with respect to an offering by the Company for its own account or for the account of any of its security holders of any class of its common equity securities (other than (i) a registration statement on Form S-4 or S-8, (ii) a registration statement filed in connection with an offer of securities solely to the Company's existing security holders, or (iii) a Demand Registration) (a "PIGGY-BACK REGISTRATION"), then the Company shall give written notice of such proposed filing to the Holders of Registrable Securities as soon as practicable (but in no event less than 15 days before the anticipated filing date of such Registration Statement with the SEC). Such notice shall offer each Holder of Registrable Securities the opportunity to register in such Piggyback Registration such amount of Registrable Securities as such Holder may request in writing within 15 days after receipt of such written notice from the Company. Any request by a Holder of Registrable Securities to participate in a PiggyBack Registration shall specify the amount and type of Registrable Securities intended to be disposed of by such selling Holder and the intended method of distribution thereof; provided, however, that if the Piggyback Registration is an underwritten offering, then all selling Holders must agree to participate in such underwritten offering on the same terms as the Company and/or any other selling securityholders. Any selling Holder may withdraw all or any part of its Included Securities from a Piggy-Back Registration by giving written notice to the Company to such effect prior to the date the Piggy-Back Registration becomes effective. The Company may withdraw a Piggy-Back Registration at any time prior to the time it becomes effective; provided, that the 10 Company shall give prompt written notice thereof to each Holder of Included Securities. The Company will pay all Registration Expenses in connection with each registration of Included Securities requested pursuant to this Section 2.2(a), and each Holder of Included Securities shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Included Securities. The Company shall cause any Registration Statement filed pursuant to this Section 2.2(a) which includes any Included Shares to be continuously effective for at least the shorter of (a) 180 days or (b) such period of time as all of the Included Securities shall have been sold thereunder, subject to the right of the Company to effect a Suspension Period with respect to such Registration Statement on the same terms and conditions as are applicable to a Demand Registration as set forth in Section 2.1(a). No Piggy-Back Registration shall relieve the Company of its obligation to effect a Demand Registration upon the request of Holders of Registrable Securities pursuant to Section 2.1 hereof. Notwithstanding any language to the contrary contained herein, an Initial Public Equity Offering shall not constitute a Piggy-Back Registration. (b) PRIORITY IN PIGGY-BACK REGISTRATION. If a Piggy-Back Registration involves an underwritten offering and the lead managing underwriter of such offering advises the Company and the Holders of Included Securities in writing that in its view the total number of securities which the Company, the selling Holders and any other Persons entitled to participate in such registration intend to include in such offering exceeds the number which can be sold in such offering without adversely affecting the success of such offering (including the initial offering price at which such securities can be sold), then the Company will be required to include in such registration only the amount and type of securities which it is so advised should be included in such registration. In such event: (x) in the case of a registration initiated by the Company involving the sale of securities for its own account (and not pursuant to a contractual "demand" registration right granted to any Person), securities shall be registered in such offering in the following order of priority: (i) first, the securities which the Company proposes to register, (ii) second, provided that no securities sought to be included by the Company have been excluded from such registration, the securities which have been requested to be included in such registration by the Holders of Included Securities (if necessary, such Included Securities to be cut back pro rata based on the amount of Registrable Securities sought to be registered by each Holder participating in the Piggy-Back Registration) and (iii) third, provided that no securities sought to be included by the Company or Included Securities have been excluded from such registration, the securities of other Persons entitled to exercise "piggy-back" registration rights pursuant to contractual commitments of the Company (such securities to be cut back in accordance with the contractual arrangements made by the Company with such Persons); and (y) in the case of a registration initiated by the Company pursuant to a contractual "demand" registration right of any Person(s) (other than a Demand Registration), securities shall be registered in such offering in the following order of priority: (i) first, securities to be sold for the account of the Company and the securities of the Person(s) whose 11 exercise of a contractual "demand" registration right is the basis for the Piggy-Back Registration (if necessary, such securities to be cut back on the basis of the contractual arrangements made by the Company with such Person(s)), (ii) second, provided that no securities of the Company or such Person(s) referred to in the immediately preceding clause (i) have been excluded from such registration, the securities requested to be included in such registration by the Holders of Included Securities pursuant to this Agreement (if necessary, such Included Securities to be cut back pro rata based on the amount of Registrable Securities sought to be registered by each Holder participating in the Piggy-Back Registration) and (iii) third, provided that no securities of the Company or the Person(s) referred to in clause (y)(i) of this Section 2.2(b) or Included Securities have been excluded from such registration, securities of other Persons entitled to exercise "piggyback" registration rights pursuant to contractual commitments of the Company (such securities to be cut back in accordance with the contractual arrangements made by the Company with such Persons). 2.3 RULE 144 AND RULE 144A. The Company covenants that, after such time as it becomes subject to the periodic reporting requirements of the Exchange Act, it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder in a timely manner and, if at any time the Company is not required to file such reports, it will, upon the request of any Holder or beneficial owner of Registrable Securities, make available such information necessary to permit sales pursuant to Rule 144A under the Securities Act. The Company further covenants that it will take such further action as any Holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144(k) and Rule 144A under the Securities Act, as such Rules may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any Holder of Registrable Securities, the Company will in a timely manner deliver to such Holder a written statement as to whether it has complied with such information requirements. Section 3. TRANSFERS BY WORLDCOM. 3.1 GENERALLY. All (i) Subject Equity held by any Holder and (ii) any shares of Capital Stock held by WorldCom or any of its Affiliates, at any time and from time to time outstanding, shall be held subject to the conditions and restrictions set forth in this Section 3. Each Holder of Subject Equity, by accepting a certificate or certificates for, or other indicia of ownership of, Subject Equity agrees to such conditions and restrictions. 3.2 TAG-ALONG RIGHTS. (a) Prior to the Triggering Date, each Holder of Subject Equity shall have the right (the "TAG-ALONG RIGHT"), but not the obligation, to require the Proposed Purchaser to purchase from it all Subject Equity owned by such Holder in the event of any proposed direct or indirect sale or other disposition (collectively, a "TRANSFER") of Capital Stock of the Company to any Person or Persons (such other Person or Persons being referred to herein as the "PROPOSED PURCHASER") by WorldCom and/or any of its Affiliates in any transaction or series of 12 related transactions resulting in a Warrant Change of Control (a "TAG-ALONG TRANSFER"). WorldCom shall notify, or cause to be notified, each Holder of Subject Equity in writing (a "TRANSFER NOTICE") of any proposed Tag-Along Transfer at least 30 days prior to the effective date thereof. Such notice shall set forth: (a) the name and address of the Proposed Purchaser, (b) the number and type of shares of Capital Stock of the Company proposed to be transferred to the Proposed Purchaser, (c) the proposed amount of consideration and terms and conditions of payment offered by the Proposed Purchaser (if the proposed consideration does not consist entirely or cash, the Transfer Notice shall describe the form and terms of the non-cash consideration), (d) the anticipated closing date of the Tag-Along Transfer (the "PROPOSED TAG-ALONG CLOSING DATE") and (e) that either the Proposed Purchaser has been informed of the Tag-Along Right and has agreed to purchase Subject Equity in accordance with the terms hereof or that WorldCom or one or more of its named Affiliates will make such purchase. The Tag-Along Right may be exercised by any Holder of Subject Equity by delivery of a written notice to the Company ("TAG-ALONG NOTICE"), within 10 days of receipt of the Transfer Notice, indicating its election to exercise the Tag-Along Right the ("PARTICIPATING HOLDERS"). The Tag-Along Notice shall state the amount of Subject Equity that such Holder proposes to sell pursuant to its Tag-Along Right. Failure by any Holder to provide a Tag-Along Notice within the 10-day notice period shall be deemed to constitute an election by such Holder not to exercise its Tag-Along Right. The closing of the sale of any Subject Equity pursuant to the exercise of a Tag-Along Right shall occur concurrently with the closing of the Tag-Along Transfer, and WorldCom shall cause the closing of a Tag-Along Transfer to be conditioned upon the concurrent sale, in accordance with the terms hereof, by the Holders of all Subject Equity that they elect to sell pursuant to the exercise of their Tag-Along Right hereunder. Each Holder of Subject Equity that exercise its Tag-Along Right shall be made an express third party beneficiary of such closing condition. (b) Any Subject Equity purchased from the Holders pursuant to this Section 3.2 shall be paid for in the same type of consideration and at the same price per share, and upon the same terms and conditions, as made available to WorldCom or its Affiliates in the proposed Tag-Along Transfer. The price paid per Warrant shall be less the aggregate exercise price of such Warrant on the closing date for the Tag-Along Transfer. If the Subject Equity to be purchased includes securities of a type that is different from the shares of Capital Stock being sold by WorldCom or its Affiliates, the price to be paid for such securities shall be the Fair Market Value of such securities, and the consideration paid therefor may, at the election of WorldCom, be made in cash or in the same form of consideration as that paid to WorldCom or its proposed Affiliates by the Proposed Purchaser. (c) The purchaser of any Holder's Subject Equity pursuant to this Section 3.2 shall have the right to receive from such Holder customary representations and warranties with respect to ownership of such Subject Equity and customary instruments of transfer. A Holder shall be entitled to withdraw an exercise of its Tag-Along Right, and promptly receive a return of all of its Subject Equity, in the event the Tag-Along Transfer, and the purchase of such Holder's Subject Equity, does not occur with 10 Business Days after the Proposed Tag-Along Closing Date. 13 3.3 DRAG-ALONG RIGHTS. If at any time prior to an Initial Public Equity Offering, WorldCom and/or any of its Affiliates determines to Transfer all of the Capital Stock of the Company owed by WorldCom and its Affiliates to a Person (other than WorldCom or any of its Affiliates) in a transaction resulting in a Warrant Change of Control, WorldCom (whether directly or through an Affiliate) shall have the right, but not the obligation, to require the Holders of Subject Equity to sell all of such Subject Equity to such transferee; PROVIDED that (a) the consideration to be received by the Holders of Subject Equity shall be the same amount (per share) and type of consideration as that received by WorldCom and its Affiliates and, in any event, shall be cash or freely transferable marketable securities, and (b) after giving effect to such transaction, WorldCom and its Affiliates shall not beneficially own, directly or indirectly, any Capital Stock of the Company or any rights to purchase Capital Stock of the Company. The price per Warrant to be paid by the proposed purchaser shall be less the aggregate exercise price of such Warrant as of the date of purchase. If the Subject Equity to be purchased pursuant to this Section 3.3 includes securities of a type that is different from the shares of Capital Stock being sold by WorldCom or its Affiliates, the price to be paid for such securities shall be the Fair Market Value of such securities. The purchaser of any Holder's Subject Equity pursuant to this Section 3.3 shall have the right to receive from such Holder customary representations and warranties with respect to ownership of such Subject Equity and customary instruments of transfer. Section 4. REGISTRATION PROCEDURES. In connection with the obligations of the Company with respect to any Registration Statement required to be filed pursuant to Section 2.1 or Section 2.2, the Company shall: (a) Prepare and file with the SEC a Registration Statement, within the relevant time period specified in Section 2.1 or 2.2, as applicable, on the appropriate form under the Securities Act, which form (i) shall be selected by the Company, (ii) shall be available for the sale of Included Securities by the selling Holders thereof in accordance with the requested methods of distribution, and (iii) shall comply as to form in all material respects with the requirements of the applicable form and include or incorporate by reference all financial statements required by the SEC to be filed therewith or incorporated by reference therein. (b) Prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement as may be necessary to keep such Registration Statement continuously effective for the time periods prescribed hereby; cause the related Prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; and comply with the provisions of the Securities Act, the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to it with respect to the disposition of all securities covered by such Registration Statement as so amended or in such prospectus as so supplemented. (c) Notify the Holders of Included Securities, their counsel and the managing underwriter or underwriters, if any, promptly (but in any event within two Business Days), and 14 confirm such notice in writing, (i) when a Prospectus or any prospectus supplement or post-effective amendment is to be filed, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective (including in such notice a written statement that any Holder may, upon request, obtain, without charge, one conformed copy of such Registration Statement or post-effective amendment including financial statements and schedules and exhibits but excluding documents incorporated by reference, if any), (ii) of the issuance by the SEC of any stop order suspending the effectiveness of such Registration Statement or of any order preventing or suspending the use of any preliminary prospectus or the initiation or threatening of any proceedings for that purpose, (iii) of the receipt by the Company of any notification with respect to (A) the suspension of the qualification or exemption from qualification of the Registration Statement or any of the Included Securities covered thereby for offer or sale in any jurisdiction, or (B) the initiation of any proceeding for such purpose, (iv) of the happening of any event, the existence of any condition or information becoming known that requires the making of any changes in such Registration Statement, Prospectus or documents so that, in the case of such Registration Statement, it will conform in all material respects with the requirements of the Securities Act and it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, not misleading, and that in the case of the Prospectus, it will conform in all material respects with the requirements of the Securities Act and it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (v) of the Company's reasonable determination that a post-effective amendment to such Registration Statement would be appropriate. (d) Use every reasonable effort to prevent the issuance of any order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of a Prospectus or suspending the qualification (or exemption from qualification) of any of the Included Securities covered thereby for sale in any jurisdiction, and, if any such order is issued, to obtain the withdrawal of any such order at the earliest possible moment. (e) If reasonably requested by the managing underwriter or underwriters, if any, or the Holders of a majority of the Included Securities being sold in connection with an underwritten offering (only for registrations pursuant to Section 2.1 hereof), (i) promptly incorporate in a prospectus supplement or post-effective amendment such information as the managing underwriter or underwriters, if any, or such Holders reasonably request to be included therein to comply with applicable law, (ii) make all required filings of such prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such prospectus supplement or post-effective amendment, and (iii) supplement or make amendments to such Registration Statement. (f) Furnish to each Holder of Included Securities who so requests and to counsel for the Holders of Included Securities and each managing underwriter, if any, without charge, upon request, one conformed copy of the Registration Statement and each post-effective 15 amendment thereto, including financial statements and schedules, and of all documents incorporated or deemed to be incorporated therein by reference and all exhibits (including exhibits incorporated by reference). (g) Deliver to each Holder of Included Securities, their counsel and each underwriter, if any, without charge, as many copies of each Prospectus (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request; and, subject to the last paragraph of this Section 4, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the Holders of Included Securities and the underwriter or underwriters or agents, if any, in connection with the offering and sale of the Included Securities covered by such Prospectus and any amendment or supplement thereto. (h) Prior to any offering of Included Securities, to register or qualify, and cooperate with the Holders of Included Securities, the underwriter or underwriters, if any, and their respective counsel in connection with the registration or qualification (or exemption from such registration or qualification) of, such Included Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as the managing underwriter or underwriters reasonably request in writing, or, in the event of a non-underwritten offering, as the Holders of a majority of the Included Securities may request; provided, however, that where Included Securities are offered other than through an underwritten offering, the Company agrees to cause its counsel to perform Blue Sky investigations and file registrations and qualifications required to be filed pursuant to this Section 4(h); keep each such registration or qualification (or exemption therefrom) effective during the period required hereunder for effectiveness of the Registration Statement and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the securities covered thereby; provided, however, that the Company will not be required to (A) qualify generally to do business in any jurisdiction where it is not then so qualified, (B) take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or (C) become subject to taxation in any jurisdiction where it is not then so subject. (i) Cooperate with the Holders of Included Securities and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Included Securities to be sold, which certificates shall not bear any restrictive legends whatsoever and shall be in a form eligible for deposit with The Depository Trust Company ("DTC"); and enable such Included Securities to be in such denominations and registered in such names as the managing underwriter or underwriters, if any, or Holders may reasonably request at least two Business Days prior to any sale of Included Securities in a firm commitment underwritten public offering. (j) Subject to the right of the Company to effect a Suspension Period, upon the occurrence of any event contemplated by Section 4(c)(iv) or 4(c)(v) above (or immediately following the end of a Suspension Period), as promptly as practicable prepare a supplement or 16 post-effective amendment to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and, subject to Section 4(b) hereof, file such with the SEC so that, as thereafter delivered to the Holders of Included Securities being sold thereunder, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (k) Prior to the effective date of a Registration Statement, (i) provide the transfer agent and registrar for the Included Securities with certificates for such securities in a form eligible for deposit with DTC and (ii) provide a CUSIP number for such securities. (l) For an underwritten offering of Included Securities pursuant to Section 2.1 hereof, enter into an underwriting agreement in form, scope and substance as is customary in underwritten offerings and take all such other actions as are reasonably requested by the managing underwriter or underwriters in order to expedite or facilitate the registration or disposition of such Included Securities, and in such connection (i) make such representations and warranties to the underwriter or underwriters, with respect to the business of the Company and the subsidiaries of the Company, and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, in form, substance and scope as are customarily made by companies to underwriters in underwritten offerings; (ii) use best efforts to obtain opinions of counsel to the Company and customary updates thereof, addressed to the underwriter or underwriters covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by underwriters; (iii) use best efforts to obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement, addressed to each of the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings and such other matters as reasonably requested by the managing underwriter or underwriters and as permitted by the Statement of Auditing Standards No. 72; and (iv) if an underwriting agreement is entered into, the same shall contain customary indemnification provisions and procedures with respect to the underwriters and the selling Holders of Included Securities. (m) Make available for inspection by a representative of the Holders of Included Securities being sold, any underwriter participating in any such disposition of Included Securities, if any, and any attorney or accountant retained by such representative of the Holders or underwriter (collectively, the "Inspectors"), at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the Company and the subsidiaries of the Company, and cause the officers, directors and employees of the Company and the subsidiaries of the Company to supply all information in each case reasonably requested by any such Inspector in connection with such Registration Statement; 17 provided, however, that all material non-public information shall be kept confidential by such Inspector (and such Inspector shall be required to enter into a customary confidentiality agreement with the Company), except to the extent that (i) the disclosure of such information is necessary to avoid or correct a misstatement or omission in the Registration Statement or in any Prospectus; (ii) the release of such information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction, (iii) disclosure of such information is necessary or advisable in connection with any action, claim, suit or proceeding, directly or indirectly, involving or potentially involving such Inspector, any underwriter of any Holder of Included Securities and arising out of, based upon, relating to or involving this Agreement or any of the transactions contemplated hereby or arising hereunder; provided, however, that prior notice shall be provided as soon as practicable to the Company of the potential disclosure of any information by such Inspector pursuant to clauses (ii) or (iii) of this sentence to permit the Company to obtain a protective order, or (iv) such information has been made generally available to the public by the Company or by a source other than the Inspectors. (n) Comply with all applicable rules and regulations of the SEC and make generally available to its security-holders earnings statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Included Securities are sold to an underwriter or to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to an underwriter or to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of the relevant Registration Statement, which statements shall cover said 12-month periods. (o) Use its best efforts to cause all Included Securities relating to such Registration Statement to be listed on each securities exchange, if any, or on the National Market tier of The Nasdaq Stock Market on which similar securities issued by the Company are then listed. Each Holder of Included Securities as to which any registration is being effected agrees, as a condition to the registration obligations with respect to such Holder provided herein, to furnish to the Company such information regarding such seller and the distribution of its Included Securities as the Company may, from time to time, reasonably request in writing to comply with the Securities Act and other applicable law. The Company may exclude from such registration the Included Securities of any Holder for so long as such Holder fails to furnish such information within a reasonable time after receiving such request. Each Holder of Included Securities agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 4(c)(ii), 4(c)(iii), 4(c)(iv), or 4(c)(v) hereof, such Holder will forthwith discontinue disposition of such Included Securities covered by the Registration Statement or Prospectus (in the case of Section 4(c)(iii), in the affected 18 jurisdiction(s) only) until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 4(j) hereof), or until it is advised in writing (the "Advice") by the Company that the use of the applicable prospectus may be resumed, and has received copies of any amendments or supplements thereto, and, if so directed by the Company, such Holder will, at the Company's expense, deliver to the Company all copies, other than permanent file copies, then in such Holder's actual possession of the Prospectus covering such Included Securities current at the time of receipt of such notice; provided, however, that nothing herein shall create any obligation on the part of any Holder to undertake to retrieve or return any such Prospectus not within the actual possession of such Holder. In the event the Company shall give any such notice, the period of time for which a Registration Statement is required hereunder to be effective shall be extended by the number of days during such periods from and including the date of the giving of such notice to and including the date when each seller of Included Securities covered by such Registration Statement shall have received (x) the copies of the supplemented or amended Prospectus contemplated by Section 4(j) hereof or (y) the Advice. Section 5. INDEMNIFICATION AND CONTRIBUTION. (a) The Company shall indemnify and hold harmless each Holder of Included Securities, each underwriter who participates in an offering of Included Securities, their respective affiliates, each Person, if any, who controls any of such parties within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and each of their respective directors, officers, employees and agents, as follows: (i) from and against any and all loss, liability, claim, damage and expense whatsoever, joint or several, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto), covering Included Securities, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) from and against any and all loss, liability, claim, damage and expense whatsoever, joint or several, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the prior written consent of the Company (except as provided in Section 5(d) below); and (iii) from and against any and all expenses whatsoever, as incurred (including reasonable fees and disbursements of counsel chosen by such Holder, or any underwriter (except to the extent otherwise expressly provided in Section 5(c) hereof)), 19 reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) of this Section 5(a); provided, however, that this indemnity does not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished in writing to the Company by such Holder or any underwriter with respect to such Holder or underwriter, as the case may be, expressly for use in the Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto). Any amounts advanced by the Company to an indemnified party pursuant to this Section 5 as a result of such losses shall be returned to the Company if it shall be finally determined by such a court in a judgment not subject to appeal or final review that such indemnified party was not entitled to indemnification by the Company. (b) Each Holder of Included Securities agrees, severally and not jointly, to indemnify and hold harmless the Company, each underwriter who participates in an offering of Included Securities and the other selling Holders and each of their respective directors, officers (including each officer of the Company who signed the Registration Statement), employees and agents and each Person, if any, who controls the Company, any underwriter or any other selling Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all loss, liability, claim, damage and expense whatsoever described in the indemnity contained in Section 5(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such selling Holder with respect to such Holder expressly for use in the Registration Statement (or any amendment thereto), or any such Prospectus (or any amendment or supplement thereto); provided, however, that no such Holder shall be liable for any claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Included Securities pursuant to any Registration Statement. (c) Each indemnified party shall give prompt notice to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability which it may have other than on account of this indemnity agreement and shall not relieve the indemnifying party from its obligation under this Section 5 unless materially prejudiced thereby. An indemnifying party may participate at its own expense in the defense of such action. Notwithstanding the foregoing, if it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume the defense of such action with counsel chosen by it and approved by the indemnified parties defendant in such action (such approval not to be unreasonably withheld), unless such 20 indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them which are different from or in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action. In no event shall the indemnifying parties be liable for the fees and expenses of more than one counsel (in addition to local counsel) for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 5 (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent includes an unconditional written release in form and substance satisfactory to the indemnified parties of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim. (d) If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for reasonable fees and expenses of counsel pursuant to Section 5(a)(iii) above, such indemnifying party agrees that it shall liable for any settlement of the nature contemplated by Section 5(a)(ii) effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) If the indemnification provided for in Section 5(a) or (b) hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Holder on the other hand from the offering of the Warrants pursuant to the Purchase Agreement or (ii) if the allocation provided by the immediately preceding clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Holder on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and the Holder on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information 21 supplied by the Company or by the Holder, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders of the Included Securities agree that it would not be just and equitable if contribution pursuant to this Section 5(e) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 5(e). The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 5(e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (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. For purposes of this Section 5(e), each Person, if any, who controls a Holder of Registrable Securities within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as such other Person, and each director of the Company, each officer of the Company who signed the Registration Statement, and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Company. Section 6. MISCELLANEOUS. 6.1 NO INCONSISTENT AGREEMENTS. Each of the Company (as to itself only) and WorldCom (as to itself and its Affiliates (other than the Company) only) represents and warrants to the Initial Purchasers and the Holders of Subject Equity that neither the Company nor WorldCom or any of its Affiliates is a party to any agreement which conflicts, or is inconsistent, with the rights granted to the Holders of Subject Equity in this Agreement. Neither the Company nor WorldCom shall, and WorldCom shall not permit any of its Affiliates to, after the date hereof, enter into any agreement that in any manner conflicts, or is inconsistent, with the rights granted to the Holders of Subject Equity hereunder. 6.2 AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the prior written consent of holders of Registrable Securities then outstanding representing not less than a majority of the Registrable Securities. For purposes of the foregoing sentence, outstanding Warrants shall be deemed to equal that number of Registrable Securities for which such Warrant would then be exercisable (assuming all conditions to exercise were satisfied and the exercise price was paid for entirely in cash). Notwithstanding the foregoing, Sections 3 and 5 hereof and this Section 6.2 may not be 22 amended, modified or supplemented without the prior written consent of each Holder (including any Person who was a Holder of Included Securities disposed of pursuant to any Registration Statement) of Subject Equity. Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders of Included Securities whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect, impair, limit or compromise the rights of other Holders of Registrable Securities or Subject Equity may be given by the Holders of not less than a majority of the Included Securities proposed to be sold by such Holders pursuant to such Registration Statement. 6.3 NOTICES. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, first-class postage pre-paid mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address of such Holder as set forth in the register for the Warrants or the Warrant Shares, as applicable; and (ii) if to the Company, at the address set forth below the Company's name on the signature pages hereto, or such other address notice of which is given to the Holders in accordance with the provisions of this Section 6.3. A copy of any notice to the Company shall also be delivered to Willkie Farr & Gallagher, One Citicorp Center, 153 E. 53rd Street, New York, NY 10022, Attention: Daniel D. Rubino, Esq. (or such other address for such firm notice of which is given in accordance with the provisions of this Section 6.3). All such notices and communications shall be deemed to have been received: if personally delivered, at the time delivered by hand; if mailed first-class postage prepaid mail, five Business Days after being deposited in the mail; if telexed or telecopied, when answered back received; and if delivered to an air courier guaranteeing overnight delivery, on the next Business Day. 6.4 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders. Any Subject Equity acquired by a transferee shall be held subject to all of the terms of this Agreement, and by taking and holding such Subject Equity such transferee shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement (including without limitation Sections 3, 4 and 5) and such transferee shall be entitled to receive the benefits hereof. 6.5 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 6.6 HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 23 6.7 GOVERNING LAW; JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 6.8 SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. 6.9 ENTIRE AGREEMENT. This Agreement, together with the Purchase Agreement and the Warrant Agreement, is intended by the parties as a final expression of their agreement, and is intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. This Agreement, the Purchase Agreement and the Warrant Agreement supersede all prior agreements and understandings between the parties with respect to such subject matter. 6.10 ATTORNEYS' FEES. As between the parties to this Agreement, in any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to its costs and expenses and any other available remedy. 6.11 SECURITIES HELD BY THE COMPANY OR ITS AFFILIATES. Whenever the consent or approval of Holders of a specified percentage of securities is required hereunder, Subject Equity held by the Company or by any of its Affiliates shall not be counted (in either the numerator or the denominator) in determining whether such consent or approval was given by the Holders of such required percentage. 6.12 REMEDIES. In the event of a breach by the Company or WorldCom of any of its obligations under this Agreement, each Holder, in addition to being entitled to exercise all rights provided herein, in the Purchase Agreement or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. Each of the Company and WorldCom agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by either the Company or WorldCom of any of the provisions of this Agreement. [Signature Pages Follow] 24 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. WAM!NET INC. By: /s/ Edward J. Driscoll III ------------------------------- Name: Edward J. Driscoll III ----------------------------- Title: President and CEO ---------------------------- Address for Notices: 6100 West 110th Street Minneapolis, Minnesota 55438 Attn: Chief Executive Officer Facsimile No.: (612) 885-0687 Telephone No.: (612) 886-5100 WORLDCOM INC. By: /s/ K. William Grothe, Jr. ------------------------------- Name: K. William Grothe, Jr. ----------------------------- Title: Vice President ---------------------------- Address for Notices: 515 East Amite Street Jackson, Mississippi 39201 Facsimile No.: (601) 974-8233 Telephone No.: (601) 360-8600 MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ Barbara Daniel ------------------------------- Name: Barbara Daniel ----------------------------- Title: Vice President ---------------------------- Address for Notices: Merrill Lynch World Headquarters World Financial Center North Tower New York, New York 10281-1305 Facsimile No.: (212) 449-8983 Telephone No.: (212) 449-1000 CREDIT SUISSE FIRST BOSTON CORPORATION By: /s/ J. Peter Beckett ---------------------------- Name: J. Peter Beckett -------------------------- Title: Director ------------------------- Address for Notices: 11 Madison Avenue New York, New York 10010-3629 Facsimile No.: (212) 325-8278 Telephone No.: (212) 325-2107 FIRST CHICAGO CAPITAL MARKETS, INC. By: /s/ Abel Mojica ---------------------------- Name: Abel Mojica -------------------------- Title: Associate ------------------------- Address for Notices: One First National Plaza Mail Suite 0701 Chicago, Illinois 50570-0324 Facsimile No.: (312) 336-4500 Telephone No.: (312) 732-3538 EX-4.12 17 WARRANT AGREEMENT DATED MARCH 5, 1998 Exhibit 4.12 ------------------------------------------------------------------------------- WARRANT AGREEMENT Dated as of March 5, 1998 By and Between WAM!NET INC. and FIRST TRUST NATIONAL ASSOCIATION as Warrant Agent ------------------------------------ Warrants to Purchase Common Stock Par Value $.01 Per Share ------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ---- ARTICLE I ISSUANCE, FORM, EXECUTION, DELIVERY AND REGISTRATION OF WARRANT CERTIFICATES SECTION 1.01. Issuance of Warrants...........................................8 SECTION 1.02. Form of Warrant Certificates...................................8 SECTION 1.03. Execution of Warrant Certificates..............................8 SECTION 1.04. Authentication and Delivery....................................9 SECTION 1.05. Temporary Warrant Certificates................................10 SECTION 1.06. Separation of Warrants and Notes..............................10 SECTION 1.07. Registration..................................................10 SECTION 1.08. Registration of Transfers or Exchanges........................11 SECTION 1.09. Lost, Stolen, Destroyed, Defaced or Mutilated Warrant Certificates..........................................16 SECTION 1.10. Offices for Exercise, etc.....................................17 ARTICLE II DURATION, EXERCISE OF WARRANTS; EXERCISE PRICE AND REPURCHASE OF WARRANTS SECTION 2.01. Duration of Warrants..........................................17 SECTION 2.02. Exercise, Exercise Price, Settlement and Delivery.............18 SECTION 2.03. Cancellation of Warrant Certificates..........................21 SECTION 2.04. Notice of an Exercise Event...................................21 ARTICLE III OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS SECTION 3.01. Enforcement of Rights.........................................21 SECTION 3.02. Obtaining Stock Exchange Listings.............................22 ARTICLE IV CERTAIN COVENANTS OF THE COMPANY SECTION 4.01. Payment of Taxes..............................................22 SECTION 4.02. Qualification Under the Securities Laws.......................22 SECTION 4.03. Rules 144 and 144A............................................23 SECTION 4.04. Form of Initial Public Equity Offering........................23 SECTION 4.05. Registration of Shares........................................23 ARTICLE V ADJUSTMENTS SECTION 5.01. Adjustment of Exercise Rate; Notices..........................24 SECTION 5.02. Fractional Shares.............................................30 SECTION 5.03. Certain Distributions.........................................30 ARTICLE VI CONCERNING THE WARRANT AGENT SECTION 6.01. Warrant Agent.................................................31 SECTION 6.02. Conditions of Warrant Agent's Obligations.....................31 SECTION 6.03. Resignation and Appointment of Successor......................35 ARTICLE VII MISCELLANEOUS SECTION 7.01. Amendment.....................................................36 SECTION 7.02. Notices and Demands to the Company and Warrant Agent..........37 SECTION 7.03. Addresses for Notices to Parties and for Transmission of Documents.....................................37 SECTION 7.04. Notices to Holders............................................38 SECTION 7.05. APPLICABLE LAW; SUBMISSION TO JURISDICTION....................38 SECTION 7.06. Persons Having Rights Under Agreement.........................38 SECTION 7.07. Headings......................................................38 SECTION 7.08. Counterparts..................................................38 SECTION 7.09. Inspection of Agreement.......................................38 SECTION 7.10. Availability of Equitable Remedies............................39 SECTION 7.11. Obtaining of Governmental Approvals...........................39 EXHIBITS: EXHIBIT A Form of Warrant Certificate EXHIBIT B Form of Legend for Global Warrant EXHIBIT C Certificate to be Delivered Upon Exchange or Registration of Transfer of Warrants EXHIBIT D Form of Certificate to be Delivered in Connection with Regulation S Transfers INDEX OF DEFINED TERMS DEFINED TERM SECTION - ------------ ------- Affiliate SECTION 5.01.(l) Agreement Preamble Business Day SECTION 2.01. Capital Stock SECTION 5.01.(l) Cashless Exercise SECTION 2.02.(b) Cashless Exercise Ratio SECTION 2.02.(b) Common Stock Preamble Company Preamble control SECTION 5.01.(l) Current Market Value SECTION 5.01.(l) Definitive Warrants SECTION 1.02. Distribution SECTION 5.03. Distribution Rights SECTION 5.03. Election to Exercise SECTION 2.02.(a) Exercisability Date SECTION 2.02. Exercise Date SECTION 2.02.(c) Exercise Event SECTION 2.02. Exercise Price SECTION 2.02. Exercise Rate SECTION 2.02. Expiration Date SECTION 2.01. Fundamental Transaction SECTION 5.01.(d) Global Shares SECTION 2.02.(e) Global Warrants SECTION 1.02. Indenture Preamble Independent Financial Expert SECTION 5.01.(l) Initial Public Equity Offering SECTION 2.02. Initial Purchasers Preamble Merrill Lynch Preamble Notes Preamble Officers' Certificate SECTION 1.08.(d)(i) Person SECTION 2.02. Private Placement Legend SECTION 1.08.(g) Prospectus SECTION 4.02. Purchase Agreement Preamble QIB SECTION 1.08.(a)(B) Registrar SECTION 1.07. Registration Rights Agreement Preamble Related Parties SECTION 6.02.(e) Requisite Warrant Holders SECTION 7.01. Resale Restriction Termination Date SECTION 1.08.(a)(y) Securities Act SECTION 1.06. Separability Date SECTION 1.06. Separation SECTION 1.06. Shares SECTION 1.01. Subject Class SECTION 4.04. Surviving Person SECTION 5.01.(d) Time of Determination SECTION 5.01.(l) Trustee Preamble Units Preamble Warrant Agent Preamble Warrant Agent Office SECTION 1.10. Warrant Certificates SECTION 2.01 Warrant Change of Control SECTION 2.01 Warrant Exercise Office SECTION 2.02.(a) Warrant Register SECTION 1.07. Warrants Preamble WARRANT AGREEMENT WARRANT AGREEMENT ("AGREEMENT"), dated as of March 5, 1998 by and between WAM!NET INC., a Minnesota corporation (together with any successor thereto, the "COMPANY"), and FIRST TRUST NATIONAL ASSOCIATION, as warrant agent (with any successor Warrant Agent, the "WARRANT AGENT"). WHEREAS, the Company has entered into a purchase agreement (the "PURCHASE AGREEMENT") dated February 26, 1998 with Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MERRILL LYNCH"), Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. (collectively, the "INITIAL PURCHASERS") in which the Company has agreed to sell to the Initial Purchasers 208,530 Units (the "UNITS") consisting, in the aggregate, of (i) $208,530,000 aggregate principal amount at maturity of Senior Discount Notes due 2005 (the "NOTES") of the Company, to be issued under an Indenture dated as of March 5, 1998 (the "INDENTURE"), between the Company and First Trust National Association, as trustee (in such capacity, the "TRUSTEE"), and (ii) 625,590 Warrants (the "WARRANTS"), each Warrant initially entitling the holder thereof to purchase 2.01 shares of Common Stock, par value $.01 per share (the "COMMON STOCK"'), of the Company, to be issued under this Agreement. First Trust National Association has been appointed Unit Agent by the Company (in such capacity, the "Unit Agent"). The certificates evidencing the Warrants are herein referred to collectively as the "WARRANT CERTIFICATES"; and WHEREAS, each Unit will consist of one Note in the principal amount at maturity of $1,000 and three Warrants; the Notes and the Warrants comprising part of the Units shall not be separately transferable until the Separability Date (as defined below); and WHEREAS, the holders of the Warrants are entitled to the benefits of a Common Stock Registration Rights Agreement dated as of March 5, 1998 among the Company, the Initial Purchasers and WorldCom Inc. (the "REGISTRATION RIGHTS AGREEMENT"); and WHEREAS, the Company desires the Warrant Agent to assist the Company in connection with the issuance, exchange, cancellation, replacement and exercise of the Warrants, and in this Agreement wishes to set forth, among other things, the terms and conditions on which the Warrants may be issued, exchanged, canceled, replaced and exercised; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I ISSUANCE, FORM, EXECUTION, DELIVERY AND REGISTRATION OF WARRANT CERTIFICATES SECTION 1.01. ISSUANCE OF WARRANTS. Warrants comprising part of the Units shall be originally issued in connection with the issuance of the Units and such Warrants shall not be separately transferable from the Notes until on or after the Separability Date as provided in Section 1.06 hereof. Each Warrant Certificate shall evidence the number of Warrants specified therein, and each Warrant evidenced thereby shall, when exercisable as provided herein and therein, represent the right, subject to the provisions contained herein and therein, to purchase from the Company (and the Company shall issue and sell to the holder of such Warrant) 2.01 fully paid, registered and non-assessable shares of Common Stock at an exercise price of $0.01 per share. The number of shares issuable upon exercise of a Warrant is subject to adjustment as provided herein and in the Warrant. The shares purchasable upon exercise of a Warrant are hereinafter referred to as the "SHARES" and, unless the context otherwise requires, such term shall also include any other securities or property purchasable and deliverable upon exercise of a Warrant as provided in Article V, subject to adjustment as provided herein and in the Warrant. SECTION 1.02. FORM OF WARRANT CERTIFICATES. The Warrant Certificates will initially be issued either in global form (the "GLOBAL WARRANTS"), substantially in the form of EXHIBIT A hereto, or in registered form as definitive Warrant Certificates (the "DEFINITIVE WARRANTS") substantially in the form of EXHIBIT A attached hereto. Any Global Warrants to be delivered pursuant to this Agreement shall bear the legend set forth in EXHIBIT B attached hereto. Such Global Warrants shall represent such of the outstanding Warrants as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Warrants from time to time endorsed thereon and that the aggregate amount of outstanding Warrants represented thereby may from time to time be reduced or increased, as appropriate. Any endorsement of a Global Warrant to reflect the amount of any increase or decrease in the amount of outstanding Warrants represented thereby shall be made by the Warrant Agent and the Depositary (as defined below) in accordance with instructions given by the holder thereof. The Depository Trust Company shall act as the Depositary with respect to the Global Warrants until a successor shall be appointed by the Company and the Warrant Agent. Upon written request, a holder of Warrants may receive from the Warrant Agent or the Depository Definitive Warrants as set forth in Section 1.08 hereof. SECTION 1.03. EXECUTION OF WARRANT CERTIFICATES. The Warrant Certificates shall be executed on behalf of the Company by the Chairman of its Board of Directors, its President or any Vice President and attested by its Secretary or Assistant Secretary. Such signatures may be the manual or facsimile signatures of the present or any future such officers. Typographical and other minor errors or defects in any such reproduction of any such signature shall not affect the validity 8 or enforceability of any Warrant Certificate that has been duly countersigned and delivered by the Warrant Agent. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer before the Warrant Certificate so signed shall be countersigned and delivered by the Warrant Agent or disposed of by the Company, such Warrant Certificate nevertheless may be countersigned and delivered or disposed of as though the person who signed such Warrant Certificate had not ceased to be such officer of the Company; and any Warrant Certificate may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Warrant Certificate, shall be the proper officers of the Company, although at the date of the execution and delivery of this Agreement any such person was not such an officer. SECTION 1.04. AUTHENTICATION AND DELIVERY. Subject to the immediately following paragraph, Warrant Certificates shall be authenticated by manual signature and dated the date of authentication by the Warrant Agent and shall not be valid for any purpose unless so authenticated and dated. The Warrant Certificates shall be numbered and shall be registered in the Warrant Register (as defined in Section 1.07 hereof). Upon the receipt by the Warrant Agent of a written order of the Company, which order shall be signed by the Chairman of its Board of Directors, its President or any Vice President and attested by its Secretary or Assistant Secretary, and shall specify the amount of Warrants to be authenticated, whether the Warrants are to be Global Warrants or Definitive Warrants, the date of such Warrants and such other information as the Warrant Agent may reasonably request, without any further action by the Company, the Warrant Agent is authorized, upon receipt from the Company at any time and from time to time of the Warrant Certificates, duly executed as provided in Section 1.03 hereof, to authenticate the Warrant Certificates and upon the holder's request deliver them. Such authentication shall be by a duly authorized signatory of the Warrant Agent (although it shall not be necessary for the same signatory to sign all Warrant Certificates). In case any authorized signatory of the Warrant Agent who shall have authenticated any of the Warrant Certificates shall cease to be such an authorized signatory before the Warrant Certificate shall be disposed of by the Company or the Warrant Agent, such Warrant Certificate nevertheless may be delivered or disposed of as though the person who authenticated such Warrant Certificate had not ceased to be such authorized signatory of the Warrant Agent, and any Warrant Certificate may be authenticated on behalf of the Warrant Agent by such persons as, at the actual time of authentication of such Warrant Certificates, shall be the duly authorized signatories of the Warrant Agent, although at the time of the execution and delivery of this Agreement any such person is not such an authorized signatory. The Warrant Agent's authentication on all Warrant Certificates shall be in substantially the form set forth in EXHIBIT A hereto. 9 SECTION 1.05. TEMPORARY WARRANT CERTIFICATES. Pending the preparation of definitive Warrant Certificates, the Company may execute, and the Warrant Agent shall authenticate and deliver, temporary Warrant Certificates, which are printed, lithographed, typewritten or otherwise produced, substantially of the tenor of the definitive Warrant Certificates in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Warrant Certificates may determine, as evidenced by their execution of such Warrant Certificates. If temporary Warrant Certificates are issued, the Company will cause definitive Warrant Certificates to be prepared without unreasonable delay. After the preparation of definitive Warrant Certificates, the temporary Warrant Certificates shall be exchangeable for definitive Warrant Certificates upon surrender of the temporary Warrant Certificates at any office or agency maintained by the Company for that purpose pursuant to Section 1.10 hereof. Subject to the provisions of Section 4.01 hereof, such exchange shall be without charge to the holder. Upon surrender for cancellation of any one or more temporary Warrant Certificates, the Company shall execute, and the Warrant Agent shall authenticate and deliver in exchange therefor, one or more definitive Warrant Certificates representing in the aggregate a like number of Warrants. Until so exchanged, the holder of a temporary Warrant Certificate shall in all respects be entitled to the same benefits under this Agreement as a holder of a definitive Warrant Certificate. SECTION 1.06. UNITS; SEPARATION OF WARRANTS AND NOTES. The Warrants shall initially be issued as part of a Unit, each Unit consisting of three Warrants and $1,000 principal face amount of Notes. The Notes and the Warrants comprising a Unit will not be separately transferable until the Separability Date. "SEPARABILITY DATE" shall mean the earliest to occur of: (i) September 1, 1998, (ii) the occurrence of an Exercise Event (as defined herein), (iii) the occurrence of an Event of Default (as defined in the Indenture), (iv) the date on which a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to a registered exchange offer for the Notes or covering the sale by holders of the Notes is declared effective under the Securities Act, (v) immediately prior to any redemption of Notes by the Company from the net proceeds of an Initial Public Equity Offering (as defined in the Indenture), (vi) immediately prior to the occurrence of a Warrant Change of Control (as defined herein) or (v) such earlier date as determined by Merrill Lynch & Co. in its sole discretion and specified to the Company, the Trustee, the Warrant Agent and the Unit Agent in writing. The separation of the Warrants and the Notes is herein referred to as a "SEPARATION". Transfers of the Units shall be made by the Unit Agent in accordance with the restrictions set forth in Section1.08 hereof. The Unit Agent shall be entitled to the same benefits and privileges as those accorded to the Warrant Agent under this Warrant Agreement. SECTION 1.07. REGISTRATION. The Company will keep, at the office or agency maintained by the Company for such purpose, a register or registers in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of, and registration of transfer and exchange of, Warrants as provided in this Article. Each person designated by the Company from time to time as a person authorized to register the transfer and exchange of the Warrants is hereinafter called, individually and collectively, the "REGISTRAR." The 10 Company hereby initially appoints the Warrant Agent as Registrar. Upon written notice to the Warrant Agent and any acting Registrar, the Company may appoint a successor Registrar for such purposes. The Company will at all times designate one person (who may be the Company and who need not be a Registrar) to act as repository of a master list of names and addresses of the holders of Warrants (the "WARRANT REGISTER"). The Warrant Agent will act as such repository unless and until some other person is, by written notice from the Company to the Warrant Agent and the Registrar, designated by the Company to act as such. The Company shall cause each Registrar to furnish to such repository, on a current basis, such information as to all registrations of transfer and exchanges effected by such Registrar, as may be necessary to enable such repository to maintain the Warrant Register on as current a basis as is practicable. SECTION 1.08. REGISTRATION OF TRANSFERS OR EXCHANGES. (a) TRANSFER OR EXCHANGE OF DEFINITIVE WARRANTS. When Definitive Warrants are presented to the Warrant Agent with a request from the holder: (i) to register the transfer of the Definitive Warrants; or (ii) to exchange such Definitive Warrants for an equal number of Definitive Warrants of other authorized denominations, the Warrant Agent shall register the transfer or make the exchange as requested if the requirements under this Warrant Agreement as set forth in this Section 1.08 hereof for such transactions are met; PROVIDED, HOWEVER, that the Definitive Warrants presented or surrendered by a holder for registration of transfer or exchange: (x) shall be duly endorsed or accompanied by a written instruction of transfer or exchange in form satisfactory to the Company and the Warrant Agent, duly executed by such holder or by his attorney, duly authorized in writing; and (y) in the case of Warrants the offer and sale of which have not been registered under the Securities Act and are presented for transfer or exchange prior to (X) the date which is two years (or such shorter period as may be prescribed by Rule 144(k) (or any successor provision thereto)) after the later of the date of original issuance of the Warrants and the last date on which the Company or any affiliate of the Company was the owner of such Warrants, or any predecessor thereto, and (Y) such later date, if any, as may be required by any subsequent change in applicable law (the "RESALE RESTRICTION TERMINATION DATE"), such Warrants shall be accompanied by the following additional information and documents, as applicable: 11 (A) if such Warrants are being delivered to the Warrant Agent by a holder for registration in the name of such holder, without transfer, a certi fication from such holder to that effect (in substantially the form of EXHIBIT C hereto); or (B) if such Warrants are being transferred to a qualified institutional buyer (as defined in Rule 144A under the Securities Act) (a "QIB") in accordance with Rule 144A under the Securities Act, a certification from the transferor to that effect (in substantially the form of EXHIBIT C hereto); or (C) if such Warrants are being transferred in reliance on Regulation S under the Securities Act, delivery by the transferor of a certification to that effect (in substantially the form of EXHIBIT C hereto), and a Certificate for Regulation S Transfers in the form of EXHIBIT D hereto; or (D) if such Warrants are being transferred in reliance on Rule 144 under the Securities Act, delivery by the transferor of (i) a certification from the transferor to that effect (in substantially the form of EXHIBIT C hereto), and (ii) an opinion of counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; or (E) if such Warrants are being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification from the transferor to that effect (in substantially the form of EXHIBIT C hereto) and an opinion of counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; PROVIDED that the Company may, based upon the views of its own counsel, instruct the Warrant Agent not to register such transfer in any case where the proposed transferee is not a QIB or non-U.S. Person. (b) RESTRICTIONS ON TRANSFER OF A DEFINITIVE WARRANT FOR A BENEFICIAL INTEREST IN A GLOBAL WARRANT. A Definitive Warrant may not be transferred by a holder for a beneficial interest in a Global Warrant except upon satisfaction of the requirements set forth below. Upon receipt by the Warrant Agent of a Definitive Warrant, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Warrant Agent, together with: (A) certification from such holder (in substantially the form of EXHIBIT C hereto) that such Definitive Warrant is being transferred to a QIB in accordance with Rule 144A under the Securities Act; and 12 (B) written instructions directing the Warrant Agent to make, or to direct the Depositary to make, an endorsement on the Global Warrant to reflect an increase in the aggregate amount of the Warrants represented by the Global Warrant, then the Warrant Agent shall cancel such Definitive Warrant and cause, or direct the Depositary to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Warrant Agent, the number of Shares represented by the Global Warrant to be increased accordingly. If no Global Warrant is then outstanding, the Company shall issue and the Warrant Agent shall upon written instructions from the Company authenticate a new Global Warrant in the appropriate amount. (c) TRANSFER OR EXCHANGE OF GLOBAL WARRANTS. The transfer or exchange of Global Warrants or beneficial interests therein shall be effected through the Depositary, in accordance with this Section 1.08, the Private Placement Legend, this Agreement (including the restrictions on transfer set forth herein) and the procedures of the Depositary therefor. (d) TRANSFER OR EXCHANGE OF A BENEFICIAL INTEREST IN A GLOBAL WARRANT FOR A DEFINITIVE WARRANT. (i) Any person having a beneficial interest in a Global Warrant may transfer or exchange such beneficial interest for a Definitive Warrant upon receipt by the Warrant Agent of written instructions or such other form of instructions as is customary for the Depositary from the Depositary or its nominee on behalf of any person having a beneficial interest in a Global Warrant, including a written order containing registration instructions and, in the case of any such transfer or exchange prior to the Resale Restriction Termination Date, the following additional information and documents: (A) if such beneficial interest is being transferred to the person designated by the Depositary as being the beneficial owner, a certification from such person to that effect (in substantially the form of EXHIBIT C hereto); or (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A under the Securities Act, a certification from the transferor to that effect (in substantially the form of EXHIBIT C hereto); or (C) if such beneficial interest is being transferred in reliance on Regulation S under the Securities Act, delivery by the transferor of (i) a certification to that effect (in substantially the form of EXHIBIT C 13 hereto) and (ii) a Certificate for Regulation S Transfers in the form of EXHIBIT D hereto; or (D) if such beneficial interest is being transferred in reliance on Rule 144 under the Securities Act, delivery by the transferor of (i) a certi fication to that effect (in substantially the form of EXHIBIT C hereto) and (ii) an opinion of counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; or (E) if such beneficial interest is being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification from the transferor to that effect (in substantially the form of EXHIBIT C hereto) and an opinion of counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; PROVIDED that the Company may instruct the Warrant Agent not to register such transfer in any case where the proposed transferee is not a QIB or Non-U.S. Person; then the Warrant Agent will cause, in accordance with the standing instructions and procedures existing between the Depositary and the Warrant Agent, the aggregate amount of the Global Warrant to be reduced and, following such reduction, the Company will execute and, upon receipt from the Comany of an authentication order in the form of an officers' certificate (a certificate signed by two officers of the Company, one of whom must be the principal executive officer, principal financial officer or principal accounting officer) (an "OFFICERS' CERTIFICATE"), the Warrant Agent will authenticate and deliver to the transferee a Definitive Warrant. (ii) Definitive Warrants issued in exchange for a beneficial interest in a Global Warrant pursuant to this Section 1.08(d) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Warrant Agent in writing. The Warrant Agent shall deliver such Definitive Warrants to the persons in whose names such Warrants are so registered and adjust the Global Warrant pursuant to paragraph (h) of this Section 1.08. (e) RESTRICTIONS ON TRANSFER OR EXCHANGE OF GLOBAL WARRANTS. Notwithstanding any other provisions of this Agreement (other than the provisions set forth in subsection (f) of this Section 1.08), a Global Warrant may not be transferred or exchanged as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or 14 another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (f) AUTHENTICATION OF DEFINITIVE WARRANTS IN ABSENCE OF DEPOSITARY. If at any time: (i) the Depositary for the Global Warrants notifies the Company that the Depositary is unwilling or unable to continue as Depositary for the Global Warrant and a successor Depositary for the Global Warrant is not appointed by the Company within 90 days after delivery of such notice; or (ii) the Company, at its sole discretion, notifies the Warrant Agent in writing that it elects to cause the issuance of Definitive Warrants for all Global Warrants under this Agreement, then the Company will execute, and the Warrant Agent will, upon receipt of an Officers' Certificate requesting the authentication and delivery of Definitive Warrants, authenticate and deliver Definitive Warrants, in an aggregate number equal to the aggregate number of Warrants represented by the Global Warrant, in exchange for such Global Warrant. (g) PRIVATE PLACEMENT LEGEND. Upon the registration of transfer, exchange or replacement of Warrant Certificates not bearing the legend set forth in the first paragraph of EXHIBIT A attached hereto (the "PRIVATE PLACEMENT LEGEND"), the Warrant Agent shall deliver Warrant Certificates that do not bear the Private Placement Legend. Upon the registration of transfer, exchange or replacement of Warrant Certificates bearing the Private Placement Legend, the Warrant Agent shall deliver Warrant Certificates that bear the Private Placement Legend unless, and the Warrant Agent is hereby authorized to deliver Warrant Certificates without the Private Placement Legend if, (i) the requested transfer is not prior to the date which is two years (or such shorter period as may be prescribed by Rule 144(k) (or any successor provision thereto) under the Securities Act or any successor provision thereunder) after the later of the original Issue Date of the Warrants or the last day on which the Company or any of its affiliates was the owner of the Warrant or any predecessor security, (ii) there is delivered to the Warrant Agent an opinion of counsel reasonably satisfactory to the Company and the Warrant Agent to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act or (iii) the Warrants to be transferred or exchanged represented by such Warrant Certificates are being transferred or exchanged pursuant to an effective registration statement under the Securities Act. (h) CANCELLATION OR ADJUSTMENT OF A GLOBAL WARRANT. At such time as all beneficial interests in a Global Warrant have either been exchanged for Definitive Warrants, redeemed, repurchased or canceled, such Global Warrant shall be returned to the Company or, upon written order to the Warrant Agent in the form of an Officers' Certificate from the Company, retained and canceled by the Warrant Agent. At any time prior to such cancellation, if any beneficial 15 interest in a Global Warrant is exchanged for Definitive Warrants, redeemed, repurchased or cancelled, the number of Warrants represented by such Global Warrant shall be reduced and an endorsement shall be made on such Global Warrant by the Warrant Agent to reflect such reduction. (i) OBLIGATIONS WITH RESPECT TO TRANSFERS OR EXCHANGES OF DEFINITIVE WARRANTS. (i) To permit registrations of transfers or exchanges, the Company shall execute, at the Warrant Agent's request, and the Warrant Agent shall authenticate Definitive Warrants and Global Warrants. (ii) All Definitive Warrants and Global Warrants issued upon any registration, transfer or exchange of Definitive Warrants or Global Warrants shall be the valid obligations of the Company, entitled to the same benefits under this Warrant Agreement as the Definitive Warrants or Global Warrants surrendered upon the registration of transfer or exchange. (iii) Prior to due presentment for registration of transfer of any Warrant, the Warrant Agent and the Company may deem and treat the person in whose name any Warrant is registered as the absolute owner of such Warrant, and neither the Warrant Agent nor the Company shall be affected by notice to the contrary. SECTION 1.09. LOST, STOLEN, DESTROYED, DEFACED OR MUTILATED WARRANT CERTIFICATES. Upon receipt by the Company and the Warrant Agent (or any agent of the Company or the Warrant Agent, if requested by the Company) of evidence satisfactory to them of the loss, theft, destruction, defacement, or mutilation of any Warrant Certificate and of an indemnity bond satisfactory to them and, in the case of mutilation or defacement, upon surrender thereof to the Warrant Agent for cancellation, then, in the absence of notice to the Company or the Warrant Agent that such Warrant Certificate has been acquired by a BONA FIDE purchaser or holder in due course, the Company shall execute, and an authorized signatory of the Warrant Agent shall manually authenticate and deliver, in exchange for or in lieu of the lost, stolen, destroyed, defaced or mutilated Warrant Certificate, a new Warrant Certificate representing a like number of Warrants, bearing a number or other distinguishing symbol not contemporaneously outstanding. Upon the issuance of any new Warrant Certificate under this Section in a name other than the prior registered holder of the lost, stolen, destroyed, defaced or mutilated Warrant Certificate, the Company may require the payment from the holder of such Warrant Certificate of a sum sufficient to cover any tax, stamp tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Warrant Agent and the Registrar) in connection therewith. Every substitute Warrant Certificate executed and delivered pursuant to this Section in lieu of any lost, stolen or destroyed Warrant Certificate shall constitute an additional contractual obligation of the Company, whether or not the lost, stolen or destroyed Warrant Certificate shall be at any time enforceable by anyone, and shall be entitled to the benefits of (but shall be subject to all the limitations of rights set forth in) this Agreement equally and proportionately with any and all other Warrant Certificates duly executed and delivered hereunder. The provisions of this Section 1.09 are exclusive with respect to 16 the replacement of lost, stolen, destroyed, defaced or mutilated Warrant Certificates and shall preclude (to the extent lawful) any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement of lost, stolen, destroyed, defaced or mutilated Warrant Certificates. The Warrant Agent is hereby authorized to authenticate in accordance with the provisions of this Agreement, and deliver the new Warrant Certificates required pursuant to the provisions of this Section. SECTION 1.10. OFFICES FOR EXERCISE, ETC. So long as any of the Warrants remain outstanding, the Company will designate and maintain in the Borough of Manhattan, The City of New York: (a) an office or agency where the Warrant Certificates may be presented for exercise, (b) an office or agency where the Warrant Certificates may be presented for registration of transfer and for exchange (including the exchange of temporary Warrant Certificates for definitive Warrant Certificates pursuant to Section 1.05 hereof), and (c) an office or agency where notices and demands to or upon the Company in respect of the Warrants or of this Agreement may be served. The Company may from time to time change or rescind such designation, as it may deem desirable or expedient; PROVIDED, HOWEVER, that an office or agency shall at all times be maintained in the Borough of Manhattan, The City of New York, as provided in the first sentence of this Section. In addition to such office or offices or agency or agencies, the Company may from time to time designate and maintain one or more additional offices or agencies within or outside The City of New York, where Warrant Certificates may be presented for exercise or for registration of transfer or for exchange, and the Company may from time to time change or rescind such designation, as it may deem desirable or expedient. The Company will give to the Warrant Agent written notice of the location of any such office or agency and of any change of location thereof. The Company hereby designates the Warrant Agent at its principal corporate trust office identified in Section 7.03 in the Borough of Manhattan, The City of New York (the "WARRANT AGENT OFFICE"), as the initial agency maintained for each such purpose. In case the Company shall fail to maintain any such office or agency or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notice may be served at the Warrant Agent Office and the Company appoints the Warrant Agent as its agent to receive all such presentations, surrenders, notices and demands. ARTICLE II DURATION, EXERCISE OF WARRANTS; EXERCISE PRICE AND REPURCHASE OF WARRANTS SECTION 2.01. DURATION OF WARRANTS. Subject to the terms and conditions established herein, the Warrants shall expire at 5:00 p.m., New York City time, on March 1, 2005. The date of expiration of a particular Warrant is referred to herein as the "EXPIRATION DATE" of such Warrant. Each Warrant may be exercised on any Business Day (as defined below) on or after the 17 Exercisability Date (as defined in Section 2.02) and on or prior to the close of business on the Expiration Date. Any Warrant not exercised before the close of business on the Expiration Date shall become void, and all rights of the holder under the Warrant Certificate evidencing such Warrant and under this Agreement shall cease. "BUSINESS DAY" shall mean any day on which (i) banks in New York City, (ii) the principal U.S. securities exchange or market, if any, on which any Common Stock is listed or admitted to trading and (iii) the principal U.S. securities exchange or market, if any, on which any other securities underlying the Warrants are listed or admitted to trading are open for business. SECTION 2.02. EXERCISE, EXERCISE PRICE, SETTLEMENT AND DELIVERY. (a) Subject to the provisions of this Agreement, a holder of a Warrant shall have the right to purchase from the Company on or after the Exercisability Date, and on or prior to the close of business on the Expiration Date, 2.01 fully paid, registered and non-assessable shares of Common Stock (and any other securities or property purchasable or deliverable upon exercise of such Warrant as provided in Article V), subject to adjustment in accordance with Article V hereof, at the purchase price of $0.01 for each share purchased (the "EXERCISE PRICE"). The number of Shares for which a particular Warrant may be exercised (the "EXERCISE RATE") shall be subject to adjustment from time to time as set forth in Article V hereof. "EXERCISABILITY DATE" means, with respect to each Warrant, the date as of which both of the following shall have occurred (whether before or on such date): (i) the Separability Date and (ii) an Exercise Event. "EXERCISE EVENT" means, with respect to each Warrant, the date of the occurrence of the earliest of: (1) immediately prior to the occurrence of a Warrant Change of Control, (2) (a) the 90th day (or such earlier date as determined by the Company in its sole discretion) following an Initial Public Equity Offering or (b) upon the closing of an Initial Public Equity Offering but only in respect of Warrants, if any, required to be exercised to permit the holders thereof to sell Shares pursuant to their registration rights, (3) a class of equity securities of the Company is listed on a national securities exchange or authorized for quotation on the The Nasdaq Stock Market or is otherwise subject to registration under the Exchange Act, or (4) September 1, 2000. "INITIAL PUBLIC EQUITY OFFERING" means an initial public offering of equity securities of the Company (whether or not underwritten and whether or not pursuant to a primary or secondary offering but excluding any offering pursuant to Form S-8 under the Securities Act or any other publicly registered offering pursuant to an issuance of shares of Common Stock or securities exercisable therefor under any benefit plan, employee compensation plan, or employee or director stock purchase plan) pursuant to an effective registration statement under the Securities Act. 18 "PERSON" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity, including any predecessor of any such entity. "VOTING STOCK" means, with respect to any Person, the Capital Stock of any class or kind ordinarily having the power to vote for the election of directors or other members of the governing body of such Person. "WARRANT CHANGE OF CONTROL" shall mean the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")), excluding WorldCom Inc., a Georgia corporation ("WORLDCOM") and its Affiliates, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has or acquires the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total voting power of all Voting Stock of the Company or has, directly or indirectly, the right to elect or designate a majority of the Board of Directors of the Company; or (b) the Company consolidates with, or merges with or into, another Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into, the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where (i) the outstanding Voting Stock of the Company is converted into or exchanged for Voting Stock of the surviving or transferee corporation or its parent corporation, (ii) the "beneficial owners" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time) of the Voting Stock of the Company immediately before such transaction own, directly or indirectly, immediately after such transaction, at least a majority of the voting power of all Voting Stock of the surviving or transferee corporation or its parent corporation immediately after such transaction, as applicable, and (iii) no "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), excluding WorldCom and its Affiliates, is the "beneficial owner" directly or indirectly, of more than 50% of the total voting power of the Voting Stock of the surviving or transferee corporation or its parent corporation, as applicable, or has, directly or indirectly, the right to elect or designate a majority of the board of directors of the surviving or transferee corporation or its parent corporation, as applicable. The good faith determination by the Board of Directors of the Company, based upon advice of outside counsel, of the beneficial ownership of securities of the Company within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act shall be conclusive, absent contrary controlling judicial precedent or contrary written interpretation published by the Securities and Exchange Commission. 19 (a) Warrants may be exercised, in whole but not in part, on or after the date they are exercisable hereunder by (i) surrendering at any office or agency maintained for that purpose by the Company pursuant to Section 1.10 (each a "WARRANT EXERCISE OFFICE") the Warrant Certificate evidencing such Warrants with the form of election to exercise Shares set forth on the reverse side of the Warrant Certificate (the "ELECTION TO EXERCISE") duly completed and signed by the registered holder or holders thereof or by the duly appointed legal representative thereof or by a duly authorized attorney, and in the case of a transfer, such signature shall be guaranteed by an eligible guarantor institution, and (ii) paying in full the Exercise Price for each such Warrant exercised. Each Warrant may be exercised only in whole. (b) Simultaneously with the exercise of each Warrant, payment in full of the aggregate Exercise Price may be made, at the option of the holder, (i) by United States dollars or by certified or official bank check, (ii) by the surrender (which surrender shall be evidenced by cancellation of the number of Warrants represented by any Warrant Certificate presented in connection with a Cashless Exercise) of a Warrant or Warrants (represented by one or more Warrant Certificates), and without payment of the Exercise Price in cash, for such number of Shares equal to the product of (1) the number of Shares for which such Warrant is exercisable with payment in cash of the aggregate Exercise Price as of the date of exercise and (2) the Cashless Exercise Ratio or (iii) with any combination of (i) and (ii). For purposes of this Agreement, the "CASHLESS EXERCISE RATIO" shall equal a fraction, the numerator of which is the excess of the Current Market Value per share of the Common Stock on the date of exercise over the Exercise Price per share as of the date of exercise, and the denominator of which is the Current Market Value per share of the Common Stock on the date of exercise. An exercise of a Warrant in accordance with the immediately preceding sentences is herein called a "CASHLESS EXERCISE". Upon surrender of a Warrant Certificate representing more than one Warrant in connection with the holder's option to elect a Cashless Exercise, the number of Shares deliverable upon a Cashless Exercise shall be equal to the Cashless Exercise Ratio multiplied by the product of (a) the number of Warrants that the holder specifies is to be exercised pursuant to a Cashless Exercise and (b) the aggregate number of Shares for which such Warrants is then exercisable (without giving effect to the Cashless Exercise option). All provisions of this Agreement shall be applicable with respect to an exercise of a Warrant Certificate pursuant to a Cashless Exercise for less than the full number of Warrants represented thereby. No payment or adjustment shall be made on account of any dividends on the Shares issued upon exercise of a Warrant. If the Company has not effected the registration under the Securities Act of the offer and sale of the Shares by the Company to the holders of the Warrants upon the exercise thereof, the Company may elect to require that holders of the Warrants effect the exercise of the Warrants solely pursuant to the Cashless Exercise option and may also amend the Warrants to eliminate the requirement for payment of the Exercise Price with respect to such Cashless Exercise option. The Warrant Agent shall have no obligation under this section to calculate the Cashless Exercise Ratio. (c) Upon such surrender of a Warrant Certificate and payment and collection of the Exercise Price at any Warrant Exercise Office (other than any Warrant Exercise Office that also is an office of the Warrant Agent), such Warrant Certificate and payment shall be promptly delivered 20 to the Warrant Agent. The "EXERCISE DATE" for a Warrant shall be the date when all of the items referred to in the first sentence of paragraphs (b) and (c) of this Section 2.02 are received by the Warrant Agent at or prior to 11:00 a.m., New York City time, on a Business Day and the exercise of the Warrants will be effective as of such Exercise Date. If all items referred to in the first sentence of paragraphs (b) and (c) are received after 11:00 a.m., New York City time, on a Business Day, the exercise of the Warrants to which such items relate will be effective on the next succeeding Business Day. Notwithstanding the foregoing, in the case of an exercise of Warrants on the Expiration Date, if all of the items referred to in the first sentence of paragraphs (b) and (c) are received by the Warrant Agent at or prior to 5:00 p.m., New York City time, on the Expiration Date, the exercise of the Warrants to which such items relate will be effective on the Expiration Date. (d) Upon the exercise of a Warrant in accordance with the terms hereof, the receipt of a Warrant Certificate and payment of the Exercise Price (or election of the Cashless Exercise option), the Warrant Agent shall: (i) except to the extent exercise of the Warrant has been effected through Cashless Exercise, cause an amount equal to the aggregate Exercise Price to be paid to the Company by crediting the same to the account designated by the Company in writing to the Warrant Agent for that purpose; (ii) advise the Company immediately by telephone of the amount so deposited to the Company's account and promptly confirm such telephonic advice in writing; and (iii) as soon as practicable, advise the Company in writing of the number of Warrants exercised in accordance with the terms and conditions of this Agreement and the Warrant Certificates, the instructions of each exercising holder of the Warrant Certificates with respect to delivery of the Shares to which such holder is entitled upon such exercise, and such other information as the Company shall reasonably request. (e) Subject to Section 5.02 hereof, as soon as practicable after the exercise of any Warrant or Warrants in accordance with the terms hereof, the Company shall issue or cause to be issued to or upon the written order of the registered holder of the Warrant Certificate evidencing such exercised Warrant or Warrants, a certificate or certificates evidencing the Shares to which such holder is entitled, in fully registered form, registered in such name or names as may be directed by such holder pursuant to the Election to Exercise, as set forth on the reverse of the Warrant Certificate. Such certificate or certificates evidencing the Shares shall be deemed to have been issued and any Persons who are designated to be named therein shall be deemed to have become the holder of record of such Shares as of the close of business on the Exercise Date; the Shares may initially be issued in global form (the "GLOBAL SHARES"). Such Global Shares shall represent such of the outstanding Shares as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Shares from time to time endorsed thereon and that the aggregate amount of outstanding Shares represented thereby may from time to time be reduced or increased, as appropriate. Any endorsement of a Global Share to reflect the amount of any increase or decrease in the amount of outstanding Shares represented thereby shall be made by the registrar for the Shares and the Depositary (referred to below) in accordance with instructions given by the holder thereof. The Depository Trust Company shall (if possible) act as the Depositary with respect to the Global Shares until a successor shall be appointed by the Company and the registrar for the Shares. After such exercise of any Warrant or Warrants, the Company shall also issue or cause to be issued to or 21 upon the written order of the registered holder of such Warrant Certificate, a new Warrant Certificate, countersigned by the Warrant Agent pursuant to written instruction, evidencing the number of Warrants, if any, remaining unexercised unless such Warrants shall have expired. SECTION 2.03. CANCELLATION OF WARRANT CERTIFICATES. In the event the Company shall purchase or otherwise acquire Warrants, the Warrant Certificates evidencing such Warrants may thereupon be delivered to the Warrant Agent, and if so delivered, shall at the Company's written instruction be canceled by it and retired. The Warrant Agent shall cancel all Warrant Certificates properly surrendered for exchange, substitution, transfer or exercise. Upon the Company's written request, the Warrant Agent shall deliver such canceled Warrant Certificates to the Company. SECTION 2.04. NOTICE OF AN EXERCISE EVENT. The Company shall, as soon as practicable after the occurrence of an Exercise Event, send or cause to be sent to each holder of Warrants, and to each beneficial owner of the Warrants with respect to which such Exercise Event has occurred to the extent that the Warrants are held of record by a depositary or other agent (with a copy to the Warrant Agent), by first-class mail, at the addresses appearing on the Warrant Register, a notice prepared by the Company advising such holder of the Exercise Event which has occurred, which notice shall describe the type of Exercise Event and the date of the occurrence thereof, as applicable, and the date and time of expiration of the right to exercise the Warrants prominently set forth in the face of such notice. ARTICLE III OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS SECTION 3.01. ENFORCEMENT OF RIGHTS. (a) Notwithstanding any of the provisions of this Agreement, any holder of a Warrant Certificate, without the consent of the Warrant Agent, the holder of any Shares or the holder of any other Warrant Certificate, may, in and for his own behalf, enforce, and may institute and maintain any suit, action or proceeding against the Company suitable to enforce his right to exercise the Warrant or Warrants evidenced by his Warrant Certificate in the manner provided in such Warrant Certificate and in this Agreement. (b) Neither the Warrants nor any Warrant Certificate shall entitle the holders thereof to any of the rights of a holder of Shares, including, without limitation, the right to vote or to receive any dividends or other payments or to consent or to receive notice as stockholders in respect of the meetings of stockholders or for the election of directors of the Company or any other matter, or any rights whatsoever as stockholders of the Company, except as expressly provided herein (including Section 5.03 hereof). SECTION 3.02. OBTAINING STOCK EXCHANGE LISTINGS. The Company will from time to time take all action which may be necessary so that the Shares, immediately upon their issuance upon the exercise of Warrants, will be listed on the principal securities exchanges and markets within 22 the United States (including the Nasdaq National Market), if any, on which other shares of Common Stock are then listed. ARTICLE IV CERTAIN COVENANTS OF THE COMPANY SECTION 4.01. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes attributable to the initial issuance of Warrants and of the Shares upon the exercise of Warrants; PROVIDED, HOWEVER, that the Company shall not be required to pay any tax or other governmental charge which may be payable in respect of any transfer or exchange of any Warrant Certificates or any certificates for Shares in a name other than the registered holder of a Warrant Certificate surrendered upon the exercise of a Warrant. In any such case, no transfer or exchange shall be made unless or until the person or persons requesting issuance thereof shall have paid to the Company the amount of such tax or other governmental charge or shall have established to the satisfaction of the Company that such tax or other governmental charge has been paid or an exemption is available therefrom. SECTION 4.02. QUALIFICATION UNDER THE SECURITIES LAWS. (a) Immediately prior to the occurrence of an Exercise Event (or, in the case of a Warrant Change of Control, as promptly as practicable thereafter), the Company will, if permitted by applicable law, take all such action as is necessary to cause the offer and sale by the Company of the Shares issuable or deliverable upon exercise of the Warrants to be registered or otherwise qualified under the provisions of the Securities Act and pursuant to all applicable state securities laws and to provide for the issuance of all Shares delivered upon exercise of the Warrants pursuant to an effective shelf registration statement under the Securities Act. Subject to the last sentence of this Section 4.02(a) and to paragraph (b) of this Section 4.02, so long as any unexpired Warrants which have become exercisable due to the occurrence of an Exercise Event remain outstanding, the Company will file such amendments and/or supplements to any registration statement under the Securities Act or under any state securities laws covering the issuance of such Shares and supplement and keep current any prospectus forming a part of such registration statement as may be necessary to permit the Company to deliver to each person exercising a Warrant a prospectus meeting the requirements of Section 10(a)(3) of the Securities Act (a "PROSPECTUS") and the regulations of the Securities and Exchange Commission and otherwise complying with the Securities Act and regulations thereunder, and as may be necessary to comply with any applicable state securities laws. The Warrant Agent shall have no duty to monitor when such registration or qualification is necessary nor shall the Warrant Agent be responsible for the Company's failure to comply with this Section 4.02. The Company's obligation to cause a shelf registration statement to become effective and maintain a Prospectus for delivery to each person exercising a Warrant shall be terminated on the date the Company delivers to the Warrant Agent an unqualified opinion of counsel reasonably satisfactory to the Warrant Agent to the effect that all Shares registrable or deliverable upon exercise of the Warrants may be issued without the 23 requirement of registration under the Securities Act and will be freely transferable after receipt without limitation under the Securities Act. (b) The Company may suspend the effectiveness of such shelf registration statement and the use of any related prospectus in the event that, and for a period not to exceed an aggregate of 60 days in any calendar year if, (i) an event occurs and is continuing as a result of which the shelf registration statement would, in the Company's good faith judgement, which determination shall be evidenced by a resolution of the Company's board of directors, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make statements therein, in the light of the circumstances under which they were made, not misleading, and (ii)(a) the Company determines in its good faith judgment, which determination shall be evidenced by a resolution of the Company's board of directors, that (A) the disclosure of such event at such time would have a material adverse effect on the business, operations or prospects of the Company (PROVIDED the Company is not otherwise required to disclose such event) or (b) the disclosure relates to a pending material business transaction which has not yet been publicly disclosed and disclosure of such event at that time would jeopardize the success of such transaction. SECTION 4.03. RULES 144 AND 144A. The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the Securities and Exchange Commission thereunder in a timely manner in accordance with the requirements of the Securities Act and the Exchange Act and, if at any time the Company is not required to file such reports, it will, upon the request of any holder or beneficial owner of Warrants or Shares, make available such information necessary to permit sales pursuant to Rule 144A under the Securities Act. SECTION 4.04. FORM OF INITIAL PUBLIC EQUITY OFFERING. The Company agrees that it will not make an Initial Public Equity Offering of any class of its Capital Stock other than the principal class and series of Capital Stock into which the Warrants are then exercisable. SECTION 4.05. REGISTRATION OF SHARES. The Company agrees that it will comply with all applicable laws, including the Securities Act and any applicable state securities laws, in connection with the offer and sale of Shares (and other securities and property deliverable) upon exercise of the Warrants. ARTICLE V ADJUSTMENTS SECTION 5.01. ADJUSTMENT OF EXERCISE RATE; NOTICES. The Exercise Rate is subject to adjustment from time to time as provided in this Section. (a) ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If, after the date hereof, the Company: 24 (i) pays a dividend or makes a distribution on any of its Common Stock in shares of any of its Common Stock (other than any such dividend to the extent covered by Section 5.03); (ii) subdivides any of its outstanding shares of Common Stock into a greater number of shares; (iii) combines any of its outstanding shares of Common Stock into a smaller number of shares; (iv) pays a dividend or makes a distribution on any of its Common Stock in shares of any of its Capital Stock (as defined below) (other than Common Stock or rights, warrants, or options for its Common Stock to the extent such issuance or distribution is covered by Section 5.03); or (v) issues by reclassification of any of its Common Stock any shares of any of its Capital Stock; then the Exercise Rate in effect immediately prior to such action for each Warrant then outstanding shall be adjusted so that the holder of a Warrant thereafter exercised may receive the number of shares of Capital Stock of the Company which such holder would have owned immediately following such action if such holder had exercised the Warrant immediately prior to such action or immediately prior to the record date applicable thereto, if any (regardless of whether the Warrants then outstanding are then exercisable and without giving effect to the Cashless Exercise option). If there are no outstanding shares of Common Stock that are of the same class as the Shares at the time of any such action and such action has therefore been taken only in respect of the Shares, the adjustment shall relate to the Shares in their same form if it would not frustrate the intent and purposes of this Section 5.01. The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. In the event that such dividend or distribution is not so paid or made or such subdivision, combination or reclassification is not effected, the Exercise Rate shall again be adjusted to be the Exercise Rate which would then be in effect if such record date or effective date had not been so fixed. If after an adjustment a holder of a Warrant upon exercise of such Warrant may receive shares of two or more classes of Capital Stock of the Company, the Exercise Rate shall thereafter be subject to adjustment upon the occurrence of an action taken with respect to any such class of Capital Stock as is contemplated by this Article V with respect to the Common Stock, on terms comparable to those applicable to Common Stock in this Article V. 25 (b) ADJUSTMENT FOR SALE OF COMMON STOCK BELOW CURRENT MARKET VALUE. If, after the date hereof, the Company grants or sells to any Interested Person (other than a wholly-owned subsidiary) any Common Stock or any securities convertible into or exchangeable or exercisable for any Common Stock at a price below the then Current Market Value (other than (1) pursuant to the exercise of the Warrants, (2) pursuant to any security convertible into, or exchangeable or exercisable for shares of Common Stock outstanding as of the date of this Agreement, (3) upon the conversion, exchange or exercise of any convertible, exchangeable or exercisable security as to which upon the issuance thereof an adjustment pursuant to this Article V has previously been made, or (4) upon the conversion, exchange or exercise of convertible, exchangeable or exercisable securities of the Company outstanding on the date of this Agreement (to the extent in accordance with the terms of such securities as in effect on the date of this Agreement)), the Exercise Rate for each Warrant then outstanding shall be adjusted in accordance with the following formula: E' = E x (O + N) --------------- (O + (N x P/M)) where: E' = the adjusted Exercise Rate for each Warrant then outstanding; E = the then current Exercise Rate for each Warrant then outstanding; O = the number of shares of Common Stock outstanding immediately prior to the sale of Common Stock or issuance of securities convertible, exchangeable or exercisable for Common Stock; N = the number of shares of Common Stock so sold or the maximum stated number of shares of Common Stock issuable upon the conversion, exchange or exercise of any such convertible, exchangeable or exercisable securities, as the case may be; P = the proceeds per share of Common Stock received by the Company, which (i) in the case of shares of Common Stock is the amount received by the Company in consideration for the sale and issuance of such shares; and (ii) in the case of securities convertible into or exchangeable or exercisable for shares of Common Stock is the amount received by the Company in consideration for the sale and issuance of such convertible or exchangeable or exercisable securities, plus the minimum aggregate amount of additional consideration, other than the surrender of such convertible or exchangeable securities, payable to the Company upon exercise, conversion or exchange thereof; and M = the Current Market Value as of the Time of Determination or at the time of sale, as the case may be. 26 The adjustment shall become effective (i) immediately after grant to an Interested Person of the convertible, exchangeable or exercisable securities to which this paragraph (b) applies or (ii) upon consummation of the sale of such securities or Common Stock to an Interested Person, as the case may be. To the extent that shares of Common Stock are not delivered after the expiration of such convertible, exchangeable or exercisable securities, the Exercise Rate for each Warrant then outstanding shall be readjusted to the Exercise Rate which would otherwise be in effect had the adjustment made upon the grant or sale of such convertible, exchangeable or exercisable securities been made on the basis of only the number of shares of Common Stock actually delivered upon conversion, exchange or exercise of such securities. In the event that such convertible, exchangeable or exercisable securities are not issued after the grant thereof, the Exercise Rate for each Warrant then outstanding shall be adjusted to be the Exercise Rate which would then be in effect if no adjustment had been made to the Exercise Rate for the grant of such convertible, exchangeable or exercisable securities. No adjustment shall be made under this paragraph (b) if the application of the formula stated above in this paragraph (b) would result in a value of E' that is lower than the value of E. No adjustment shall be made under this paragraph (b) for any sale of Common Stock that has been the subject of a previous adjustment pursuant to this paragraph (b)(unless the terms of the securities on which the basis for such adjustment was made are changed in a manner that decreases the sale price of the Common Stock, in which event an adjustment shall be made to reflect such decrease). No adjustment shall be made under this paragraph (b) if any convertible, exchangeable or exercisable securities to which this paragraph (b) would otherwise apply are distributed to the holders of Warrants pursuant to Section 5.03. No adjustment in the Exercise Rate shall be made under this paragraph (b) upon the conversion, exchange or exercise of options to acquire shares of Common Stock by officers, directors or employees of the Company; PROVIDED that the exercise price of such options, at the time of issuance thereof, is at least equal to the then Current Market Value of the Common Stock underlying such options. No adjustment in the Exercise Rate shall be made under this paragraph (b) in connection with or upon the issuance of shares Common Stock to the former stockholders of 4-Sight Limited, a private limited company organized under the laws of England and Wales, pursuant to and in accordance with that certain stock purchase agreement, dated February 10, 1998, between the Company and the stockholders of 4-Sight Limited. "INTERESTED PERSON" means (i) any Affiliate of the Company, (ii) any holder of 10% of more in voting power of the outstanding Capital Stock of the Company or (iii) any member of the Board of Directors or any executive officer of the Company. 27 (c) NOTICE OF ADJUSTMENT. Whenever the Exercise Rate is adjusted, the Company shall promptly mail to holders of Warrants then outstanding at the addresses appearing on the Warrant Register a notice of the adjustment. The Company shall file with the Warrant Agent and any other Registrar such notice and a certificate from the Company's independent public accountants briefly stating the facts requiring the adjustment and the manner of computing it. The certificate shall be conclusive evidence that the adjustment is correct, absent manifest error. Neither the Warrant Agent nor any such Registrar shall be under any duty or responsibility with respect to any such certificate except to exhibit the same during normal business hours to any holder desiring inspection thereof. (d) REORGANIZATION OF COMPANY; SPECIAL DISTRIBUTIONS. (i) If the Company, in a single transaction or through a series of related transactions, merges, consolidates or amalgamates with or into any other person or sells, assigns, transfers, leases, conveys or otherwise disposes of all or substantially all of its properties and assets to another person or group of affiliated persons or is a party to a merger or binding share exchange which reclassifies or changes its outstanding Common Stock (a "FUNDAMENTAL TRANSACTION"), as a condition to consummating any such transaction the person formed by any such consolidation or merger (if other than the Company) or the person to whom such transfer has been made (the "SURVIVING PERSON") shall enter into a supplemental warrant agreement. The supplemental warrant agreement shall provide (a) that the holder of a Warrant then outstanding may exercise it for the kind and amount of securities, cash or other assets which such holder would have received immediately after the Fundamental Transaction if such holder had exercised the Warrant immediately before the effective date of the transaction (regardless of whether the Warrants are then exercisable and without giving effect to the Cashless Exercise option), assuming (to the extent applicable) that such holder (i) made no election with respect to the form of consideration payable in such transaction and (ii) was treated alike with the plurality of non-electing holders, and (b) that the Surviving Person shall succeed to and be substituted to every right and obligation of the Company in respect of this Agreement and the Warrants. The supplemental warrant agreement shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article V. The Surviving Person shall mail to holders of Warrants at the addresses appearing on the Warrant Register a notice briefly describing the supplemental warrant agreement. If the issuer of securities deliverable upon exercise of Warrants is an affiliate of the Surviving Person, that issuer shall join in the supplemental warrant agreement. (ii) Notwithstanding the foregoing, if the Company enters into a Fundamental Transaction with another Person (other than a subsidiary of the Company) and the consideration payable in such Fundamental Transaction to holders of the shares of Capital Stock (and other securities or property) issuable or deliverable upon exercise of the Warrants consists solely of cash, then the holders of Warrants shall be entitled to receive such cash on the date of consummation of the Fundamental Transaction on an equal basis with holders of such shares (or other securities issuable upon exercise of the Warrants) as if the Warrants had been exercised immediately prior to such event, less the Exercise Price therefor. Upon receipt of such cash payment the rights of a holder of a Warrant shall terminate and cease and such holder's Warrants shall expire. 28 (iii) If this paragraph (d) applies, it shall supersede the application of paragraph (a) of this Section 5.01. (e) COMPANY DETERMINATION FINAL. Any determination that the Company or the Board of Directors of the Company make that must be made pursuant to this Article V shall be conclusive. (f) WARRANT AGENT'S ADJUSTMENT DISCLAIMER. The Warrant Agent has no duty to determine when an adjustment under this Article V should be made, how it should be made or what it should be. The Warrant Agent has no duty to determine whether a supplemental warrant agreement under paragraph (d) need be entered into or whether any provisions of any supplemental warrant agreement are correct. The Warrant Agent shall not be accountable for and makes no representation as to the validity or value of any securities or assets issued upon exercise of Warrants. The Warrant Agent shall not be responsible for the Company's failure to comply with this Article V. (g) ADJUSTMENT FOR TAX PURPOSES. The Company may make such increases in the Exercise Rate, in addition to those otherwise required by this Section, as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. (h) UNDERLYING SHARES. The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock or Common Stock held in the treasury of the Company, for the purpose of effecting the exercise of Warrants, the full number of Shares then deliverable upon the exercise of all Warrants then outstanding, and the shares so deliverable shall be fully paid and nonassessable and free from all liens and security interests. (i) SPECIFICITY OF ADJUSTMENT. Irrespective of any adjustments in the number or kind of shares purchasable upon the exercise of the Warrants, Warrant Certificates theretofore or thereafter issued may continue to express the same number and kind of Shares per Warrant as are stated on the Warrant Certificates initially issuable pursuant to this Agreement. (j) VOLUNTARY ADJUSTMENT. The Company from time to time may increase the Exercise Rate by any number and for any period of time (PROVIDED that such period is not less than 20 Business Days). Whenever the Exercise Rate is so increased, the Company shall mail to holders at the addresses appearing on the Warrant Register and file with the Warrant Agent a notice of the increase. The Company shall give the notice at least 15 days before the date the increased Exercise Rate takes effect. The notice shall state the increased Exercise Rate and the period it will be in effect. (k) MULTIPLE ADJUSTMENTS. After an adjustment to the Exercise Rate for outstanding Warrants under this Article V, any subsequent event requiring an adjustment under this Article V shall cause an adjustment to the Exercise Rate for outstanding Warrants as so adjusted. (l) DEFINITIONS. 29 "AFFILIATE" of any specified Person means any other Person which, directly or indirectly, controls, is controlled by or is under direct or indirect common control with such specified Person. For purposes of this definition, "CONTROL" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "AFFILIATED," "CONTROLLING" and "CONTROLLED" have meanings correlative to the foregoing. None of the Initial Purchasers or any of their Affiliates shall be deemed to be an Affiliate of the Company or of any of its subsidiaries or Affiliates. "CAPITAL STOCK" means, with respect to any Person, any and all shares, interests, participations, rights in, or other equivalents (however designated and whether voting or non-voting) of, such Person's capital stock, whether outstanding on the date hereof or issued after the date hereof, and any and all rights, warrants or options or other securities exchangeable for or convertible into such capital stock. "CURRENT MARKET VALUE" per share of Common Stock or any other security at any date of determination means (i) if the security is not traded on a national or regional securities exchange, The Nasdaq Stock Market or in a recognized over-the-counter market (a "Quoted Security"), (a) the fair market value of the security, as determined in good faith by the Board of Directors of the Company and certified in a board resolution delivered to the Warrant Agent, which shall be based on the most recently completed arms-length transaction between the Company and a person other than an Affiliate of the Company, the closing of which shall have occurred within the six-month period preceding such determination, or (b) if no such transaction shall have occurred within such six-month period, the fair market value of the security as determined by a nationally or regionally recognized independent financial expert (provided that, in the case of the calculation of Current Market Value solely for determining the cash value of fractional shares, the last determination of Current Market Value pursuant to this clause (i), if made within the preceding six months, may be utilized), which determination shall be set forth in an officers' certificate delivered to the Warrant Agent, or (ii) (a) if the security is a Quoted Security, the average of the daily closing sales prices of such security for the 20 consecutive trading days immediately preceding such date, or (b) if the security has been a Quoted Security for less than 20 consecutive trading days before such date, then the average of the daily closing sales prices for all of the trading days before such date for which closing sales prices are available. The closing sales price of a security for each such trading day shall be: (A) in the case of a security listed or admitted to trading on any United States national or regional securities exchange or on The Nasdaq Stock Market, the closing sales price, regular way, on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day or (B) in the case of a security not then listed or admitted to trading on any national or regional securities exchange or The Nasdaq Stock Market, the average of the closing bid and asked prices on such day, as reported by a reputable quotation source designated by the Company, or in the case of a security as to which no such reported bid and asked prices are available on such day, the average of the reported high bid and low asked prices on such day, as reported by a reputable quotation service, or a newspaper of general circulation in the Borough of Manhattan, City and State 30 of New York, customarily published on each business day, designated by the Company, or, if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than two days prior to the date in question) for which prices have been so reported; provided, however, that if there are no bid and asked prices reported for such security during such two-day period, Current Market Value shall be determined as if the security were not a Quoted Security. "INDEPENDENT FINANCIAL EXPERT" means a United States investment banking firm of national or regional standing in the United States (i) which does not, and whose directors and executive officers or Affiliates do not have a direct or indirect material financial interest for its or their proprietary account in the Company or any of its Affiliates and (ii) which, in the judgment of the Board of Directors of the Company, is otherwise independent with respect to the Company and its Affiliates and qualified to perform the task for which it is to be engaged. "TIME OF DETERMINATION" means, (i) in the case of any distribution of securities or other property to existing stockholders to which paragraph (b) applies, the time and date of the determination of stockholders entitled to receive such securities or property or (ii) in the case of any other issuance and sale to which paragraph (b) applies, the time and date of such issuance or sale. (m) WHEN DE MINIMIS ADJUSTMENT MAY BE DEFERRED. No Adjustment in the Exercise Rate need be made unless the adjustment would require an increase of at least 1% in the Exercise Rate. Any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustments. All calculations under this Section 5 shall be made to the nearest 1/1000th of a share, as the case may be. SECTION 5.02. FRACTIONAL SHARES. The Company will not be required to issue fractional Shares upon exercise of the Warrants or distribute Share certificates that evidence fractional Shares. In addition, in no event shall any holder of Warrants be required to make any payment of a fractional cent. In lieu of fractional Shares, there shall be paid to the registered holders of Warrant Certificates at the time Warrants evidenced thereby are exercised as herein provided an amount in cash (rounded to the nearest cent) equal to the same fraction of the Current Market Value per Share on the Business Day immediately preceding the exercise of such Warrants. Such payments will be made by check or by transfer to an account maintained by such registered holder with a bank in The City of New York. If any holder surrenders for exercise more than one Warrant Certificate, the number of Shares deliverable to such holder shall be computed on the basis of the aggregate amount of all the Warrants exercised by such holder. SECTION 5.03. CERTAIN DISTRIBUTIONS. If at any time the Company grants, issues or sells options, convertible securities or rights to purchase Capital Stock, warrants or other securities PRO RATA to the record holders of Common Stock (the "DISTRIBUTION RIGHTS") or, without duplication, makes any dividend or otherwise makes any distribution, including, subject to applicable law, pursuant to any plan of liquidation ("DISTRIBUTION") on Common Stock (whether in cash, property, evidences of indebtedness or otherwise), then the Company shall grant, issue, sell or make to each 31 registered holder of Warrants then outstanding the aggregate Distribution Rights or Distribution, as the case may be, which such holder would have acquired if such holder had held the maximum number of Shares acquirable upon complete exercise of such holder's Warrants (regardless of whether the Warrants are then exercisable and without giving effect to the Cashless Exercise option) immediately before the record date for the grant, issuance or sale of such Distribution Rights or Distribution, as the case may be, or, if there is no such record date, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Distribution Rights or Distribution, as the case may be. ARTICLE VI CONCERNING THE WARRANT AGENT SECTION 6.01. WARRANT AGENT. The Company hereby appoints First Trust National Association as Warrant Agent of the Company in respect of the Warrants and the Warrant Certificates upon the terms and subject to the conditions herein and in the Warrant Certificates set forth, and First Trust National Association hereby accepts such appointment. The Warrant Agent shall have the powers and authority specifically granted to and conferred upon it in the Warrant Certificates and hereby and such further powers and authority to act on behalf of the Company as the Company may hereafter grant to or confer upon it and it shall accept in writing. All of the terms and provisions with respect to such powers and authority contained in the Warrant Certificates are subject to and governed by the terms and provisions hereof. The Warrant Agent may act through agents and shall not be responsible for the misconduct or negligence of any such agent appointed with due care. SECTION 6.02. CONDITIONS OF WARRANT AGENT'S OBLIGATIONS. The Warrant Agent accepts its obligations herein set forth upon the terms and conditions hereof and in the Warrant Certificates, including the following, to all of which the Company agrees and to all of which the rights hereunder of the holders from time to time of the Warrant Certificates shall be subject: (a) The Warrant Agent shall be entitled to compensation to be agreed upon with the Company in writing for all services rendered by it and the Company agrees promptly to pay such compensation and to reimburse the Warrant Agent for its reasonable out-of-pocket expenses (including reasonable fees and expenses of counsel) incurred without gross negligence or willful misconduct on its part in connection with the services rendered by it hereunder. The Company also agrees to indemnify the Warrant Agent and any predecessor Warrant Agent, their directors, officers, affiliates, agents and employees for, and to hold them and their directors, officers, affiliates, agents and employees harmless against, any loss, liability or expense of any nature whatsoever (including, without limitation, reasonable fees and expenses of counsel) incurred without gross negligence or willful misconduct on the part of the Warrant Agent, arising out of or in connection with its acting as such Warrant Agent hereunder and its exercise of its rights and performance of its obligations hereunder. The 32 obligations of the Company under this Section 6.02 shall survive the exercise and the expiration of the Warrant Certificates and the resignation and removal of the Warrant Agent. (b) In acting under this Agreement and in connection with the Warrant Certificates, the Warrant Agent is acting solely as agent of the Company and does not assume any obligation or relationship of agency or trust for or with any of the owners or holders of the Warrant Certificates. (c) The Warrant Agent may consult with counsel of its selection and any advice or written opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion. (d) The Warrant Agent shall be fully protected and shall incur no liability for or in respect of any action taken or omitted to be taken or thing suffered by it in reliance upon any Warrant Certificate, notice, direction, consent, certificate, affidavit, opinion of counsel, instruction, statement or other paper or document reasonably believed by it to be genuine and to have been presented or signed by the proper parties. (e) The Warrant Agent, and its officers, directors, affiliates and employees ("RELATED PARTIES"), may become the owners of, or acquire any interest in, Warrant Certificates, shares or other obligations of the Company with the same rights that it or they would have it if were not the Warrant Agent hereunder and, to the extent permitted by applicable law, it or they may engage or be interested in any financial or other transaction with the Company and may act on, or as depositary, trustee or agent for, any committee or body of holders of shares or other obligations of the Company as freely as if it were not the Warrant Agent hereunder. Nothing in this Agreement shall be deemed to prevent the Warrant Agent or such Related Parties from acting in any other capacity for the Company. (f) The Warrant Agent shall not be under any liability for interest on, and shall not be required to invest, any monies at any time received by it pursuant to any of the provisions of this Agreement or of the Warrant Certificates. (g) The Warrant Agent shall not be under any responsibility in respect of the validity of this Agreement (or any term or provision hereof) or the execution and delivery hereof (except the due execution and delivery hereof by the Warrant Agent) or in respect of the validity or execution of any Warrant Certificate (except its authentication thereof). (h) The recitals and other statements contained herein and in the Warrant Certificates (except as to the Warrant Agent's authentication thereon) shall be taken as the statements of the Company and the Warrant Agent assumes no responsibility for the correctness of the same. The Warrant Agent does not make any representation as to the validity or sufficiency of this Agreement or the Warrant Certificates, except for its due execution and delivery of 33 this Agreement; PROVIDED, HOWEVER, that the Warrant Agent shall not be relieved of its duty to authenticate the Warrant Certificates as authorized by this Agreement. The Warrant Agent shall not be accountable for the use or application by the Company of the proceeds of the exercise of any Warrant. (i) Before the Warrant Agent acts or refrains from acting with respect to any matter contemplated by this Warrant Agreement, it may require: (1) an Officers' Certificate stating on behalf of the Company that, in the opinion of the signers, all conditions precedent, if any, provided for in this Warrant Agreement relating to the proposed action have been complied with; and (2) if reasonably necessary in the sole judgment of the Warrant Agent, an opinion of counsel for the Company stating that, in the opinion of such counsel, all such conditions precedent have been complied with provided that such matter is one customarily opined on by counsel. Each Officers' Certificate or, if requested, an opinion of counsel with respect to compliance with a condition or covenant provided for in this Warrant Agreement shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. (j) The Warrant Agent shall be obligated to perform such duties as are herein and in the Warrant Certificates specifically set forth and no implied duties or obligations shall be read into this Agreement or the Warrant Certificates against the Warrant Agent. The Warrant Agent shall not be accountable or under any duty or responsibility for the use by the Company of any of the Warrant Certificates authenticated by the Warrant Agent and delivered by it to the Company pursuant to this Agreement. The Warrant Agent shall have no duty or responsibility in case of any default by the Company in the performance of its covenants or agreements contained in the Warrant Certificates or in the case of the receipt of any written demand from a holder of a Warrant Certificate with 34 respect to such default, including, without limiting the generality of the foregoing, any duty or responsibility to initiate or attempt to initiate any proceedings at law or otherwise or, except as provided in Section 7.02 hereof, to make any demand upon the Company. (k) Unless otherwise specifically provided herein, any order, certificate, notice, request, direction or other communication from the Company made or given under any provision of this Agreement shall be sufficient if signed by its Chairman of the Board of Directors, its President, its Treasurer, its Controller or any Vice President or its Secretary or any Assistant Secretary. (l) The Warrant Agent shall have no responsibility in respect of any adjustment pursuant to Article V hereof. (m) The Company agrees that it will perform, execute, acknowledge and deliver, or cause to be performed, executed, acknowledged and delivered, all such further and other acts, instruments and assurances as may reasonably be required by the Warrant Agent for the carrying out or performing by the Warrant Agent of the provisions of this Agreement. (n) The Warrant Agent is hereby authorized and directed to accept written instructions with respect to the performance of its duties hereunder from any one of the Chairman of the Board of Directors, the President, the Treasurer, the Controller, any Vice President or the Sec retary or any Assistant Secretary of the Company or any other officer or official of the Company reasonably believed to be authorized to give such instructions and to apply to such officers or officials for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions with respect to any matter arising in connection with the Warrant Agent's duties and obligations arising under this Agreement. Such application by the Warrant Agent for written instructions from the Company may, at the option of the Warrant Agent, set forth in writing any action proposed to be taken or omitted by the Warrant Agent with respect to its duties or obligations under this Agreement and the date on or after which such action shall be taken and the Warrant Agent shall not be liable for any action taken or omitted in accordance with a proposal included in any such application on or after the date specified therein (which date shall be not less than 10 Business Days after the Company receives such application unless the Company consents to a shorter period), provided that (i) such application includes a statement to the effect that it is being made pursuant to this paragraph (n) and that unless objected to prior to such date specified in the application, the Warrant Agent will not be liable for any such action or omission to the extent set forth in such paragraph (n) and (ii) prior to taking or omitting any such action, the Warrant Agent has not received written instructions objecting to such proposed action or omission. (o) Whenever in the performance of its duties under this Agreement the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and 35 established by a certificate signed on behalf of the Company by any one of the Chairman of the Board of Directors, the President, the Treasurer, the Controller, any Vice President or the Secretary or any Assistant Secretary of the Company or any other officer or official of the Company reasonably believed to be authorized to give such instructions and delivered to the Warrant Agent; and such certificate shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (p) The Warrant Agent shall not be required to risk or expend its own funds in the performance of its obligations and duties hereunder. SECTION 6.03. RESIGNATION AND APPOINTMENT OF SUCCESSOR. (a) The Company agrees, for the benefit of the holders from time to time of the Warrant Certificates, that there shall at all times be a Warrant Agent hereunder. (b) The Warrant Agent may at any time resign as Warrant Agent by giving written notice to the Company of such intention on its part, specifying the date on which its desired resignation shall become effective; PROVIDED, HOWEVER, that such date shall be at least 60 days after the date on which such notice is given unless the Company agrees to accept less notice. Upon receiving such notice of resignation, the Company shall promptly appoint a successor Warrant Agent, qualified as provided in Section 6.03(d) hereof, by written instrument in duplicate signed on behalf of the Company, one copy of which shall be delivered to the resigning Warrant Agent and one copy to the successor Warrant Agent. As provided in Section 6.03(d) hereof, such resignation shall become effective upon the earlier of (x) the acceptance of the appointment by the successor Warrant Agent or (y) 60 days after receipt by the Company of notice of such resignation. The Company may, at any time and for any reason, and shall, upon any event set forth in the next succeeding sentence, remove the Warrant Agent and appoint a successor Warrant Agent by written instrument in duplicate, specifying such removal and the date on which it is intended to become effective, signed on behalf of the Company, one copy of which shall be delivered to the Warrant Agent being removed and one copy to the successor Warrant Agent. The Warrant Agent shall be removed as aforesaid if it shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Warrant Agent or of its property shall be appointed, or any public officer shall take charge or control of it or of its property or affairs for the purpose of rehabilitation, conservation or liquidation. Any removal of the Warrant Agent and any appointment of a successor Warrant Agent shall become effective upon acceptance of appointment by the successor Warrant Agent as provided in Section 6.03(d). As soon as practicable after appointment of the successor Warrant Agent, the Company shall cause written notice of the change in the Warrant Agent to be given to each of the registered holders of the Warrants in the manner provided for in Section 8.04 hereof. (c) Upon resignation or removal of the Warrant Agent, if the Company shall fail to appoint a successor Warrant Agent within a period of 60 days after receipt of such notice of resignation or removal, then the holder of any Warrant Certificate or the retiring Warrant Agent may apply to a court of competent jurisdiction for the appointment of a successor to the Warrant Agent. 36 Pending appointment of a successor to the Warrant Agent, either by the Company or by such a court, the duties of the Warrant Agent shall be carried out by the Company. (d) Any successor Warrant Agent, whether appointed by the Company or by a court, shall be a bank or trust company in good standing, incorporated under the laws of the United States of America or any State thereof and having, at the time of its appointment, a combined capital surplus of at least $50 million. Such successor Warrant Agent shall execute and deliver to its predecessor and to the Company an instrument accepting such appointment hereunder and all the provisions of this Agreement, and thereupon such successor Warrant Agent, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as Warrant Agent hereunder, and such predecessor shall thereupon become obligated to (i) transfer and deliver, and such successor Warrant Agent shall be entitled to receive, all securities, records or other property on deposit with or held by such predecessor as Warrant Agent hereunder and (ii) upon payment of the amounts then due it pursuant to Section 6.02(a) hereof, pay over, and such successor Warrant Agent shall be entitled to receive, all monies deposited with or held by any predecessor Warrant Agent hereunder. (e) Any corporation or bank into which the Warrant Agent hereunder may be merged or converted, or any corporation or bank with which the Warrant Agent may be consolidated, or any corporation or bank resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party, or any corporation or bank to which the Warrant Agent shall sell or otherwise transfer all or substantially all of its corporate trust business, shall be the successor to the Warrant Agent under this Agreement (provided that such corporation or bank shall be qualified as aforesaid) without the execution or filing of any document or any further act on the part of any of the parties hereto. (f) No Warrant Agent under this Warrant Agreement shall be personally liable for any action or omission of any successor Warrant Agent. ARTICLE VII MISCELLANEOUS SECTION 7.01. AMENDMENT. This Agreement and the terms of the Warrants may be amended by the Company and the Warrant Agent, without the consent of the holder of any Warrant Certificate, for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective or inconsistent provision contained herein or therein, or to effect any assumptions of the Company's obligations hereunder and thereunder by a successor corporation under the circumstances described in Section 5.01(d) hereof or in any other manner which the Company may deem necessary or desirable and which shall not adversely affect the interests of the holders of the Warrant Certificates. 37 The Company and the Warrant Agent may amend, modify or supplement this Agreement and the terms of the Warrants, and waivers to departures from the terms hereof and thereof may be given, with the consent of the Requisite Holders (as defined below) for the purpose of adding any provision to or changing in any manner or eliminating any of the provisions of this Agreement or modifying in any manner the rights of the holders of the outstanding Warrants; PROVIDED, HOWEVER, that no such modification may be made to a Warrant that increases the Exercise Price or decreases the Exercise Rate, modifies anti-dilution adjustments to the Exercise Rate in a manner adverse to the holder, makes any change to the first paragraph of Section 5.01(d), reduces the period of time during which such Warrant is exercisable hereunder, or effects any change to this Section 7.01 without the consent of the holder of such Warrant. "REQUISITE HOLDERS" means (i), in the case of any amendment, modification or supplement that does not affect Article IV, the holders of a majority of the outstanding Warrants or (ii) in the case of any amendment, modification or supplement that affects Article IV, the holders of a majority of (x) the Shares issued upon exercise of the Warrants that, at the date of determination, are "restricted securities" within the meaning of the Securities Act and (y) of the outstanding Warrants (treating for approval purposes each Warrant as entitling the holder to a vote in an amount equal to the number of Shares issuable upon exercise of such Warrant in full). Notwithstanding any other provision of this Agreement, the Warrant Agent's consent must be obtained regarding any supplement or amendment which alters the Warrant Agent's rights or duties (it being expressly understood that the foregoing shall not be in derogation of the right of the Company to remove the Warrant Agent in accordance with Section 6.03 hereof). For purposes of any amendment, modification or waiver hereunder, Warrants held by the Company or any of its Affiliates shall be disregarded. Any modification or amendment made in accordance with this Agreement will be conclusive and binding on all present and future holders of Warrant Certificates whether or not they have consented to such modification or amendment or waiver and whether or not notation of such modification or amendment is made upon such Warrant Certificates. Any instrument given by or on behalf of any holder of a Warrant Certificate in connection with any consent to any modification or amendment will be conclusive and binding on all subsequent holders of such Warrant Certificate. SECTION 7.02. NOTICES AND DEMANDS TO THE COMPANY AND WARRANT AGENT. If the Warrant Agent shall receive any notice or demand addressed to the Company by the holder of a Warrant Certificate pursuant to the provisions hereof or of the Warrant Certificates, the Warrant Agent shall promptly forward such notice or demand to the Company. SECTION 7.03. ADDRESSES FOR NOTICES TO PARTIES AND FOR TRANSMISSION OF DOCUMENTS. All notices hereunder to the parties hereto shall be deemed to have been given when sent by certified or registered mail, postage prepaid, or by facsimile transmission, confirmed by first class mail, postage prepaid, addressed to any party hereto as follows: 38 To the Company: WAM!NET Inc. 6100 West 110th Street Minneapolis, Minnesota 55438 Facsimile No. (612) 885-0687 Attention: Chief Executive Officer with a copy to: Willkie Farr & Gallagher One Citicorp Center 153 East 53rd Street New York, NY 10022 Attention: Daniel D. Rubino, Esq. To the Warrant Agent: First Trust National Association 180 East 5th Street St. Paul, Minnesota 55104 Facsimile No.: (612) 244-0711 Attention: Corporate Trust Department Principal Corporate Trust Office in New York City: 100 Wall Street, Suite 2000 New York, NY 10005 or at any other address of which either of the foregoing shall have notified the other in writing. SECTION 7.04. NOTICES TO HOLDERS. Notices to holders of Warrants shall be mailed to such holders at the addresses of such holders as they appear in the Warrant Register. Any such notice shall be sufficiently given if sent by first-class mail, postage prepaid. SECTION 7.05. APPLICABLE LAW; SUBMISSION TO JURISDICTION. THE VALIDITY, INTERPRETATION AND PERFORMANCE OF THIS AGREEMENT AND EACH WARRANT CERTIFICATE ISSUED HEREUNDER AND OF THE RESPECTIVE TERMS AND PROVISIONS THEREOF SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PROVISIONS THEREOF. 39 SECTION 7.06. PERSONS HAVING RIGHTS UNDER AGREEMENT. Nothing in this Agreement expressed or implied and nothing that may be inferred from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the Company, the Warrant Agent, the holders of the Warrant Certificates and, with respect to Section 4.03 and 4.04, the holders of Shares issued pursuant to Warrants, any right, remedy or claim under or by reason of this Agreement or of any covenant, condition, stipulation, promise or agreement hereof; and all covenants (except for Sections 4.03 and 4.04, which shall also be for the benefit of all holders of Shares issued pursuant to Warrants), conditions, stipulations, promises and agreements in this Agreement contained shall be for the sole and exclusive benefit of the Company and the Warrant Agent and their successors and of the holders of the Warrant Certificates. SECTION 7.07. HEADINGS. The descriptive headings of the several Articles and Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. SECTION 7.08. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original; but such counterparts shall together constitute but one and the same instrument. SECTION 7.09. INSPECTION OF AGREEMENT. A copy of this Agreement shall be available during regular business hours at the principal corporate trust office of the Warrant Agent, for inspection by the holder of any Warrant Certificate. The Warrant Agent may require such holder to submit his Warrant Certificate for inspection by it. SECTION 7.10. AVAILABILITY OF EQUITABLE REMEDIES. Since a breach of the provisions of this Agreement could not adequately be compensated by money damages, holders of Warrants shall be entitled, in addition to any other right or remedy available to them, to an injunction restraining such breach or a threatened breach and to specific performance of any such provision of this Agreement, and in either case no bond or other security shall be required in connection therewith, and the parties hereby consent to such injunction and to the ordering of specific performance. SECTION 7.11. OBTAINING OF GOVERNMENTAL APPROVALS. The Company will from time to time take all action required to be taken by it which may be necessary to obtain and keep effective any and all permits, consents and approvals of governmental agencies and authorities and securities acts filings under United States Federal and state laws, and the rules and regulations of all stock exchanges on which the Warrants are listed which may be or become requisite in connection with the issuance, sale, transfer, and delivery of the Warrant Certificates, the exercise of the Warrants or the issuance, sale, transfer and delivery of the Shares issued upon exercise of the Warrants. 40 IN WITNESS WHEREOF, this Warrant Agreement has been duly executed by the parties hereto as of the day and year first above written. WAM!NET INC. By: /s/ Edward J. Driscoll III ------------------------------ Name: Edward J. Driscoll III ---------------------------- Title: President and CEO --------------------------- FIRST TRUST NATIONAL ASSOCIATION, as Warrant Agent By: /s/ Kathe Barrett ------------------------------ Name: Kathe Barrett ---------------------------- Title: Trust Officer --------------------------- 41 EXHIBIT A [FORM OF WARRANT CERTIFICATE] [FACE] THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OF OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECU RITIES ACT ("RULE 144A")) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT ("REGULATION S"), (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S, PURSUANT TO RULE 904 OF REGULATION S OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM IN REGULATION S. A-1 REGISTERED No. CUSIP 933590 11 9 ________ WARRANTS WARRANT CERTIFICATE WAM!NET INC. This Warrant Certificate certifies that ____________, or registered assigns, is the registered holder of ________ Warrants (the "Warrants") to purchase shares of Common Stock, par value $0.01 per share (the "Common Stock"), of WAM!NET INC., a Minnesota corporation (the "Company," which term includes its successors and assigns). Each Warrant entitles the holder to purchase from the Company at any time from 9:00 a.m. New York City time on or after the Exercisability Date until 5:00 p.m., New York City time, on March 1, 2005 (the "Expiration Date"), 2.01 fully paid, registered and non-assessable shares of Common Stock, subject to adjustment as provided in Article V of the Warrant Agreement (the "Exercise Rate"), at the exercise price of $0.01 for each share purchased (the "Exercise Price") (the shares of Common Stock purchasable upon exercise of a Warrant being herein referred to as the "Shares" and, unless the context otherwise requires, such term shall also mean all other securities or property purchasable and deliverable upon exercise of a Warrant as provided in the Warrant Agreement), upon surrender of this Warrant Certificate and payment of the Exercise Price (i) in United States dollars or by certified check or official bank check, (ii) pursuant to the next sentence or (iii) in any combination of (i) and (ii), at any office or agency maintained for that purpose by the Company (the "Warrant Agent Office"), subject to the conditions set forth herein and in the Warrant Agreement. In addition to payment by cash or check, a Warrant may be exercised solely by the surrender of the Warrant, and without the payment of the Exercise Price in cash, for such number of Shares equal to the product of (1) the number of Shares for which such Warrant is exercisable with payment of the Exercise Price as in cash of the date of exercise and (2) the Cashless Exercise Ratio. For purposes of this Warrant, the "Cashless Exercise Ratio" shall equal a fraction, the numerator of which is the excess of the Current Market Value per share of the Common Stock on the date of exercise over the Exercise Price per share as of the date of exercise and the denominator of which is the Current Market Value per share of the Common Stock on the date of exercise. An exercise of a Warrant in accordance with the immediately preceding sentences is herein called a "Cashless Exercise." Upon surrender of a Warrant Certificate representing more than one Warrant in connection with the Holder's option to elect a Cashless Exercise, the number of Shares deliverable upon a Cashless Exercise shall be equal to the Cashless Exercise Ratio multiplied by the product of (a) the number of Warrants that the holder specifies is to be exercised pursuant to a Cashless Exercise and (b) the aggregate number of Shares for which such Warrants are then exercisable (without giving effect to the Cashless Exercise option). If the Company has not effected the registration under the Securities Act of the offer and sale of the Shares by the Company to the holders of the Warrants upon the exercise thereof, the Company may elect to require that holders of the Warrants effect the exercise of the Warrants solely pursuant to the A-2 Cashless Exercise option and may also amend the Warrants to eliminate the requirements for payment of the Exercise Price with respect tp such Cashless Exercise option. A Warrant may not be exercised in part. All provisions of the Warrant Agreement shall be applicable with respect to an exercise of a Warrant Certificate pursuant to a Cashless Exercise for less than the full number of Warrants represented thereby. Capitalized terms used herein without being defined herein shall have the definitions ascribed to such terms in the Warrant Agreement. This Warrant has initially been issued as part of a unit ("Unit"), each Unit consisting of three Warrants and $1,000 principal amount at maturity of the Company's 13 1/4% Senior Discount Notes due 2005 (the "Notes"). As set forth in the Warrant Agreement and the Indenture, dated as of March 5, 1998 (the "Indenture"), between the Company and First Trust National Association, as Trustee, pursuant to which the Notes have been issued, the Warrants and the Notes will not be separately transferable until the "Separability Date", which means the earliest to occur of: (i) September 1, 1998, (ii) the occurrence of an Exercise Event (as defined herein), (iii) the occurrence of an Event of Default (as defined in the Indenture), (iv) the date on which a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to a registered exchange offer for the Notes or covering the sale by holders of the Notes is declared effective under the Securities Act, (v) immediately prior to any redemption of Notes by the Company from the net proceeds of an Initial Public Equity Offering (as defined in the Indenture), (vi) immediately prior to the occurrence of a Warrant Change of Control (as defined in the Warrant Agreement) or (v) such earlier date as determined by Merrill Lynch & Co. in its sole discretion. "Current Market Value" per share of Common Stock or any other security at any date of determination means (i) if the security is not traded on a national or regional securities exchange, The Nasdaq Stock Market or in a recognized over-the-counter market (a "Quoted Security"), (a) the fair market value of the security, as determined in good faith by the Board of Directors of the Company and certified in a board resolution delivered to the Warrant Agent, which shall be based on the most recently completed arms-length transaction between the Company and a person other than an Affiliate of the Company, the closing of which shall have occurred within the six-month period preceding such determination, or (b) if no such transaction shall have occurred within such six-month period, the fair market value of the security as determined by a nationally or regionally recognized independent financial expert (provided that, in the case of the calculation of Current Market Value solely for determining the cash value of fractional shares, the last determination of Current Market Value pursuant to this clause (i), if made within the preceding six months, may be utilized), which determination shall be set forth in an officers' certificate delivered to the Warrant Agent, or (ii) (a) if the security is a Quoted Security, the average of the daily closing sales prices of such security for the 20 consecutive trading days immediately preceding such date, or (b) if the security has been a Quoted Security for less than 20 consecutive trading days before such date, then the average of the daily closing sales prices for all of the trading days before such date for which closing sales prices are available. The closing sales price of a security for each such trading day shall be: (A) in the case of a security listed or admitted to trading on any United States national or regional securities exchange or on The Nasdaq Stock Market, the closing sales price, regular way, on such day, or if no sale takes place on such day, the average of the closing bid and asked prices A-3 on such day or (B) in the case of a security not then listed or admitted to trading on any national or regional securities exchange or The Nasdaq Stock Market, the average of the closing bid and asked prices on such day, as reported by a reputable quotation source designated by the Company, or in the case of a security as to which no such reported bid and asked prices are available on such day, the average of the reported high bid and low asked prices on such day, as reported by a reputable quotation service, or a newspaper of general circulation in the Borough of Manhattan, City and State of New York, customarily published on each business day, designated by the Company, or, if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than two days prior to the date in question) for which prices have been so reported; provided, however, that if there are no bid and asked prices reported for such security during such two-day period, Current Market Value shall be determined as if the security were not a Quoted Security. "Exercisability Date" means, with respect to each Warrant, the date as of which both of the following shall have occurred (whether before or on such date): (i) the Separability Date and (ii) an Exercise Event. "Exercise Event" means, with respect to each Warrant, the date of the occurrence of the earliest of: (1) immediately prior to the occurrence of a Warrant Change of Control, (2 )(a) the 90th day (or such earlier date as determined by the Company in its sole discretion) following an Initial Public Equity Offering (as defined in the Warrant Agreement) or (b) upon the closing of the Initial Public Equity Offering but only in respect of Warrants, if any, required to be exercised to permit the holders thereof to sell Shares pursuant to their registration rights, (3) a class of equity securities of the Company is listed on a national securities exchange or authorized for quotation on The Nasdaq Stock Market or is otherwise registered under the Exchange Act, or (4) September 1, 2000. "Independent Financial Expert" means a United States investment banking firm of national or regional standing in the United States (i) which does not, and whose directors and executive officers or Affiliates (as defined in the Warrant Agreement) do not, have a direct or indirect material financial interest for its or their proprietary account in the Company or any of its Affiliates and (ii) which, in the judgment of the Board of Directors of the Company, is otherwise independent with respect to the Company and its Affiliates and qualified to perform the task for which it is to be engaged. The Company has initially designated the principal corporate trust office of the Warrant Agent in the Borough of Manhattan, The City of New York, as the initial Warrant Agent Office. Any Warrants not exercised on or prior to 5:00 p.m., New York City time, on March 1, 2005 shall thereafter be void. A-4 If the Company merges, amalgamates or consolidates with or into, or sells all or substantially all of its property and assets to, another Person solely for cash, the holders of Warrants shall be entitled to such cash on the date of consummation of such transaction on an equal basis with holders of Shares (or other securities issuable upon exercise of the Warrants) as if the Warrants had been exercised immediately prior to such event, less the Exercise Price. Upon receipt of such cash the rights of a holder of a Warrant shall terminate and cease and such holder's Warrants shall expire. Reference is hereby made to the further provisions on the reverse hereof which provisions shall for all purposes have the same effect as though fully set forth at this place. This Warrant Certificate shall not be valid unless authenticated by the Warrant Agent, as such term is used in the Warrant Agreement. THIS WARRANT CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PROVISIONS THEREOF. A-5 WITNESS the signatures of the Company's duly authorized officers. Dated: WAM!NET INC. By: ---------------------------- Name: Title: Attest: By: ------------------------- Name: Title: Certificate of Authentication: This is one of the Warrants referred to in the within-mentioned Warrant Agreement: FIRST TRUST NATIONAL ASSOCIATION, as Warrant Agent By: ------------------------------ Authorized Signatory A-6 [REVERSE] WAM!NET INC. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants expiring at 5:00 p.m., New York City time, on the Expiration Date, each of which represents the right to purchase, at any time on or after the Exercisability Date and on or prior to the Expiration Date, 2.01 shares of Common Stock, subject to adjustment as set forth in the Warrant Agreement. The Warrants are issued pursuant to a Warrant Agreement dated as of March 5, 1998 (as amended from time to time, the "Warrant Agreement"), duly executed and delivered by the Company to First Trust National Association, as Warrant Agent (the "Warrant Agent"), which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Warrant Agent, the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. Warrants may be exercised by (i) surrendering at any Warrant Agent Office this Warrant Certificate with the form of Election to Exercise set forth hereon duly completed and executed and (ii) to the extent such exercise is not being effected through a Cashless Exercise, by paying in full the Exercise Price for each Warrant exercised and any other amounts required to be paid pursuant to the Warrant Agreement. If all of the items referred to in the preceding paragraph are received by the Warrant Agent at or prior to 11:00 a.m., New York City time, on a Business Day, the exercise of the Warrant to which such items relate will be effective on such Business Day. If all items referred to in the preceding paragraph are not received until after 11:00 a.m., New York City time, on a Business Day, the exercise of the Warrants to which such items relate will be deemed to be effective on the next succeeding Business Day. Notwithstanding the foregoing, in the case of an exercise of Warrants on the Expiration Date, if all of the items referred to in the preceding paragraph are received by the Warrant Agent at or prior to 5:00 p.m., New York City time, on the Expiration Date, the exercise of the Warrant to which such items relate will be effective on the Expiration Date and prior to the expiration of such Warrant. As soon as practicable after the exercise of any Warrant or Warrants, the Company shall issue or cause to be issued to or upon the written order of the registered holder of this Warrant Certificate, a certificate or certificates evidencing the Share or Shares to which such holder is entitled, in fully registered form, registered in such name or names as may be directed by such holder pursuant to the form of Election to Exercise, as set forth hereon. Such certificate or certificates evidencing the Share or Shares shall be deemed to have been issued and any persons who are designated to be named therein shall be deemed to have become the holder of record of such Share or Shares as of the close of business on the date upon which the exercise of this Warrant was deemed to be effective as provided in the preceding paragraph. A-7 The Company will not be required to issue fractional shares of Common Stock upon exercise of Warrants or distribute Share certificates that evidence fractional shares of Common Stock. In lieu of fractional shares of Common Stock, there shall be paid to the holder of this Warrant Certificate at the time such Warrant Certificate is exercised an amount in cash equal to the same fraction of the Current Market Value per share of Common Stock on the Business Day preceding the date this Warrant Certificate is surrendered for exercise. Warrant Certificates, when surrendered at any office or agency maintained by the Company for that purpose by the registered holder thereof in person or by legal representative or attorney duly authorized in writing, may be exchanged for a new Warrant Certificate or new Warrant Certificates evidencing in the aggregate a like number of Warrants, in the manner and subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at any office or agency maintained by the Company for that purpose, a new Warrant Certificate evidencing in the aggregate a like number of Warrants shall be issued to the transferee in exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. The Company and the Warrant Agent may deem and treat the registered holder hereof as the absolute owner of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone) for the purpose of any exercise hereof and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. The term "Business Day" shall mean any day on which (i) banks in New York City, (ii) the principal U.S. securities exchange or market, if any, on which the Common Stock is listed or admitted to trading and (iii) the principal U.S. securities exchange or market, if any, on which any other securities underlying the Warrants are listed or admitted to trading are open for business. The Warrants and the Shares issuable upon exercise thereof are entitled to the benefits of a registration rights agreement (as amended from time to time, the "Registration Rights Agreement"), pursuant to which the holders representing not less than a majority of Registrable Securities (as defined in the Registration Rights Agreement) have the right under certain circumstances to require the Company to effect one demand registration of the Registrable Securities. The Registration Rights Agreement also provides the holders of Registrable Securities with the right, subject to the conditions and limitations contained therein, to include the Registrable Securities in certain registration statements filed by the Company for its account or for the account of any of its other securityholders. The Registration Rights Agreement further provides, among other things, that (i) prior to the Triggering Date (as defined in the Registration Rights Agreement), if WorldCom Inc, a Georgia corporation ("WorldCom") or its Affiliates (as defined in the Registration Rights Agreement) effect a direct or indirect sale or other disposition of capital stock of the Company to any proposed purchaser in any transaction or a series of related transactions resulting A-8 in a Warrant Change of Control, the holders of Warrants and Shares will have the right to sell all of such securities to the proposed purchaser at the same price as received by WorldCom or its Affiliates and (ii) prior to an Initial Public Equity Offering, WorldCom or its Affiliates may require the holders of Warrants and Shares to sell such securities to any person to whom WorldCom and such Affiliates sell all of their capital stock in the Company in a transaction that results in a Warrant Change of Control, at the same price as that received by WorldCom and such Affiliates. The Company will furnish to any holder of a Warrant upon written request and without charge a copy of the Warrant Agreement and the Registration Rights Agreement. Requests may be made to: WAM!NET Inc., 6100 West 110th Street, Minneapolis, Minnesota 55438; Attention: Secretary. A-9 (ELECTION TO EXERCISE) (To be executed upon exercise of Warrants on the Exercise Date) The undersigned hereby irrevocably elects to exercise this Warrant Certificate as to ____ Warrants and to purchase the whole number of Shares issuable upon exercise thereof and herewith tenders payment for such Shares as follows: $ __________________ in cash or by certified or official bank check; or by surrender of _____ Warrants pursuant to a Cashless Exercise at the current Cashless Exercise Ratio. The undersigned requests that a certificate representing such Shares be registered in the name of ________________________ whose address is ___________________________________________ and that such Shares be delivered to _________________________ whose address is ___________________________________________. Any cash payments to be paid in lieu of a fractional Share should be made to _____________________________ whose address is ___________________________ and the check epresenting payment thereof should be delivered to _________________________________________ whose address is ___________________________________________________. Dated __________________________, Name of holder of Warrant Certificate: ------------------------------------ (Please Print) Tax Identification or Social Security Number: ---------------------------------- Address: ------------------------------------------------- ------------------------------------------------- Signature: ----------------------------------------------- Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever and if the certificate representing the Shares is to be registered in a name other than that in which this Warrant Certificate is registered, or if any cash payment to be paid in lieu of a fractional share is to be made to a person other than the registered holder of this Warrant Certificate, the signature of the holder hereof must be guaranteed. A-10 Dated ----------------------------- Signature: ------------------------------------------- Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed: -------------------------------- [FORM OF ASSIGNMENT] For value received ___________________________ hereby sells, assigns and transfers unto _________________________________ the within Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _________________________ attorney, to transfer said Warrant Certificate on the books of the within-named Company, with full power of substitution in the premises. Dated , 199 ------------ -- Signature: ------------------------------------------- Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed: -------------------------------- In connection with any transfer of Warrants represented by this Warrant Certificate occurring prior to the date which is the earlier of (i) the date of the declaration by the Securities and Exchange Commission of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act") covering resales of the Warrants (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) the Resale Restriction Termination Date, the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that: A-11 [CHECK ONE] [ ] (a) the Warrants are being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. OR [ ] (b) this Warrant Certificate is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in Section 1.08 of the Warrant Agreement. If none of the foregoing boxes is checked, the Unit Agent shall not be obligated to register this Warrant Certificate in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth Section 1.08 of the Warrant Agreement shall have been satisfied. Date: Your signature: ---------------- --------------------------- --------------------------- (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: ------------------------------------- TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing the Warrants for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ---------------- -------------------------------- -------------------------------- NOTICE: To be executed by an executive officer A-12 SCHEDULE OF EXCHANGES OF DEFINITIVE AND GLOBAL WARRANTS The following exchanges made in respect of certified Warrants or another Global Warrant have been made:
AMOUNT OF DECREASE IN AMOUNT OF INCREASE IN NUMBER OF WARRANTS NUMBER OF WARRANTS NUMBER OF WARRANTS OF THIS SUBJECT TO THIS GLOBAL SUBJECT TO THIS GLOBAL GLOBAL WARRANT FOLLOWING SIGNATURE OF AUTHORIZED DATE OF EXCHANGE WARRANT WARRANT SUCH DECREASE (OR INCREASE) OFFICER OF WARRANT AGENT - ---------------- ---------------------- ---------------------- --------------------------- ------------------------
A-13 EXHIBIT B FORM OF LEGEND FOR GLOBAL WARRANT Any Global Warrant authenticated and delivered hereunder shall bear a legend in substantially the following form: THIS SECURITY IS A GLOBAL WARRANT WITHIN THE MEANING OF THE WARRANT AGREEMENT HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT AGREEMENT, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT AGREEMENT. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OF OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. B-14 EXHIBIT C CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF WARRANTS Re: Warrants to Purchase Common Stock (the "Warrants") of WAM!NET INC. THIS CERTIFICATE relates to __________________ Warrants held in [ ]* book-entry or [ ]* certificated form by the undersigned transferor (the "Transferor"). The Transferor:* [ ] has requested the Warrant Agent by written order to deliver in exchange for its beneficial interest in the Global Warrant held by the Depositary a Warrant or Warrants in definitive, registered form of authorized denominations and an aggregate number equal to its beneficial interest in such Global Warrant (or the portion thereof indicated above); or [ ] has requested the Warrant Agent by written order to exchange or register the transfer of a Warrant or Warrants. In connection with such request and in respect of each such Warrant, the Transferor does hereby certify that Transferor is familiar with the Warrant Agreement relating to the above captioned Warrants and the restrictions on transfers thereof as provided in Section 1.08 of such Warrant Agreement, and that the transfer of this Warrant does not require registration under the Securities Act of 1933, as amended (the "ACT") because*: [ ] Such Warrant is being acquired for the Transferor's own account, without transfer (in satisfaction of Section 1.08(a)(y)(A) or Section 1.08(d)(i)(A) of the Warrant Agreement). [ ] Such Warrant is being transferred to a qualified institutional buyer (as defined in Rule 144A under the Act), in reliance on Rule 144A. [ ] Such Warrant is being transferred in reliance on Regulation S under the Act. [ ] Such Warrant is being transferred in accordance with Rule 144 under the Act. C-1 [ ] Such Warrant is being transferred in reliance on and in compliance with an exemption from the registration requirements of the Act. ---------------------------- [INSERT NAME OF TRANSFEROR] By: ------------------------- Date: -------------------- *Check applicable box. C-2 EXHIBIT D ------------, ------ FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH REGULATION S TRANSFERS First Trust National Association Suite 200 100 Wall Street New York, NY 10005 Attention: Corporate Trust Department Ladies and Gentlemen: In connection with our proposed sale of Warrants of WAM!NET Inc. (the "Company"), we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (1) the offer of the Warrants was not made to a person in the United States; (2) either (a) at the time the buy offer was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States, or (b) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States; (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act, as applicable; (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; (5) we have advised the transferee of the transfer restrictions applicable to the Warrants; and D-1 (6) if the circumstance set forth in Rule 904(c) under the Securities Act are applicable, we have complied with the additional conditions therein, including (if applicable) sending a confirmation or other notice stating that the Warrants may be offered and sold during the restricted period specified in Rule 903(c)(2) or (3), as applicable, in accordance with the provisions of Regulation S; pursuant to registration of the Warrants under the Securities Act; or pursuant to an available exemption from the registration requirements under the Act. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Defined terms used herein without definition have the respective meanings provided in Regulation S under the Securities Act. Very truly yours, [Name of Transferor] By: ------------------------------- [Authorized Signature] Upon transfer the Warrants would be registered in the name of the new beneficial owner as follows: Name: ------------------------------- Address: ---------------------------- Taxpayer ID Number: ----------------- D-2 EX-10.1 18 CREDIT AGREEMENT DATED SEPTEMBER 26, 1997 EXHIBIT 10.1 CREDIT AGREEMENT among NETCO COMMUNICATIONS CORPORATION THE LENDING INSTITUTIONS PARTY HERETO, as Lenders, THE FIRST NATIONAL BANK OF CHICAGO, as Agent, dated as of September 26, 1997 TABLE OF CONTENTS
Page ---- ARTICLE I. DEFINITIONS...................................................................................... 1 ARTICLE II. THE CREDITS...................................................................................... 10 2.1. Commitment........................................................................................ 10 2.2. Required Payments; Termination.................................................................... 10 2.3. Ratable Loans..................................................................................... 10 2.4. Types of Advances................................................................................. 10 2.5. Commitment Fee; Reductions in Aggregate Commitment................................................ 11 2.6. Minimum Amount of Each Advance.................................................................... 11 2.7. Optional Principal Payments....................................................................... 11 2.8. Method of Selecting Types and Interest Periods for New Advances................................... 11 2.9. Conversion and Continuation of Outstanding Advances............................................... 12 2.10. Changes in Interest Rate, etc..................................................................... 12 2.11. Rates Applicable After Default.................................................................... 13 2.12. Method of Payment................................................................................. 13 2.13. Noteless Agreement; Evidence of Indebtedness...................................................... 13 2.14. Telephonic Notices................................................................................ 14 2.15. Interest Payment Dates; Interest and Fee Basis.................................................... 14 2.16. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions........................................................................................ 15 2.17. Lending Installations............................................................................. 15 2.18. Non-Receipt of Funds by the Agent................................................................. 15 ARTICLE III. YIELD PROTECTION; TAXES........................................................................ 16 3.1. Yield Protection.................................................................................. 16 3.2. Changes in Capital Adequacy Regulations........................................................... 17 3.3. Availability of Types of Advances................................................................. 17 3.4. Funding Indemnification........................................................................... 17 3.5. Taxes............................................................................................. 18 3.6. Lender Statements; Survival of Indemnity.......................................................... 19
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Page ARTICLE IV. CONDITIONS PRECEDENT............................................................................ 20 4.1. Initial Advance................................................................................... 20 4.2. Each Advance...................................................................................... 21 4.3. Advances for Permitted Acquisitions............................................................... 21 ARTICLE V. REPRESENTATIONS AND WARRANTIES.................................................................... 22 5.1. Existence and Standing............................................................................ 22 5.2. Authorization and Validity........................................................................ 22 5.3. No Conflict; Government Consent................................................................... 22 5.4. Financial Statements.............................................................................. 23 5.5. Material Adverse Change........................................................................... 23 5.6. Taxes............................................................................................. 23 5.7. Litigation and Contingent Obligations............................................................. 23 5.8. Subsidiaries...................................................................................... 23 5.9. ERISA............................................................................................. 24 5.10. Accuracy of Information........................................................................... 24 5.11. Regulation U...................................................................................... 24 5.12. Material Agreements............................................................................... 24 5.13. Compliance With Laws.............................................................................. 24 5.14. Ownership of Properties........................................................................... 24 5.15. Plan Assets; Prohibited Transactions.............................................................. 24 5.16. Environmental Matters............................................................................. 25 5.17. Investment Company Act............................................................................ 25 5.18. Public Utility Holding Company Act................................................................ 25 5.19. Insurance......................................................................................... 25 ARTICLE VI. COVENANTS......................................................................................... 26 6.1. Financial Reporting............................................................................... 26 6.2. Use of Proceeds................................................................................... 27 6.3. Notice of Default................................................................................. 28 6.4. Conduct of Business............................................................................... 28 6.5. Taxes............................................................................................. 28 6.6. Insurance......................................................................................... 28 6.7. Compliance with Laws.............................................................................. 28 6.8. Maintenance of Properties......................................................................... 28
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Page 6.9. Inspection........................................................................................ 29 6.10. Merger............................................................................................ 29 6.11. Affiliates........................................................................................ 29 ARTICLE VII. DEFAULTS......................................................................................... 29 ARTICLE VIII. ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES................................................ 32 8.1. Acceleration...................................................................................... 32 8.2. Amendments........................................................................................ 32 8.3. Preservation of Rights............................................................................ 33 ARTICLE IX. GENERAL PROVISIONS.............................................................................. 33 9.1. Survival of Representations....................................................................... 33 9.2. Governmental Regulation........................................................................... 33 9.3. Headings.......................................................................................... 34 9.4. Entire Agreement.................................................................................. 34 9.5. Several Obligations; Benefits of this Agreement................................................... 34 9.6. Expenses; Indemnification......................................................................... 34 9.7. Numbers of Documents.............................................................................. 35 9.8. Accounting........................................................................................ 35 9.9. Severability of Provisions........................................................................ 35 9.10. Nonliability of Lenders........................................................................... 35 9.11. Confidentiality................................................................................... 36 9.12. Nonreliance....................................................................................... 36 ARTICLE X. THE AGENT......................................................................................... 36 10.1. Appointment; Nature of Relationship............................................................... 36 10.2. Powers............................................................................................ 37 10.3. General Immunity.................................................................................. 37 10.4. No Responsibility for Loans, Recitals, etc........................................................ 37 10.5. Action on Instructions of Lenders................................................................. 37 10.6. Employment of Agents and Counsel.................................................................. 38 10.7. Reliance on Documents; Counsel.................................................................... 38 10.8. Agent's Reimbursement and Indemnification......................................................... 38 10.9. Notice of Default................................................................................. 39
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Page 10.10. Rights as a Lender............................................................................... 39 10.11. Lender Credit Decision........................................................................... 39 10.12. Successor Agent.................................................................................. 39 10.13. Agent's Fee...................................................................................... 40 10.14. Delegation to Affiliates......................................................................... 40 ARTICLE XI. SETOFF; RATABLE PAYMENTS.......................................................................... 41 11.1. Setoff............................................................................................ 41 11.2. Ratable Payments.................................................................................. 41 ARTICLE XII. BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS................................................ 41 12.1. Successors and Assigns............................................................................ 41 12.2. Participations.................................................................................... 42 12.2.1. Permitted Participants; Effect......................................................... 42 12.2.2. Voting Rights.......................................................................... 42 12.2.3. Benefit of Setoff...................................................................... 42 12.3. Assignments....................................................................................... 43 12.3.1. Permitted Assignments.................................................................. 43 12.3.2. Effect; Effective Date................................................................. 43 12.4. Dissemination of Information...................................................................... 44 12.5. Tax Treatment..................................................................................... 44 ARTICLE XIII. NOTICES....................................................................................... 44 13.1. Notices........................................................................................... 44 13.2. Change of Address................................................................................. 45 ARTICLE XIV. COUNTERPARTS................................................................................... 45 ARTICLE XV. CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL............................................................................................ 45 15.1. Choice of Law..................................................................................... 45 15.2. Consent to Jurisdiction........................................................................... 45 15.3. Waiver of Jury Trial.............................................................................. 46
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Page EXHIBITS EXHIBIT A - WORLDCOM, INC. GUARANTY................................................................ 48 EXHIBIT B - FORM OF OPINION OF COUNSEL TO BORROWER................................................. 52 EXHIBIT C - FORM OF OPINION OF COUNSEL TO GUARANTOR................................................ 53 EXHIBIT D - COMPLIANCE CERTIFICATE ................................................................ 54 EXHIBIT E - ASSIGNMENT AGREEMENT .................................................................. 56 EXHIBIT F - LOAN/CREDIT RELATED MONEY TRANSFER INSTRUCTION......................................... 67 EXHIBIT G - NOTE................................................................................... 68 SCHEDULES SCHEDULE 1 - SUBSIDIARIES.......................................................................... 70 SCHEDULE 2 - INDEBTEDNESS AND LIENS................................................................ 71 SCHEDULE 3 - LITIGATION............................................................................ 72
v NETCO COMMUNICATIONS CORPORATION CREDIT AGREEMENT This Agreement, dated as of September 26, 1997, is among NetCo Communications Corporation, the Lenders, and The First National Bank of Chicago, as Agent. The parties hereto agree as follows: ARTICLE I DEFINITIONS As used in this Agreement: "Acquisition" means any transaction, or any series of related transactions, consummated on or after the date of this Agreement, by which the Borrower or any of its Subsidiaries (i) acquires any going business or all or substantially all of the assets of any firm, corporation or limited liability company, or division thereof, whether through purchase of assets, merger or otherwise or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage or voting power) of the outstanding ownership interests of a partnership or limited liability company. "Advance" means a borrowing hereunder (or conversion or continuation thereof) consisting of the aggregate amount of the several Loans made on the same Borrowing Date (or date of conversion or continuation) by the Lenders to the Borrower of the same Type and, in the case of Eurodollar Advances, for the same Interest Period. "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise. "Agent" means The First National Bank of Chicago in its capacity as contractual representative of the Lenders pursuant to Article X, and not in its individual capacity as a Lender, and any successor Agent appointed pursuant to Article X. "Aggregate Commitment" means the aggregate of the Commitments of all the Lenders, as reduced from time to time pursuant to the terms hereof, or any lesser amount to which the Guarantor has limited the principal amount of "Guaranteed Debt" under (and as that term is defined in) the Guaranty. "Agreement" means this credit agreement, as it may be amended or modified and in effect from time to time. "Agreement Accounting Principles" means generally accepted accounting principles as in effect from time to time, applied in a manner consistent with that used in preparing the financial statements referred to in Section 5.4. "Alternate Base Rate" means, for any day, a rate of interest per annum equal to the higher of (i) the Corporate Base Rate for such day and (ii) the sum of the Federal Funds Effective Rate for such day plus 1/2% per annum. "Arranger" means First Chicago Capital Markets, Inc., a Delaware corporation, and its successors. "Article" means an article of this Agreement unless another document is specifically referenced. "Authorized Officer" means any of the President, Chief Executive Officer, or Finance Director of the Borrower, acting singly. "Borrower" means NetCo Communications Corporation, a Minnesota corporation, and its successors and assigns. "Borrowing Date" means a date on which an Advance is made hereunder. "Borrowing Notice" is defined in Section 2.8. "Business Day" means (i) with respect to any borrowing, payment or rate selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago and New York for the conduct of substantially all of their commercial lending activities and on which dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago for the conduct of substantially all of their commercial lending activities. Page 2 "Capitalized Lease" of a Person means any lease of Property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Capitalized Lease Obligations" of a Person means the amount of the obligations of such Person under Capitalized Leases which would be shown as a liability on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Change in Control" means (i) prior to the effectiveness of an IPO, the failure of the Guarantor to control a majority of seats on the board of directors of the Borrower, and (ii) upon and after the effectiveness of an IPO, either the failure of the Guarantor to own directly or indirectly common stock or (via warrants or otherwise) the common stock equivalent of at least 30% of the outstanding shares of voting stock of the Borrower on a fully diluted basis or the failure of the Guarantor to be the largest single holder of common stock or common stock equivalents of the Borrower on a fully diluted basis. "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. "Commitment" means, for each Lender, the obligation of such Lender to make Loans not exceeding the amount set forth opposite its signature below or as set forth in any Notice of Assignment relating to any assignment that has become effective pursuant to Section 12.3.2, as such amount may be modified from time to time pursuant to the terms hereof. "Contingent Obligation" of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement or take-or-pay contract. "Conversion/Continuation Notice" is defined in Section 2.9. "Controlled Group" means all members of a controlled group of corporations or other business entities and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code. "Corporate Base Rate" means a rate per annum equal to the corporate base rate of interest announced by First Chicago from time to time, changing when and as said corporate base rate changes. Page 3 "Default" means an event described in Article VII. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to (i) the protection of the environment, (ii) the effect of the environment on human health, (iii) emissions, discharges or releases of pollutants, contaminants, hazardous substances or wastes into surface water, ground water or land, or (iv) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, hazardous substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any rule or regulation issued thereunder. "Eurodollar Advance" means an Advance which bears interest at the applicable Eurodollar Rate. "Eurodollar Base Rate" means, with respect to a Eurodollar Advance for the relevant Interest Period, the rate determined by the Agent to be the rate at which First Chicago offers to place deposits in U.S. dollars with first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, in the approximate amount of First Chicago's relevant Eurodollar Loan and having a maturity approximately equal to such Interest Period. "Eurodollar Loan" means a Loan which bears interest at the applicable Eurodollar Rate. "Eurodollar Rate" means, with respect to a Eurodollar Advance for the relevant Interest Period, the sum of (i) the quotient of (a) the Eurodollar Base Rate applicable to such Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus .55%. The Eurodollar Rate shall be rounded to the next higher multiple of 1/16 of 1% if the rate is not such a multiple. "Excluded Taxes" means, in the case of each Lender or applicable Lending Installation and the Agent, taxes imposed on its overall net income, and franchise taxes imposed on it, by (i) the jurisdiction under the laws of which such Lender or the Agent is incorporated or organized or (ii) the jurisdiction in which the Agent's or such Lender's principal executive office or such Lender's applicable Lending Installation is located. "Exhibit" refers to an exhibit to this Agreement, unless another document is specifically referenced. Page 4 "Facility Termination Date" means September 26, 2000 or any earlier date on which the Aggregate Commitment is reduced to zero or otherwise terminated pursuant to the terms hereof. "Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago time) on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion. "First Chicago" means The First National Bank of Chicago in its individual capacity, and its successors. "Floating Rate" means, for any day, a rate per annum equal to the Alternate Base Rate for such day, in each case changing when and as the Alternate Base Rate changes. "Floating Rate Advance" means an Advance which bears interest at the Floating Rate. "Floating Rate Loan" means a Loan which bears interest at the Floating Rate. "Guarantor" means WorldCom, Inc., a Georgia corporation, and its successors and assigns. "Guaranty" means that certain Guaranty of even date herewith in the form of Exhibit "A" executed by the Guarantor in favor of the Agent, for the ratable benefit of the Lenders, as it may be amended or modified and in effect from time to time. "Indebtedness" of a Person means such Person's (i) obligations for borrowed money, (ii) obligations representing the deferred purchase price of Property or services (other than accounts payable arising in the ordinary course of such Person's business payable on terms customary in the trade), (iii) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from property now or hereafter owned or acquired by such Person, (iv) obligations which are evidenced by notes, acceptances, or other instruments, (v) obligations of such Person to purchase securities or other property arising out of or in connection with the sale of the same or substantially similar securities or property, (vi) Capitalized Lease Obligations, (vii) Contingent Obligations, and (viii) any other obligation for borrowed money or other financial accommodation which in accordance with Agreement Accounting Principles would be shown as a liability on the consolidated balance sheet of such Person. Page 5 "Interest Period" means, with respect to a Eurodollar Advance, a period of one, two, three or six months commencing on a Business Day selected by the Borrower pursuant to this Agreement. Such Interest Period shall end on the day which corresponds numerically to such date one, two, three or six months thereafter, provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day. "IPO" means an initial public offering of common stock in the Borrower. "Lenders" means the lending institutions listed on the signature pages of this Agreement and their respective successors and assigns. "Lending Installation" means, with respect to a Lender or the Agent, the office, branch, subsidiary or affiliate of such Lender or the Agent listed on the signature pages hereof or on a Schedule or otherwise selected by such Lender or the Agent pursuant to Section 2.17. "Letter of Credit" of a Person means a letter of credit or similar instrument which is issued upon the application of such Person or upon which such Person is an account party or for which such Person is in any way liable. "Lien" means any lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement). "Loan" means, with respect to a Lender, such Lender's loan made pursuant to Article II (or any conversion or continuation thereof). "Loan Documents" means this Agreement and any Notes issued pursuant to Section 2.13. "Material Adverse Effect" means a material adverse effect on (i) the business, Property, condition (financial or otherwise), results of operations, or prospects of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to perform its obligations under the Loan Documents, (iii) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Agent or the Lenders thereunder, or (iv) the Page 6 validity or enforceability of the Guaranty or the rights or remedies of the Agent or the Lenders thereunder. "Material Borrower Indebtedness" is defined in Section 7.5. "Material Guarantor Indebtedness" is defined in Section 7.5. "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which the Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "Non-U.S. Lender" is defined in Section 3.5(iv). "Note" means any promissory note issued by the Borrower at the request of a Lender pursuant to Section 2.13 in the form of Exhibit G, including any amendment, modification, renewal or replacement of such promissory note. "Notice of Assignment" is defined in Section 12.3.2. "Obligations" means all unpaid principal of and accrued and unpaid interest on the Loans, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of the Borrower to the Lenders or to any Lender, the Agent or any indemnified party arising under the Loan Documents. "Other Taxes" is defined in Section 3.5(ii). "Participants" is defined in Section 12.2.1. "Payment Date" means the last day of each March, June, September, and December. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Permitted Acquisition" means an Acquisition which has been approved or consented to by the board of directors or equivalent governing body of the Person whose assets or equity interests are to be acquired. "Person" means any natural person, corporation, firm, joint venture, partnership, limited liability company, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof. Page 7 "Plan" means an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Borrower or any member of the Controlled Group may have any liability. "Property" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. "Purchasers" is defined in Section 12.3.1. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System. "Reportable Event" means a reportable event as defined in Section 4043 of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC has by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided, however, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "Reports" is defined in Section 9.6. "Required Lenders" means Lenders in the aggregate having at least 662/3% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding at least 662/3% of the aggregate unpaid principal amount of the outstanding Advances. "Reserve Requirement" means, with respect to an Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities. Page 8 "Schedule" refers to a specific schedule to this Agreement, unless another document is specifically referenced. "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Single Employer Plan" means a Plan maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, limited liability company, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower. "Substantial Portion" means, with respect to the Property of the Borrower and its Subsidiaries, Property which (i) represents more than 10% of the consolidated assets of the Borrower and its Subsidiaries as would be shown in the consolidated financial statements of the Borrower and its Subsidiaries as at the beginning of the twelve-month period ending with the month in which such determination is made, or (ii) is responsible for more than 10% of the consolidated net sales or of the consolidated net income of the Borrower and its Subsidiaries as reflected in the financial statements referred to in clause (i) above. "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and any and all liabilities with respect to the foregoing, but excluding Excluded Taxes. "Transferee" is defined in Section 12.4. "Transaction Documents" means, collectively, the Loan Documents and the Guaranty. "Type" means, with respect to any Advance, its nature as a Floating Rate Advance or a Eurodollar Advance. "Unfunded Liabilities" means the amount (if any) by which the present value of all vested and unvested accrued benefits under all Single Employer Plans exceeds the fair market value of all such Plan assets allocable to such benefits, all determined as of the then most Page 9 recent valuation date for such Plans using PBGC actuarial assumptions for single employer plan terminations. "Unmatured Default" means an event which but for the lapse of time or the giving of notice, or both, would constitute a Default. "Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled, directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (ii) any partnership, limited liability company, association, joint venture or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. ARTICLE II THE CREDITS 2.1. Commitment. From and including the date of this Agreement and prior to the Facility Termination Date, each Lender severally agrees, on the terms and conditions set forth in this Agreement, to make Loans to the Borrower from time to time in amounts not to exceed in the aggregate at any one time outstanding the amount of its Commitment. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow at any time prior to the Facility Termination Date. The Commitments to lend hereunder shall expire on the Facility Termination Date. 2.2. Required Payments; Termination. Any outstanding Advances and all other unpaid Obligations shall be paid in full by the Borrower on the Facility Termination Date. 2.3. Ratable Loans. Each Advance hereunder shall consist of Loans made from the several Lenders ratably in proportion to the ratio that their respective Commitments bear to the Aggregate Commitment. 2.4. Types of Advances. The Advances may be Floating Rate Advances or Eurodollar Advances, or a combination thereof, selected by the Borrower in accordance with Sections 2.8 and 2.9. Page 10 2.5. Commitment Fee; Reductions in Aggregate Commitment. The Borrower agrees to pay to the Agent for the account of each Lender a commitment fee of 0.25% per annum on the daily unused portion of such Lender's Commitment from the date hereof to and including the Facility Termination Date, payable on each Payment Date hereafter and on the Facility Termination Date. The Borrower may permanently reduce the Aggregate Commitment in whole, or in part ratably among the Lenders in integral multiples of $1,000,000, upon at least five Business Days' written notice to the Agent, which notice shall specify the amount of any such reduction, provided, however, that the amount of the Aggregate Commitment may not be reduced below the aggregate principal amount of the outstanding Advances. All accrued commitment fees shall be payable on the effective date of any termination of the obligations of the Lenders to make Loans hereunder. 2.6. Minimum Amount of Each Advance. Each Eurodollar Advance shall be in the minimum amount of $1,000,000 (and in multiples of $500,000 if in excess thereof), and each Floating Rate Advance shall be in the minimum amount of $500,000 (and in multiples of $500,000 if in excess thereof), provided, however, that any Floating Rate Advance may be in the amount of the unused Aggregate Commitment. 2.7. Optional Principal Payments. The Borrower may from time to time pay, without penalty or premium, all outstanding Floating Rate Advances, or, in a minimum aggregate amount of $500,000 or any integral multiple of $500,000 in excess thereof, any portion of the outstanding Floating Rate Advances upon two Business Days' prior notice to the Agent. The Borrower may from time to time pay, subject to the payment of any funding indemnification amounts required by Section 3.4 but without penalty or premium, all outstanding Eurodollar Advances, or, in a minimum aggregate amount of $1,000,000 or any integral multiple of $500,000 in excess thereof, any portion of the outstanding Eurodollar Advances upon three Business Days' prior notice to the Agent. 2.8. Method of Selecting Types and Interest Periods for New Advances. The Borrower shall select the Type of Advance and, in the case of each Eurodollar Advance, the Interest Period applicable thereto from time to time. The Borrower shall give the Agent irrevocable notice (a "Borrowing Notice") not later than 10:00 a.m. (Chicago time) at least one Business Day before the Borrowing Date of each Floating Rate Advance and three Business Days before the Borrowing Date for each Eurodollar Advance, specifying: (i) the Borrowing Date, which shall be a Business Day, of such Advance, (ii) the aggregate amount of such Advance, (iii) the Type of Advance selected, and (iv) in the case of each Eurodollar Advance, the Interest Period applicable thereto. Page 11 Not later than noon (Chicago time) on each Borrowing Date, each Lender shall make available its Loan or Loans in funds immediately available in Chicago to the Agent at its address specified pursuant to Article XIII. The Agent will make the funds so received from the Lenders available to the Borrower at the Agent's aforesaid address. 2.9. Conversion and Continuation of Outstanding Advances. Floating Rate Advances shall continue as Floating Rate Advances unless and until such Floating Rate Advances are converted into Eurodollar Advances pursuant to this Section 2.9 or are repaid in accordance with Section 2.7. Each Eurodollar Advance shall continue as a Eurodollar Advance until the end of the then applicable Interest Period therefor (except as provided in the next sentence), at which time such Eurodollar Advance shall be automatically converted into a Floating Rate Advance unless (x) such Eurodollar Advance is or was repaid in accordance with Section 2.7 or (y) the Borrower shall have given the Agent a Conversion/Continuation Notice (as defined below) requesting that, at the end of such Interest Period, such Eurodollar Advance continue as a Eurodollar Advance for the same or another Interest Period. Subject to the terms of Section 2.6, the Borrower may elect from time to time to convert all or any part of a Floating Rate Advance into a Eurodollar Advance, and subject to the terms of Section 3.4, the Borrower may elect to convert all (but not less than all) of a Eurodollar Advance into a Floating Rate Advance in the event the Borrower receives a demand for compensation under Section 3.1. The Borrower shall give the Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of a Floating Rate Advance into a Eurodollar Advance, permitted conversion of a Eurodollar Advance into a Floating Rate Advance, or continuation of a Eurodollar Advance not later than 10:00 a.m. (Chicago time) at least three Business Days prior to the date of the requested conversion or continuation, specifying: (i) the requested date, which shall be a Business Day, of such conversion or continuation, (ii) the aggregate amount and Type of the Advance which is to be converted or continued, and (iii) the amount of such Advance which is to be converted into or continued as a Eurodollar Advance and the duration of the Interest Period applicable thereto. 2.10. Changes in Interest Rate, etc. Each Floating Rate Advance shall bear interest on the outstanding principal amount thereof, for each day from and including the date such Advance is made or is automatically converted from a Eurodollar Advance into a Floating Rate Advance pursuant to Section 2.9, to but excluding the date it is paid or is converted into a Eurodollar Advance pursuant to Section 2.9 hereof, at a rate per annum equal to the Floating Rate for such day. Changes in the rate of interest on that portion of any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in Page 12 the Alternate Base Rate. Each Eurodollar Advance shall bear interest on the outstanding principal amount thereof from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the interest rate determined by the Agent as applicable to such Eurodollar Advance based upon the Borrower's selections under Section 2.8 and 2.9 and otherwise in accordance with the terms hereof. No Interest Period may end after the Facility Termination Date. 2.11. Rates Applicable After Default. Notwithstanding anything to the contrary contained in Section 2.8 or 2.9, during the continuance of a Default or Unmatured Default the Required Lenders may, at their option, by notice to the Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that no Advance may be made as, converted into or continued as a Eurodollar Advance. During the continuance of a Default the Required Lenders may, at their option, by notice to the Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that (i) each Eurodollar Advance shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus 2% per annum and (ii) each Floating Rate Advance shall bear interest at a rate per annum equal to the Floating Rate in effect from time to time plus 2% per annum, provided that, during the continuance of a Default under Section 7.6 or 7.7, the interest rates set forth in clauses (i) and (ii) above shall be applicable to all Advances without any election or action on the part of the Agent or any Lender. 2.12. Method of Payment. All payments of the Obligations hereunder shall be made, without setoff, deduction, or counterclaim, in immediately available funds to the Agent at the Agent's address specified pursuant to Article XIII, or at any other Lending Installation of the Agent specified in writing by the Agent to the Borrower, by noon (local time) on the date when due and shall be applied ratably by the Agent among the Lenders. Each payment delivered to the Agent for the account of any Lender shall be delivered promptly by the Agent to such Lender in the same type of funds that the Agent received at its address specified pursuant to Article XIII or at any Lending Installation specified in a notice received by the Agent from such Lender. The Agent is hereby authorized to charge the account of the Borrower maintained with First Chicago for each payment of principal, interest and fees as it becomes due hereunder. 2.13. Noteless Agreement; Evidence of Indebtedness. (i) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. Page 13 (ii) The Agent shall also maintain accounts in which it will record (a) the amount of each Loan made hereunder, the Type thereof and the Interest Period with respect thereto, (b) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (c) the amount of any sum received by the Agent hereunder from the Borrower and each Lender's share thereof. (iii) The entries maintained in the accounts maintained pursuant to paragraphs (i) and (ii) above shall be prima facie evidence of the existence and amounts of the Obligations therein recorded; provided, however, that the failure of the Agent or any Lender to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Obligations in accordance with their terms. (iv) Any Lender may request that its Loans be evidenced by a promissory note (a "Note"). In such event, the Borrower shall prepare, execute and deliver to such Lender a Note payable to the order of such Lender in a form supplied by the Agent. Thereafter, the Loans evidenced by such Note and interest thereon shall at all times (including after any assignment pursuant to Section 12.3) be represented by one or more Notes payable to the order of the payee named therein or any assignee pursuant to Section 12.3, except to the extent that any such Lender or assignee subsequently returns any such Note for cancellation and requests that such Loans once again be evidenced as described in paragraphs (i) and (ii) above. 2.14. Telephonic Notices. The Borrower hereby authorizes the Lenders and the Agent to extend, convert or continue Advances, effect selections of Types of Advances and to transfer funds to such account as the Borrower may designate based on telephonic notices made by any person or persons the Agent or any Lender in good faith believes to be acting on behalf of the Borrower. The Borrower agrees to deliver promptly to the Agent a written confirmation, if such confirmation is requested by the Agent or any Lender, of each telephonic notice signed by an Authorized Officer. If the written confirmation differs in any material respect from the action taken by the Agent and the Lenders, the records of the Agent and the Lenders shall govern absent manifest error. 2.15. Interest Payment Dates; Interest and Fee Basis. Interest accrued on each Floating Rate Advance shall be payable on each Payment Date, commencing with the first such date to occur after the date hereof and at maturity. Interest accrued on each Eurodollar Advance shall be payable on the last day of its applicable Interest Period, on any date on which the Eurodollar Advance is prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued on each Eurodollar Advance having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period. Interest on Floating Rate Advances and commitment fees shall be calculated for actual days elapsed on the basis of a 365- or 366-day year, as appropriate. Interest on Eurodollar Advances shall be calculated for actual days elapsed on the basis of a 360-day Page 14 year. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to noon (local time) at the place of payment. If any payment of principal of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. The Agent will provide the Borrower with notice of the amount of interest due from time to time in accordance with its customary commercial practices. 2.16. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions. Promptly after receipt thereof, the Agent will notify each Lender of the contents of each Aggregate Commitment reduction notice, Borrowing Notice, Conversion/Continuation Notice, and repayment notice received by it hereunder. The Agent will notify each Lender of the interest rate applicable to each Eurodollar Advance promptly upon determination of such interest rate and will give each Lender prompt notice of each change in the Alternate Base Rate. 2.17. Lending Installations. Each Lender may book its Loans at any Lending Installation selected by such Lender and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Loans and any Notes issued hereunder shall be deemed held by each Lender for the benefit of such Lending Installation. Each Lender may, by written notice to the Agent and the Borrower in accordance with Article XIII, designate replacement or additional Lending Installations through which Loans will be made by it and for whose account Loan payments are to be made. 2.18. Non-Receipt of Funds by the Agent. Unless the Borrower or a Lender, as the case may be, notifies the Agent prior to the date on which it is scheduled to make payment to the Agent of (i) in the case of a Lender, the proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal, interest or fees to the Agent for the account of the Lenders, that it does not intend to make such payment, the Agent may assume that such payment has been made. The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Lender or the Borrower, as the case may be, has not in fact made such payment to the Agent, the recipient of such payment shall, on demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (x) in the case of payment by a Lender, the Federal Funds Effective Rate for such day or (y) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan. Page 15 ARTICLE III YIELD PROTECTION; TAXES 3.1. Yield Protection. If, on or after the date of this Agreement, the adoption of any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any change in the interpretation or administration thereof by any governmental or quasi-governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender or applicable Lending Installation with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) subjects any Lender or any applicable Lending Installation to any Taxes, or changes the basis of taxation of payments (other than with respect to Excluded Taxes) to any Lender in respect of its Eurodollar Loans, or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Installation (other than reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Advances), or (iii) imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Installation of making, funding or maintaining its Eurodollar Loans or reduces any amount receivable by any Lender or any applicable Lending Installation in connection with its Eurodollar Loans, or requires any Lender or any applicable Lending Installation to make any payment calculated by reference to the amount of Eurodollar Loans held or interest received by it, by an amount deemed material by such Lender, and the result of any of the foregoing is to increase the cost to such Lender or applicable Lending Installation of making or maintaining its Eurodollar Loans or Commitment or to reduce the return received by such Lender or applicable Lending Installation in connection with such Eurodollar Loans or Commitment, then, within 15 days of demand by such Lender, the Borrower shall pay such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduction in amount received. No Lender shall be entitled to demand compensation or be compensated under this Section 3.1 to the extent that such compensation relates to any period of time more than 180 days prior to the date upon which such Lender first notified the Borrower of the occurrence of the event entitling such Lender to such compensation (unless, and to the extent, that any such compensation so demanded shall relate to the retroactive application of any event so notified to the Borrower). Page 16 3.2. Changes in Capital Adequacy Regulations. If a Lender determines the amount of capital required or expected to be maintained by such Lender, any Lending Installation of such Lender or any corporation controlling such Lender is increased as a result of a Change, then, within 15 days of demand by such Lender, the Borrower shall pay such Lender the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Lender determines is attributable to this Agreement, its Loans or its Commitment to make Loans hereunder (after taking into account such Lender's policies as to capital adequacy), provided that no Lender shall be entitled to demand compensation or be compensated under this Section 3.2 to the extent that such compensation relates to any period of time more than 180 days prior to the date upon which such Lender first notified the Borrower of the Change entitling such Lender to such compensation (unless, and to the extent, that any such compensation so demanded shall relate to the retroactive application of any event so notified to the Borrower). "Change" means (i) any change after the date of this Agreement in the Risk-Based Capital Guidelines or (ii) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement which affects the amount of capital required or expected to be maintained by any Lender or any Lending Installation or any corporation controlling any Lender. "Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement. 3.3. Availability of Types of Advances. If any Lender determines that maintenance of its Eurodollar Loans at a suitable Lending Installation would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or if the Required Lenders determine that (i) deposits of a type and maturity appropriate to match fund Eurodollar Advances are not available or (ii) the interest rate applicable to a Type of Advance does not accurately reflect the cost of making or maintaining such Advance, then the Agent shall suspend the availability of the affected Type of Advance and require any affected Eurodollar Advances to be repaid or converted to Floating Rate Advances, subject to the payment of any funding indemnification amounts required by Section 3.4. 3.4. Funding Indemnification. If any payment of a Eurodollar Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a Eurodollar Advance is not made on the date specified by the Borrower for any reason other than default by the Lenders, the Borrower will indemnify each Lender for any loss or cost incurred by it resulting therefrom, including, Page 17 without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain such Eurodollar Advance. 3.5. Taxes. (i) All payments by the Borrower to or for the account of any Lender or the Agent hereunder or under any Note shall be made free and clear of and without deduction for any and all Taxes. If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender or the Agent, (a) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.5) such Lender or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (b) the Borrower shall make such deductions, (c) the Borrower shall pay the full amount deducted to the relevant authority in accordance with applicable law and (d) the Borrower shall furnish to the Agent the original or a certified copy of a receipt evidencing payment thereof. (ii) In addition, the Borrower hereby agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note ("Other Taxes"). (iii) The Borrower hereby agrees to indemnify the Agent and each Lender for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed on amounts payable under this Section 3.5) paid by the Agent or such Lender and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. Payments due under this indemnification shall be made within 30 days of the date the Agent or such Lender makes demand therefor pursuant to Section 3.6. (iv) At least five Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Lender, each Lender that is not incorporated under the laws of the United States of America or a state thereof (each a "Non-U.S. Lender") agrees that it will deliver to each of the Borrower and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes. Each Non-U.S. Lender further undertakes to deliver to each of the Borrower and the Agent (i) two renewals or additional copies of such form (or any successor form) on or before the date that such form expires or becomes obsolete, and (ii) after the occurrence of any event requiring a change in the most recent forms so delivered by it, such additional forms or amendments thereto as may be reasonably requested by the Borrower or the Agent. All forms or amendments described in the preceding sentence shall certify that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has Page 18 occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form or amendment with respect to it and such Lender advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. (v) For any period during which a Non-U.S. Lender has failed to provide the Borrower with an appropriate form pursuant to clause (iv), above (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), such Non-U.S. Lender shall not be entitled to indemnification under this Section 3.5 with respect to Taxes imposed by the United States; provided that, should a Non-U.S. Lender which is otherwise exempt from or subject to a reduced rate of withholding tax become subject to Taxes because of its failure to deliver a form required under clause (iv), above, the Borrower shall take such steps as such Non-U.S. Lender shall reasonably request to assist such Non-U.S. Lender to recover such Taxes. 3.6. Lender Statements; Survival of Indemnity. To the extent reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Eurodollar Loans to reduce any liability of the Borrower to such Lender under Sections 3.1, 3.2 and 3.5 or to avoid the unavailability of Eurodollar Advances under Section 3.3, so long as such designation is not, in the judgment of such Lender, disadvantageous to such Lender. Each Lender shall deliver a written statement of such Lender to the Borrower (with a copy to the Agent) as to the amount due, if any, under Section 3.1, 3.2, 3.4 or 3.5. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurodollar Loan shall be calculated as though each Lender funded its Eurodollar Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate applicable to such Loan, whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement of any Lender shall be payable on demand after receipt by the Borrower of such written statement. The obligations of the Borrower under Sections 3.1, 3.2, 3.4 and 3.5 shall survive payment of the Obligations and termination of this Agreement. Page 19 ARTICLE IV CONDITIONS PRECEDENT 4.1. Initial Advance. The Lenders shall not be required to make the initial Advance hereunder unless the Borrower has furnished to the Agent with sufficient copies for the Lenders: (i) Copies of the articles or certificate of incorporation of the Borrower, together with all amendments, and a certificate of good standing, each certified by the appropriate governmental officer in its jurisdiction of incorporation. (ii) Copies, certified by the Secretary or Assistant Secretary of the Borrower, of its by-laws and of its Board of Directors' resolutions and of resolutions or actions of any other body authorizing the execution of the Loan Documents. (iii) An incumbency certificate, executed by the Secretary or Assistant Secretary of the Borrower, which shall identify by name and title and bear the signatures of the Authorized Officers and any other officers of the Borrower authorized to sign the Loan Documents, upon which certificate the Agent and the Lenders shall be entitled to rely until informed of any change in writing by the Borrower. (iv) A certificate, signed by the chief financial officer, chief executive officer, or finance director of the Borrower, stating that on the initial Borrowing Date no Default or Unmatured Default has occurred and is continuing. (v) A written opinion of the Borrower's counsel, addressed to the Lenders in substantially the form of Exhibit B. (vi) A written opinion of the Guarantor's counsel, addressed to the Lenders in substantially the form of Exhibit C. (vii) Any Notes requested by a Lender pursuant to Section 2.13 payable to the order of each such requesting Lender. (viii) The Guaranty. (ix) Written money transfer instructions, in substantially the form of Exhibit F, addressed to the Agent and signed by an Authorized Officer, together with such Page 20 other related money transfer authorizations as the Agent may have reasonably requested. (x) The insurance certificate described in Section 5.19. (xiv) Such other documents as any Lender or its counsel may have reasonably requested. 4.2. Each Advance. The Lenders shall not be required to make any Advance (other than an Advance that, after giving effect thereto and to the application of the proceeds thereof, does not increase the aggregate amount of outstanding Advances), unless on the applicable Borrowing Date: (i) There exists no Default or Unmatured Default. (ii) The representations and warranties contained in Article V are true and correct as of such Borrowing Date except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct on and as of such earlier date. (iii) The Agent has received the written authorization of the Guarantor to make such Advance. (iv) All legal matters incident to the making of such Advance shall be satisfactory to the Lenders and their counsel. Each Borrowing Notice with respect to each such Advance shall constitute a representation and warranty by the Borrower that the conditions contained in Sections 4.2(i) and (ii) have been satisfied. Any Lender may require a duly completed compliance certificate in substantially the form of Exhibit D as a condition to making an Advance. 4.3. Advances for Permitted Acquisitions. The Lenders shall not be required to make any Advance the proceeds of which are or are to be used in connection with a Permitted Acquisition unless, in addition to satisfying the conditions set forth in Sections 4.1 and 4.2 but solely in the event that the aggregate consideration for such Acquisition is equal to or greater than $1,000,000, the Borrower has furnished to the Agent copies, certified by the Secretary or Assistant Secretary of the Borrower, of the agreements, instruments, and documents governing such Permitted Acquisition (including the most recent financial statements of the Acquisition candidate). Page 21 ARTICLE V REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lenders that: 5.1. Existence and Standing. Each of the Borrower and its Subsidiaries is a corporation, partnership (in the case of Subsidiaries only) or limited liability company duly and properly incorporated or organized, as the case may be, validly existing and (to the extent such concept applies to such entity) in good standing under the laws of its jurisdiction of incorporation or organization and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted. 5.2. Authorization and Validity. The Borrower has the power and authority and legal right to execute and deliver the Loan Documents and to perform its obligations thereunder. The execution and delivery by the Borrower of the Loan Documents and the performance of its obligations thereunder have been duly authorized by proper corporate proceedings, and the Loan Documents to which the Borrower is a party constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally. 5.3. No Conflict; Government Consent. Neither the execution and delivery by the Borrower of the Loan Documents, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Borrower or any of its Subsidiaries or (ii) the Borrower's or any Subsidiary's articles or certificate of incorporation, partnership agreement, certificate of partnership, articles or certificate of organization, by-laws, or operating or other management agreement, as the case may be, or (iii) the provisions of any indenture, instrument or agreement to which the Borrower or any of its Subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder, or result in, or require, the creation or imposition of any Lien in, of or on the Property of the Borrower or a Subsidiary pursuant to the terms of any such indenture, instrument or agreement. No order, consent, adjudication, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of any governmental or public body or authority, or any subdivision thereof, which has not been obtained by the Borrower or any of its Subsidiaries, is required to be obtained by the Borrower or any of its Subsidiaries in connection with the execution and delivery of the Loan Documents, the borrowings under this Agreement, the payment and performance by the Borrower of the Obligations or the legality, validity, binding effect or enforceability of any of the Loan Documents. Page 22 5.4. Financial Statements. The December 31, 1996 consolidated financial statements of the Borrower and its Subsidiaries heretofore delivered to the Lenders were prepared in accordance with generally accepted accounting principles in effect on the date such statements were prepared and fairly present the consolidated financial condition and operations of the Borrower and its Subsidiaries at such date and the consolidated results of their operations for the period then ended. 5.5. Material Adverse Change. Since December 31, 1996 there has been no change in the business, Property, condition (financial or otherwise) or results of operations of the Borrower and its Subsidiaries which could reasonably be expected to have a Material Adverse Effect. 5.6. Taxes. The Borrower and its Subsidiaries have filed all United States federal tax returns and all other tax returns which are required to be filed and have paid all taxes due pursuant to said returns or pursuant to any assessment received by the Borrower or any of its Subsidiaries, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided in accordance with Agreement Accounting Principles and as to which no Lien exists. No tax liens have been filed and no claims are being asserted with respect to any such taxes except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided in accordance with Agreement Accounting Principles. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of any taxes or other governmental charges are adequate. 5.7. Litigation and Contingent Obligations. Except as set forth on Schedule 3, as of the date of this Agreement there is no litigation, arbitration, governmental investigation, proceeding or inquiry pending or, to the knowledge of any of their officers, threatened against or affecting the Borrower or any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect or which seeks to prevent, enjoin or delay the making of any Loans. Other than any liability incident to any litigation, arbitration or proceeding which (i) could not reasonably be expected to have a Material Adverse Effect or (ii) is set forth on Schedule 3, the Borrower has no material contingent obligations not provided for or disclosed in the financial statements referred to in Section 5.4. 5.8. Subsidiaries. Schedule 1, as supplemented or modified by the Borrower in writing from time to time, contains an accurate list of all of the presently existing Subsidiaries of the Borrower, setting forth their respective jurisdictions of organization and the percentage of their respective capital stock or other ownership interests owned by the Borrower or other Subsidiaries. All of the issued and outstanding shares of capital stock or other ownership interests of such Subsidiaries have been (to the extent such concepts are relevant with respect to such ownership interests) duly authorized and issued and are fully paid and non-assessable. Page 23 5.9. ERISA. The Unfunded Liabilities of all Single Employer Plans do not in the aggregate exceed $500,000. Neither the Borrower nor any other member of the Controlled Group has incurred, or is reasonably expected to incur, any withdrawal liability to Multiemployer Plans in excess of $500,000 in the aggregate. Each Plan complies in all material respects with all applicable requirements of law and regulations, no Reportable Event has occurred with respect to any Plan, neither the Borrower nor any other member of the Controlled Group has withdrawn from any Plan or initiated steps to do so, and no steps have been taken to reorganize or terminate any Plan. 5.10. Accuracy of Information. No information, exhibit or report furnished by the Borrower or any of its Subsidiaries to the Agent or to any Lender in connection with the negotiation of, or compliance with, the Loan Documents contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained therein not misleading. 5.11. Regulation U. Margin stock (as defined in Regulation U) constitutes less than 25% of the value of those assets of the Borrower and its Subsidiaries which are subject to any limitation on sale, pledge, or other restriction hereunder. 5.12. Material Agreements. Neither the Borrower nor any Subsidiary is a party to any agreement or instrument or subject to any charter or other corporate restriction which could reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement to which it is a party, which default could reasonably be expected to have a Material Adverse Effect. 5.13. Compliance With Laws. The Borrower and its Subsidiaries have complied with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof having jurisdiction over the conduct of their respective businesses or the ownership of their respective Property except for any failure to comply with any of the foregoing which could not reasonably be expected to have a Material Adverse Effect. 5.14. Ownership of Properties. Except as set forth on Schedule 2, on the date of this Agreement, the Borrower and its Subsidiaries will have good title to all of the Property and assets reflected in the Borrower's most recent consolidated financial statements provided to the Agent as owned by the Borrower and its Subsidiaries. 5.15. Plan Assets; Prohibited Transactions. The Borrower is not an entity deemed to hold "plan assets" within the meaning of 29 C.F.R. ss. 2510.3-101 of an employee benefit plan (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA or any plan (within the meaning of Section 4975 of the Code), and neither the execution of this Page 24 Agreement nor the making of Loans hereunder gives rise to a prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code. 5.16. Environmental Matters. In the ordinary course of its business, the officers of the Borrower consider the effect of Environmental Laws on the business of the Borrower and its Subsidiaries, in the course of which they identify and evaluate potential risks and liabilities accruing to the Borrower due to Environmental Laws. On the basis of this consideration, the Borrower has concluded that the effect of Environmental Laws upon the Borrower and its Subsidiaries, if any, cannot reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any Subsidiary has received any notice to the effect that its operations are not in material compliance with any of the requirements of applicable Environmental Laws or are the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to have a Material Adverse Effect. 5.17. Investment Company Act. Neither the Borrower nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 5.18. Public Utility Holding Company Act. Neither the Borrower nor any Subsidiary is a "holding company" or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 5.19. Insurance. The certificate signed by the President, Chief Financial Officer, or Finance Director of the Borrower, that attests to the existence and adequacy of, and summarizes, the property and casualty insurance program carried by the Borrower with respect to itself and its Subsidiaries and that has been furnished by the Borrower to the Agent and the Lenders, is complete and accurate as of the date of this Agreement. This summary includes the insurer's or insurers' name(s), policy number(s), expiration date(s), amount(s) of coverage, type(s) of coverage, exclusion(s), and deductibles. This summary also includes similar information, and describes any reserves, relating to any self-insurance program that is in effect. Page 25 ARTICLE VI COVENANTS During the term of this Agreement, unless the Required Lenders shall otherwise consent in writing: 6.1. Financial Reporting. The Borrower will maintain, for itself and each Subsidiary, a system of accounting established and administered in accordance with generally accepted accounting principles, and furnish to the Lenders: (i) Within 90 days after the close of each of its fiscal years, an unqualified (except for qualifications relating to changes in accounting principles or practices reflecting changes in generally accepted accounting principles and required or approved by the Borrower's independent certified public accountants) audit report certified by independent certified public accountants reasonably acceptable to the Lenders, prepared in accordance with Agreement Accounting Principles on a consolidated and consolidating basis (consolidating statements need not be certified by such accountants) for itself and its Subsidiaries, including balance sheets as of the end of such period, related profit and loss and reconciliation of surplus statements, and a statement of cash flows, accompanied by (a) any management letter prepared by said accountants, and (b) a certificate of said accountants addressed to the Borrower that, in the course of their examination necessary for their certification of the foregoing, they have obtained no knowledge of any Default or Unmatured Default, or if, in the opinion of such accountants, any Default or Unmatured Default shall exist, stating the nature and status thereof. (ii) Within 45 days after the close of the first three quarterly periods of each of its fiscal years, for itself and its Subsidiaries, consolidated and consolidating unaudited balance sheets as at the close of each such period and consolidated and consolidating profit and loss and reconciliation of surplus statements and a statement of cash flows for the period from the beginning of such fiscal year to the end of such quarter, all certified by its chief financial officer, chief executive officer, or finance director. (iii) As soon as available, but in any event within 30 days after the beginning of each fiscal year of the Borrower, a copy of the plan and forecast (including a projected consolidated and consolidating balance sheet, income statement and funds flow statement) of the Borrower for such fiscal year. Page 26 (iv) Together with the financial statements required under Sections 6.1(i) and (ii), a compliance certificate in substantially the form of Exhibit D signed by its chief financial officer, chief executive officer, or finance director stating that no Default or Unmatured Default exists, or if any Default or Unmatured Default exists, stating the nature and status thereof. (v) Within 270 days after the close of each fiscal year, a statement of the Unfunded Liabilities of each Single Employer Plan, certified as correct by an actuary enrolled under ERISA. (vi) As soon as possible and in any event within 10 days after the Borrower knows that any Reportable Event has occurred with respect to any Plan, a statement, signed by the chief financial officer of the Borrower, describing said Reportable Event and the action which the Borrower proposes to take with respect thereto. (vii) As soon as possible and in any event within 10 days after receipt by the Borrower, a copy of (a) any notice or claim to the effect that the Borrower or any of its Subsidiaries is or may be liable to any Person as a result of the release by the Borrower, any of its Subsidiaries, or any other Person of any toxic or hazardous waste or substance into the environment, and (b) any notice alleging any violation of any federal, state or local environmental, health or safety law or regulation by the Borrower or any of its Subsidiaries, which, in the case of either clause (a) or (b) hereinabove, could reasonably be expected to have a Material Adverse Effect. (viii) Promptly upon the furnishing thereof to all shareholders of the Borrower, copies of all financial statements, reports and proxy statements so furnished. (ix) Promptly upon the filing thereof, copies of all registration statements and annual, quarterly, monthly or other regular reports which the Borrower or any of its Subsidiaries files with the Securities and Exchange Commission. (x) Such other information (including non-financial information) as the Agent or any Lender may from time to time reasonably request. 6.2. Use of Proceeds. The Borrower will, and will cause each Subsidiary to, use the proceeds of the Advances for capital expenditures, working capital, and general corporate purposes, and to repay outstanding Advances. The Borrower will not, nor will it permit any Subsidiary to, use any of the proceeds of the Advances to purchase or carry any "margin stock" (as defined in Regulation U) or to make any Acquisition other than a Permitted Acquisition. Page 27 6.3. Notice of Default. The Borrower will, and will cause each Subsidiary to, give prompt notice in writing to the Lenders of the occurrence of any Default or Unmatured Default and of any other development, financial or otherwise, which could reasonably be expected to have a Material Adverse Effect. 6.4. Conduct of Business. The Borrower will, and will cause each Subsidiary to, carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted and do all things necessary to remain duly incorporated or organized, validly existing and (to the extent such concept applies to such entity) in good standing as a domestic corporation, partnership or limited liability company in its jurisdiction of incorporation or organization, as the case may be, and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted. 6.5. Taxes. The Borrower will, and will cause each Subsidiary to, timely file complete and correct United States federal and applicable foreign, state and local tax returns required by law and pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or Property, except those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside in accordance with Agreement Accounting Principles. At any time that the Borrower or any of its Subsidiaries is organized as a limited liability company, each such limited liability company will qualify for partnership tax treatment under United States federal tax law. 6.6. Insurance. The Borrower will, and will cause each Subsidiary to, maintain with financially sound and reputable insurance companies insurance on all their Property in such amounts and covering such risks as is consistent with sound business practice, and the Borrower will furnish to any Lender upon request full information as to the insurance carried. 6.7. Compliance with Laws. The Borrower will, and will cause each Subsidiary to, comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject including, without limitation, all Environmental Laws, the failure to comply with which could reasnably be expected to have a Material Adverse Effect. 6.8. Maintenance of Properties. The Borrower will, and will cause each Subsidiary to, do all things necessary to maintain, preserve, protect and keep its Property in good repair, working order and condition, and make all necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times. 6.9. Inspection. The Borrower will, and will cause each Subsidiary to, permit the Agent and the Lenders, by their respective representatives and agents, to inspect any of the Property, books and financial records of the Borrower and each Subsidiary, to examine and Page 28 make copies of the books of accounts and other financial records of the Borrower and each Subsidiary, and to discuss the affairs, finances and accounts of the Borrower and each Subsidiary with, and to be advised as to the same by, their respective officers at such reasonable times and intervals as the Agent or any Lender may designate, subject, however, to the consent of third parties who may have possession of the Property of the Borrower. 6.10. Merger. The Borrower will not, nor will it permit any Subsidiary to, merge or consolidate with or into any other Person unless the Borrower (with respect to mergers or consolidations involving the Borrower) or a Subsidiary (with respect to mergers or consolidations not involving the Borrower) is the surviving corporation, except that a Subsidiary may merge into the Borrower or a Wholly-Owned Subsidiary. 6.11. Affiliates. The Borrower will not, and will not permit any Subsidiary to, enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make any payment or transfer to, any Affiliate (other than the Guarantor) except in the ordinary course of business and pursuant to the reasonable requirements of the Borrower's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than the Borrower or such Subsidiary would obtain in a comparable arms-length transaction. ARTICLE VII DEFAULTS The occurrence of any one or more of the following events shall constitute a Default: 7.1. Any representation or warranty made or deemed made by or on behalf of the Borrower or any of its Subsidiaries to the Lenders or the Agent under or in connection with this Agreement, any Loan, or any certificate or information delivered in connection with this Agreement or any other Loan Document shall be materially false on the date as of which made. 7.2. Nonpayment of principal of any Loan when due, or nonpayment of interest upon any Loan or of any commitment fee or other obligations under any of the Loan Documents within five days after the same becomes due. 7.3. The breach by the Borrower of any of the terms or provisions of Section 6.2, 6.10, 6.11, or 6.12. Page 29 7.4. The breach by the Borrower (other than a breach which constitutes a Default under another Section of this Article VII) of any of the terms or provisions of this Agreement which is not remedied within ten days after written notice from the Agent or any Lender. 7.5. Failure of the Borrower or any of its Subsidiaries to pay when due any Indebtedness aggregating in excess of $500,000 ("Material Borrower Indebtedness") or of the Guarantor to pay when due any Indebtedness aggregating in excess of $50,000,000 ("Material Guarantor Indebtedness"); or the default by the Borrower or any of its Subsidiaries in the performance (beyond the applicable grace period with respect thereto, if any) of any term, provision or condition contained in any agreement under which any such Material Borrower Indebtedness was created or is governed, or any other event shall occur and be continuing or condition exist and continue to exist, the effect of which default or event is to cause, or to permit the holder or holders of such Material Borrower Indebtedness to cause, such Material Borrower Indebtedness to become due prior to its stated maturity; or the default by the Guarantor in the performance (beyond the applicable grace period with respect thereto, if any) of any term, provision or condition contained in any agreement under which any such Material Guarantor Indebtedness was created or is governed, or any other event shall occur and be continuing or condition exist and continue to exist, the effect of which default or event is to cause, or to permit the holder or holders of such Material Guarantor Indebtedness to cause, such Material Guarantor Indebtedness to become due prior to its stated maturity; or any Material Borrower Indebtedness or any Material Guarantor Indebtedness shall be declared to be due and payable or required to be prepaid or repurchased (other than by a regularly scheduled payment) prior to the stated maturity thereof; or the Borrower or any of its Subsidiaries or the Guarantor shall not pay, or admit in writing its inability to pay, its debts generally as they become due. 7.6. The Borrower or any of its Subsidiaries or any Guarantor shall (i) have an order for relief entered with respect to it under the Federal bankruptcy laws as now or hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any Substantial Portion of its Property, (iv) institute any proceeding seeking an order for relief under the Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (v) take any corporate or partnership action to authorize or effect any of the foregoing actions set forth in this Section 7.6 or (vi) fail to contest in good faith any appointment or proceeding described in Section 7.7. 7.7. Without the application, approval or consent of the Borrower or any of its Subsidiaries or the Guarantor, a receiver, trustee, examiner, liquidator or similar official shall Page 30 be appointed for the Borrower or any of its Subsidiaries or the Guarantor or any Substantial Portion of its Property, or a proceeding described in Section 7.6 shall be instituted against the Borrower or any of its Subsidiaries or the Guarantor and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of 45 consecutive days. 7.8. Any court, government or governmental agency shall condemn, seize or otherwise appropriate, or take custody or control of, all or any portion of the Property of the Borrower and its Subsidiaries or the Guarantor which, when taken together with all other Property of the Borrower and its Subsidiaries or the Guarantor so condemned, seized, appropriated, or taken custody or control of, during the twelve-month period ending with the month in which any such action occurs, constitutes a Substantial Portion. 7.9. The Borrower or any of its Subsidiaries shall fail within 30 days to pay, bond or otherwise discharge any judgment or order for the payment of money in excess of $500,000, which is not stayed on appeal or otherwise being appropriately contested in good faith. 7.10. The Unfunded Liabilities of all Single Employer Plans shall exceed in the aggregate $500,000 or any Reportable Event shall occur in connection with any Plan which could reasonably be expected to have a Material Adverse Effect. 7.11. The Borrower or any other member of the Controlled Group shall have been notified by the sponsor of a Multiemployer Plan that it has incurred withdrawal liability to such Multiemployer Plan in an amount which, when aggregated with all other amounts required to be paid to Multiemployer Plans by the Borrower or any other member of the Controlled Group as withdrawal liability (determined as of the date of such notification), exceeds $500,000 or requires payments exceeding $250,000 per annum. 7.12. The Borrower or any of its Subsidiaries shall (i) be the subject of any proceeding or investigation pertaining to the release by the Borrower, any of its Subsidiaries or any other Person of any toxic or hazardous waste or substance into the environment, or (ii) violate any Environmental Law, which, in the case of an event described in clause (i) or clause (ii), could reasonably be expected to have a Material Adverse Effect. 7.13. Any Change in Control shall occur. 7.14. The Guaranty shall fail to remain in full force or effect or any action shall be taken to discontinue or to assert the invalidity or unenforceability of the Guaranty, or the Guarantor shall fail to comply with any of the terms or provisions of the Guaranty to which it is a party, or the Guarantor shall deny that it has any further liability under the Guaranty, or Page 31 shall give notice to such effect, or any portion of any outstanding Advance is determined not to be "Guaranteed Debt" under (and as that term is defined in) the Guaranty. 7.15. The representations and warranties set forth in Section 5.15 (Plan Assets; Prohibited Transactions") shall at any time not be true and correct. ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES 8.1. Acceleration. If any Default described in Section 7.6 or 7.7 occurs with respect to the Borrower, the obligations of the Lenders to make Loans hereunder shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of the Agent or any Lender. If any other Default occurs and is continuing, the Required Lenders (or the Agent with the consent of the Required Lenders) may terminate or suspend the obligations of the Lenders to make Loans hereunder, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower hereby expressly waives. If, within 30 days after acceleration of the maturity of the Obligations or termination of the obligations of the Lenders to make Loans hereunder as a result of any Default (other than any Default as described in Section 7.6 or 7.7 with respect to the Borrower) and before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Required Lenders (in their sole discretion) shall so direct, the Agent shall, by notice to the Borrower, rescind and annul such acceleration and/or termination. 8.2. Amendments. Subject to the provisions of this Article VIII, the Required Lenders (or the Agent with the consent in writing of the Required Lenders) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lenders or the Borrower hereunder or waiving any Default hereunder; provided, however, that no such supplemental agreement shall, without the consent of all of the Lenders: (i) Extend the final maturity of any Loan or forgive all or any portion of the principal amount thereof, or reduce the rate or extend the time of payment of interest or fees thereon. (ii) Reduce the percentage specified in the definition of Required Lenders. Page 32 (iii) Extend the Facility Termination Date, or reduce the amount or extend the payment date for, the mandatory payments required under Section 2.2, or increase the amount of the Commitment of any Lender hereunder, or permit the Borrower to assign its rights under this Agreement. (iv) Amend this Section 8.2. (v) Release any guarantor of any Advance. No amendment of any provision of this Agreement relating to the Agent shall be effective without the written consent of the Agent. The Agent may waive payment of the fee required under Section 12.3.2 without obtaining the consent of any other party to this Agreement. 8.3. Preservation of Rights. No delay or omission of the Lenders or the Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or an acquiescence therein, and the making of a Loan notwithstanding the existence of a Default or the inability of the Borrower to satisfy the conditions precedent to such Loan shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by the Lenders required pursuant to Section 8.2, and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Agent and the Lenders until the Obligations have been paid in full. ARTICLE IX GENERAL PROVISIONS 9.1. Survival of Representations. All representations and warranties of the Borrower contained in this Agreement shall survive the making of the Loans herein contemplated. 9.2. Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, no Lender shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation. Page 33 9.3. Headings. Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents. 9.4. Entire Agreement. The Transaction Documents embody the entire agreement and understanding among the Borrower, the Agent and the Lenders and supersede all prior agreements and understandings among the Borrower, the Agent and the Lenders relating to the subject matter thereof other than the fee letter described in Section 10.13. 9.5. Several Obligations; Benefits of this Agreement. The respective obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner or agent of any other (except to the extent to which the Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns, provided, however, that the parties hereto expressly agree that the Arranger shall enjoy the benefits of the provisions of Sections 9.6, 9.10 and 10.11 to the extent specifically set forth therein and shall have the right to enforce such provisions on its own behalf and in its own name to the same extent as if it were a party to this Agreement. 9.6. Expenses; Indemnification. (i) The Borrower shall reimburse the Agent and the Arranger for any costs, internal charges and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Agent, which attorneys may be employees of the Agent) paid or incurred by the Agent or the Arranger in connection with the preparation, negotiation, execution, delivery, syndication, review, amendment, modification, and administration of the Transaction Documents; provided, however, that the Borrower shall not be obligated to reimburse the Agent and the Arranger for more than $30,000 of the time charges of attorneys for the Agent in connection with the preparation, negotiation, and execution of this commitment letter, the fee letter of even date herewith, and the Loan Documents. The limitation set forth in the immediately preceding sentence shall not apply to any costs of amendment, modification, or enforcement incurred by First Chicago. The Borrower also agrees to reimburse the Agent, the Arranger and the Lenders for any costs, internal charges and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Agent, the Arranger and the Lenders, which attorneys may be employees of the Agent, the Arranger or the Lenders) paid or incurred by the Agent, the Arranger or any Lender in connection with the collection and enforcement of the Transaction Documents. Expenses being reimbursed by the Borrower under this Section include, without limitation, costs and expenses incurred in connection with the Reports described in the following sentence. The Borrower acknowledges that from time to time First Chicago may prepare and may distribute to the Lenders (but shall have no obligation or duty to prepare or to distribute to the Lenders) certain audit reports (the "Reports") pertaining to the Borrower's assets for internal use by First Chicago from information furnished to it by or on behalf of the Page 34 Borrower, after First Chicago has exercised its rights of inspection pursuant to this Agreement. (ii) The Borrower hereby further agrees to indemnify the Agent, the Arranger and each Lender, its directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor whether or not the Agent, the Arranger or any Lender is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, the other Transaction Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Loan hereunder except to the extent that they are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the party seeking indemnification. The obligations of the Borrower under this Section 9.6 shall survive the termination of this Agreement. 9.7. Numbers of Documents. All statements, notices, closing documents, and requests hereunder shall be furnished to the Agent with sufficient counterparts so that the Agent may furnish one to each of the Lenders. 9.8. Accounting. Except as provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with Agreement Accounting Principles. 9.9. Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 9.10. Nonliability of Lenders. The relationship between the Borrower on the one hand and the Lenders and the Agent on the other hand shall be solely that of borrower and lender. Neither the Agent, the Arranger nor any Lender shall have any fiduciary responsibilities to the Borrower. Neither the Agent, the Arranger nor any Lender undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower's business or operations. The Borrower agrees that neither the Agent, the Arranger nor any Lender shall have liability to the Borrower (whether sounding in tort, contract or otherwise) for losses suffered by the Borrower in connection with, arising out of, or in any way related to, the transactions contemplated and the relationship established by the Transaction Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or Page 35 willful misconduct of the party from which recovery is sought. Neither the Agent, the Arranger nor any Lender shall have any liability with respect to, and the Borrower hereby waives, releases and agrees not to sue for, any special, indirect or consequential damages suffered by the Borrower in connection with, arising out of, or in any way related to the Transaction Documents or the transactions contemplated thereby. 9.11. Confidentiality. The Agent and each Lender agrees to hold any confidential information which it may receive from the Borrower pursuant to this Agreement in confidence, except for disclosure (i) to its Affiliates and to other Lenders and their respective Affiliates with a reason to know, each of whom shall be made aware of the terms of this Section 9.11 and shall be deemed bound thereby, (ii) to legal counsel, accountants, and other professional advisors to that Lender or to a Transferee, each of whom shall be made aware of the terms of this Section 9.11 and shall be deemed bound thereby, (iii) to regulatory officials having the authority to require such disclosure, (iv) to any Person as requested pursuant to or as required by law, regulation, or legal process, (v) to the extent reasonably required in connection with any legal proceeding involving the Borrower or any of its Subsidiaries to which the Agent, any Lender or their respective Affiliates may be party, (vi) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Transaction Document, and (vii) permitted by Section 12.4. 9.12. Nonreliance. Each Lender hereby represents that it is not relying on or looking to any margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System) for the repayment of the Loans provided for herein. ARTICLE X THE AGENT 10.1. Appointment; Nature of Relationship. The First National Bank of Chicago is hereby appointed by each of the Lenders as its contractual representative (herein referred to as the "Agent") hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Agent to act as the contractual representative of such Lender with the rights and duties expressly set forth herein and in the other Loan Documents. The Agent agrees to act as such contractual representative upon the express conditions contained in this Article X. Notwithstanding the use of the defined term "Agent," it is expressly understood and agreed that the Agent shall not have any fiduciary responsibilities to any Lender by reason of this Agreement or any other Loan Document and that the Agent is merely acting as the contractual representative of the Lenders with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In its capacity as the Lenders' contractual Page 36 representative, the Agent (i) does not hereby assume any fiduciary duties to any of the Lenders, (ii) is a "representative" of the Lenders within the meaning of Section 9-105 of the Uniform Commercial Code and (iii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Lenders hereby agrees to assert no claim against the Agent on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Lender hereby waives. 10.2. Powers. The Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Agent shall have no implied duties to the Lenders, or any obligation to the Lenders to take any action thereunder except any action specifically provided by the Loan Documents to be taken by the Agent. 10.3. General Immunity. Neither the Agent nor any of its directors, officers, agents or employees shall be liable to the Borrower, the Lenders or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except to the extent such action or inaction is determined in a final non-appealable judgment by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of such Person. 10.4. No Responsibility for Loans, Recitals, etc. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (b) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Lender; (c) the satisfaction of any condition specified in Article IV, except receipt of items required to be delivered solely to the Agent; (d) the existence or possible existence of any Default or Unmatured Default; (e) the validity, enforceability, effectiveness, sufficiency or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith; (f) the value, sufficiency, creation, perfection or priority of any Lien in any collateral security; or (g) the financial condition of the Borrower or any guarantor of any of the Obligations or of any of the Borrower's or any such guarantor's respective Subsidiaries. The Agent shall have no duty to disclose to the Lenders information that is not required to be furnished by the Borrower to the Agent at such time, but is voluntarily furnished by the Borrower to the Agent (either in its capacity as Agent or in its individual capacity). 10.5. Action on Instructions of Lenders. The Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders, and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of Page 37 the Lenders. The Lenders hereby acknowledge that the Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Document unless it shall be requested in writing to do so by the Required Lenders. The Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. 10.6. Employment of Agents and Counsel. The Agent may execute any of its duties as Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Agent shall be entitled to advice of counsel concerning the contractual arrangement between the Agent and the Lenders and all matters pertaining to the Agent's duties hereunder and under any other Loan Document. 10.7. Reliance on Documents; Counsel. The Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Agent, which counsel may be employees of the Agent. 10.8. Agent's Reimbursement and Indemnification. The Lenders agree to reimburse and indemnify the Agent ratably in proportion to their respective Commitments (or, if the Commitments have been terminated, in proportion to their Commitments immediately prior to such termination) (i) for any amounts not reimbursed by the Borrower for which the Agent is entitled to reimbursement by the Borrower under the Loan Documents, (ii) for any other expenses incurred by the Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents (including, without limitation, for any expenses incurred by the Agent in connection with any dispute between the Agent and any Lender or between two or more of the Lenders) and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby (including, without limitation, for any such amounts incurred by or asserted against the Agent in connection with any dispute between the Agent and any Lender or between two or more of the Lenders), or the enforcement of any of the terms of the Loan Documents or of any such other documents, provided that no Lender shall be liable for any of the foregoing to the extent any of the foregoing is found in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Page 38 Agent. The obligations of the Lenders under this Section 10.8 shall survive payment of the Obligations and termination of this Agreement. 10.9. Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Unmatured Default hereunder unless the Agent has received written notice from a Lender or the Borrower referring to this Agreement describing such Default or Unmatured Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give prompt notice thereof to the Lenders. 10.10. Rights as a Lender. In the event the Agent is a Lender, the Agent shall have the same rights and powers hereunder and under any other Loan Document with respect to its Commitment and its Loans as any Lender and may exercise the same as though it were not the Agent, and the term "Lender" or "Lenders" shall, at any time when the Agent is a Lender, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Subsidiaries in which the Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. 10.11. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent, the Arranger or any other Lender and based on the financial statements prepared by the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Agent, the Arranger or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. 10.12. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, such resignation to be effective upon the appointment of a successor Agent or, if no successor Agent has been appointed, forty-five days after the retiring Agent gives notice of its intention to resign. Upon any such resignation, the Required Lenders shall have the right to appoint, on behalf of the Borrower and the Lenders, a successor Agent with the consent of the Borrower (which consent shall not be unreasonably withheld or delayed). The Borrower's consent shall not be deemed to be withheld unreasonably if the proposed successor Agent is a competitor of the Borrower or the Guarantor in the telecommunications industry. If no successor Agent shall have been so appointed by the Required Lenders within thirty days after the resigning Agent's giving notice of its intention to resign, then the resigning Agent may appoint, on behalf of the Borrower Page 39 and the Lenders, a successor Agent. Notwithstanding the previous sentence, the Agent may at any time without the consent of the Borrower or any Lender, appoint any of its Affiliates which is a commercial bank as a successor Agent hereunder. If the Agent has resigned and no successor Agent has been appointed, the Lenders may perform all the duties of the Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Agent shall be deemed to be appointed hereunder until such successor Agent has accepted the appointment. Any such successor Agent shall be a commercial bank having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning Agent. Upon the effectiveness of the resignation of the Agent, the resigning Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation of an Agent, the provisions of this Article X shall continue in effect for the benefit of such Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder and under the other Loan Documents. In the event that there is a successor to the Agent by merger, or the Agent assigns its duties and obligations to an Affiliate pursuant to this Section 10.12, then the term "Corporate Base Rate" as used in this Agreement shall mean the prime rate, base rate or other analogous rate of the new Agent. 10.13. Agent's Fee. The Borrower agrees to pay to the Agent, for its own account, the fees agreed to by the Borrower and the Agent pursuant to that certain letter agreement dated September 8, 1997, or as otherwise agreed from time to time. 10.14. Delegation to Affiliates. The Borrower and the Lenders agree that the Agent may delegate any of its duties under this Agreement to any of its Affiliates. Any such Affiliate (and such Affiliate's directors, officers, agents and employees) which performs duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which the Agent is entitled under Articles IX and X. ARTICLE XI SETOFF; RATABLE PAYMENTS 11.1. Setoff. In addition to, and without limitation of, any rights of the Lenders under applicable law, if the Borrower becomes insolvent, however evidenced, or any Default occurs and is continuing, any and all deposits (including all account balances, whether Page 40 provisional or final and whether or not collected or available) and any other Indebtedness at any time held or owing by any Lender or any Affiliate of any Lender to or for the credit or account of the Borrower may be offset and applied toward the payment of the Obligations owing to such Lender, whether or not the Obligations, or any part hereof, shall then be due. 11.2. Ratable Payments. If any Lender, whether by setoff or otherwise, has payment made to it upon its Loans (other than payments received pursuant to Section 3.1, 3.2, 3.4 or 3.5) in a greater proportion than that received by any other Lender, such Lender agrees, promptly upon demand, to purchase a portion of the Loans held by the other Lenders so that after such purchase each Lender will hold its ratable proportion of Loans. If any Lender, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Obligations or such amounts which may be subject to setoff, such Lender agrees, promptly upon demand, to take such action necessary such that all Lenders share in the benefits of such collateral ratably in proportion to their Loans. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made. ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS 12.1. Successors and Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lenders and their respective successors and assigns, except that (i) the Borrower shall not have the right to assign its rights or obligations under the Loan Documents and (ii) any assignment by any Lender must be made in compliance with Section 12.3. Notwithstanding clause (ii) of this Section, any Lender may at any time, without the consent of the Borrower or the Agent, assign all or any portion of its rights under this Agreement and any Note to a Federal Reserve Bank; provided, however, that no such assignment to a Federal Reserve Bank shall release the transferor Lender from its obligations hereunder. The Agent may treat the Person which made any Loan or which holds any Note as the owner thereof for all purposes hereof unless and until such Person complies with Section 12.3 in the case of an assignment thereof or, in the case of any other transfer, a written notice of the transfer is filed with the Agent. Any assignee or transferee of the rights to any Loan or any Note agrees by acceptance of such transfer or assignment to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the owner of the rights to any Loan (whether or not a Note has been issued in evidence thereof), shall be conclusive and binding on any subsequent holder, transferee or assignee of the rights to such Loan. Page 41 12.2. Participations. 12.2.1 Permitted Participants; Effect. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities other than competitors of the Borrower or the Guarantor in the telecommunications industry ("Participants") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender under the Transaction Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Transaction Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the owner of its Loans and the holder of any Note issued to it in evidence thereof for all purposes under the Transaction Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Transaction Documents. 12.2.2. Voting Rights. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Transaction Documents other than any amendment, modification or waiver with respect to any Loan or Commitment in which such Participant has an interest which forgives principal, interest or fees or reduces the interest rate or fees payable with respect to any such Loan or Commitment, extends the Facility Termination Date, postpones any date fixed for any regularly-scheduled payment of principal of, or interest or fees on, any such Loan or Commitment, releases any guarantor of any such Loan or releases all or substantially all of the collateral, if any, securing any such Loan. 12.2.3. Benefit of Setoff. The Borrower agrees that each Participant shall be deemed to have the right of setoff provided in Section 11.1 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, provided that each Lender shall retain the right of setoff provided in Section 11.1 with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 11.1, agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 11.2 as if each Participant were a Lender. Page 42 12.3. Assignments. 12.3.1. Permitted Assignments. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more banks or other entities other than competitors of the Borrower or the Guarantor in the telecommunications industry ("Purchasers") all or any part of its rights and obligations under the Loan Documents. Such assignment shall be substantially in the form of Exhibit E or in such other form as may be agreed to by the parties thereto. The consent of the Borrower and the Agent shall be required prior to an assignment becoming effective with respect to a Purchaser which is not a Lender or an Affiliate thereof; provided, however, that if a Default has occurred and is continuing, the consent of the Borrower shall not be required. Such consent shall not be unreasonably withheld or delayed. Each such assignment shall (unless each of the Borrower and the Agent otherwise consents) be in an amount not less than the lesser of (i) $5,000,000 or (ii) the remaining amount of the assigning Lender's Commitment (calculated as at the date of such assignment). 12.3.2. Effect; Effective Date. Upon (i) delivery to the Agent of a notice of assignment, substantially in the form attached as Exhibit I to Exhibit E (a "Notice of Assignment"), together with any consents required by Section 12.3.1, and (ii) payment by the transferor Lender, the Purchaser, or both, of a $4,000 fee to the Agent for processing such assignment, such assignment shall become effective on the effective date specified in such Notice of Assignment. The Notice of Assignment shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Commitment and Loans under the applicable assignment agreement are "plan assets" as defined under ERISA and that the rights and interests of the Purchaser in and under the Loan Documents will not be "plan assets" under ERISA. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Lender party to this Agreement and any other Loan Document executed by or on behalf of the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party hereto, and no further consent or action by the Borrower, the Lenders or the Agent shall be required to release the transferor Lender with respect to the percentage of the Aggregate Commitment and Loans assigned to such Purchaser. Upon the consummation of any assignment to a Purchaser pursuant to this Section 12.3.2, the transferor Lender, the Agent and the Borrower shall, if the transferor Lender or the Purchaser desires that its Loans be evidenced by Notes, make appropriate arrangements so that new Notes or, as appropriate, replacement Notes are issued to such transferor Lender and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their respective Commitments, as adjusted pursuant to such assignment. Page 43 12.4. Dissemination of Information. The Borrower authorizes each Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the creditworthiness of the Borrower and its Subsidiaries, including without limitation any information contained in any Reports; provided that each Transferee and prospective Transferee agrees to be bound by Section 9.11 of this Agreement. 12.5. Tax Treatment. If any interest in any Loan Document is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 3.5(iv). ARTICLE XIII NOTICES 13.1. Notices. Except as otherwise permitted by Section 2.13 with respect to borrowing notices, all notices, requests and other communications to any party hereunder shall be in writing (including electronic transmission, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Agent, at its address or facsimile number set forth on the signature pages hereof, (y) in the case of any Lender, at its address or facsimile number set forth below its signature hereto or (z) in the case of any party, at such other address or facsimile number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower in accordance with the provisions of this Section 13.1. Each such notice, request or other communication shall be effective (i) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (ii) if given by mail, three Business Days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered (or, in the case of electronic transmission, received) at the address specified in this Section; provided that notices to the Agent under Article II shall not be effective until received. 13.2. Change of Address. The Borrower, the Agent and any Lender may each change the address for service of notice upon it by a notice in writing to the other parties hereto. Page 44 ARTICLE XIV COUNTERPARTS This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by the Borrower, the Agent and the Lenders and each party has notified the Agent by facsimile transmission or telephone that it has taken such action. ARTICLE XV CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL 15.1. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 15.2. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO, ILLINOIS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS. Page 45 15.3. WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER. Page 46 IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed this Agreement as of the date first above written. NETCO COMMUNICATIONS CORPORATION By: /s/ Edward J. Driscoll III -------------------------------- Edward J. Driscoll III President 333 North Washington Avenue Minneapolis, Minnesota 55401 Attention: Mark Marlow Finance Director Telecopier: (612) 204-3101 Commitments ----------- $25,000,000 THE FIRST NATIONAL BANK OF CHICAGO, Individually and as Agent By: /s/ Michael P. King -------------------------------- Michael P. King Assistant Vice President One First National Plaza Chicago, Illinois 60670 Attention: Communications Division Telecopier: (312) 732-8587 =========== $25,000,000 Page 47 EXHIBIT A WORLDCOM, INC. GUARANTY The undersigned hereby requests the Lenders party to that certain Credit Agreement dated as of September 26, 1997 (as it may be amended or modified from time to time with the consent of the undersigned the "Credit Agreement") by and among NetCo Communications Corporation (the "Borrower"), The First National Bank of Chicago individually and as agent (in such capacity the "Agent") and the Lenders party thereto (the "Lenders"), through any of their respective branches, offices, subsidiaries or affiliates, to extend credit or to permit credit to remain outstanding to the Borrower under the Credit Agreement as the Borrower may desire and as each Lender may extend or permit under the Credit Agreement from time to time in its sole discretion, and, in consideration of any credit granted or continued under the Credit Agreement, the undersigned hereby absolutely and unconditionally guarantees prompt payment when due, whether at stated maturity, upon acceleration or otherwise, and at all times thereafter, of any and all existing and future indebtedness and liability of every kind, nature and character, direct or indirect, absolute or contingent of the Borrower to the Lenders arising under the Credit Agreement (including all attorneys' fees incurred by the Lenders in connection with the collection or enforcement thereof) (the "Guaranteed Debt"). The undersigned waives notice of the acceptance of this Guaranty. The undersigned further waives presentment, protest, notice, the benefit of any statutes of limitations, demand or action on delinquency in respect of the Guaranteed Debt or any part thereof, including any right to require the Lenders to sue the Borrower, any other guarantor or any other person obligated with respect to the Guaranteed Debt or any part thereof, or otherwise to enforce payment thereof against any collateral securing the Guaranteed Debt or any part thereof. The undersigned hereby agrees that, if at any time any payment of any portion of the Guaranteed Debt is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, the undersigned's obligations hereunder with respect to such payment shall be reinstated at such time as though such payment had not been made and whether or not the Lenders are in possession of this Guaranty. This Guaranty shall continue in effect until receipt by the Lenders of written notice of its termination and, notwithstanding such receipt, thereafter as to Guaranteed Debt incurred or arising as to advances made or approved by the undersigned prior to receipt by the Lenders of such notice of termination, including any extensions, modifications, renewals or indulgences with respect to, or substitutions for, such Guaranteed Debt or any part thereof as to which the undersigned has received prior written notice. Page 48 The validity and enforceability of this Guaranty shall not be impaired or affected by any of the following, whether occurring before or after receipt by the Lenders of notice of termination of this Guaranty: (a) any extension, modification or renewal of, or indulgence with respect to, or substitutions for, the Guaranteed Debt or any part thereof or any agreement relating thereto at any time as to which the undersigned has received prior written notice; (b) any change in the interest rate payable on, or fees, commissions or other amounts payable with respect to, the Guaranteed Debt; (c) any failure or omission to enforce any right, power or remedy with respect to the Guaranteed Debt or any part thereof or any agreement relating thereto, or any collateral securing the Guaranteed Debt or any part thereof; (d) any waiver of any right, power or remedy or of any default with respect to the Guaranteed Debt or any part thereof or any agreement relating thereto or with respect to any collateral securing the Guaranteed Debt or any part thereof; (e) any release, surrender, compromise, settlement, waiver, subordination or modification, with or without consideration, of any collateral securing the Guaranteed Debt or any part thereof, any other guaranties with respect to the Guaranteed Debt or any part thereof, or any other obligation of any person or entity with respect to the Guaranteed Debt or any part thereof; (f) the enforceability or validity of the Guaranteed Debt or any part thereof or the genuineness, enforceability or validity of any agreement relating thereto or with respect to any collateral securing the Guaranteed Debt or any part thereof; (g) the application of payments received from any source other than the undersigned to the payment of indebtedness other than the Guaranteed Debt, any part thereof or amounts which are not covered by this Guaranty even though the Lenders might lawfully have elected to apply such payments to any part or all of the Guaranteed Debt or to amounts which are not covered by this Guaranty; (h) any change of ownership of the Borrower or the insolvency, bankruptcy or any other change in the legal status of the Borrower (or the retirement or death of any partner or the introduction of any further partner); (i) the change in or the imposition of any law, decree, regulation or other governmental act which does or might impair, delay or in any way affect the validity, enforceability or the payment when due of the Guaranteed Debt; (j) the failure of the Borrower or the undersigned to maintain in full force, validity or effect or to obtain or renew when required all governmental and other approvals, licenses or consents required in connection with the Guaranteed Debt or this Guaranty, or to take any other action required in connection with the performance of all obligations pursuant to the Guaranteed Debt or this Guaranty; or (k) the existence of any claim, setoff or other rights which the undersigned may have at any time against the Borrower in connection herewith or an unrelated transaction, all whether or not the undersigned shall have had notice or knowledge of any act or omission referred to in the foregoing clauses (a) through (k) of this paragraph. It is agreed that the undersigned's liability hereunder is several and independent of any other guaranties or other obligations at any time in effect with respect to the Guaranteed Debt or any part thereof and that the undersigned's liability hereunder may be enforced regardless of the existence, validity, enforcement or non-enforcement of any such other guaranties or other obligations or any provision of any applicable law or regulation purporting to prohibit payment by the Page 49 Borrower of the Guaranteed Debt in the manner agreed upon between the Lenders and the Borrower. Credit may be granted or continued from time to time by the Lenders to the Borrower without notice to or authorization from the undersigned regardless of the Borrower's financial or other condition at the time of any such grant or continuation, provided that no such credit shall be deemed to be Guaranteed Debt unless authorized by the undersigned. The Lenders shall have no obligation to disclose or discuss with the undersigned their respective internal assessments of the financial condition of the Borrower. Until the Guaranteed Debt is paid in full, the undersigned shall not exercise any right of subrogation with respect to payments made by the undersigned pursuant to this Guaranty. The undersigned waives any benefit of the collateral, if any, which may from time to time secure the Guaranteed Debt or any part thereof and authorizes the Lenders to take any action or exercise any remedy with respect thereto, which the Lenders in their sole discretion shall determine, without notice to the undersigned. In the event the Lenders in their sole discretion elect to give notice of any action with respect to the collateral, if any, securing the Guaranteed Debt or any part thereof, ten days written notice mailed to the undersigned by ordinary mail at the address shown hereon shall be deemed reasonable notice of any matters contained in such notice. In the event that acceleration of the time for payment of any of the Guaranteed Debt is stayed, upon the insolvency, bankruptcy or reorganization of the Borrower, or otherwise, all such amounts shall nonetheless be payable by the undersigned forthwith upon demand by the Lenders. Without limiting the rights of the Lenders under applicable law, the undersigned authorizes each Lender to apply or offset any sums standing to the credit of the undersigned with any office, branch, subsidiary or affiliate of such Lender to the payment when due of any amount owing by the undersigned under this Guaranty. No provision of this Guaranty may be amended, supplemented or modified, or any of the terms and provisions hereof waived, except by a written instrument executed by the requisite number of Lenders under the Credit Agreement (or the Agent with the consent of the requisite number of Lenders under the Credit Agreement) and the undersigned. No failure on the part of a Lender to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Page 50 The undersigned shall pay all costs, fees and expenses (including attorneys' fees) incurred by the Agent and the Lenders in collecting or enforcing the undersigned's obligations under this Guaranty. The provisions of this Guaranty are severable, and in any action or proceeding involving any state corporate law, or any state or federal bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of the undersigned hereunder would otherwise be held or determined to be avoidable, invalid or unenforceable on account of the amount of the undersigned's liability under this Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the amount of such liability shall, without any further action by the undersigned, the Agent, or the Lenders be automatically limited and reduced to the highest amount which is valid and enforceable as determined in such action or proceeding. This Guaranty shall (i) bind the undersigned and the heirs, personal representatives, successors and assigns of the undersigned, (ii) inure to the benefit of the Agent and the Lenders and their respective successors and assigns and (iii) be governed by the internal laws of the State of Illinois. The undersigned hereby irrevocably submits to the non-exclusive jurisdiction of any United States federal or Illinois state court sitting in Chicago in any action or proceeding arising out of or relating to this Guaranty, and the undersigned hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in any such court. THE UNDERSIGNED HEREBY WAIVES ANY RIGHT TO A JURY TRIAL IN ANY ACTION ARISING HEREUNDER. WORLDCOM, INC. By -------------------------------- Chicago, Illinois September 26, 1997 Address: 515 East Amite Street Jackson, Mississippi 39201 Page 51 EXHIBIT B FORM OF OPINION OF COUNSEL TO BORROWER Page 52 EXHIBIT C FORM OF OPINION OF COUNSEL TO GUARANTOR Page 53 EXHIBIT D COMPLIANCE CERTIFICATE To: The Lenders parties to the Credit Agreement Described Below This Compliance Certificate is furnished pursuant to that certain Credit Agreement dated as of September 26, 1997 (as amended, modified, renewed or extended from time to time, the "Agreement") among NetCo Communications Corporation (the "Borrower"), the lenders party thereto and The First National Bank of Chicago, as Agent for the Lenders. Unless otherwise defined herein, capitalized terms used in this Compliance Certificate have the meanings ascribed thereto in the Agreement. THE UNDERSIGNED HEREBY CERTIFIES THAT: 1. I am the duly elected of the Borrower; 2. I have reviewed the terms of the Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Borrower and its Subsidiaries during the accounting period covered by the attached financial statements; and 3. The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or event which constitutes a Default or Unmatured Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth below. Described below are the exceptions, if any, to paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking, or proposes to take with respect to each such condition or event: ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- Page 54 The foregoing certifications, together with the financial statements delivered with this Certificate in support hereof, are made and delivered this ____ day of __________, ____. --------------------------------- Page 55 EXHIBIT E ASSIGNMENT AGREEMENT This Assignment Agreement (this "Assignment Agreement") between ______________ (the "Assignor") and _________________ (the "Assignee") is dated as of _______________, 19__. The parties hereto agree as follows: 1. PRELIMINARY STATEMENT. The Assignor is a party to a Credit Agreement (which, as it may be amended, modified, renewed or extended from time to time is herein called the "Credit Agreement") described in Item 1 of Schedule 1 attached hereto ("Schedule 1"). Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to them in the Credit Agreement. 2. ASSIGNMENT AND ASSUMPTION. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, an interest in and to the Assignor's rights and obligations under the Credit Agreement such that after giving effect to such assignment the Assignee shall have purchased pursuant to this Assignment Agreement the percentage interest specified in Item 3 of Schedule 1 of all outstanding rights and obligations under the Credit Agreement relating to the facilities listed in Item 3 of Schedule 1 and the other Loan Documents. The aggregate Commitment (or Loans, if the applicable Commitment has been terminated) purchased by the Assignee hereunder is set forth in Item 4 of Schedule 1. 3. EFFECTIVE DATE. The effective date of this Assignment Agreement (the "Effective Date") shall be the later of the date specified in Item 5 of Schedule 1 or two Business Days (or such shorter period agreed to by the Agent) after a Notice of Assignment substantially in the form of Exhibit "I" attached hereto has been delivered to the Agent. Such Notice of Assignment must include any consents required to be delivered to the Agent by Section 12.3.1 of the Credit Agreement. In no event will the Effective Date occur if the payments required to be made by the Assignee to the Assignor on the Effective Date under Sections 4 and 5 hereof are not made on the proposed Effective Date. The Assignor will notify the Assignee of the proposed Effective Date no later than the Business Day prior to the proposed Effective Date. As of the Effective Date, (i) the Assignee shall have the rights and obligations of a Lender under the Loan Documents with respect to the rights and obligations assigned to the Assignee hereunder and (ii) the Assignor shall relinquish its rights and be released from its corresponding obligations under the Loan Documents with respect to the rights and obligations assigned to the Assignee hereunder. 4. PAYMENT OBLIGATIONS. On and after the Effective Date, the Assignee shall be entitled to receive from the Agent all payments of principal, interest and fees with respect to the interest assigned hereby. The Assignee shall advance funds directly to the Agent with Page 56 respect to all Loans and reimbursement payments made on or after the Effective Date with respect to the interest assigned hereby. ** In the event that either party hereto receives any payment to which the other party hereto is entitled under this Assignment Agreement, then the party receiving such amount shall promptly remit it to the other party hereto. **Each Assignor may insert its standard payment provisions. 5. FEES PAYABLE BY THE ASSIGNEE. The Assignee shall pay to the Assignor a fee on each day on which a payment of interest or commitment fees is made under the Credit Agreement with respect to the amounts assigned to the Assignee hereunder (other than a payment of interest or commitment fees for the period prior to the Effective Date or, in the case of Fixed Rate Loans, the Payment Date, which the Assignee is obligated to deliver to the Assignor pursuant to Section 4 hereof). The amount of such fee shall be the difference between (i) the interest or fee, as applicable, paid with respect to the amounts assigned to the Assignee hereunder and (ii) the interest or fee, as applicable, which would have been paid with respect to the amounts assigned to the Assignee hereunder if each interest rate was of 1% less than the interest rate paid by the Borrower or if the commitment fee was of 1% less than the commitment fee paid by the Borrower, as applicable. In addition, the Assignee agrees to pay % of the recordation fee required to be paid to the Agent in connection with this Assignment Agreement. 6. REPRESENTATIONS OF THE ASSIGNOR; LIMITATIONS ON THE ASSIGNOR'S LIABILITY. The Assignor represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim created by the Assignor. It is understood and agreed that the assignment and assumption hereunder are made without recourse to the Assignor and that the Assignor makes no other representation or warranty of any kind to the Assignee. Neither the Assignor nor any of its officers, directors, employees, agents or attorneys shall be responsible for (i) the due execution, legality, validity, enforceability, genuineness, sufficiency or collectability of any Loan Document, including without limitation, documents granting the Assignor and the other Lenders a security interest in assets of the Borrower or any guarantor, (ii) any representation, warranty or statement made in or in connection with any of the Loan Documents, (iii) the financial condition or creditworthiness of the Borrower or any guarantor, (iv) the performance of or compliance with any of the terms or provisions of any of the Loan Documents, (v) inspecting any of the Property, books or records of the Borrower, (vi) the validity, enforceability, perfection, priority, condition, value or sufficiency of any collateral securing or purporting to secure the Loans or (vii) any mistake, error of judgment, or action taken or omitted to be taken in connection with the Loans or the Loan Documents. 7. REPRESENTATIONS OF THE ASSIGNEE. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements requested by the Assignee and such other documents and information as it has deemed Page 57 appropriate to make its own credit analysis and decision to enter into this Assignment Agreement, (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information at it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, (iii) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto, (iv) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender, (v) agrees that its payment instructions and notice instructions are as set forth in the attachment to Schedule 1, (vi) confirms that none of the funds, monies, assets or other consideration being used to make the purchase and assumption hereunder are "plan assets" as defined under ERISA and that its rights, benefits and interests in and under the Loan Documents will not be "plan assets" under ERISA, **[and (vii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying that the Assignee is entitled to receive payments under the Loan Documents without deduction or withholding of any United States federal income taxes]**.** **to be inserted if the Assignee is not incorporated under the laws of the United States, or a state thereof. 8. INDEMNITY. The Assignee agrees to indemnify and hold the Assignor harmless against any and all losses, costs and expenses (including, without limitation, reasonable attorneys' fees) and liabilities incurred by the Assignor in connection with or arising in any manner from the Assignee's non-performance of the obligations assumed under this Assignment Agreement. 9. SUBSEQUENT ASSIGNMENTS. After the Effective Date, the Assignee shall have the right pursuant to Section 12.3.1 of the Credit Agreement to assign the rights which are assigned to the Assignee hereunder to any entity or person, provided that (i) any such subsequent assignment does not violate any of the terms and conditions of the Loan Documents or any law, rule, regulation, order, writ, judgment, injunction or decree and that any consent required under the terms of the Loan Documents has been obtained and (ii) unless the prior written consent of the Assignor is obtained, the Assignee is not thereby released from its obligations to the Assignor hereunder, if any remain unsatisfied, including, without limitation, its obligations under Sections 4, 5 and 8 hereof. 10. REDUCTIONS OF AGGREGATE COMMITMENT. If any reduction in the Aggregate Commitment occurs between the date of this Assignment Agreement and the Effective Date, the percentage interest specified in Item 3 of Schedule 1 shall remain the Page 58 same, but the dollar amount purchased shall be recalculated based on the reduced Aggregate Commitment. 11. ENTIRE AGREEMENT. This Assignment Agreement and the attached Notice of Assignment embody the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings between the parties hereto relating to the subject matter hereof. 12. GOVERNING LAW. This Assignment Agreement shall be governed by the internal law, and not the law of conflicts, of the State of Illinois. 13. NOTICES. Notices shall be given under this Assignment Agreement in the manner set forth in the Credit Agreement. For the purpose hereof, the addresses of the parties hereto (until notice of a change is delivered) shall be the address set forth in the attachment to Schedule 1. IN WITNESS WHEREOF, the parties hereto have executed this Assignment Agreement by their duly authorized officers as of the date first above written. **[NAME OF ASSIGNOR]** By: ---------------------------------- Title: ---------------------------------- ---------------------------------- ---------------------------------- **[NAME OF ASSIGNEE]** By: ---------------------------------- Title: ---------------------------------- ---------------------------------- ---------------------------------- Page 59 SCHEDULE 1 to Assignment Agreement 1. Description and Date of Credit Agreement: Credit Agreement dated as of September 26, 1997 by and among NetCo Communications Corporation, The First National Bank of Chicago individually and as Agent, and the Lenders party thereto 2. Date of Assignment Agreement: _____________, 19__ 3. Amounts (As of Date of Item 2 above): a. Total of Commitments (Loans)* under Credit Agreement $__________ b. Assignee's Percentage of Facility purchased under the Assignment Agreement** __________% c. Amount of Assigned Share in Facility purchased under the Assignment Agreement $__________ 4. Assignee's Aggregate (Loan Amount)* Commitment Amount Purchased Hereunder: $__________ 5. Proposed Effective Date: ___________ Accepted and Agreed: **[NAME OF ASSIGNOR]** **[NAME OF ASSIGNEE]** By: By: ----------------------- ----------------------- Title: Title: ----------------------- ----------------------- * If a Commitment has been terminated, insert outstanding Loans in place of Commitment ** Percentage taken to 10 decimal places Page 60 Attachment to SCHEDULE 1 to ASSIGNMENT AGREEMENT ADMINISTRATIVE INFORMATION SHEET Attach Assignor's Administrative Information Sheet, which must include notice addresses for the Assignor and the Assignee (Sample form shown below) ASSIGNOR INFORMATION Contact: Name: Telephone No.: ---------------------------- -------------------------- Fax No.: Telex No.: -------------------------- ------------------------------- Answerback: --------------------------------------- Payment Information: - ------------------- Name & ABA # of Destination Bank: ----------------------------------------------- ----------------------------------------------- Account Name & Number for Wire Transfer: ---------------------------------------- ---------------------------------------- Other Instructions: ------------------------------------------------------------- - -------------------------------------------------------------------------------- Address for Notices for Assignor: ----------------------------------------------- ----------------------------------------------- ----------------------------------------------- ASSIGNEE INFORMATION Credit Contact: Name: Telephone No.: ---------------------------- -------------------------- Fax No.: Telex No.: -------------------------- ------------------------------- Answerback: --------------------------------------- Key Operations Contacts: Booking Installation: Booking Installation: ------------- -------------------- Name: Name: ----------------------------- ------------------------------------ Telephone No.: Telephone No.: -------------------- --------------------------- Fax No.: Fax No.: -------------------------- --------------------------------- Page 61 Telex No.: Telex No.: ------------------------ ------------------------------- Answerback: Answerback: ----------------------- ------------------------------ Payment Information: Name & ABA # of Destination Bank: ----------------------------------------------- ----------------------------------------------- Account Name & Number for Wire Transfer: ---------------------------------------- ---------------------------------------- Other Instructions: ------------------------------------------------------------- - -------------------------------------------------------------------------------- Address for Notices for Assignee: ---------------------------------------------- ---------------------------------------------- ---------------------------------------------- Page 62 FNBC INFORMATION Assignee will be called promptly upon receipt of the signed agreement. Initial Funding Contact: Subsequent Operations Contact: Name: John Loizzo Name: ----------------------------------------- ----------------------- Telephone No.: (312) 732-4118 Telephone No.: (312) -------------------------------- --------------- Fax No.: (312) 732-7455 Fax No.: (312) ------------------------ -------------------- FNBC Telex No.: 190201 (Answerback: FNBC UT) ----------------------------- Initial Funding Standards: - -------------------------- Libor - Fund 2 days after rates are set. FNBC Wire Instructions: The First National Bank of Chicago, ABA # 071000013 - ---------------------- BNF = 7521-7653/DES, Ref: Address for Notices for FNBC: One First National Plaza, Chicago, IL 60670 - ---------------------------- Attn: Agency/Compliance Division, Suite 0353 Fax No. (312) 732-2038 or (312) 732-4339 Page 63 EXHIBIT "I" to Assignment Agreement NOTICE OF ASSIGNMENT _________________, 19__ To: NETCO COMMUNICATIONS CORPORATION 333 North Washington Avenue Minneapolis, Minnesota 55401 THE FIRST NATIONAL BANK OF CHICAGO One First National Plaza Mail Suite 0629 Chicago, Illinois 60670 From: **[NAME OF ASSIGNOR]** (the "Assignor") **[NAME OF ASSIGNEE]** (the "Assignee") 1. We refer to that Credit Agreement (the "Credit Agreement") described in Item 1 of Schedule 1 attached hereto ("Schedule 1"). Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to them in the Credit Agreement. 2. This Notice of Assignment (this "Notice") is given and delivered to the Borrower and the Agent pursuant to Section 12.3.2 of the Credit Agreement. 3. The Assignor and the Assignee have entered into an Assignment Agreement, dated as of _________________, 19__ (the "Assignment"), pursuant to which, among other things, the Assignor has sold, assigned, delegated and transferred to the Assignee, and the Assignee has purchased, accepted and assumed from the Assignor the percentage interest specified in Item 3 of Schedule 1 of all outstandings, rights and obligations under the Credit Agreement relating to the facility listed in Item 3 of Schedule 1. The Effective Date of the Assignment shall be the later of the date specified in Item 5 of Schedule 1 or two Business Days (or such shorter period as agreed to by the Agent) after this Notice of Assignment and any consents and fees required by Sections 12.3.1 and 12.3.2 of the Credit Agreement have been delivered to the Agent, provided that the Effective Date shall not occur if any condition precedent agreed to by the Assignor and the Assignee has not been satisfied. Page 64 4. The Assignor and the Assignee hereby give to the Borrower and the Agent notice of the assignment and delegation referred to herein. The Assignor will confer with the Agent before the date specified in Item 5 of Schedule 1 to determine if the Assignment Agreement will become effective on such date pursuant to Section 3 hereof, and will confer with the Agent to determine the Effective Date pursuant to Section 3 hereof if it occurs thereafter. The Assignor shall notify the Agent if the Assignment Agreement does not become effective on any proposed Effective Date as a result of the failure to satisfy the conditions precedent agreed to by the Assignor and the Assignee. At the request of the Agent, the Assignor will give the Agent written confirmation of the satisfaction of the conditions precedent. 5. The Assignor or the Assignee shall pay to the Agent on or before the Effective Date the processing fee of $4,000 required by Section 12.3.2 of the Credit Agreement. 6. If Notes are outstanding on the Effective Date, the Assignor and the Assignee request and direct that the Agent prepare and cause the Borrower to execute and deliver new Notes or, as appropriate, replacement notes, to the Assignor and the Assignee. The Assignor and, if applicable, the Assignee each agree to deliver to the Agent the original Note received by it from the Borrower upon its receipt of a new Note in the appropriate amount. 7. The Assignee advises the Agent that notice and payment instructions are set forth in the attachment to Schedule 1. 8. The Assignee hereby represents and warrants that none of the funds, monies, assets or other consideration being used to make the purchase pursuant to the Assignment are "plan assets" as defined under ERISA and that its rights, benefits, and interests in and under the Loan Documents will not be "plan assets" under ERISA. 9. The Assignee authorizes the Agent to act as its agent under the Loan Documents in accordance with the terms thereof. The Assignee acknowledges that the Agent has no duty to supply information with respect to the Borrower or the Loan Documents to the Assignee until the Assignee becomes a party to the Credit Agreement.* *May be eliminated if Assignee is a party to the Credit Agreement prior to the Effective Date. NAME OF ASSIGNOR NAME OF ASSIGNEE By: By: ------------------------------- -------------------------------------- Title: Title: ---------------------------- ----------------------------------- Page 65 ACKNOWLEDGED AND CONSENTED TO BY ACKNOWLEDGED AND CONSENTED TO BY THE FIRST NATIONAL BANK OF CHICAGO NETCO COMMUNICATIONS CORPORATION By: By: ------------------------------- -------------------------------------- Title: Title: ---------------------------- ----------------------------------- **[Attach photocopy of Schedule 1 to Assignment]** Page 66 EXHIBIT F LOAN/CREDIT RELATED MONEY TRANSFER INSTRUCTION To The First National Bank of Chicago, as Agent (the "Agent") under the Credit Agreement described below Re: Credit Agreement, dated September 26. 1997 (as it may be amended or modified, the "Credit Agreement"), among NetCo Communications Corporation (the "Borrower"), the Lenders named therein and the Agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned thereto in the Credit Agreement. The Agent is specifically authorized and directed to act upon the following standing money transfer instructions with respect to the proceeds of Advances or other extensions of credit from time to time until receipt by the Agent of a specific written revocation of such instructions by the Borrower, provided, however, that the Agent may otherwise transfer funds as hereafter directed in writing by the Borrower in accordance with Section 13.1 of the Credit Agreement or based on any telephonic notice made in accordance with Section 2.14 of the Credit Agreement. Facility Identification Number(s) ----------------------------------------------- Customer/Account Name ----------------------------------------------------------- Transfer Funds To --------------------------------------------------------------- --------------------------------------------------------------- For Account No. ----------------------------------------------------------------- Reference/Attention To ---------------------------------------------------------- Authorized Officer (Customer Representative) Date -------------------- - ---------------------------------- ------------------------ (Please Print) Signature Bank Officer Name Date -------------------- - ---------------------------------- ------------------------ (Please Print) Signature (Deliver Completed Form to Credit Support Staff For Immediate Processing) Page 67 EXHIBIT G NOTE $_______________ ____________, _____ NetCo Communications Corporation, a Minnesota corporation (the "Borrower"), promises to pay to the order of ____________________________________ (the "Lender") the lesser of the principal sum of ______________________________ Dollars or the aggregate unpaid principal amount of all Loans made by the Lender to the Borrower pursuant to Article II of the Agreement (as hereinafter defined), in immediately available funds at the main office of The First National Bank of Chicago in Chicago, Illinois, as Agent, together with interest on the unpaid principal amount hereof at the rates and on the dates set forth in the Agreement. The Borrower shall pay the principal of and accrued and unpaid interest on the Loans in full on the Facility Termination Date. The Lender shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of each Loan and the date and amount of each principal payment hereunder. This Note is one of the Notes issued pursuant to, and is entitled to the benefits of, the Credit Agreement dated as of September 26, 1997 (which, as it may be amended or modified and in effect from time to time, is herein called the "Agreement"), among the Borrower, the lenders party thereto, including the Lender, and The First National Bank of Chicago, as Agent, to which Agreement reference is hereby made for a statement of the terms and conditions governing this Note, including the terms and conditions under which this Note may be prepaid or its maturity date accelerated. This Note is guaranteed pursuant to the Guaranty, as more specifically described in the Agreement, and reference is made thereto for a statement of the terms and provisions thereof. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Agreement. NETCO COMMUNICATIONS CORPORATION By: ------------------------------------- Print Name: ------------------------------ Title: ----------------------------------- Page 68 SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL TO NOTE OF NETCO COMMUNICATIONS CORPORATION, DATED ____________, _____ Principal Maturity Principal Amount of of Interest Amount Unpaid Date Loan Period Paid Balance ---- --------- ----------- --------- ------- Page 69 SCHEDULE 1 SUBSIDIARIES (See Section 5.8) Investment Jurisdiction of Owned Percent In Organization By Ownership ---------- --------------- ----- --------- WAM!Net, Inc. MN Borrower 100% Netco Communications of Canada, Inc. Ontario, Canada Borrower 100% Page 70 SCHEDULE 2 INDEBTEDNESS AND LIENS (See Section 5.14)
Maturity Indebtedness Indebtedness Property and Amount Incurred By Owed To Encumbered (If Any) of Indebtedness - ------------ ------------ ------------------- --------------- Borrower LTI Leasing Various equipment 9/30/98 Technologies as set forth in Amount of Incorporated Financing Statement Indebtedness is (some of the approximately equipment is leased $125,000.00 as of through a sale 9/22/97 leaseback program) Borrower Midwest Forklift, Forklift and $400 per month Inc. miscellaneous lease payments. equipment (lease) Lease is an annul Lease
OTHER INDEBTEDNESS
Principle Maturity of Unpaid Balance Date of Loan Lender Amount of Loan Interest Period (as of 9/22/97) - ------------ ------ -------------- --------------- --------------- 9/18/96 WorldCom, Inc. $5,000,000 9/30/99 $5,212,500.00 12/23/96 WorldCom, Inc. $19,000,000 12/31/03 $19,945,933.95 6/30/96 WorldCom, Inc. $10,000,000 9/30/97 $10,136,683.34 3/29/95 Gene Bier, $75,000 Convertible $89,616.63 John Steinberg, Patrick Dirk 9/4/95 James Ecker $ 50,000 Convertible $ 52,700.00 ----------- -------------- Total $34,125,000 $35,437,433.92
Page 71 SCHEDULE 3 LITIGATION (See Section 5.7) 1. Arbitration proceedings filed by Piper Jaffray, Inc. with National Association of Securities Dealers, Inc. on or about June 30, 1997. 2. On or about September 25, 1997, the Borrower served a complaint against Piper Jaffray, Inc. The claim will be filed in Hennepin County District Court, Fourth Judicial District, Minneapolis, Minnesota. The complaint requests, among other things, that the contract referred to in the arbitration proceeding referenced in number one above be declared unenforceable and void. 3. On or about September 25, 1997, the Borrower served a complaint against Joseph V. Caruso, an employee of Piper Jaffray, Inc., alleging fraud, misrepresentation, breach of fiduciary duty, and other matters. The claim will be filed in Hennepin County District Court, Fourth Judicial District, Minneapolis, Minnesota. The Borrower is claiming damages in excess of $50,000. Page 72 EX-10.2 19 TEN PERCENT CONVERTIBLE NOTE PURCHASE AGREEMENT EXHIBIT 10.2 CONVERTIBLE NOTE PURCHASE AGREEMENT NETCO COMMUNICATIONS CORPORATION and WORLDCOM INC. SEPTEMBER 12, 1996 CONVERTIBLE NOTE PURCHASE AGREEMENT Agreement made this 12th day of September 1996, by and between NETCO COMMUNICATIONS CORPORATION, a Minnesota corporation, having its principal place of business at 102 Union Plaza, 333 North Washington Avenue. Minneapolis, Minnesota 55401 ("NETCO") and WORLDCOM INC., a Georgia corporation, having its principal place of business at 515 East Amite Street, Jackson, Mississippi 39201 ("WCOM"). WITNESSETH: Whereas, NETCO is engaged in the development and implementation of a high speed, digital data transportation delivery and ancillary data storage and remote proofing services addressed initially to the printing and prepress industries, and requires significant permanent financing to accomplish such development and implementation; and Whereas, WCOM is engaged in the sale and marketing of voice and data transmission over its multinational communications infrastructure; and Whereas, NETCO and WCOM are considering a strategic association, including a possible acquisition by WCOM of a majority ownership of NETCO, to finance and facilitate the deployment and implementation of NETCO's services over WCOM's communications infrastructure; and Whereas, NETCO is alternatively considering other sources of permanent financing, including a possible public offering of its common stock to finance the deployment and implementation of its services; and Whereas, NETCO currently requires financing to continue its development and deployment activities pending the receipt of additional permanent financing; and Whereas, WCOM is agreeable to lending NETCO the sum 1 of Five Million Dollars ($5,000,000) in consideration of NETCO's issuance to WCOM of NETCO's Convertible Subordinated Note upon the terms and conditions, and for the additional consideration, provided herein; NOW THEREFORE, in consideration of the foregoing premises, and of the consideration provided herein, the parties agree as follows: 1. Purchase and Sale of the Note. (a) Subject to the terms and conditions ----------------------------- set forth in this Agreement, WCOM hereby purchases from NETCO, and NETCO hereby sells to WCOM for the principal amount of Five Million Dollars ($5,000,000) NETCO's 10% Convertible Promissory Note (the "Note") of equivalent principal amount in form appended to this Agreement as Exhibit 1. (b) Delivery of the Note shall be made against receipt of payment ("Closing") to occur no later than September 20, 1996, failing which payment, this Agreement shall be null and void and of no further force and effect. 2. Representation, Warranties and Covenants of NETCO. NETCO hereby ------------------------------------------------- represents, warrants and covenants to WCOM that: (a) Corporate Organization and Power; Qualification. NETCO 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 NETCO. (b) Subsidiaries. NETCO does not own, directly or indirectly, any ------------ capital stock or other equity securities of any corporation nor does NETCO have any direct or 2 indirect ownership interest, including interests in partnerships and joint ventures, in any other entity or business, with the sole exceptions of WAMNET, Inc., a Minnesota corporation and Netco Communications Corporation of Canada, Inc., a Canadian corporation that are each a wholly owned subsidiary of NETCO. (c) Authorization; Enforceability. NETCO 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 and the Convertible Subordinated Note ("Note") in the form appended to this Agreement as Exhibit 1. This Agreement has been, and the Note contemplated hereby to which NETCO is a party when delivered to WCOM will have been, duly executed and delivered by NETCO and is, or when so delivered will be, a legal, valid and binding obligation of NETCO, enforceable against NETCO in accordance with its 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 NETCO of this Agreement and of the Note, do not and will not as of closing or thereafter (a) require any Governmental Approval or any other consent or approval, including any consent or approval of the stockholders of NETCO, 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 (b) 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 NETCO under, any contract to which NETCO is a party or by which NETCO 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 threatened (nor, to the knowledge of NETCO, is there any basis therefor) against or in any other way relating to or affecting (a) NETCO or (b) any of its businesses or properties. (f) Taxes. NETCO has filed (or obtained extensions of the time by ----- which it is required to file) 3 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. NETCO 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 NETCO consists of 10,000,000 shares of which 5,000,000 are Common Shares and 5,000,000 are undesignated shares, and of which 1,295,971 Common Shares are issued and outstanding. NETCO does not hold any of its shares in treasury. (ii) All such issued and outstanding shares of capital stock of NETCO have been validly issued and are fully paid and nonassessable and are not subject to preemptive rights. (iii) Except as contemplated by this Agreement and as disclosed on Schedule 1, there are no outstanding subscriptions, options, warrants or ---------- other rights of any kind to acquire any additional shares of capital stock of NETCO, 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 NETCO committed to issue any such option, warrant, right or security. (iv) There are no agreements relating to voting, purchase or sale of capital stock between NETCO and any of its stockholders or affiliates, and to the best of NETCO's knowledge, among any of its stockholders. (h) (i) NETCO has delivered to 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 December 31, 1995, and for the six month period ended June 30, 1996. Such financial statements (i) fairly present the financial condition, assets and liabilities of NETCO at their respective dates 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 4 accounting principles except as may be noted therein, and (iii) were prepared from the books and records of NETCO, which books and records are complete and correct and fairly reflect all material transactions of NETCO'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 Note, NETCO will furnish 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, NETCO will furnish WCOM with such additional financial and business information, including monthly or other periodic financial statements as NETCO may prepare from time to time, upon the reasonable request of WCOM. (i) NETCO shall use the loan proceeds of for reasonable and necessary capital expenditures and operating expenses in accordance with its usual and past practices, except as may be approved by WCOM. (j) NETCO has provided WCOM access to full and complete information regarding NETCO and shall continue to provide such information as WCOM may reasonably request. 3. Representation and Warranties of WCOM. WCOM hereby represents ------------------------------------- and warrants to NETCO that: (a) WCOM has been given access to full and complete information regarding the Company and has utilized such access to his or her satisfaction for the purpose of obtaining information WCOM desires or deems relevant to the decision to purchase the Note; and particularly, WCOM has had the opportunity to ask questions of, and receive answers from, representatives of the Company concerning the terms and conditions of the Note and to obtain any additional information WCOM desires or deems relevant; and (b) 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 5 maintenance services; and upon the Company's ability to successfully market its data transportation technology and services to appropriate customers; and that the Company can give no assurances that it will be able to successfully obtain, provide or accomplish any such matters. (c) WCOM has obtained, to the extent it has deemed necessary, professional advice with respect to the risks inherent in the investment in the Note; and (d) WCOM, being a corporation with total assets in excess of $5,000,000 that was not formed for the purpose of acquiring the Note, is an "accredited investor" within the meaning of Rule 501(a) of the General Rules and Regulations under the Securities Act of 1933. 4. Future Negotiations. (a) NETCO hereby agrees that it will defer ------------------- filing, but not the preparation of, a registration statement in connection with a contemplated public offering of NETCO's common stock for a period of thirty days from the date of Closing. During such period, NETCO and WCOM will negotiate in good faith for purposes of ascertaining whether a mutually agreeable arrangement contemplating WCOM's acquisition of majority ownership of NETCO may be concluded between NETCO and WCOM. NETCO and WCOM agree that, upon conclusion of that initial 30 day period, they will negotiate in good faith for a period not exceeding 10 days regarding the terms and conditions that might be mutually agreeable for an extension of time during which to continue negotiations for the purpose of ascertaining whether a mutually agreeable arrangement contemplating WCOM's acquisition of majority ownership of NETCO may be concluded between NETCO and WCOM. (b) NETCO shall not, during the time(s) provided in subparagraph 4(a) of this Agreement for negotiations with WCOM, directly or indirectly, solicit, entertain or encourage inquiries or proposals to enter into an agreement or negotiate with any other party, to invest in or purchase, or enter into any merger or consolidation with respect to the business, securities or assets of, NETCO, and will not engage in any transaction not in the ordinary course of business which could adversely affect the value of such business or assets, excepting only (i) negotiations ancillary to the preparation of a registration statement for a public offering, or (ii) negotiations with current holders of promissory notes aggregating $5,600,000 for the exchange 6 of such notes for NETCO stock. 5. WCOM Consent. During the term of the Note, WCOM shall have a ------------ right of prior approval over the following corporate actions which could affect the status of the Common Stock into which the Note is convertible: a. changes in NETCO's articles or bylaws, with the exception of an amendment to NETCO's articles of incorporation increasing its authorized capital stock to 20,000,000 shares of which 15,000,000 will be Common Shares and 5,000,000 will be undesignated shares. b. changes in the rights granted to the Common Stock and undesignated shares, except the designation of undesignated shares as common stock having the same rights as currently authorized Common Stock. c. the authorization, offering, incurring or issuance of indebtedness (other than conventional bank or other institutional indebtedness incurred in the ordinary course of business with the approval of a majority of the members of the Board of Directors of NETCO), additional common stock, preferred stock, convertible securities, shares of any other class of stock, other securities or options, warrants, or rights with respect thereto, except the prior approval of WCOM shall not be required for (i) stock options granted to officers, directors, employees or consultants of NETCO in aggregate amount not to exceed options for 2,000,000 shares or (ii) shares which may be offered to the public in a registered public offering. d. acts involving a substantial sale of assets, merger, consolidation, reorganization, recapitalization, liquidation, or dissolution of NETCO. e. the declaration or payment of dividends on, or making other distributions with respect to, any securities, excluding (i) interest on indebtedness to banks or other institutional indebtedness incurred in the ordinary course of business with the approval of a majority of 7 the members of the Board of Directors, (ii) interest on indebtedness incurred in connection with the leasing of capital equipment, and (iii) interest on currently owed debt, f. increasing or decreasing the number of Directors constituting the Board of Directors. g. engaging in any other business other than the business currently engaged in or under development by NETCO. h. the appointment of an Executive Committee or committee performing similar functions; and i. entering into any contracts or transactions with NETCO's officers, Directors, shareholders or their affiliates, excepting the prior approval of WCOM shall not be required for (i) stock options granted to officers, directors, employees or consultants of NETCO in aggregate amount not to exceed options for 2,000,000 shares or (ii) the exchange of shares for existing indebtedness owed to holders of notes in aggregate principal amount of $5,600,000 in anticipation a registered public offering. 6. WCOM's Right to Nominate a Director. ----------------------------------- During (i) the term of the Note, and for so long as any amount of principal or interest remains unpaid thereunder and/or (ii) the period of three (3) years following WCOM's conversion of at least fifty percent (50%) of the initial principal balance of the Note into NETCO Common Stock, WCOM shall have the right to nominate a representative to serve on NETCO's Board of Directors, and NETCO shall use its best efforts to secure the prompt appointment or election of such representative to its Board of Directors. 8 IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. "NETCO" NETCO COMMUNICATIONS CORPORATION By: /s/ Edward J. Driscoll, III --------------------------- Edward J Driscoll, III Its: Pesident and Secretary "WCOM" WORLDCOM INC. By: /s/ K. William Grothe, Jr --------------------------- K. William Grothe, Jr Its: Vice President 9 Netco Communications Corporation Common Stock & CSE listing (Schedule 1) Common Stock O/S ---------------- # of shares Common Stock: 1,295,791 Options Analysis ---------------- Employment Contracts: Price # of options Options at $ 2.25 76,500 Options at $ 5.00 18,000 Options at $ 7.50 90,280 Options at $ 10.00 89,000 ------------------------------------------------- Cat. Total 273,780 ------------------------------------------------- Board of Directors: Price # of options Options at $ 2.25 62,000 ------------------------------------------------- Cat. Total 62,000 ------------------------------------------------- Officers: Price # of options Options at 2.25 75,500 ------------------------------------------------- Cat. Total 75,500 ------------------------------------------------- Warrant & Convertible Debt Analysis ----------------------------------- Bridge Financing: Price # of warrants Warrants at $ 5.00 220,000 Warrants at $ 7.50 1,012,000 -------------------------------------------------- Cat. Total 1,232,000 -------------------------------------------------- Convertible Debt: Price # of warrants $125,000 at $ 1.90 65,789 -------------------------------------------------- Cat. Total 65,789 -------------------------------------------------- Other: Price # of warrants Warrants at $ 3.00 113,333 Warrants at $ 10.00 9,000 -------------------------------------------------- Cat. Total 122,333 -------------------------------------------------- Total Common Stock & Equivalents 3,127,193 10 EXHIBIT 1 Registered Holder: WorldCom Inc. $5,000,000 NETCO COMMUNICATIONS CORPORATION 102 UNION PLAZA 333 NORTH WASHINGTON AVENUE MINNEAPOLIS, MINNESOTA 55401 10% Convertible Subordinated Note Due September 30, 1999 For Value Received, NETCO COMMUNICATIONS CORPORATION, a Minnesota corporation, (hereinafter called the "Issuer") hereby promises to pay to the order of WorldCom Inc., or the registered holder (hereinafter referred to as the "Holder") principal amount of Five Million Dollars ($5,000,000), 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 September 30, 1999, or sooner as hereinafter provided. 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 ten percent (10%) per annum. Interest shall accrue from the date of purchase of this Convertible Subordinated Note (hereinafter, the "Note"), and be payable on March 30 and September 30 of each year, commencing with the first interest payment on March 30, 1997. The Issuer shall, upon request of the registered Holder, mail a check or draft representing such interest to the registered holder at the address designated by the registered holder and appearing on the books of registration maintained by the Issuer. No interest shall accrue or be paid on this Note after September 30, 1999. If any payment due hereunder is not received by the Holder within 15 days from the date due, Issuer shall pay a late payment charge of Five Dollars ($5.00) or four percent (4%) of the amount of the delinquency, whichever is greater. The following terms, covenants, statements of Holders' rights and conditions shall apply to this Convertible Subordinated 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 of the principal and interest on all existing or future obligations of the Issuer for money borrowed from a bank, trust, insurance, or other financial institution engaged in the business of lending money, which is hereinafter referred to as "Senior Indebtedness." In the event of any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangement with creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Issuer, or in the event the Note shall be declared due and payable upon the occurrence of an event of default (as specified herein), (1) no amount shall be paid by the Issuer in respect of the principal or interest on this Note at the time outstanding, unless and until the principal of and interest on the Senior Indebtedness then outstanding shall have been paid in full, and (2) no claim or proof of claim shall be filed with the Issuer by or on behalf of the holder of this Note which shall assert any right to receive any payments in respect of the principal of and interest on this Note except subject to the payment in full of the principal and interest of all of the Senior Indebtedness then outstanding. ARTICLE 2 EVENT OF DEFAULT 2.1) Each of the following shall constitute an Event of Default: (a) Failure to pay interest when due, continued for thirty (30) days; (b) Failure to pay principal or premium when due; 2 (c) 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 (c) 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) or (b) 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 or Default and before and after acceleration of the entire unpaid principal balance of this Note, interest shall continue to accrue thereafter at a rate equal to two percent (2%) per annum in excess of the then 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 of part thereof. 2.4) Holder may waive any default before of 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 REDEMPTION BY ISSUER 3.1) This Note is redeemable at any time commencing January 1, 1998, in whole or in part, prior to maturity at the option of the Issuer, on 3 sixty 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 redemption. 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 cease to bear interest unless 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 4.1) The holder of this Note shall have the right, at its option, at any time between the date hereof and September 30, 1999, to convert the then outstanding principal amount of this Note, or any portion thereof into shares of Common Stock, par value $.01, of the Issuer ("Common 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, 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 shall be called for redemption according to the terms of Article 3, the right of the Holder to convert this Note shall terminate on the date fixed for redemption. 4.2) Common Stock issued on conversion of this Note shall be delivered as follows: (a) Within fifteen 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 Common 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 respect of a fractional share and all interest accrued through the date of conversion. Such 4 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 Common Stock upon conversion shall be treated for all purposes as having become the record holder of such shares of Common Stock at such time and the conversion shall be at the Conversion Price in effect at 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. 4.3) Subject to adjustment as hereinafter provided, the Conversion Price per share of Common Stock shall be Five Dollars ($5.00) (the "Conversion Price"). 4.4) The per share Conversion Price and the number of Shares deliverable hereunder shall be adjusted as hereinafter set forth; however, no adjustment shall be made under this Article 4.4 as a result of the exercise of any options or the conversions of any convertible securities outstanding on the date hereof: (a) If after the date hereof, the Issuer shall: (1) take a record of the holders of its Common Stock for the purposes of entitling them to receive a dividend payable in, or other distribution of, Common Stock; or (2) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock; or (3) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock; or (4) issue by reclassification of its shares of Common Stock any other shares of common stock; then the Conversion Price shall be adjusted to that price determined by multiplying the Conversion Price in effect immediately prior to such event by a fraction (i) the numerator of which shall be the total number of 5 outstanding shares of Common Stock of the Issuer immediately prior to such event, and (ii) the denominator of which shall be the total number of outstanding shares of Common Stock of the Issuer immediately after such event. 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 (except a split-up or combination provision for which is made in Article 4.4): (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 Common Stock immediately theretofore subject to acquisition hereunder, such shares of stock, 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 Common 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 (including, without limitation, provisions for adjustments of the Conversion Price) shall thereafter be applicable as nearly as may be, in relation to any shares of stock, 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 shares of stock, 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 the exercise of its right to convert after the record date for such distribution or, in the absence of a 6 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 determined in good faith by the Board of Directors in its sole discretion) which would have been distributed to the Holder if it had exercised its rights to convert 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 the exercise of any conversion option 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 the exercise of any conversion option for the largest number of whole shares then called for, pay a sum in cash equal to the sum of (a) the excess, if any, of the fair market value of such fractional share, as determined in good faith by the Issuer's board of directors, over the proportional part of the per share Conversion Price represented by such fractional share plus (b) the proportional part of the per share Conversion Price represented by such fractional share. 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 or registration statement proposed to be filed by the Issuer; provided, however, that nothing herein shall prevent the Issuer from, at any time, abandoning or 7 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, 8 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, 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 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 9 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 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 10 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 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 11 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 stock issued or issuable hereunder, its officers, directors, employees and agents, and any person who controls such Note holder or such holder of common 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 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 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 this 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 of 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 12 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(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(e), 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. 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 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 13 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 share 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 writing and shall be 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 6.5 by giving the other party written notice of the new address in the manner set forth above. 14 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 singly, 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 President and Secretary. Dated: September 17, 1996 NETCO COMMUNICATIONS CORPORATION By: /s/ Edward J. Driscoll, III ---------------------------- Edward J. Driscoll, III President and Secretary 15 CONVERSION NOTICE To Netco Communications Corporation: The undersigned holder of this Note hereby irrevocably exercises the option to convert this Note into shares of Common Stock of Netco Communications Corporation, in accordance with the terms of this Note, and 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 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. The undersigned holder elects to convert $____________ in principal of this Note into shares of Common Stock of Netco Communications Corporation. 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 16 EX-10.3 20 AGREEMENTS DATED NOVEMBER 14, 1996 EXHIBIT 10.3 PREFERRED STOCK, SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT NETCO COMMUNICATIONS CORPORATION and WORLDCOM INC. November 14, 1996 PREFERRED STOCK, SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT Preferred Stock, Subordinated Note and Warrant Purchase Agreement (herein "Agreement") made this fourteenth day of November 1996, by and between NETCO COMMUNICATIONS CORPORATION, a Minnesota corporation, having its principal place of business at 102 Union Plaza, 333 North Washington Avenue. Minneapolis, Minnesota 55401 ("NETCO") and WORLDCOM INC., a Georgia corporation, having its principal place of business at 515 East Amite Street, Jackson, Mississippi 39201 ("WCOM"). WITNESSETH: Whereas, NETCO is engaged in the development and implementation of high speed, digital data transportation delivery and ancillary data storage and remote proofing services addressed initially to the printing and prepress industries, and requires significant permanent financing to accomplish such development and implementation; and Whereas, WCOM is engaged in the sale and marketing of voice and data transmission over its multinational communications infrastructure; and Whereas, WCOM and NETCO are parties to a certain Convertible Note Purchase Agreement dated September 12, 1996 (the "Convertible Note Agreement") pursuant to which WCOM purchased from NETCO a 10% Convertible Subordinated Note due September 30, 1999, (the "Convertible Note") in principal amount of Five Million Dollars ($5,000,000); and Whereas, NETCO and WCOM each desire that WCOM increase its investment in NETCO to finance and facilitate the deployment and implementation of NETCO's services over WCOM's communications infrastructure; and Whereas, NETCO and WCOM each desire that NETCO secure the continued employment of certain key managerial employees of NETCO and that NETCO provide for appropriate incentives for other current and future employees of NETCO; and Whereas, NETCO and WCOM each desire that WCOM have temporary majority control of NETCO's board of directors in order to secure NETCO's repayment of obligations incurred pursuant to this Agreement; and Whereas, NETCO and WCOM each desire to provide for the possible future acquisition by WCOM of a majority ownership interest in NETCO, and that the number of Warrants provided for herein, subject to the provisions and conditions of this Agreement, shall be sufficient for that purpose until the time those Warrants shall be exercised or expire; and Whereas, NETCO and WCOM each desire to provide, in the event of WCOM's future acquisition of a majority ownership interest in NETCO, for the future liquidity of other owners of minority ownership interests in NETCO; Whereas, NETCO is agreeable to selling to WCOM, and WCOM is agreeable to purchasing from NETCO, pursuant to the terms and conditions of this Agreement, the Preferred Stock, the Subordinated Promissory Note and the Common Stock Purchase Warrants as provided in this Agreement; NOW THEREFORE, in consideration of the foregoing premises, and of the consideration provided herein, the parties agree as follows: I. PURCHASE AND SALE OF PREFERRED STOCK 1.01 Purchase and Sale of the Preferred Stock. Subject to the terms and ---------------------------------------- conditions set forth in this Agreement, WCOM hereby purchases from NETCO, and NETCO hereby sells to WCOM for the price of Ten Dollars ($10) per share, One Hundred Thousand Shares of NETCO's newly authorized Class A Preferred Shares (the "Preferred Stock") having a par value of Ten Dollars ($10) per share. 1.02 Duration, Rights and Preferences of the Preferred Stock. The Preferred ------------------------------------------------------- Stock shall have a duration continuing until December 31, 1999, at which time the Preferred Stock shall be redeemed by NETCO for par value together with any accumulated and then unpaid dividends, and shall be thereafter retired by NETCO. The Preferred Stock shall have and enjoy for its duration the rights and preferences, including the right to elect a majority of NETCO's board of directors, as are set forth in the "Statement of Rights and Preferences of Class A Preferred Shares" appended to this Agreement as Exhibit 1 and incorporated herein by this reference. II. LOAN AGREEMENT 2.01 The Loan. (a) Subject to the terms and conditions set forth in this -------- Agreement, WCOM will loan to NETCO an amount not exceeding Twenty Eight Million Five Hundred Thousand Dollars ($28,500,000) (the "Loan"). The Loan will ---- 2 be made in an initial disbursement ("Initial Disbursement") of Nineteen Million Dollars ($19,000,000) at Closing, and, upon request of NETCO, in subsequent disbursements ("Future Disbursements") not exceeding Five Hundred Fifty Four Thousand One Hundred Sixty Seven Dollars ($554,167) on the first of the Funding Dates (as hereinafter defined) and not exceeding Three Hundred Thirty Two Thousand Dollars ($332,500) on each of the subsequent Funding Dates. (b) The Funding Dates for Future Disbursements of the Loan shall occur not more frequently than once each calendar quarter, commencing with the calendar quarter ending March 31, 1997. Each Future Disbursement shall be made by WCOM to NETCO upon receipt of a notice (the "Funding Notice") from NETCO, -------------- signed by an officer of NETCO authorized by the board, requesting the Future Disbursement. The amount of each such Future Disbursement shall be delivered by WCOM to NETCO in immediately available funds by wire transfer to an account designated by NETCO in the Funding Notice. Each Funding Notice shall be in form of the Funding Notice attached to this Agreement as Exhibit 2. 2.02. 7% Subordinated Note. The Loan shall be evidenced by the 7% -------------------- Subordinated Note ("Subordinated Note") attached to this Agreement as Exhibit 3. The Loan shall be governed by the terms of the Subordinated Note, and shall bear interest and be repayable in accordance therewith in the principal amount of the sum of the Initial Disbursement and all Future Disbursements made by WCOM to NETCO. III. PURCHASE AND SALE OF WARRANTS 3.01 Purchase and Sale of the Warrants. Subject to the terms and --------------------------------- conditions set forth in this Agreement, WCOM hereby purchases from NETCO, and NETCO hereby sells to WCOM for price of One Cent ($.01) each, Common Stock Purchase Warrants entitling WCOM to purchase until December 31, 2000, up to Four Million One Hundred Fifty Seven Thousand Five Hundred (4,157,500) shares of NETCO's authorized and unissued Common Stock, par value $.01 per share, at an initial exercise price of Four Dollars Eighty One Cents ($4.81) per share, subject to adjustment, and upon the additional terms and conditions, set forth in the "Common Stock Purchase Warrant" in form appended to this Agreement as Exhibit 4 and incorporated herein by this reference. IV. CONTEMPLATED FUTURE TRANSACTION 4.01 Intentions. NETCO and WCOM intend to provide, in accordance with the ---------- terms of this Agreement, for the liquidity of investment by minority shareholders of NETCO and by others who hold interests exercisable or convertible into shares of NETCO's common Stock. In view of that intention, NETCO and WCOM desire to provide alternatives that will allow, in light of future 3 circumstances as they may now be foreseen, for the liquidity of investment by such minority interest holders of NETCO. Provided, however, nothing herein contained shall be deemed to create any obligation by WCOM to purchase any securities, rights or interests of any kind in NETCO, or to assure a market or value thereafter, except as may be expressly stated herein. 4.02 Tender or Buy-Back. (a) Unless NETCO shall be a publicly held company ------------------ then required to file periodic reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 with its Common Stock listed for trading on the NASDAQ Small Cap Market, the NASDAQ Stock Market or on a national securities exchange, then, during calendar year 2000, WCOM, in accordance with the provisions of this Section 4.02, shall either (i) tender for the purchase of all outstanding shares of NETCO Common Stock and all outstanding options, warrants, convertible securities and other rights or interests to purchase shares of NETCO Common Stock, or (ii) sell to NETCO the Common Stock Purchase Warrants and/or the shares acquired upon exercise thereof or upon conversion of the Convertible Note as may be then owned by WCOM. (b) NETCO's management and Board of Directors shall obtain during calendar year 2000 from a nationally recognized investment banking firm a valuation of the fair market value per share of NETCO's Common Stock without a premium allocated for any controlling ownership of NETCO. Provided, however, if such valuation has not been obtained by NETCO's management and Board of Directors by June 30, 2000, holders of at least Eight Hundred Thousand (800,000) shares of NETCO's Common Stock may apply jointly to the Chief Judge of the Hennepin County District Court, Hennepin County Minnesota, for appointment of a nationally recognized investment banking firm to promptly determine and report such valuation, and all fees, costs and expenses incurred in connection with such application, including fees and expenses of counsel chosen by such shareholders to make the application and the fees and expenses of the investment banking firm chosen by the Court, shall be borne by NETCO. The Court shall retain jurisdiction until such valuation shall have been reported, and the Court shall be empowered to order any party to this Agreement, its officers, agents and employees to furnish any information necessary to establish and report such valuation. For purposes hereof, the valuation established pursuant to this Section 4.02(b) shall be referred to as the "Tender Valuation." (c) Upon receipt of the Tender Valuation, WCOM may tender (the "First Tender") to purchase (i) all outstanding shares of Common Stock of NETCO and (ii) all outstanding options, warrants, convertible securities and other rights or interests to purchase shares of NETCO Common Stock held by persons other than WCOM or any of its affiliates (excluding only such affiliates of WCOM whose affiliation with WCOM arise solely from their affiliation with NETCO). The First Tender may be in the form of cash, unrestricted WCOM common stock issued pursuant to an effective registration statement under the Securities Act of 1933, or a combination thereof. The First Tender for each share of Common Stock shall be at a price at least equal to 4 the per share valuation obtained pursuant to Section 4.02(b) hereof; and the First Tender for all other rights or interests to purchase NETCO Common Stock shall be the same price offered for each share of NETCO Common Stock less the amount payable pursuant to such right or interest to purchase a share of NETCO Common Stock. The First Tender shall remain open for acceptance for at least thirty (30) days but not longer than sixty (60) days. For purposes hereof, "affiliate" shall have the meaning ascribed in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934. (d) WCOM shall sell, and NETCO shall purchase for the price ("NETCO Purchase Price") specified below, the Common Stock Purchase Warrants and/or shares of Common Stock theretofore issued to WCOM upon exercise thereof or upon conversion of the Convertible Note upon occurrence of the following circumstances: (i) WCOM fails to make the First Tender within ninety (90) days following receipt of the Tender Valuation provided in section 4.02(b) hereof; or (ii) owners of a majority of the then outstanding shares of NETCO Common Stock (excluding shares which may be owned by WCOM or its affiliates) reject WCOM's First Tender, and WCOM makes no Second Tender as provided hereinafter; or (iii) owners of a majority of the then outstanding shares of NETCO Common Stock (excluding shares which may be owned by WCOM or its affiliates) reject WCOM's Second Tender as provided hereinafter. In the event owners of a majority of the then outstanding shares of NETCO (excluding shares which may be owned by WCOM and its affiliates) reject WCOM's First Tender, WCOM shall have sixty (60) days following such rejection to again tender (the "Second Tender") to purchase the same outstanding shares, options, warrants, convertible securities and other rights or interests to acquire NETCO shares. During such sixty (60) day period, NETCO shall make a good faith effort to determine what price might be acceptable to the owners of such shares, and shall communicate such information to WCOM. The Second Tender may be in the form of cash, unrestricted WCOM common stock issued pursuant to an effective registration statement under the Securities Act of 1933, or a combination thereof. The Second Tender for each share of Common Stock shall be at a price per share determined by WCOM; and the Second Tender for all other rights or interests to purchase NETCO Common Stock shall be the same price offered for each share of NETCO Common Stock less the amount payable pursuant to such right or interest to purchase a share of NETCO Common Stock. The Second Tender shall remain open for acceptance for at least thirty (30) days but not longer than sixty (60) days. 5 (e) The purchase price payable by NETCO for all shares of the Common Stock theretofore purchased by WCOM and for the Common Stock Purchase Warrants shall be calculated as follows; (1) In the event that WCOM fails to Tender, the NETCO Purchase Price shall be an amount equal to (m) the Tender Valuation for all shares of Common Stock theretofore purchased by WCOM upon exercise of the Common Stock Purchase Warrants and/or conversion of the Convertible Note, and (n) the difference between the Tender Valuation and the exercise price or conversion price, respectively, for the shares of Common Stock remaining purchasable upon exercise or conversion, respectively, of the Common Stock Purchase Warrants and/or Convertible Note. (2) In the event that WCOM's First Tender has been rejected and WCOM has not made a Second Tender, the NETCO Purchase Price shall be an amount equal to (o) the purchase price offered by WCOM in its rejected First Tender for all shares of Common Stock theretofore purchased by WCOM upon exercise of the Common Stock Purchase Warrants and/or conversion of the Convertible Note, and (p) the difference between the purchase price offered by WCOM in its rejected First Tender and the exercise price or conversion price, respectively, for the shares of Common Stock remaining purchasable upon exercise or conversion, respectively, of the Common Stock Purchase Warrants and/or Convertible Note. (3) In the event that WCOM's Second Tender has been rejected, the NETCO Purchase Price shall be an amount equal to (o) the purchase price offered by WCOM in its rejected Second Tender for all shares of Common Stock theretofore purchased by WCOM upon exercise of the Common Stock Purchase Warrants and/or conversion of the Convertible Note, and (p) the difference between the purchase price offered by WCOM in its rejected Second Tender and the exercise price or conversion price, respectively, for the shares of Common Stock remaining purchasable upon exercise or conversion, respectively, of the Common Stock Purchase Warrants and/or Convertible Note. (f) NETCO shall have nine (9) months (the "Payment Period") to pay WCOM the full NETCO Purchase Price for the Common Stock Purchase Warrants and shares of Common Stock previously issued upon exercise thereof or upon conversion of the Convertible Note, which shall be computed (i) beginning on the day following the last day the First Tender or Second Tender may have been accepted, as the case may be, if WCOM has made a First Tender or Second Tender, or (ii) if WCOM has not made a First Tender, then beginning on the ninety-first day following the receipt of the Tender Valuation. For the duration of the Payment Period, WCOM hereby irrevocably grants to Edward J. Driscoll III and Allen L. 6 Witters, jointly and with powers of substitution, the limited proxy in form attached hereto as Exhibit 5, which shall be deemed an irrevocable proxy coupled with an interest, to vote in the place and stead of WCOM, any and all shares of NETCO Common Stock acquired by WCOM upon exercise of the Common Stock Purchase Warrants or conversion of the Convertible Note. Payment shall be made by NETCO in good and immediately available funds against assignment and delivery of the Common Stock Purchase Warrants at NETCO's principal business office at 9:00 A.M., Minneapolis, Minnesota local time, on the tenth (10th) day following notice from NETCO to WCOM. Should NETCO fail for any reason to timely pay such purchase price in full during the Payment Period, then, in such event, (i) WCOM shall be relieved of all further obligations to sell and transfer the Common Stock Purchase Warrants, or shares previously issued upon exercise thereof or conversion of the Convertible Note, to NETCO, (ii) NETCO shall have no further right to require WCOM to sell or convey any of the Common Stock Purchase Warrants, or shares previously issued upon exercise thereof or conversion of the Convertible Note, to NETCO, and (iii) NETCO shall not be obligated to pay, and WCOM shall have no right to receive in payment, any amount determined with reference to the rights of either party under this Section 4.02. 4.03 Alternative to Tender or Buy-Back. The provisions of Section 4.02 --------------------------------- notwithstanding, NETCO and WCOM may in the future agree upon an alternative method to provide for and accomplish the intentions expressed in Section 4.01 of this Agreement; and, upon such future agreement, both NETCO and WCOM shall be relieved, respectively, of their obligations set forth in Section 4.02. It is also expressly understood and agreed that, notwithstanding the rejection of either the First Tender or Second Tender contemplated by Section 4.02(f) and 4.02(e), NETCO and WCOM may nonetheless agree to waive WCOM's and NETCO's respective obligations of sale and purchase under Section 4.02(d) upon NETCO's determination to become, and its thereafter becoming, required to file periodic reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 with its Common Stock listed for trading on the NASDAQ Small Cap Market, the NASDAQ Stock Market or on a national securities exchange. V. CREDIT FACILITIES 5.01 Provision of Credit Facilities. As further consideration for the ------------------------------ purchase of the Preferred Stock and Common Stock Purchase Warrants, WCOM agrees to use reasonable efforts to assist NETCO in obtaining commercially reasonable credit facilities ("Credit Facilities") at commercially reasonable rates in the approximate amount of Twenty Five Million Dollars ($25,000,000) during calendar year 1997 to finance the acquisition and installation of NETCO customer site equipment and/or the acquisition and installation of telephony equipment necessary to interconnect NETCO customers. Such Credit Facilities are expressly in addition to the Subordinated Note. 7 5.02 Form of Credit Facilities. The Credit Facilities may be in the form ------------------------- of equipment lease financing, secured debt, or other commercially reasonable credit instrument in form and substance acceptable to WCOM and NETCO for which the equipment and/or income stream generated by the equipment serves as security for the repayment thereof. 5.03 Nature of Assistance. The assistance to be rendered by WCOM may -------------------- take the form of recommendation to a commercial lender with whom WCOM does business, WCOM's guaranty, or partial guaranty, of such Credit Facility, a secured loan or loans by WCOM, or other assistance reasonably calculated to assist NETCO to obtain the financing necessary to acquire and install customer site equipment and/or telephony equipment interconnecting such customer sites; provided, however, WCOM shall not be required to guaranty such Credit Facility or itself to make such loan, in whole or in part, but may do so in its sole discretion. VI. REPRESENTATIONS, WARRANTIES AND COVENANTS OF NETCO 6.01 NETCO hereby represents, warrants and covenants to WCOM that, as of the date hereof and as of the Closing provided for in Section 8 hereof: (a) Corporate Organization and Power; Qualification. NETCO is duly ----------------------------------------------- organized, validly existing and in good standing as a corporation under the laws of the state of Minnesota, 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 NETCO. (b) Subsidiaries. NETCO does not own, directly or indirectly, any capital ------------ stock or other equity securities of any corporation nor does NETCO have any direct or indirect ownership interest, including interests in partnerships and joint ventures, in any other entity or business, with the sole exceptions of WAMNET, Inc., a Minnesota corporation and Netco Communications Corporation of Canada, Inc., a Canadian corporation that are each a wholly owned subsidiary of NETCO. (c) Authorization; Enforceability. NETCO 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 and the Common Stock Purchase Warrant, and to issue and deliver the Preferred Stock to WCOM. This Agreement has been, and the Preferred Stock, the Subordinated Note and the Common Stock Purchase Warrant contemplated hereby to which NETCO is a party when delivered to WCOM will have been, duly executed and delivered by NETCO 8 and is, or when so delivered will be, a legal, valid and binding obligation of NETCO, enforceable against NETCO in accordance with its terms. (d) No Violations; Consent. The execution, delivery and performance in ---------------------- accordance with their respective terms by NETCO of this Agreement, and of the Subordinated Note and the Common Stock Purchase Warrant, 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 NETCO, 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 NETCO under, any contract to which NETCO is a party or by which NETCO 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 threatened (nor, to the knowledge of NETCO, is there any basis therefor) against or in any other way relating to or affecting (a) NETCO or (b) any of its businesses or properties. (f) Taxes. NETCO 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. NETCO 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 NETCO consists of 20,000,000 shares of which 15,000,000 are Common Shares and 5,000,000 are undesignated shares. NETCO does not hold any of its shares in treasury. (ii) 1,295,971 Common Shares are issued and outstanding and have been validly issued and are fully paid and nonassessable and are not subject to preemptive rights. (iii) 100,000 of the undesignated shares have been designated as the Preferred Stock having the rights and preferences set forth on 1 hereof, and will be duly authorized and may be validly issued prior to the Closing provided in Section 8 of this Agreement. (iv) Except as contemplated by this Agreement and as disclosed on Schedule 1 to this Agreement, there are no outstanding subscriptions, ---------- options, 9 warrants or other rights of any kind to acquire any additional shares of capital stock of NETCO, or other instruments or securities convertible into or exchangeable for, or which otherwise confer on the holder thereof any right to acquire, any such additional shares, nor is NETCO committed to issue any such option, warrant, right, or security, or any other instrument convertible into a security. (v) Except as expressly provided for in this Agreement, there are no agreements relating to voting, purchase or sale of capital stock between NETCO and any of its stockholders or affiliates, and to the best of NETCO's knowledge, among any of its stockholders. Provided, that a total of 190,280 options having exercise prices of 7.50 or $10.00 per share respectively that were granted in connection with employment agreements as disclosed on Schedule 1 may be reissued on identical terms but at ---------- an exercise price of $4.81 per share. (h) (i) NETCO has delivered to 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 December 31, 1995, and for the nine month period ended September 30, 1996. Such financial statements (x) fairly present the financial condition, assets and liabilities of NETCO 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 NETCO, which books and records are complete and correct and fairly reflect all material transactions of NETCO'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 Note, NETCO will furnish 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, NETCO will furnish WCOM with such additional financial and business information, including monthly or other periodic financial statements as NETCO may prepare from time to time, upon the reasonable request of WCOM. (i) NETCO has provided WCOM access to full and complete information regarding NETCO and shall continue to provide such information as WCOM may reasonably request. (j) NETCO shall not, during the Payment Period defined in Section 4.02(e): (i) declare any dividend; or 10 (ii) increase the compensation of any Officer or Director, provided that the salaries of Officers may be adjusted in accordance with NETCO's prior practices in the ordinary course of business; or (iii) borrow against, or pledge, any of its assets otherwise than in the ordinary course of business unless a principal purpose of such borrowing or pledge is to finance the amounts payable to WCOM pursuant to Section 4,02(d) hereof. VII. REPRESENTATIONS, WARRANTIES AND COVENANTS OF WCOM 7.01 WCOM hereby represents, warrants and covenants to NETCO that: (a) WCOM 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 WCOM desires or deems relevant to the decision to purchase the Preferred Stock, the Subordinated Note and the Common Stock Purchase Warrants; and particularly, WCOM has had the opportunity to ask questions of, and receive answers from, representatives of the Company concerning the terms and conditions of the Note and to obtain any additional information WCOM desires or deems relevant; and (b) 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, as contemplated by the Credit Facilities, 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) WCOM has obtained, to the extent it has deemed necessary, professional advice with respect to the risks inherent in the investment in the Preferred Stock, the Subordinated Note and the Common Stock Purchase Warrants. (d) WCOM, being a corporation with total assets in excess of $5,000,000 that was not formed for the purpose of acquiring the Note, is an "accredited investor" within the meaning of Rule 501(a) of the General Rules and Regulations under the Securities Act of 1933. 11 (e) WCOM will not use its majority control of NETCO's board of directors to cause NETCO to waive or fail to enforce any provision of this Agreement for purposes of frustrating or preventing the intentions of the parties as set forth in Section 4.01 hereof. Provided, however, that this covenant shall not be deemed to require any current or future director of NETCO 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 interest of NETCO, or of its shareholders, in light of the circumstances then prevailing, including any actions (i) which modify or alter the terms of, or reasonably delay, the implementation of, the Tender contemplated by Section 4.02 of this Agreement, or (ii) which relieve WCOM of its obligation to sell the Common Stock Purchase Warrants, or shares issued upon exercise thereof, to NETCO. VIII. CLOSING 8.01 Closing. Closing shall occur at the offices of NETCO, at 9:00 A.M., ------- local Minneapolis time, on the fourteenth (14th) full business day after the date of this Agreement, or at such other time and place as may be agreed by NETCO and WCOM. 8.02 Conditions to Closing. The Closing shall be conditioned upon --------------------- satisfaction of all of the following requirements; (a) The approval of this Agreement by NETCO's Board of Directors and by WCOM; (b) The due authorization and approval by NETCO's Board of Directors of the Preferred Stock, the Subordinated Note and the Common Stock Purchase Warrants; (c) Any necessary corporate filings by NETCO to validly authorize the Preferred Stock; (d) The full approval, execution and delivery by WCOM to Edward J. Driscoll and Allen L. Witters of the Irrevocable, Limited Proxy Coupled With An Interest in form appended to this Agreement as Exhibit 5. (e) The full execution, and due approval by NETCO's Board of Directors, of each of the employment agreements between NETCO and Edward J. Driscoll, III and Allen Witters, respectively, substantially in form appended to this Agreement as Exhibits 6 and 7, respectively; (f) Resignations, effective on Closing of three (3) members of NETCO's current Board of Directors, and the election, effective on Closing, of three (3) new directors nominated by WCOM; 12 (g) Such certificates, dated as of the Closing, from officers of NETCO as WCOM may reasonably request relating to the representations, warranties and covenants given by NETCO herein or to the satisfaction of these conditions of closing; (h) The full execution by WCOM, Edward J. Driscoll, III and Allen Witters of the Refusal Option Agreement attached hereto as Exhibit 8; and (i) The opinion of NETCO counsel, in form and substance as that attached hereto as Exhibit 9, addressed to WCOM. 8.03 Payment and Delivery. At Closing, NETCO shall deliver the Preferred -------------------- Stock, the Subordinated Note and the Common Stock Purchase Warrants to WCOM against WCOM's payment of the aggregate purchase price therefor of Twenty Million Forty One Thousand Five Hundred Seventy Five Dollars ($20,041,575) by wire transfer in immediately available funds to a depository account specified by NETCO. IX. TERMINATION 9.01 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 8.02 hereof. 9.02 Consequences of Termination. Neither party shall be liable to the --------------------------- other upon any termination in accordance with Section 9.01 hereof. X. PARTIAL AND TEMPORARY SUPERCESSION 10.1 Abeyance of Certain Provisions of Convertible Note Purchase ----------------------------------------------------------- Agreement. For the duration of the Preferred Stock as set forth in Section 1.02 - --------- of this Agreement, the following identified provisions of the Convertible Note Purchase Agreement shall be deemed to be waived by WCOM and without force and effect: (a) Paragraph 5(a) through and including Paragraph 5(i) of the Convertible Note Purchase Agreement requiring WCOM's consent to the taking of certain actions requiring, in each case, the approval of NETCO's board of directors; and (b) Paragraph 6 of the Convertible Note Purchase Agreement relating to WCOM's right to nominate one director to NETCO's board of directors. 10.2 Reinstatement of Certain Provisions of Convertible Note Purchase ---------------------------------------------------------------- Agreement. Immediately upon the expiration of the duration of the Preferred - --------- Stock 13 as set forth in section 1.02 of this Agreement, and without further action of any kind each provision of the Convertible Note Purchase Agreement identified in Section 10.1 hereof, to the extent then applicable, shall immediately become again effective and enforceable in accordance with their respective terms. XI. MISCELLANEOUS ------------- 11.1. 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 WCOM and NETCO. 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. 11.2. 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 WCOM: WorldCom. Inc. 515 E. Amite Jackson, Mississippi 39201 Attention: K. William Grothe, Jr. Vice President Telephone: (601) 360-8051 Telecopy. (601) 974-8233 with a copy to: WorldCom Inc. 515 E. Amite Jackson, Mississippi 39201 Attention: William Anderson General Counsel Telephone: (601) 360-8977 Telecopy: (601) 360-8282 14 (b) If to the NETCO Netco Communications Corporation 102 Union Plaza 333 North Washington Ave. Minneapolis, MN 55401 Attention: Edward J. Driscoll, III President Telephone: (612) 204-3100 Telecopy: (612) 204-3101 with a copy to: George H. Frisch 5030 Woodlawn Boulevard Minneapolis, Minnesota 55417 Telephone: (612) 724-2929 Telecopy: (612) 724-8387 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. 11.3. Binding Effect; Assignment. This Agreement shall be binding upon and -------------------------- inure to the benefit of the NETCO and 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. 11.4. Third-Party Beneficiaries. This Agreement is for the sole benefit ------------------------- of the parties hereto and their permitted assigns and, except as expressly set forth in Section 4.02(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. 11.5. Entire Agreement; Savings. This Agreement, the Subordinated Note and ------------------------- the Common Stock Purchase 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; provided, however, that nothing in this Agreement shall be deemed in any way to affect the Convertible Note Agreement or the Convertible Note, which shall each continue in accordance with their respective terms and, except as expressly provided in Section 10 of this Agreement, be unaffected by this Agreement. 15 11.6 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. 11.7 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. 11.8 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. 11.9 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. 11.10 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. 16 IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. "NETCO" NETCO COMMUNICATIONS CORPORATION BY: /s/ Edward J. Driscoll, III ________________________________ Edward J. Driscoll, III Its: President and Secretary "WCOM" WORLDCOM INC. By: /s/ K. William Grothe, Jr. ________________________________ K. William Grothe, Jr. Its: Vice President 17 Index of Schedules and Exhibits ------------------------------- Schedules --------- Schedule - -------- 1. Schedule of Outstanding Common Stock and Common Stock Equivalents Exhibits -------- Exhibit - ------- 1 Statement of Rights and Preferences of Class A Preferred Shares 2 Funding Notice 3 Subordinated Note 4 Common Stock Purchase Warrant 5 Limited Irrevocable Proxy Coupled With An Interest 6 Employment Agreement between NETCO and Edward J. Driscoll, III 7 Employment Agreement between NETCO and Allen Witters 8 Refusal Option 9 Opinion of Counsel 18 SCHEDULE 1 Common Stock & Common Stock Equivalents Common Stock O/S ---------------- # of shares Common Stock: 1,295,791
Options Granted --------------- Employment Contracts: Price # of options Options at $ 2.25 76,500 Options at $ 5.00 18,000 Options at $ 7.50 90,280 0ptions at $ 10.00 117,500 ----------------------------------------------------------- Cat. Total 302,280 ----------------------------------------------------------- Board of Directors: Price # of options Options at $ 2.25 62,000 ----------------------------------------------------------- Cat. Total 62,000 ----------------------------------------------------------- Officers: Price # of options Options at 2.25 75,500 ----------------------------------------------------------- Cat. Total 75,500 ----------------------------------------------------------- Warrant & Convertible Debt Outstanding -------------------------------------- Bridge Financing: Price # of warrants Warrants at $ 5.00 220,000 Warrants at $ 7.50 1,012,000 ----------------------------------------------------------- Cat. Total 1,232,000 ----------------------------------------------------------- Convertible Debt: Price Convertible to $ 5,000,000 at $ 5.00 1,000,000 $ 125,000 at $ 1.90 65,789 ----------------------------------------------------------- Cat. Total 1,065,789 ----------------------------------------------------------- Other: Price # of warrants Warrants at $ 3.00 113,333 Warrants at $ 10.00 9,000 ----------------------------------------------------------- Cat. Total 122,333 ----------------------------------------------------------- Total Common Stock & Equivalents 4,155,693 =========
Exhibit 1 Statement of Rights and Preferences of Class A Preferred Shares Series A Preferred Stock ------------------------ Section 1. Designation and Amount. The shares of the Preferred Stock shall ---------------------- be designated as "Series A Preferred Stock." The number of shares constituting the Series A Preferred Stock shall be One Hundred Thousand (100,000). Each share of Series A Preferred Stock shall have a par value of Ten Dollars ($10.00) per share. The number of shares of Series 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 Series A Preferred Stock to a number less than the number of shares then outstanding, plus the number of shares, 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 Series A Preferred Stock. Section 2. Dividends and Distributions. (A) The holders of shares of --------------------------- Series A Preferred Stock, in preference to the holders of Common Stock, par value $.01 per share (the "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 One Dollar and Seventy Five Cents ($1.75) per share payable out of the net earnings of the Company constituting funds legally available for the purpose. The Quarterly Dividend shall begin to accrue on January 1, 1997, and shall be payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series 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 Exhibit 1-1 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 Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series 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 Series 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 Series A Preferred Stock then outstanding. The Directors may fix a record date for the determination of holders of shares of Series 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 Series A Preferred ------------- Stock shall have the following voting rights. (A) Each share of Series A Preferred Stock shall entitle the holder thereof to one vote for each share of Series A Preferred Stock standing in the name of the holder on the books of the Company. The holders of Series A Preferred Stock, voting separately as a class, shall be entitled to elect a majority of the Directors. The right to elect Directors may be exercised at any annual meeting of the stockholders of the Company, at any special meeting held in place of an annual meeting, or at a special meeting called to elect directors. The right to elect directors shall continue until December 31, 1999, and then expire. The directors elected by the Series 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 Series A Preferred Stock and have been qualified. The term of office of any person elected as a director by the holders of Series A Preferred Stock shall terminate on December 31, 1999. The vacancies created thereby may be filled by resolution of the remaining Directors who shall have been elected by a vote of the holders of the Common Stock of the Company. If the office of a director elected by the holders of Series A Preferred Stock is vacant prior to December 31, 1999, due to resignation, removal or death, the vacancy shall be filled by the majority vote of the directors then in office, even if less than a Exhibit 1-2 quorum, upon the recommendation of the remaining director or directors who were elected by the holders of the Series A Preferred Stock. If the office of a director who was elected by the holders of Common Stock is vacant prior to December 31, 1999, due to resignation, removal or death, the vacancy shall be filled by the majority vote of the directors then in office, even if less than a quorum, upon the recommendation of the remaining director or directors who were elected by the holders of the Common Stock. If the vacancy is not so filled within forty (40) days after the creation of the vacancy, a special meeting of the holders of Preferred Stock and/or Common Stock shall be called and the vacancy or vacancies shall be filled at that meeting. (B) In addition to the right to elect a majority of the Directors as provided in Section 3(A), the holder of each share of the Series A Preferred Stock shall be entitled to one 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 hereof, or in any other Certificate of Designations creating a series of Preferred Stock, or in any similar stock of the Company hereafter created, or by law, the holders of shares of Series 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 Series A Preferred Stock shall have no special voting rights and their consent 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. (A) Whenever Quarterly Dividends or -------------------- distributions payable on the Series 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 Series 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 Series A Preferred Stock: (i) 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 Series A Preferred stock; Exhibit 1-3 (ii) 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 Series A Preferred Stock, except dividends paid ratably on the Series 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; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series 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 Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series 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 Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board) to all holders of such shares upon such terms as the Board, 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 Series 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 Series A Preferred Stock unless each holder of Preferred Stock has received in cash out of the assets of the Company, whether from capital or earnings, available for distribution to the shareholders of the Company, before any amount is paid to the holders of Common Stock, the sum of Ten Dollars ($10.00) per Exhibit 1-4 share for each share of 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 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 Series 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 Series A Preferred Stock that remain issued and outstanding shall expire and shall be automatically redeemed on December 31, 1999, at par value, plus an amount equal to all accumulated and unpaid dividends, if any, due with respect to the Preferred Stock (collectively, the "Redemption Price"). Redemption shall be in cash out of any funds legally available for the redemption of the Preferred Stock. Section 8. Reacquired Shares. Any shares of Series 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 a series of Preferred Stock or any similar stock or as otherwise required by law. Section 9. Rank. The Series A Preferred Stock shall rank, with respect to ---- the payment of dividends and the distribution of assets, senior to all series of any other class of Preferred Stock. Section 10. Amendment. If any proposed amendment to the Articles of --------- Incorporation or this Certificate of Designation would alter or change the preferences, special rights or powers given to the Series A Preferred Stock so as to affect the Series 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 Series A Preferred Stock, then the holders of the Series A Preferred Stock shall be entitled to vote as a series upon such amendment, and the Exhibit 1-5 affirmative vote of two-thirds of the outstanding shares of Series A Preferred Stock shall be necessary to the adoption thereof, in addition to such other vote as may be required by law. Exhibit 1-6 Exhibit 2 Funding Notice (date) WorldCom Inc. 515 E. Amite Jackson, Mississippi 39201 Attention:________________ Dear________________: Pursuant to Sections 2.01 and 2.02 of that certain Preferred Stock, Subordinated Note and Warrant Purchase Agreement ("Loan Agreement") dated as of November 14, 1996 between Netco Communications Corporation ("NETCO") and WorldCom Inc. ("WCOM), NETCO hereby requests WCOM to make the following Future Disbursement as contemplated by the Loan Agreement. 1) Amount $______________________ 2) For quarter ending _______________________ Please cause the requested funds to be delivered by wire transfer to NETCO's account as follows: (wire transfer instructions) By my signature set forth below, I hereby certify that this request for Future Disbursement has been duly authorized by NETCO's board of Directors. Thank you for your courtesies in this matter. Very truly yours, Netco Communications Corporation By________________________________ (authorized signature) Exhibit 3 Registered Holder: WorldCom Inc. $____________ NETCO COMMUNICATIONS CORPORATION 102 UNION PLAZA 333 NORTH WASHINGTON AVENUE MINNEAPOLIS, MINNESOTA 55401 7% Subordinated Note Due December 31, 2003 For Value Received, NETCO COMMUNICATIONS CORPORATION, a Minnesota corporation, (hereinafter called the "Issuer") hereby promises to pay to the order of WorldCom Inc., or the registered holder (hereinafter referred to as the "Holder") the principal amount of Twenty Eight Million Five Hundred Thousand Dollars ($28,500,000), or such lesser amount as has been actually advanced to Issuer by Holder pursuant to that certain Preferred Stock, Subordinated 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 December 31, 2003, or sooner as hereinafter provided. 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 seven percent (7%) per annum. Interest shall accrue from the date of purchase of this Note (hereinafter, the "Note"), and be payable on June 30 and December 31 of each year, commencing with the first interest payment on December 31, 1996. The Issuer shall, upon request of the registered Holder, mail a check or draft representing such interest to the registered holder at the address designated by the registered holder and appearing on the books of registration maintained by the Issuer. Except as otherwise provided in Article 2, no interest shall accrue or be paid on this Note after December 31, 2003. If any payment due hereunder is not received by the Holder within 15 days from the date due, Issuer shall pay a late payment charge of Five Dollars ($5.00) or four percent (4%) of the amount of the delinquency, whichever is greater. The following terms, covenants, and conditions shall apply to this Note. Exhibit 3-1 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 of the principal and interest on all existing or future obligations of the Issuer for money borrowed from a bank, trust, insurance, or other financial institution engaged in the business of lending money, which is hereinafter referred to as "Senior Indebtedness." In the event of any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangement with creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Issuer, or in the event the Note shall be declared due and payable upon the occurrence of an event of default (as specified herein), (1) no amount shall be paid by the Issuer in respect of the principal or interest on this Note at the time outstanding, unless and until the principal of and interest on the Senior Indebtedness then outstanding shall have been paid in full, and (2) no claim or proof of claim shall be filed with the Issuer by or on behalf of the holder of this Note which shall assert any right to receive any payments in respect of the principal of and interest on this Note except subject to the payment in full of the principal and interest of all of the Senior Indebtedness then outstanding. ARTICLE 2 EVENT OF DEFAULT 2.1) Each of the following shall constitute an Event of Default. (a) Failure to pay interest when due, continued for thirty (30) days; (b) Failure to pay principal or premium when due; (c) 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 7 or 11 of the United States Bankruptcy Code, as the same may be amended. 2.2) Upon the occurrence of any Event of Default specified in Section 2.1(c) 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 Section 2.1 (a) or Section 2.1 (b) above, the holder of this Note shall have the sole option of declaring the unpaid principal Exhibit 3-2 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 at a rate equal to two percent (2%) per annum in excess of the then 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 of 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 3.1) This Note may be prepaid at any time, in whole or in part, prior to maturity at the option of the Issuer, 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 payment. 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 cease to bear interest on the portion to be prepaid, as set forth in the notice, unless payment hereof is refused upon the presentation of the same at or after the time specified in such notice. ARTICLE 4 PAYMENT 4.1) 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. 4.2) No recourse shall be had for the payment of the principal, or interest, or for any claim based thereon, or otherwise, against any incorporator, shareholder, officer, director, or agent, past, present, or future, of the Issuer, whether by virtue of any Exhibit 3-3 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 5 DIVIDENDS 5.1) Until payment in full 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. ARTICLE 6 NOTICE 6.1) All notices, requests, demands and other communications under this Note shall be in writing and shall be 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 6.1 by giving the other party written notice of the new address in the manner set forth above. ART1CLE 7 MISCELLANEOUS 7.1) 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. 7.2) 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. 7.3) The remedies of Holder as provided herein shall be cumulative and concurrent, and may be pursued singly, successively or together against Issuer at the Exhibit 3-4 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. 7.4) 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 President and Secretary. Dated: November __, 1996 NETCO COMMUNICATIONS CORPORATION By:______________________________ Edward J. Driscoll, III President and Secretary Exhibit 3-5 Exhibit 4 EXERCISABLE ON OR BEFORE, AND VOID AFTER 5:00 P.M. MINNEAPOLIS TIME DECEMBER 31, 2000 Certificate for 4,157,500 Warrants WARRANTS TO PURCHASE COMMON STOCK OF NETCO COMMUNICATIONS CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA THIS CERTIFIES that 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 Netco Communications Corporation, a Minnesota corporation (the "Company"), at any time on or before 5:00 Minneapolis time, December 31, 2000, 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 $4.81 per share (the "Initial Exercise Price" subject to adjustments as noted subsequently). 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 value $10.00 per share, which shares shall each be valued for purposes hereof at Exhibit 4-1 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 or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of its Exhibit 4-2 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) The Initial Exercise Price of $4.81 per share shall increase to $4.94 per share on March 31, 1997, and shall thereafter increase by the amount of $.08 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 (such increases beginning with the calendar quarter ending June 30, 1997, being referred to as the "Quarterly Increase"); provided, that to encourage earlier partial exercise of the Warrants, the amount of each Quarterly Increase shall be abated at the rate of $.00875 per share (the "Abatement") for each incremental purchase of aggregated amounts of Five Hundred Thousand (500,000) shares upon partial exercise of this Warrant. Each Abatement shall take effect on the last day of the calendar quarter during which such partial exercise and purchase occurred, as illustrated by the following examples: (i) the purchase of One Million Five Hundred Thousand (1,500,000) shares during the second calendar quarter of 1998 would result in a reduction, commencing June 30, 1998, of the Quarterly Increase to .0625 per share for each subsequent calendar quarter; (ii) the further purchase of Five Hundred Thousand (500,000) shares during the third calendar quarter of 1998 would result in a further reduction, commencing September 30, 1998, of the Quarterly Increase to $.045 per share for each subsequent calendar quarter. The exercise price computed from time to time in accordance with this provision shall be referred to as the "Current Exercise Price." (d) In case the Company shall at anytime hereafter subdivide or combine the outstanding shares of Common Stock or declare a dividend payable in Common Stock, the exercise price of this Warrant in effect immediately prior to the subdivision, combination or record date for such dividend payable in Common Stock shall forthwith be proportionately increased, in the case of combination, or decreased, in the case of subdivision or dividend payable in Common Stock, and each share of Common Stock purchasable upon exercise of the Warrant shall be changed to the number determined by dividing the then Current Exercise Price by the exercise price as adjusted after the subdivision, combination, or dividend payable in Common Stock. (e) No fractional shares of Common Stock are to be issued upon the exercise of the Warrant, but the Company shall pay a cash Exhibit 4-3 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. (f) 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. (g) 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 Exhibit 4-4 (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). (h) Upon any adjustment of the Current Exercise Price, then and in each such case, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the registered holder of this Warrant at the address of such holder as shown on the books of the Company, which notice shall state the exercise price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 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 Exhibit 4-5 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. 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 three (3) ------------------- years from the date hereof until two (2) years after the complete exercise of this Warrant, but in any event no later March 31, 2003, 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. Exhibit 4-6 IN WITNESS WHEREOF, Netco Communications Corporation, Inc. has caused this Warrant to be signed by its duly authorized officer and this Warrant to be dated November ___, 1996. NETCO COMMUNICATIONS CORPORATION By: _____________________________ Edward J. Driscoll, III President Exhibit 4-7 Exhibit 5 NETCO COMMUNICATIONS CORPORATION IRREVOCABLE, LIMITED PROXY COUPLED WITH AN INTEREST WorldCom Inc. ("WCOM") hereby irrevocably appoints Edward J. Driscoll, III, and Allen L. Witters as Proxies (each with the power to act alone and with the power of substitution and revocation) to represent the undersigned and to vote, as designated and limited below, all Common Shares of Netco Communications Corporation ("NETCO") held of record by the undersigned during the Payment Period. This Proxy is given pursuant to section 4.02(e) of that certain Preferred Stock, Subordinated Note and Warrant Purchase Agreement ("Purchase Agreement") between WCOM and NETCO dated November 14, 1996. Capitalized terms used and not otherwise defined in this Proxy shall have the meanings ascribed to them in the Purchase Agreement. The Proxies are authorized during the Payment Period to vote in their discretion upon all matters which may come before any meeting of shareholders of NETCO during the Payment Period, including the election of directors; provided, however, that the Proxies are not authorized to vote in favor of any proposal which approves any merger, sale or exchange of assets, or other transaction requiring shareholder approval unless a principle purpose of such transaction is to permit NETCO to obtain the financing and/or funds that are necessary, and that are used, to pay WCOM the full purchase price (pursuant to section 4.02(d) of the Purchase Agreement) for the Warrants and/or the shares of NETCO Common Stock theretofore issued upon exercise of the Warrants or conversion of the Convertible Note. WCOM retains the right to vote on all other matters submitted to NETCO shareholders for which the Proxies are not expressly authorized to vote. This Proxy is coupled with an interest and is irrevocable until expiration of the Payment Period. WorldCom, Inc. By:______________________________ Its:_____________________________ Dated: November __, 1996 Exhibit 6 EXECUTIVE EMPLOYMENT AGREEMENT ------------------------------ AGREEMENT, made and entered into as of the ____ day of November, 1996, by and between Netco Communications Corporation, a Minnesota corporation (the "Corporation"), and Edward J. Driscoll, III ("Executive"). RECITALS: -------- WHEREAS, the Executive is the President and Chief Executive Officer of the Corporation; WHEREAS, the Executive's leadership and services have constituted a major factor in the successful growth and development of the Corporation's business; and WHEREAS, the Corporation desires to employ and retain the unique experience, ability and services of the Executive as a principal executive officer; and WHEREAS, the Corporation and the Executive desire to record the terms of Executive's continued employment by the Corporation; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1.) Term of Employment. Subject to the terms and conditions of this ------------------ Agreement, the Corporation hereby employs Executive and Executive hereby accepts employment for the period commencing October 1, 1996, and ending December 31, 1998, and thereafter for successive one year periods ending December 31 of each succeeding year unless and until the employment is terminated in accordance with the provisions of this Agreement. Each December 31, commencing December 31, 1998, shall be designated the "Annual Renewal Date." 2) Duties, Responsibilities, and Authority. During the term of this --------------------------------------- Agreement, Executive shall serve as Chief Executive Officer of the Corporation. As such, Executive shall be responsible for the overall direction of the Corporation and he shall have such duties as are generally appropriate to his Exhibit 6 - 1 position and such authority as shall be required to enable him to perform these duties, including but not limited to the authorities and duties currently prescribed in the Articles of Incorporation and the Bylaws of the Corporation, subject to the power of the shareholders and/or directors of the Corporation to amend or modify such Articles of Incorporation or Bylaws. The Executive shall exert his best efforts and devote substantially all of his time and attention to the Corporation's business. The Executive shall be in complete charge of the operations of the Company, and shall have full authority and responsibility, subject only to the general direction, approval, and control of the Corporation's Board of Directors, for formulating policies and administering the Corporation in all respects. His powers shall include authority to hire and fire Corporation personnel, except for members of the Board of Directors who are also employees of the Corporation, and to retain consultants when he deems necessary to implement Corporation policies. 3.) Location of Employment. Executive's services shall be rendered ---------------------- principally in Minneapolis, Minnesota and Executive shall not be required, without his consent, to change his residence or work location from either Hennepin County or Ramsey County, Minnesota by virtue of his employment with the Corporation. 4.) Compensation, Benefits, Expenses. -------------------------------- (a) Salary. The Corporation shall pay Executive a base salary at an ------ annual rate of $150,000.00 commencing October 1, 1996. Salary shall be paid in accordance with the Corporation's regular payroll procedure, but not less frequently than monthly. Executive's base salary shall be reviewed periodically (at intervals of not more than 12 months) by the Board of Directors of the Corporation ("the Board of Directors" or "Board") or a committee thereof for the purpose of considering increases thereof. In evaluating increases in salary, such factors as corporate performance, individual merit, inflation and other appropriate considerations shall be taken into account. (b) Stock Option. In addition to any other compensation or benefits ------------ to which the Executive may be entitled under this Agreement or otherwise, Executive shall receive options to acquire Four Hundred Thousand (400,000) shares of the capital stock of the Corporation in accordance with the terms of that certain Stock Option Agreement which is attached hereto and marked Exhibit A. (c) Bonus and Other Compensation. The Executive shall be entitled to ---------------------------- additional bonus and other compensation as may be established from time to time by the Board of Directors based upon an annual business plan which shall set goals (which shall include achievement of revenue and Exhibit 6 - 2 profit measures which are reasonable at the time established) for the Corporation. (d) Vacation. During each year of his employment, Executive will be -------- entitled to reasonable vacations not exceeding five weeks per year, holidays and time off when ill, all at full pay. Vacations shall be at such time or times and for such periods as Employer and Executive shall agree. (e) Automobiles. The Corporation recognizes the Executive's need for ----------- an automobile or automobiles for business purposes. It, therefore, shall provide the Executive with a reasonably suitable automobile or automobiles, including all related maintenance, repairs, insurance and other costs associated with such automobiles during the term of this Agreement or any renewal or extension thereof. (f) Expenses. The Corporation recognizes that Executive will have to -------- incur certain out-of-pocket expenses related to his services and the Corporation's business and that it will be extremely difficult to account for such expenses. It is understood that Executive's compensation is intended to cover all such out-of-pocket expenses. The Corporation, however, shall reimburse Executive for any specific expenditures incurred for travel, lodging, entertainment, and the like upon submission of appropriate receipts and documentation sufficient to substantiate them as reasonable and necessary business expenses. (g) Employee Benefits. This Agreement shall not be in lieu of any ----------------- rights, benefits and privileges to which Executive may be entitled as an employee of the Corporation under any retirement, pension, profit-sharing, insurance, group life insurance, hospitalization, surgical and major medical coverage, and long-term disability or other plans which may now be in effect or which may hereafter be adopted. Executive shall have the same rights and privileges to participate in such plans and benefits as any other employee during his period of employment. In addition, to the extent appropriate for a senior executive of the Corporation, Executive shall be entitled to participate in any pension and retirement plans, bonus plans and such other fringe benefit programs or plans as are or may be made available from time to time to executive and/or other salaried Executives of the Corporation. 5.) Termination. ----------- (a) Events of Termination. This Agreement may be terminated upon --------------------- the occurrence of any one of the following events: Exhibit 6 - 3 (1) Voluntary. Executive may terminate this Agreement at any time --------- during the term of this Agreement by giving 30 days prior written notice of termination to the Board. (2) Involuntary Without Cause. The Board, without cause, may ------------------------- terminate this Agreement on any Annual Renewal Date during the term of this Agreement upon written notice to Executive at least 90 days prior to an Annual Renewal Date. (3) Involuntary With Cause. The Board, upon written notice effective ---------------------- immediately, may terminate this Agreement at any time during the term of this Agreement for cause. "Cause" for purposes of such termination shall mean the following: a. admission or conviction of an act of dishonesty by Executive with respect to the material interests of the Corporation; b. willful misfeasance or willful nonfeasance of a duty intended to injure or having the effect of injuring the reputation, business relationships of the Corporation, provided that for purposes hereof Executive shall not be deemed to have committed willful misfeasance or willful nonfeasance by reason of any act or failure to act by Executive done in good faith; c. conviction of Executive upon a charge of any crime involving moral turpitude or any felony reflecting unfavorably upon the Corporation; or d. Failure, neglect or refusal by Executive to perform his duties and responsibilities as set forth in this agreement (other than by reason of disability due to physical or mental illness or by reason of permitted vacations or holidays) without the same being corrected upon ninety (90) business days prior written notice from the Corporation specifying such non-performance. (4) Bankruptcy. This Agreement may be terminated by either party upon ---------- written notice to the other effective immediately if the other party to this Agreement: a. is adjudicated as a bankrupt; Exhibit 6 - 4 b. is subject to the entry of an order, judgment, or decree by any court of competent jurisdiction approving a petition appointing a trustee, receiver, or liquidator of all or a substantial part of the party's assets; c. makes or attempts to make an assignment for the benefit of creditors; or d. institutes or attempts to institute voluntary bankruptcy proceedings. (5) Death. This Agreement shall terminate upon the death of the ----- Executive. (6) Disability. This Agreement shall terminate upon the permanent ---------- disability of Executive. For the purposes of this Agreement, Executive shall be deemed permanently disabled if any ailment, illness or other incapacity prevents him from performing his duties as specified in this Agreement for a period of six consecutive months or for an aggregate of six months in any twelve month period from the date of this Agreement. (7) Purchase of Executive's Shares by WorldCom Inc. This Agreement ---------------------------------------------- shall terminate on the Annual Renewal Date next following sale by Executive of all shares and options to purchase shares of the Corporation owned by him to WorldCom Inc. pursuant to Section 4.02 of that certain Preferred Stock, Subordinated Note and Warrant Purchase Agreement between WorldCom Inc. and the Corporation ("Preferred Stock Purchase Agreement"). (b) Consequences of Termination. --------------------------- (1) In the event of the termination of this Agreement in accordance with Subparagraph 5(a)(1) or 5(a)(3) above (voluntary termination or involuntary termination with cause), Executive shall be entitled to the base salary earned by him prior to the date of termination as provided herein computed on a pro rata basis to and including such date of termination. In addition, Executive shall also be reimbursed for his reasonable business expenses incurred prior to the date of termination. (2) In the event of the termination of this Agreement in accordance with Subparagraph 5(a)(7) above (purchase of Exhibit 6 - 5 Executive's shares by WorldCom), Executive shall be entitled to the base salary earned by him prior to the date of termination as provided herein computed on a pro rata basis to and including such date of termination. In addition, Executive shall also be reimbursed for his reasonable business expenses incurred prior to the date of termination. In the event termination pursuant to Subparagraph 5(a)(7) above occurs on or prior to December 31, 1999, then, to the extent that the consideration received by Executive in exchange for his options to purchase shares of the Corporation is a non-cash consideration, all stock options under the Stock Option Agreement (Exhibit A) that have not theretofore vested (including any and all options or rights received or exchanged therefor by Executive as a consequence of the transaction occurring pursuant to Section 4.02 of the Preferred Stock Purchase Agreement) shall immediately vest and become exercisable in accordance with the provisions of said Stock Option Agreement thereto applicable. In addition, in the event termination pursuant to Subparagraph 5(a)(7) occurs on or prior to December 31, 2000, then Executive shall also receive a lump sum payment in the amount of Seventy Five Thousand Dollars ($75,000). (3) If the Corporation terminates this Agreement without cause pursuant to Subparagraph 5(a)(2) above (involuntary without cause), Executive shall be entitled to receive a severance cash payment as liquidated damages for, and in lieu of, any and all damages which he may incur as a result of such termination in an amount equal to the greater of (i) the Executive's then base salary for two years, or (ii) the amounts reasonably estimated to be due hereunder for the two year period following the Annual Renewal Date upon which the termination becomes effective, which shall be payable within 30 days from the date of termination plus, in either case, one half of the cash bonus (determined pursuant to Paragraph 4(c) above relating to Bonus and Other Compensation), to which Executive would have been entitled had he continued in the employment of the Corporation for the year following termination, which payment shall be payable in accordance with Paragraph 4(b). Additionally, If the Corporation terminates this Agreement without cause pursuant to Subparagraph 5(a)(2) above, an stock options under the Stock Option Agreement (Exhibit A) that have not theretofore vested shall immediately vest and become exercisable in Exhibit 6 - 6 accordance with the provisions of said Stock Option Agreement. (4) In the event this Agreement is terminated due to the death (pursuant Subparagraph 6(a)(5)) or disability (pursuant to Subparagraph 6(a)(6)) of Executive, Executive (or his estate) shall be entitled to his then base salary for a period of six months, plus the cash bonus payable with respect to the fiscal year of death or disability, in accordance with normal payment procedures under this Agreement. 6.) Non-Competition. Executive covenants and agrees that: --------------- (a) During the term of this Agreement, he shall not without the prior written consent of the Corporation, directly or indirectly, as an Executive, employer, agent, principal, proprietor, partner, stockholder, consultant, director, or corporate officer, engage in any business engaged in the high-speed, transaction based electronic data transportation and delivery business (the "Competitive Business") or render any services to any business that is engaged in a Competitive Business. (b) For a period of two years (the "Non-Competition Period") after Executive has ceased to be employed by the Corporation or any subsidiary of the Corporation, Executive shall not without the prior written consent of the Corporation: (1) directly or indirectly engage in, or (2) be employed by any person, firm, partnership, association, corporation or business organization, entity or enterprise that is, or is about to become, directly or indirectly engaged in, any Competitive Business. For purposes hereof, "Competitive Business" shall mean engaging or having a material interest, directly or indirectly as owner, employee, officer, director, partner, venturer or stockholder, capital investor, consultant, agent, principal advisor or otherwise, either alone or in association with others, in the operation of a high speed, transaction based, electronic data transportation and delivery business; provided, however, that the restrictions contained in this Subparagraph (b) shall not apply to any business that does not meet both of the following requirements: (1) the Corporation or a subsidiary of the Corporation shall have operated such business, or had such business in the planning or development stage therein, during the 120-day period Exhibit 6 - 7 immediately prior to Executive's ceasing to be employed by the Corporation or any subsidiary of the Corporation, and (2) Executive, during such period, shall have had substantial planning, development, administrative or operational responsibilities for such business of the corporation or such subsidiary of the Corporation in such area. (c) Executive shall not during the Non-Competition Period (i) solicit any employee of the Corporation to engage in a Competitive Business, or (ii) personally solicit customers of the Corporation in a manner which is competitive with the Corporation. (d) If the scope of any restrictions contained in Subparagraphs 6(a), (b) or (c) hereof are too broad to permit enforcement of such restrictions to their full extent, then such restrictions shall be enforced to the maximum extent permitted by law, and Executive hereby consents and agrees that such scope may be judicially modified accordingly in any proceeding brought to enforce such restrictions. Ownership of less than five (5%) percent of the outstanding stock of a corporation traded on a national securities exchange shall not be deemed to breach or conflict with the provisions of Subparagraphs (a) or (b) of this Section 6. 7.) Trade Secrets. Executive 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, 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 this paragraph shall be a material breach of this Agreement. 8.) Disclosure and Assignment. Except as provided elsewhere in this ------------------------- Agreement, Executive 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, relating to high-speed, transaction based electronic data transportation and delivery services, which while the Executive is employed by the Corporation are made, conceived or reduced to practice by Executive, alone or with others, during or after usual working hours, either on or off the job, and Executive hereby Exhibit 6 - 8 assigns to the Corporation all such ideas, discoveries, inventions and improvements relating to high-speed, transaction based electronic data transportation and delivery to be the Corporation's exclusive property. 9.) Disclosure and Right of First Refusal. Paragraph 8 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 Executive's own time, and (1) --- --- which does not relate (a) directly to high-speed, transaction based electronic data transportation and delivery or (b) to the Corporation's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Executive for the Corporation. Executive 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 Executive and the Corporation. In the event the Corporation and Executive cannot agree on terms and Executive 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 Executive shall have the obligation to offer to the Corporation the idea, discovery, invention or improvement on such terms as offered to the other party. 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 Executive 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 which was developed --- entirely on the Executive'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 Executive 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. Exhibit 6 - 9 10.) Assistance to the Corporation. Executive shall give the Corporation, ----------------------------- at the Corporation's expense, all assistance the Corporation reasonably requires to perfect, protect, and exercise the rights to all ideas, discoveries, inventions or improvements acquired by the Corporation pursuant to the assignment provisions of Paragraph 8 of this Agreement or the right of first refusal provisions of Paragraph 9 of this Agreement. 11.) Documents and Tangible Property. All documents or other tangible -------------------------------- property relating in any way to the business of the Corporation which are conceived or generated by Executive or come into Executive's possession during Executive's employment shall be and remain the Corporation's exclusive property, and Executive agrees to return all such documents and tangible property to the Corporation upon termination of Executive's employment by the Corporation or at such earlier or later time the Corporation may request Executive to do so. 12.) Remedies for Breach of Covenants of Executive. The covenants set --------------------------------------------- forth in Paragraphs 6, 7, 8, 9, 10 and 11 of this Agreement shall continue to be binding upon Executive, notwithstanding the termination of his employment with the Corporation for any reason whatsoever. Such covenants shall be deemed and construed as separate agreements independent of any other provisions of this Agreement. The existence of any claim or cause of action by Executive against the Corporation, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Corporation or any or all of such covenants. It is expressly agreed that the remedy at law for the breach of any such covenant is inadequate and that temporary and permanent injunctive relief shall be available to prevent the breach or any threatened breach thereof, without the necessity of proof of actual damages; provided, however, that it is expressly agreed that the provisions of Subparagraph 6(b) shall immediately become void and no longer of any effect whatsoever in the event of a merger or consolidation of the Corporation into another corporation in which the Corporation is not the surviving corporation or which requires the stockholders of the Corporation to exchange their shares of Common Stock of the Corporation for any other class of capital stock, expressly excepting any transaction involving the issuance of the capital stock of WorldCom Inc. The termination of such provision shall be effective on the effective date of such merger or consolidation. 13.) Notices. Any notices to be given hereunder by either party to the ------- other may be effected either by personal delivery in writing or by mail, registered or certified, postage prepaid, with return receipt requested. Personal delivery to the Corporation shall mean personal delivery to the Chairman of the Board of Directors. Mailed notices shall be addressed to the respective addresses shown below. Either party may change its address for notice by giving written notice in accordance with the terms of this Paragraph 13. Exhibit 6 - 10 (a) If to Executive: Edward J. Driscoll 2500 Christian Drive Chaska, Minnesota 55318 (b) If to the Corporation: Netco Communications Corporation 104 Union P1aza 333 North Washington Ave. Minneapolis, MN 55401 with a copy to: WorldCom Inc. 515 E. Amite Jackson, Mississippi 39201 Attention: K. William Grothe, Jr. Vice President 14.) Successors and Assigns: Sale of Business. ---------------------------------------- (a) The Corporation's rights and obligations under this Agreement shall inure to the benefit of and shall be binding upon the Corporation's successors and assigns. (b) In the event of a merger or consolidation of the Corporation with any other corporation or corporations, the sale by the Corporation of a major portion of its assets or of its business and goodwill, or any other corporate reorganization involving the Corporation, this Agreement shall be assigned and transferred to such successor in interest as an asset of the Corporation; and the Corporation agrees that it shall make it a condition of such sale or transfer agreement that the purchaser or assignee shall assume the Corporation's obligations under this Agreement. (c) In the event of any such assignment, the Executive agrees to continue to perform his duties according to the terms of this Agreement to or for such assignee or transferee of this Agreement; provided, however, the Corporation shall remain secondarily liable as a guarantor of such assignee's or transferee's obligations to the Executive under this Agreement. The Executive acknowledges that his services are unique and personal, and, accordingly, the Executive may not assign his rights (except the right to receive payments due to him) or delegate his duties or obligations under this Agreement. Exhibit 6 - 11 15.) General Provisions. ------------------ (a) Law Governing. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of Minnesota. (b) Invalid Provisions. If any provision of this Agreement is held to ------------------ be illegal, invalid, or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and still be legal, valid or enforceable. (c) Entire Agreement. This Agreement sets forth the entire ---------------- understanding of the parties and supersedes all prior agreements or understandings, whether written or oral, with respect to the subject matter hereof. The prior Employment Agreement dated September 24, 1994 between the parties hereto is terminated. No terms, conditions, warranties, other than those contained herein, and no amendments or modifications hereto shall be binding unless made in writing and signed by the parties hereto. (d) Binding Effect. This Agreement shall extend to and be binding upon -------------- and inure to the benefit of the parties hereto, their respective heirs, representatives, successors and assigns. This Agreement may not be assigned by Executive. (e) Waiver. The failure of either party to insist in any one or more ------ instances upon performance of any term or condition of this Agreement shall not be construed a waiver of its future performance. The obligations of either party with respect to such term, covenant or condition shall continue in full force and effect. (f) Titles. Titles of the paragraphs herein are used solely for ------ convenience and shall not be used for interpretation or construing any word, clause, paragraph, or provision of this Agreement. (g) Counterparts. This Agreement may be executed in two or more ------------ counterparts each of which shall be deemed an original, but which together shall constitute one and the same instrument. Exhibit 6 - 12 IN WITNESS WHEREOF, the Corporation and Executive have executed this Agreement as of the date and year first written "EXECUTIVE" NETCO COMMUNICATIONS CORPORATION ________________________________ By:_________________________________ Edward J. Driscoll, III Edward J. Driscoll, III Chief Executive Officer Exhibit 6 - 13 Exhibit A to Executive Employment Agreement STOCK OPTION AGREEMENT THIS AGREEMENT, made and entered into as of and effective this __day of November 1996, by and between NETCO COMMUNICATIONS CORPORATION, a Minnesota corporation (hereinafter referred to as the "Corporation") and EDWARD J. DRISCOLL, III, a resident of the State of Minnesota (hereinafter referred to as the "Executive"). WHEREAS, the Corporation considers it desirable and in its best interests that the Executive 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: Section I - Grant of Option 1.01 Grant of Option. The Corporation grants to Executive an Option --------------- (the "Option") to purchase FOUR HUNDRED THOUSAND (400,000) common shares of the Corporation at a purchase price of $4.81 per share. Section III - Term and Duration 2.01 Term and Duration. The Option shall have a term commencing with ----------------- the date first above written and expiring on December 31, 2007. Section III - Vesting 3.01 Vesting of Option. Subject to earlier vesting and exercise ----------------- provisions of Paragraph 3.02 hereof, the Option shall vest and may be exercised in incremental amounts at the rate of fifty (50) shares for each Installed Customer Site that becomes first installed during a calendar quarter during the term of the Option, commencing with the calendar quarter ending March 31, 1997, and for each successive calendar quarter through expiration of the term of the Option. 3.02 Earlier Vesting of Option. The provisions of Paragraph 3.01 to ------------------------- the contrary notwithstanding, the Option shall immediately vest and become immediately exercisable in its entirety in any of the following events: Exhibit 6A-1 Edward J. Driscoll, III Stock Option Agreement _______, 1996 (a) Executive's employment by the Corporation is terminated "involuntarily without cause" as that phrase is defined in that certain Employment Agreement (the "Employment Agreement") between the Corporation and the Executive, dated of even date with this Stock Option Agreement; (b) The Employment Agreement is terminated pursuant to Section 5(a)(7) of the Employment Agreement prior to December 31, 1999. (c) An Acquisition or Change of Control occurs during the period commencing January 1, 1997 and ending January 31, 1999. 3.03 Definitions. For purposes of this Section 3, the following words ----------- shall have the meanings ascribed to them. (a) Acquisition. "Acquisition" means either (i) the purchase of all or ----------- substantially all of the assets of the Corporation by any person or party, or (ii) the merger or consolidation of the Corporation with any person or party; provided that neither (i) the purchase of all or substantially all of the assets of the Corporation by WorldCom Inc., nor (ii) a merger or consolidation in which the shares of the Corporation are exchanged for shares WorldCom Inc., of a class that is registered under the Securities Exchange Act of 1934 shall be deemed to be an "acquisition" for purposes hereof. (b) Change of Control. "Change of Control" means the election by ----------------- shareholders of the Corporation of a majority of directors of the Corporation who were not recommended by the Corporation's executive management for nomination for election as directors, provided that election of a majority of the directors of the Corporation who receive the affirmative vote of WorldCom Inc., shall not be deemed a change of control. (c) Customer. "Customer" shall mean a customer of the Corporation -------- who has subscribed to, and agreed to pay for, Use Fees for use of the Corporation's WAM!NET Service. (d) Installed Customer Site. "Installed Customer Site" shall mean a ----------------------- customer that has been continually connected to the Corporation's WAM!NET Service for at least Ninety (90) days or has begun either (i) to pay minimum monthly Use Fees under a service agreement or (ii) to incur use charges under an agreement having no minimum monthly Use Fees. Exhibit 6A-2 Edward J. Driscoll, III Stock Option Agreement _________, 1996 (e) Use Fees. "Use Fees" shall mean fees payable by a Customer for use of -------- WAM!NET Services, and shall include fees payable by a Customer relating to remote proofing and digital image archiving and retrieval services. (f) WAM!NET Service. "WAM!NET Service" shall mean the Corporation's --------------- WAM!NET(TM) Electronic Data Transportation and Delivery Service (the "WAM!NET Service") as presently configured or as may be configured in the future, and shall include services relating to remote proofing and digital image archiving and retrieval services. Section IV - Exercise and Payment 4.01 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, accompanied by payment in cash or exercise of the Conversion Right as provided, respectively, in Paragraphs 4.02 or 4.03 hereof, or by some combination thereof. The notice shall specify how many shares are being acquired for cash in accordance with Paragraph 4.02 hereof, and how many by exercise of the Conversion Right in accordance with Paragraph 4.03 hereof. The notice shall also be accompanied by any document reasonably required by the Corporation to be executed by Executive acknowledging the applicable restrictions on the transfer of the common shares being purchased as set forth under Section 7.02 of this Agreement. 4.02 Payment in Cash. The notice specified in Paragraph 4.01 hereof shall --------------- be accompanied by payment of the option price for the shares being purchased for cash, which shall be in the form of cash or 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 acceptable to the Corporation. 4.03 Payment by Exercise of Conversion Right. In the alternative, the --------------------------------------- notice specified in Paragraph 4.01 hereof shall be accompanied by payment for the shares being purchased by exercise of the Conversion Right provided in this paragraph. The holder of this option shall have the right to require the Corporation to convert this option, to the extent then vested, to shares of Common Stock of the Corporation at any time prior to December 31, 2006. Upon exercise of the Conversion Right, the Corporation shall deliver to the holder of this Option (without payment of the exercise price in cash or check as provided in Paragraph 4.02 thereof) shares of the Corporation's common Stock in number equal to the quotient obtained by dividing Exhibit 6A-3 Edward J. Driscoll, III Stock Option Agreement ________, 1996 (a) 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, as determined immediately prior to the exercise of the Conversion Right, of the aggregate Fair Market Value of the shares for which the Option may be exercised by (b) the Fair Market Value of one share of common stock immediately prior to the exercise of the Conversion Right. The immediately preceding formula is illustrated by the following example where (i) the number of optioned shares being acquired by exercise of the Conversion Right is 10,000, (ii) the per share exercise price of the Option is $4.81, and (iii) the applicable Fair Market Value is $14.43: [(10,000 x 14.43) - (10,000 x 4.81)] / 14.43 = [144,300 - 48,100] / 14.43 = 96,200 / 14.43 = 6,667 shares. 4.04 Delivery of Certificates. Upon receipt of the Notice of Exercise, ------------------------ together with any document specified in Paragraph 4.01 hereof accompanied by payment in accordance with either Paragraph 4.02 or 4.03 hereof, the Corporation will deliver to the holder of this Option a certificate or certificates for the number of shares of common stock issuable thereupon, together with a payment in cash in lieu of any fraction of a share. 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. 4.05 Fair Market Value. "Fair Market Value" of a share of the Corporation's ----------------- common stock as of a particular date (the "Determination Date") shall mean: (a) If the Corporation'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 Corporation's common stock is not traded on an exchange or on NASDAQ, but is traded in the over-the-counter securities market, then the average closing bid and asked prices reported for the ten (10) business days immediately preceding the Determination Date; and Exhibit 6A-4 Edward J. Driscoll, III Stock Option Agreement ________, 1996 (c) If the Corporation'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 a national investment banking firm whom, upon request of the holder of this Option, the Corporation shall select and retain to render such valuation. Section V - Termination 5.01 Termination of Option. Except as herein otherwise provided, the --------------------- Option granted under this Agreement, to the extent not theretofore exercised, shall terminate upon the first to occur of the following events: (a) Ninety (90) days following the Executive's voluntary termination of Executive's employment by the Corporation. (b) Ninety (90) days following the Executive's termination of employment by the Corporation "involuntarily for cause" as that phrase is defined in the Employment Agreement. (c) The expiration of twelve months from the date of Executive's death should Executive die within three months of termination of employment by the Corporation. (d) 11:59 PM Minneapolis, Minnesota, local time on December 31, 2007. 5.02 Governing Date. 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 after Dec. 31, 2007. Section VI - Reclassification, Consolidation or Merger 6.01 Reclassification, Split or Dividend. 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. 6.02 Consolidation or Merger. If the Corporation is reorganized or ----------------------- consolidated or merged with another corporation, the Executive shall be entitled to receive an option (the "New Option") covering common shares of such Exhibit 6A-5 Edward J. Driscoll, III Stock Option Agreement _________, 1996 reorganized, consolidated or merged Corporation 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 Executive additional benefits which he does not have under this Option, or deprive him of benefits which he has under this Option. VII - Rights and Restrictions 7.01 Rights Prior to Exercise of Option. This Option is non-transferable by ---------------------------------- Executive, 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 in accordance with Section 4.02 or 4.03 hereof, and delivery to him of such common shares as herein provided. 7.02 Restriction on Disposition. All common shares acquired by Executive -------------------------- 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 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 except in accordance with applicable exemptions from registration under applicable federal and state laws or pursuant to registration thereunder. 7.03 Refusal Option. All common shares acquired by Executive pursuant -------------- to this Agreement shall be subject to the Right of Refusal Agreement among Executive, Allen L. Witters and WorldCom Inc. VIII - Miscellaneous 8.01 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. 8.02 Construction. This Agreement shall be construed in accordance with ------------ the laws of the State of Minnesota, excluding the conflicts of laws provisions thereof. This Agreement shall also be construed, to the extent Exhibit 6A-6 Edward J. Driscoll, III Stock Option Agreement _______, 1996 practicable, consistently with the Employment Agreement between the Corporation and the Executive dated as of the date first above written. In witness whereof, the parties have signed this Incentive Stock Option Agreement the day and year first above written. "Executive" "Corporation" Netco Communications Corporation By: __________________________ By: ___________________________ Edward J. Driscoll, III Edward J. Driscoll, III Exhibit 6A-7 Exhibit 7 EXECUTIVE EMPLOYMENT AGREEMENT ------------------------------ AGREEMENT, made and entered into as of the _____ day of November, 1996, by and between Netco Communications Corporation, a Minnesota corporation (the "Corporation"), and Allen L. Witters ("Executive"). RECITALS: --------- WHEREAS, the Executive is the Chief Technology Officer of the Corporation; WHEREAS, the Executive's leadership and services have constituted a major factor in the successful growth and development of the Corporation's business; and WHEREAS, the Corporation desires to employ and retain the unique experience, ability and services of the Executive as a principal executive officer; and WHEREAS, the Corporation and the Executive desire to record the terms of Executive's continued employment by the Corporation; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1.) Term of Employment. Subject to the terms and conditions of this ------------------ Agreement, the Corporation hereby employs Executive and Executive hereby accepts employment for the period commencing October 1, 1996, and ending December 31, 1998, and thereafter for successive one year periods ending December 31 of each succeeding year unless and until the employment is terminated in accordance with the provisions of this Agreement. Each December 31, commencing December 31, 1998, shall be designated the "Annual Renewal Date." 2.) Duties, Responsibilities, and Authority. During the term of this --------------------------------------- Agreement, Executive shall serve as Chief Technology Officer of the Corporation. As such, Executive shall be responsible for the overall management and direction of the technology, infrastructure and technical network operations of the Corporation, and he shall have such duties as are generally appropriate to his position and such authority as shall be required to enable him to perform these duties, including but not limited to the authorities and duties currently prescribed in the Articles of Incorporation and the Bylaws of the Corporation, subject to the power of the shareholders and/or directors of the Corporation to amend or modify such Articles of Incorporation or Bylaws. The Executive shall exert his best efforts and devote Exhibit 7 - 1 substantially all of his time and attention to the Corporation's business. The Executive shall be in charge of the development of technology and infrastructure of the Corporation, and shall have full authority and responsibility, subject only to the direction, approval, and control of the Corporation's Chief Executive Officer, and to the general direction, approval and control of the Corporation's Board of Directors, for formulating technology policies and administering the Corporation's technology services and products in all respects. His powers shall include authority, upon consultation of the Corporation's Chief Executive Officer, to hire and fire Corporation personnel in his department and, with the permission of the Corporation's Chief Executive Officer, to retain consultants when he deems necessary to implement Corporation policies. 3.) Location of Employment. Executive's services shall be rendered ---------------------- principally in Minneapolis, Minnesota and Executive shall not be required, without his consent, to change his residence or work location from either Hennepin County or Ramsey County, Minnesota by virtue of his employment with the Corporation. 4.) Compensation, Benefits, Expenses. -------------------------------- (a) Salary. The Corporation shall pay Executive a base salary at an annual ------ rate of $150,000.00 commencing October 1, 1996. Salary shall be paid in accordance with the Corporation's regular payroll procedure, but not less frequently than monthly. Executive's base salary shall be reviewed periodically (at intervals of not more than 12 months) by the Board of Directors of the Corporation ("the Board of Directors" or "Board") or a committee thereof for the purpose of considering increases thereof. In evaluating increases in salary, such factors as corporate performance, individual merit, inflation and other appropriate considerations shall be taken into account. (b) Stock Option. In addition to any other compensation or benefits to ------------ which the Executive may be entitled under this Agreement or otherwise, Executive shall receive options to acquire Four Hundred Thousand (400,000) shares of the capital stork of the Corporation in accordance with the terms of that certain Stock Option Agreement which is attached hereto and marked Exhibit A. (c) Bonus and Other Compensation. The Executive shall be entitled to ---------------------------- additional bonus and other compensation as may be established from time to time by the Board of Directors based upon an annual business plan which shall set goals (which shall include achievement of revenue and profit measures which are reasonable at the time established) for the Corporation. (d) Vacation. During each year of his employment, Executive will be -------- entitled to reasonable vacations not exceeding five weeks per year, holidays Exhibit 7 - 2 and time off when ill, all at full pay. Vacations shall be at such time or times and for such periods as Employer and Executive shall agree. (e) Automobiles. The Corporation recognizes the Executive's need for an ----------- automobile or automobiles for business purposes. It, therefore, shall provide the Executive with a reasonably suitable automobile or automobiles, including all related maintenance, repairs, insurance and other costs associated with such automobiles during the term of this Agreement or any renewal or extension thereof. (f) Expenses. The Corporation recognizes that Executive will have to incur -------- certain out-of-pocket expenses related to his services and the Corporation's business and that it will be extremely difficult to account for such expenses. It is understood that Executive's compensation is intended to cover all such out-of-pocket expenses. The Corporation, however, shall reimburse Executive for any specific expenditures incurred for travel, lodging, entertainment, and the like upon submission of appropriate receipts and documentation sufficient to substantiate them as reasonable and necessary business expenses. (g) Employee Benefits. This Agreement shall not be in lieu of any rights, ----------------- benefits and privileges to which Executive may be entitled as an employee of the Corporation under any retirement, pension, profit-sharing, insurance, group life insurance, hospitalization, surgical and major medical coverage, and long-term disability or other plans which may now be in effect or which may hereafter be adopted. Executive shall have the same rights and privileges to participate in such plans and benefits as any other employee during his period of employment. In addition, to the extent appropriate for a senior executive of the Corporation, Executive shall be entitled to participate in any pension and retirement plans, bonus plans and such other fringe benefit programs or plans as are or may be made available from time to time to executive and/or other salaried Executives of the Corporation. 5.) Termination. ----------- (a) Events of Termination. This Agreement may be terminated upon the --------------------- occurrence of any one of the following events: (1) Voluntary. Executive may terminate this Agreement at any time --------- during the term of this Agreement by giving 30 days prior written notice of termination to the Board. (2) Involuntary Without Cause. The Board, without cause, may ------------------------- terminate this Agreement on any Annual Renewal Date during the term of this Agreement upon written notice to Executive at least 90 days prior to an Annual Renewal Date. Exhibit 7 - 3 (3) Involuntary With Cause. The Board, upon written notice effective ---------------------- immediately, may terminate this Agreement at any time during the term of this Agreement for cause. "Cause" for purposes of such termination shall mean the following: a. admission or conviction of an act of dishonesty by Executive with respect to the material interests of the Corporation; b. willful misfeasance or willful nonfeasance of a duty intended to injure or having the effect of injuring the reputation, business relationships of the Corporation, provided that for purposes hereof Executive shall not be deemed to have committed willful misfeasance or willful nonfeasance by reason of any act or failure to act by Executive done in good faith; c. conviction of Executive upon a charge of any crime involving moral turpitude or any felony reflecting unfavorably upon the Corporation; or d. Failure, neglect or refusal by Executive to perform his duties and responsibilities as set forth in this agreement (other than by reason of disability due to physical or mental illness or by reason of permitted vacations or holidays) without the same being corrected upon ninety (90) business days prior written notice from the Corporation specifying such non-performance. (4) Bankruptcy. This Agreement may be terminated by either party ---------- upon written notice to the other effective immediately if the other party to this Agreement: a. is adjudicated as a bankrupt; b. is subject to the entry of an order, judgment, or decree by any court of competent jurisdiction approving a petition appointing a trustee, receiver, or liquidator of all or a substantial part of the party's assets; c. makes or attempts to make an assignment for the benefit of creditors; or d. institutes or attempts to institute voluntary bankruptcy proceedings. Exhibit 7 - 4 (5) Death. This Agreement shall terminate upon the death of the Executive. ----- (6) Disability. This Agreement shall terminate upon the permanent ---------- disability of Executive. For the purposes of this Agreement, Executive shall be deemed permanently disabled if any ailment, illness or other incapacity prevents him from performing his duties as specified in this Agreement for a period of six consecutive months or for an aggregate of six months in any twelve month period from the date of this Agreement. (7) Purchase of Executive's Shares by WorldCom Inc. This Agreement shall --------------------------------------------- terminate on the Annual Renewal Date next following sale by Executive of all shares and options to purchase shares of the Corporation owned by him to WorldCom Inc. pursuant to Section 4.02 of that certain Preferred Stock, Subordinated Note and Warrant Purchase Agreement between WorldCom Inc. and the Corporation ("Preferred Stock Purchase Agreement"). (b) Consequences of Termination. --------------------------- (1) In the event of the termination of this Agreement in accordance with Subparagraph 5(a)(1) or 5(a)(3) above (voluntary termination or involuntary termination with cause), Executive shall be entitled to the base salary earned by him prior to the date of termination as provided herein computed on a pro rata basis to and including such date of termination. In addition, Executive shall also be reimbursed for his reasonable business expenses incurred prior to the date of termination. (2) In the event of the termination of this Agreement in accordance with Subparagraph 5(a)(7) above (purchase of Executive's shares by WorldCom), Executive shall be entitled to the base salary earned by him prior to the date of termination as provided herein computed on a pro rata basis to and including such date of termination. In addition, Executive shall also be reimbursed for his reasonable business expenses incurred prior to the date of termination. In the event termination pursuant to Subparagraph 5(a)(7) above occurs on or prior to December 31, 1999, then, to the extent that the consideration received by Executive in exchange for his options to purchase shares of the Corporation is a non-cash consideration, all stock options under the Stock Option Agreement (Exhibit A) that have not theretofore vested (including any and all options or rights received or exchanged therefor by Executive as a consequence of Exhibit 7 - 5 the transaction occurring pursuant to Section 4.02 of the Preferred Stock Purchase Agreement) shall immediately vest and become exercisable in accordance with the provisions of said Stock Option Agreement thereto applicable. In addition, in the event termination pursuant to Subparagraph 5(a)(7) occurs on or prior to December 31, 2000, then Executive shall also receive a lump sum payment in the amount of Seventy Five Thousand Dollars ($75,000). (3) If the Corporation terminates this Agreement without cause pursuant to Subparagraph 5(a)(2) above (involuntary without cause), Executive shall be entitled to receive a severance cash payment as liquidated damages for, and in lieu of, any and all damages which he may incur as a result of such termination in an amount equal to the greater of (i) the Executive's then base salary for two years, or (ii) the amounts reasonably estimated to be due hereunder for the two year period following the Annual Renewal Date upon which the termination becomes effective, which shall be payable within 30 days from the date of termination plus, in either case, one half of the cash bonus (determined pursuant to Paragraph 4(c) above relating to Bonus and Other Compensation), to which Executive would have been entitled had he continued in the employment of the Corporation for the year following termination, which payment shall be payable in accordance with Paragraph 4(b). Additionally, If the Corporation terminates this Agreement without cause pursuant to Subparagraph 5(a)(2) above, all stock options under the Stock Option Agreement (Exhibit A) that have not theretofore vested shall immediately vest and become exercisable in accordance with the provisions of said Stock Option Agreement. (4) In the event this Agreement is terminated due to the death (pursuant to Subparagraph 6(a)(5)) or disability (pursuant to Subparagraph 6(a)(6)) of Executive, Executive (or his estate) shall be entitled to his then base salary for a period of six months, plus the cash bonus payable with respect to the fiscal year of death or disability, in accordance with normal payment procedures under this Agreement. 6.) Non-Competition. Executive covenants and agrees that: --------------- (a) During the term of this Agreement, he shall not without the prior written consent of the Corporation, directly or indirectly, as an Executive, employer, agent, principal, proprietor, partner, stockholder, consultant, director, or corporate officer, engage in any business engaged in the high- Exhibit 7 - 6 speed, transaction based electronic data transportation and delivery business (the "Competitive Business") or render any services to any business that is engaged in a Competitive Business. (b) For a period of two years (the "Non-Competition Period") after Executive has ceased to be employed by the Corporation or any subsidiary of the Corporation, Executive shall not without the prior written consent of the Corporation: (1) directly or indirectly engage in, or (2) be employed by any person, firm, partnership, association, corporation or business organization, entity or enterprise that is, or is about to become, directly or indirectly engaged in, any Competitive Business. For purposes hereof, "Competitive Business" shall mean engaging or having a material interest, directly or indirectly as owner, employee, officer, director, partner, venturer or stockholder, capital investor, consultant, agent, principal advisor or otherwise, either alone or in association with others, in the operation of a high speed, transaction based, electronic data transportation and delivery business; provided, however, that the restrictions contained in this Subparagraph (b) shall not apply to any business that does not meet both of the following requirements: (1) the Corporation or a subsidiary of the Corporation shall have operated such business, or had such business in the planning or development stage therein, during the 120-day period immediately prior to Executive's ceasing to be employed by the Corporation or any subsidiary of the Corporation, and (2) Executive, during such period, shall have had substantial planning development, administrative or operational responsibilities for such business of the corporation or such subsidiary of the Corporation in such area. (c) Executive shall not during the Non-Competition Period (i) solicit any employee of the Corporation to engage in a Competitive Business, or (ii) personally solicit customers of the Corporation in a manner which is competitive with the Corporation. (d) If the scope of any restrictions contained in Subparagraphs 6(a), (b) or (c) hereof are too broad to permit enforcement of such restrictions to their full extent, then such restrictions shall be enforced to the maximum extent permitted by law, and Executive hereby consents and agrees that such scope may be judicially modified accordingly in any proceeding brought to enforce such restrictions. Ownership of less than five (5%) percent of the outstanding Exhibit 7 - 7 stock of a corporation traded on a national securities exchange shall not be deemed to breach or conflict with the provisions of Subparagraphs (a) or (b) of this Section 6. 7.) Trade Secrets. Executive 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, 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 this paragraph shall be a material breach of this Agreement. 8.) Disclosure and Assignment. Except as provided elsewhere in this ------------------------- Agreement, Executive 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, relating to high-speed, transaction based electronic data transportation and delivery services, which while the Executive is employed by the Corporation are made, conceived or reduced to practice by Executive, alone or with others, during or after usual working hours, either on or off the job, and Executive hereby assigns to the Corporation all such ideas, discoveries, inventions and improvements relating to high-speed, transaction based electronic data transportation and delivery to be the Corporation's exclusive property. 9.) Disclosure and Right of First Refusal. Paragraph 8 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 Executive's own time, and (1) --- --- which does not relate (a) directly to high-speed, transaction based electronic data transportation and delivery or (b) to the Corporation's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Executive for the Corporation. Executive 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 Executive and the Corporation. In the event the Corporation and Executive cannot agree on terms and Executive 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 Exhibit 7 - 8 Corporation, then the Corporation shall have the right and Executive shall have the obligation to offer to the Corporation the idea, discovery, invention or improvement on such terms as offered to the other party. 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 Executive 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 --- which was developed entirely on the Executive'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 Executive 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.) Assistance to the Corporation. Executive shall give the Corporation, ----------------------------- at the Corporation's expense, all assistance the Corporation reasonably requires to perfect, protect, and exercise the rights to all ideas, discoveries, inventions or improvements acquired by the Corporation pursuant to the assignment provisions of Paragraph 8 of this Agreement or the right of first refusal provisions of Paragraph 9 of this Agreement. 11.) Documents and Tangible Property. All documents or other tangible ------------------------------- property relating in any way to the business of the Corporation which are conceived or generated by Executive or come into Executive's possession during Executive's employment shall be and remain the Corporation's exclusive property, and Executive agrees to return all such documents and tangible property to the Corporation upon termination of Executive's employment by the Corporation or at such earlier or later time the Corporation may request Executive to do so. 12.) Remedies for Breach of Covenants of Executive. The covenants set --------------------------------------------- forth in Paragraphs 6, 7, 8, 9, 10 and 11 of this Agreement shall continue to be binding upon Executive, notwithstanding the termination of his employment with the Corporation for any reason whatsoever. Such covenants shall be deemed and construed as separate agreements independent of any other provisions of this Agreement. The existence of any claim or cause of action by Executive against the Exhibit 7 - 9 Corporation, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Corporation or any or all of such covenants. It is expressly agreed that the remedy at law for the breach of any such covenant is inadequate and that temporary and permanent injunctive relief shall be available to prevent the breach or any threatened breach thereof, without the necessity of proof of actual damages; provided, however, that it is expressly agreed that the provisions of Subparagraph 6(b) shall immediately become void and no longer of any effect whatsoever in the event of a merger or consolidation of the Corporation into another corporation in which the Corporation is not the surviving corporation or which requires the stockholders of the Corporation to exchange their shares of Common Stock of the Corporation for any other class of capital stock, expressly excepting any transaction involving the issuance of the capital stock of WorldCom Inc. The termination of such provision shall be effective on the effective date of such merger or consolidation. 13.) Notices. Any notices to be given hereunder by either party to the ------- other may be effected either by personal delivery in writing or by mail, registered or certified, postage prepaid, with return receipt requested. Personal delivery to the Corporation shall mean personal delivery to the Chairman of the Board of Directors. Mailed notices shall be addressed to the respective addresses shown below. Either party may change its address for notice by giving written notice in accordance with the terms of this Paragraph 13. (a) If to Executive: Allen L. Witters 9640 Eden Prairie Road Eden Prairie, Minnesota 55487 (b) If to the Corporation: Netco Communications Corporation 104 Union Plaza 333 North Washington Ave. Minneapolis, MN 55401 with a copy to: WorldCom Inc. 515 E. Amite Jackson, Mississippi 39201 Attention: K. William Grothe, Jr. Vice President Exhibit 7 - 10 14.) Successors and Assigns; Sale of Business. ---------------------------------------- (a) The Corporation's rights and obligations under this Agreement shall inure to the benefit of and shall be binding upon the Corporation's successors and assigns. (b) In the event of a merger or consolidation of the Corporation with any other corporation or corporations, the sale by the Corporation of a major portion of its assets or of its business and goodwill, or any other corporate reorganization involving the Corporation, this Agreement shall be assigned and transferred to such successor in interest as an asset of the Corporation; and the Corporation agrees that it shall make it a condition of such sale or transfer agreement that the purchaser or assignee shall assume the Corporation's obligations under this Agreement. (c) In the event of any such assignment, the Executive agrees to continue to perform his duties according to the terms of this Agreement to or for such assignee or transferee of this Agreement; provided, however, the Corporation shall remain secondarily liable as a guarantor of such assignee's or transferee's obligations to the Executive under this Agreement. The Executive acknowledges that his services are unique and personal, and, accordingly, the Executive may not assign his rights (except the right to receive payments due to him) or delegate his duties or obligations under this Agreement. 15.) General Provisions. ------------------ (a) Law Governing. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of Minnesota. (b) Invalid Provisions. If any provision of this Agreement is held to be ------------------ illegal, invalid, or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and still be legal, valid or enforceable. (c) Entire Agreement. This Agreement sets forth the entire understanding ---------------- of the parties and supersedes all prior agreements or understandings, whether written or oral, with respect to the subject matter hereof. The prior Employment Agreement dated September 24, 1994 between the parties hereto Exhibit 7 - 11 is terminated. No terms, conditions, warranties, other than those contained herein, and no amendment or modifications hereto shall be binding unless made in writing and signed by the parties hereto. (d) Binding Effect. This Agreement shall extend to and be binding upon -------------- and inure to the benefit of the parties hereto, their respective heirs, representatives, successors and assigns. This Agreement may not be assigned by Executive. (e) Waiver. The failure of either party to insist in any one or more ------ instances upon performance of any term or condition of this Agreement shall not be construed a waiver of its future performance. The obligations of either party with respect to such term, covenant or condition shall continue in full force and effect. (f) Titles. Titles of the paragraphs herein are used solely for ------ convenience and shall not be used for interpretation or construing any word, clause, paragraph, or provision of this Agreement. (g) Counterparts. This Agreement may be executed in two or more ------------ counterparts each of which shall be deemed an original, but which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Corporation and Executive have executed this Agreement as of the date and year first written "EXECUTIVE" NETCO COMMUNICATIONS CORPORATION ___________________________ By:___________________________ Allen L. Witters Edward J. Driscoll, III Chief Executive Officer Exhibit 7 - 12 Exhibit A to Executive Employment Agreement STOCK OPTION AGREEMENT THIS AGREEMENT, made and entered into as of and effective this ___ day of November 1996, by and between NETCO COMMUNICATIONS CORPORATION, a Minnesota corporation (hereinafter referred to as the "Corporation") and ALLEN WITTERS, a resident of the State of Minnesota (hereinafter referred to as the "Executive"). WHEREAS, the Corporation considers it desirable and in its best interests that the Executive 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: Section I - Grant of Option 1.01 Grant of Option. The Corporation grants to Executive an Option --------------- (the "Option") to purchase FOUR HUNDRED THOUSAND (400,000) common shares of the Corporation at a purchase price of $4.81 per share. Section III - Term and Duration 2.01 Term and Duration. The Option shall have a term commencing with the ----------------- date first above written and expiring on December 31, 2007. Section III - Vesting 3.01 Vesting of Option. Subject to earlier vesting and exercise provisions ----------------- of Paragraph 3.02 hereof, the Option shall vest and may be exercised in incremental amounts at the rate of fifty (50) shares for each Installed Customer Site that becomes first installed during a calendar quarter during the term of the Option, commencing with the calendar quarter ending March 31, 1997, and for each successive calendar quarter through expiration of the term of the Option. 3.02 Earlier Vesting of Option. The provisions of Paragraph 3.01 to the ------------------------- contrary notwithstanding, the Option shall immediately vest and become immediately exercisable in its entirety in any of the following events: Exhibit 7A - 1 Allen Witters Stock Option Agreement ________, 1996 (a) Executive's employment by the Corporation is terminated "involuntarily without cause" as that phrase is defined in that certain Employment Agreement (the "Employment Agreement") between the Corporation and the Executive, dated of even date with this Stock Option Agreement; (b) The Employment Agreement is terminated pursuant to Section 5(a)(7) of the Employment Agreement prior to December 31, 1999. (c) An Acquisition or Change of Control occurs during the period commencing January 1, 1997 and ending January 31, 1999. 3.03 Definitions. For purposes of this Section 3, the following words shall ----------- have the meanings ascribed to them. (a) Acquisition. "Acquisition" means either (i) the purchase of all or ----------- substantially all of the assets of the Corporation by any person or party, or (ii) the merger or consolidation of the Corporation with any person or party; provided that neither (i) the purchase of all or substantially all of the assets of the Corporation by WorldCom Inc., nor (ii) a merger or consolidation in which the shares of the Corporation are exchanged for shares WorldCom Inc., of a class that is registered under the Securities Exchange Act of 1934 shall be deemed to be an "acquisition" for purposes hereof. (b) Change of Control. "Change of Control" means the election by ----------------- shareholders of the Corporation of a majority of directors of the Corporation who were not recommended by the Corporation's executive management for nomination for election as directors, provided that election of a majority of the directors of the Corporation who receive the affirmative vote of WorldCom Inc., shall not be deemed a change of control. (c) Customer. "Customer" shall mean a customer of the Corporation who has -------- subscribed to, and agreed to pay for, Use Fees for use of the Corporation's WAM!NET Service. (d) Installed Customer Site. "Installed Customer Site" shall mean a ----------------------- customer that has been continually connected to the Corporation's WAM!NET Service for at least Ninety (90) days or has begun either (i) to pay minimum monthly Use Fees under a service agreement Exhibit 7A - 2 Allen Witters Stock Option Agreement ________, 1996 or (ii) to incur use charges under an agreement having no minimum monthly Use Fees. (e) Use Fees. "Use Fees" shall mean fees payable by a Customer for use of -------- WAM!NET Services, and shall include fees payable by a Customer relating to remote proofing and digital image archiving and retrieval services. (f) WAM!NET Service. "WAM!NET Service" shall mean the Corporation's --------------- WAM!NET(TM) Electronic Data Transportation and Delivery Service (the "WAM!NET Service") as presently configured or as may be configured in the future, and shall include services relating to remote proofing and digital image archiving and retrieval services. Section IV - Exercise and Payment 4.01 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, accompanied by payment in cash or exercise of the Conversion Right as provided, respectively, in Paragraphs 4.02 or 4.03 hereof, or by some combination thereof. The notice shall specify how many shares are being acquired for cash in accordance with Paragraph 4.02 hereof, and how many by exercise of the Conversion Right in accordance with Paragraph 4.03 hereof. The notice shall also be accompanied by any document reasonably required by the Corporation to be executed by Executive acknowledging the applicable restrictions on the transfer of the common shares being purchased as set forth under Section 7.02 of this Agreement. 4.02 Payment in Cash. The notice specified in Paragraph 4.01 hereof shall --------------- be accompanied by payment of the option price for the shares being purchased for cash, which shall be in the form of cash or 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 acceptable to the Corporation. 4.03 Payment by Exercise of Conversion Right. In the alternative, the --------------------------------------- notice specified in Paragraph 4.01 hereof shall be accompanied by payment for the shares being purchased by exercise of the Conversion Right provided in this paragraph. The holder of this option shall have the right to require the Corporation to convert this option, to the extent then vested, to shares of Common Stock of the Corporation at any time prior to December 31, 2006. Upon exercise of the Conversion Right, the Corporation shall deliver to the holder of this Option (without payment of the exercise price in cash or check as provided Exhibit 7A - 3 Allen Witters Stock Option Agreement ________, 1996 in Paragraph 4.02 hereof) shares of the Corporation's common Stock in number equal to the quotient obtained by dividing (a) 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, as determined immediately prior to the exercise of the Conversion Right, of the aggregate Fair Market Value of the shares for which the Option may be exercised by (b) the Fair Market Value of one share of common stock immediately prior to the exercise of the Conversion Right. The immediately preceding formula is illustrated by the following example where (i) the number of optioned shares being acquired by exercise of the Conversion Right is 10,000, (ii) the per share exercise price of the Option is $4.81, and (iii) the applicable Fair Market Value is $14.43: [(10,000 x 14.43) - (10,000 x 4.81)] / 14.43 = [144,300 - 48,100] / 14.43 = 96,200/14.43 = 6,667 shares. 4.04 Delivery of Certificates. Upon receipt of the Notice of Exercise, ------------------------ together with any document specified in Paragraph 4.01 hereof accompanied by payment in accordance with either Paragraph 4.02 or 4.03 hereof, the Corporation will deliver to the holder of this Option a certificate or certificates for the number of shares of common stock issuable thereupon, together with a payment in cash in lieu of any fraction of a share. 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. 4.05 Fair Market Value. "Fair Market Value" of a share of the ----------------- Corporation's common stock as of a particular date (the "Determination Date") shall mean: (a) If the Corporation'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 Corporation's common stock is not traded on an exchange or on NASDAQ but is traded in the over-the-counter securities market, then the average closing bid and asked prices reported for Exhibit 7A-4 Allen Witters Stock Option Agreement ________, 1996 the ten (10) business days immediately preceding the Determination Date; and (c) If the Corporation'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 a national investment banking firm whom, upon request of the holder of this Option, the Corporation shall select and retain to render such valuation. Section V - Termination 5.01 Termination of Option. Except as herein otherwise provided, the --------------------- Option granted under this Agreement, to the extent not theretofore exercised, shall terminate upon the first to occur of the following events: (a) Ninety (90) days following the Executive's voluntary termination of Executive's employment by the Corporation. (b) Ninety (90) days following the Executive's termination of employment by the Corporation "involuntarily for cause" as that phrase is defined in the Employment Agreement. (c) The expiration of twelve months from the date of Executive's death should Executive die within three months of termination of employment by the Corporation. (d) 11:59 PM Minneapolis, Minnesota, local time on December 31, 2007. 5.02 Governing Date. 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 after Dec. 31, 2007. Section VI - Reclassification, Consolidation or Merger 6.01 Reclassification, Split or Dividend. 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. Exhibit 7A-5 Allen Witters Stock Option Agreement ________, 1996 6.02 Consolidation or Merger. If the Corporation is reorganized or ----------------------- consolidated or merged with another corporation, the Executive shall be entitled to receive an option (the "New Option") covering common shares of such reorganized, consolidated or merged Corporation 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 Executive additional benefits which he does not have under this Option, or deprive him of benefits which he has under this Option. VII - Rights and Restrictions 7.01 Rights Prior to Exercise of Option. This Option is non- ---------------------------------- transferable by Executive, 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 in accordance with Section 4.02 or 4.03 hereof, and delivery to him of such common shares as herein provided. 7.02 Restriction on Disposition. All common shares acquired by -------------------------- Executive 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 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 except in accordance with applicable exemptions from registration under applicable federal and state laws or pursuant to registration thereunder. 7.03 Refusal Option. All common shares acquired by Executive pursuant -------------- to this Agreement shall be subject to the Right of Refusal Agreement among Executive, Edward J. Driscoll, III and WorldCom Inc. VIII - Miscellaneous 8.01 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. Exhibit 7A-6 Allen Witters Stock Option Agreement ________, 1996 8.02 Construction. This Agreement shall be construed in accordance with ------------ the laws of the State of Minnesota, excluding the conflicts of laws provisions thereof. This Agreement shall also be construed, to the extent practicable, consistently with the Employment Agreement between the Corporation and the Executive dated as of the date first above written. In witness whereof, the parties have signed this Incentive Stock Option Agreement the day and year first above written. "Executive" "Corporation" Netco Communications Corporation By:_______________________ By:___________________________ Allen Witters Edward J. Driscoll, III Exhibit 7A-7 Exhibit 8 RIGHT OF REFUSAL AGREEMENT THIS RIGHT OF REFUSAL AGREEMENT (Agreement) is made this ____ day of November, 1996, by and among WorldCom, Inc., a Georgia corporation ("WCOM"), Edward J. Driscoll, III ("Driscoll") and Allen L. Witters ("Witters"). RECITALS Netco Communications Corporation, a Minnesota Corporation ("Netco"), is engaged in the design, development and deployment of a high-speed, transaction based electronic data transportation and delivery service. Netco presently serves as its own transfer agent for its Common Stock. Driscoll is the Chief Executive Officer of Netco. Driscoll owns four hundred thousand (400,000) shares of the Common Stock of Netco represented by Certificate No. 1 standing in his name on the books and records of Netco, and also enjoys an option to acquire, according to the terms thereof, an additional four hundred thousand (400,000) shares of the Common Stock of Netco. The four hundred thousand (400,000) shares of Netco Common Stock presently owned by Driscoll, together with any additional shares of Netco Common Stock which Driscoll may acquire in the future by reason of the exercise of the option or otherwise are herein referred to as the "Driscoll Shares". Witters is the Chief Technology Officer of Netco. Witters owns four hundred thousand (400,000) shares of the Common Stock of Netco represented by Certificate No. 2 standing in his name on the books and records of Netco, and also enjoys an option to acquire, according to the terms thereof, an additional four hundred thousand (400,000) shares of the Common Stock of Netco. The four hundred thousand (400,000) shares of Netco Common Stock presently owned by Witters, together with any additional shares of Netco Common Stock which Witters may acquire in the future by reason of the exercise of the option or otherwise are herein referred to as the "Witters Shares". Driscoll and Witters are each founders of Netco and comprise its principal executive and technical management. The Driscoll Shares and the Witters Shares are sometimes referred to herein as "Shares." WCOM and Netco, have concurrently herewith, and contingent upon the execution hereof, entered into a certain Preferred Stock, Subordinated Note and Warrant Purchase Agreement (the "WCOM Agreement"), contemplating a substantial investment by WCOM into Netco. Exhibit 8-1 WCOM, Driscoll and Witters each desire preserve and provide for the successful continuity of Netco's management and thereby to provide for the orderly disposition of the Driscoll Shares and the Witters Shares under the circumstances contemplated in this Agreement. In consideration of WCOM entering into the WCOM Agreement with Netco, and in the further consideration of the mutual promises, covenants and conditions herein contained, and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, Driscoll, Witters and WCOM agree as follows: 1.) Restriction on Transfer. Neither Driscoll nor Witters may sell or ----------------------- engage in any transaction which will result in a change of beneficial or record ownership of any of the Shares held by them including, without limitation, a voluntary or involuntary sale, assignment, transfer, pledge, hypothecation, encumbrance, disposal, loan, gift, attachment or levy (a transfer) except as provided in this Agreement, and any transfer of the Shares or attempt to transfer the Shares in contravention of this Agreement shall be void and ineffective for any purpose or confer in any transferee or purported transferee any rights whatsoever. This restriction shall apply only to the Shares identified in the Recitals, and shall not apply to other shares of Netco which either Driscoll or Witters may acquire in the future. 2.) Rights of First and Second Refusal. In the event either Driscoll ---------------------------------- or Witters (the "Selling Shareholder") proposes to transfer or is required by operation of law or other involuntary transfer any or all of the Shares (the "Offered Shares") then standing in the his name during the term of this Agreement, he shall first offer such shares to the other ("Offeree") in accordance with the following provisions: (a) The Selling Shareholder shall deliver written notice (Notice) to the Offeree, to WCOM and to NETCO stating (i) the Selling Shareholder's intention to transfer the Offered Shares, (ii) the identity of the proposed transferee, (iii) the price at which the Selling Shareholder proposes to transfer the Offered Shares, and (iv) the terms of payment upon which the Offered Shares are proposed to be transferred. (b) Within thirty (30) days after receipt of the Notice, the Offeree shall have the first right to purchase or obtain such shares, upon the price and the terms of payment designated in the Notice. (c) If the Offeree elects not to purchase or obtain all of the Offered Shares designated the Notice, then WorldCom shall have thirty (30) days to purchase or obtain such of the Shares not acquired by the Offeree, at the price and terms of payment designated in the Notice. Exhibit 8-2 (d) If neither the Offeree nor WCOM elect to purchase or obtain all of the shares designated in the Notice, then the Selling Shareholder may transfer the shares referred to in the Notice to the proposed transferee named therein, providing (i) such transfer is completed within sixty (60) days following expiration of WorldCom's right to purchase or obtain such shares, and (ii) is made at the price and on the terms designated in the Notice. (e) Any of the Shares once offered pursuant to this Paragraph 2 which are not sold and transferred in accordance with the provisions of Subparagraph 2(d) must be again offered to the Offeree Shareholder and to WCOM by Notice in accordance with this Paragraph 2 prior to any other or subsequent proposed transfer of Shares. 3.) Legend on Stock Certificates. (a) Each certificate representing ---------------------------- the Shares now owned (or hereafter issued pursuant to exercise of the stock options referred to in the Recitals) shall be endorsed prominently with the following legend: THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO A SHAREHOLDER RIGHT OF FIRST AND SECOND REFUSAL AGREEMENT BETWEEN WORLDCOM, INC., AND THE SHAREHOLDERS THAT ARE SIGNATORY THERETO, PROVIDING FOR, AMONG OTHER MATTERS, A RIGHT OF FIRST REFUSAL IN FAVOR OF THE SIGNATORY SHAREHOLDERS AND WORLDCOM TO PURCHASE THE SECURITIES REPRESENTED BY THIS CERTIFICATE. A COPY OF THE AGREEMENT IS ON FILE AT THE PRINCIPAL BUSINESS OFFICE OF NETCO COMMUNICATIONS CORPORATION, 102 UNION PLAZA, 333 N. WASHINGTON AVENUE, MINNEAPOLIS, MINNESOTA 55401. (b) Driscoll and Witters each agree to promptly present the certificates representing the Shares held by each, respectively, to Netco for endorsement with the above referenced legend. (c) Driscoll and Witters each agree that Netco may enter stop transfer instructions against any transfer of any of the Shares made in contravention of the provisions of Paragraph 2 of this Agreement, whether such shares be represented by a certificate issued to them or be uncertificated shares of Netco. 4.) Term of the Agreement. The restrictions on transfer of Shares set --------------------- forth in Paragraph 1 of this Agreement together with the obligations of Notice and offer set forth in Paragraph 2 of this Agreement shall immediately terminate upon the earlier to occur of any of the following: (a) Upon the dissolution or bankruptcy of Netco. Exhibit 8-3 (b) Upon Netco's becoming required to file periodic reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934. (c) Upon December 31, 2000. (d) Upon consummation of a sale made in accordance with Paragraph 2 of this Agreement to a person who is not a party to this Agreement. 5.) Modification. This Agreement, as applied to any Shareholder, may ------------ be amended at any time by the written agreement of WorldCom and a Shareholder affected thereby. 6.) Notice. Any Notice required or permitted hereunder shall be ------ delivered in person or sent by telecopier, air courier, or certified mail, return receipt requested, postage and fees prepaid in all cases to the person entitled to receive such Notice addressed as follows: Exhibit 8-4 (a) If to Driscoll: Edward J. Driscoll 2500 Christian Drive Chaska, Minnesota 55318 (b) If to Witters: Allen L. Witters 9640 Eden Prairie Road Eden Prairie, Minnesota 55437 (c) If to WCOM: WorldCom Inc. 515 E. Amite Jackson, Mississippi 39201 Attention: K. William Grothe, Jr. Vice President (b) If to Netco: Netco Communications Corporation 104 Union Plaza 333 North Washington Ave. Minneapolis, MN 55401 with a copy to: WorldCom Inc. 515 E. Amite Jackson, Mississippi 39201 Attention: K. William Grothe, Jr. Vice President Notice shall be effective upon delivery if it is hand delivered; upon receipt if it is transmitted by telecopier, air courier or registered, certified, or express mail; upon expiration of the third business day after deposit on the United States mail if mailed from and to an address in the United States; and upon expiration of the tenth (10th) business day after deposit on the United States mail if mailed from or to an address outside the United States. 7.) Succession. This Agreement shall be binding upon and inure to the ---------- benefit of parties hereto and upon their permitted successors and interests of any kind whatsoever, their heirs, executives, administrators and personal representatives. Exhibit 8-5 8.) Governing Law. This Agreement shall be governed in all respects by ------------- the laws of the State of Minnesota as such laws are applied to agreements between residents entered into and to be performed entirely within Minnesota and without regard to the conflicts of law provisions thereof. The parties hereby irrevocably consent to the exclusive jurisdiction and venue of the state or federal courts located in the State of Minnesota, County of Hennepin, for the resolution of any disputes arising out of this Agreement. 9.) Counterparts. This Agreement may be signed in any number of ------------ counterparts, each of which will be an original, but all of which together will constitute one and the same instrument. 10.) Sole Agreement. This Agreement constitutes the entire agreement -------------- and understanding of the parties hereto with respect to the subject matter hereof and supersedes any and all prior or contemporaneous agreements and understandings pertaining thereto whether oral or written. 11.) Construction. The titles of the sections of this Agreement are for ------------ convenience of reference only and are not to be considered in construing this Agreement. The language of this Agreement shall be construed for its fair meaning and not strictly for or against any party. 12.) Effectiveness. This Agreement shall become effective as of the day ------------- and year first above written upon the acknowledgment and consent of Netco in accordance with the Acknowledgment appended to this Agreement. Exhibit 8-6 IN WITNESS WHEREOF, the parties have executed this Right of Refusal Agreement as of the day and year first above written. WORLDCOM, INC. EDWARD J. DRISCOLL, III By:___________________________ ____________________________ K. William Grothe, Jr. Edward J. Driscoll, III Vice President ALLEN L. WITTERS ____________________________ Allen L. Witters EXHIBIT 8-7 ACKNOWLEDGMENT Netco Communications Corporation, a Minnesota corporation, acting in its capacity as transfer agent for its Common Stock, hereby acknowledges its receipt of the Right of Refusal Agreement, dated as of November__, 1996, among Edward J. Driscoll, III, Allen L. Witters and WorldCom, Inc. NETCO COMMUNICATIONS CORPORATION Date: _________________________ By:_____________________________ Edward J. Driscoll, III President Exhibit 8-8 Exhibit 9 Opinion of Counsel (date) Board of Directors WorldCom Inc. 515 E. Amite Jackson, Mississippi 39201 Ladies and Gentlemen: I have acted as counsel for Netco Communications Corporation, a Minnesota corporation (the "Company"), in connection with the execution and delivery by the Company of a certain Preferred Stock, Subordinated Note and Warrant Purchase Agreement (the "Investment Agreement") dated as of November 14, -------------------- 1996, between the Company and WorldCom Inc. ("WCOM"), together with the execution and delivery by the Company of a 7% Subordinated Note due December 31, 2003 (the "Note") in principal face amount of Twenty Eight Million Five Hundred ---- Thousand Dollars ($28,500,000) in favor of WCOM, of a Warrant Certificate (the "Warrants") representing the right to purchase up to Four Million One Hundred -------- Fifty Seven Thousand Five Hundred (4,157,500) shares of the Company's Common Stock, par value $.01 per share, and the issuance of 100,000 shares of $10,00 par value Class A Preferred Stock of the Company (the "Preferred Stock"), in accordance with the terms thereof, and the execution of an Executive Employment Agreement (the "Driscoll Employment Agreement") dated as of ___________, 1996, ----------------------------- between the Company and Edward J. Driscoll, III, and of an Executive Employment Agreement (the "Witters Employment Agreement") dated as of _____________, 1996, ---------------------------- between the Company and Allen L. Witters. This opinion is delivered to you pursuant to Paragraph 8.02(h) of the Investment Agreement. The Investment Agreement, the Note, the Warrants, the Preferred Stock, the Driscoll Employment Agreement and the Witters Employment Agreement are sometime collectively referred to herein as the "Agreements." Capitalized terms ---------- appearing herein that are not otherwise defined shall have the meanings ascribed to them in the Agreements. For purposes of this opinion, I have reviewed such questions of law and examined such corporate records, certificates and other documents as I have Exhibit 9-1 Board of Directors WorldCom Inc. __________________,1996 page 2 considered necessary or appropriate. As to various questions of fact, I have relied without investigation upon representations made in the Agreements and upon certificates of officers of the Company. I have also examined such certificates of public officials, corporate documents and records, and other certificates and instruments, and have engaged in such other investigation as I have deemed necessary in connection with the opinions hereinafter set forth. I have assumed the authenticity of all documents submitted to me as originals, the genuineness of all signatures, the legal capacity of natural persons, the conformity to the originals of all documents submitted to me as copies, the valid execution of all agreements and documents referred to herein by all parties thereto other than the Company and the enforceability of such agreements against all parties other than the Company. Whenever the opinions expressed herein or matters set forth in "Scope of Opinion" are qualified by or use the phrase "to my knowledge," "known to me" or words of like import, it indicates that during the course of my representation of the Company and after reasonable inquiry limited as described in this letter with respect to the subject matter of any such opinion, no information has come my attention for such purpose, which would give me knowledge of the existence or nonexistence of relevant facts. No inference as to my knowledge of the existence or nonexistence of any facts should, or may be, drawn merely from the fact that I represent the Company. Based upon and subject to the foregoing and subject to the limitations and qualifications set forth in "Scope of Opinion," I am of the opinion that, under applicable law in effect on the date of this opinion: 1. The Company is duly organized, validly existing and in good standing as a corporation under the laws of the state of Minnesota, has all corporate power and authority to own its properties and to carry on its businesses as now being 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, have not had a materially adverse effect on the Company. 2. The Company has full corporate power and authority to enter into the Agreements, and the Agreements have been duly authorized, executed and delivered, and, in the case of the Preferred Stock, issued by the Company, and constitute valid, legal and binding obligations of the Company, and, in the case of the Driscoll Employment Agreement and the Witters Employment Agreement, of Driscoll and Witters respectively, Exhibit 9-2 Board of Directors WorldCom Inc. __________________,1996 page 3 enforceable in accordance with their respective terms (except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally and subject to general principles of equity); the execution, delivery and performance of the Agreements and the consummation of the transactions therein contemplated will not result in breach or violation of any of the terms and provisions of, or constitutes a default under, any applicable statute, rule or regulation, any material agreement or instrument known to me to which the Company is a party or by which it is bound or to which any of its property is subject, the Company's articles of incorporation or by-laws, or any order or decree known to me of any court or governmental agency or body having jurisdiction over the Company or any of its respective properties; and no additional consent, approval, authorization or order of, or filing with, any court or governmental agency or body is required for the execution, delivery and performance of this Agreement, or for the consummation of the transactions contemplated hereby and thereby. Scope of Opinion ---------------- The foregoing opinions are limited to the laws of the state of Minnesota and the laws of the United States of America, and the opinions given hereunder are limited thereto. I express no opinion as to the enforceability of cumulative remedies to the extent such cumulative remedies purport to compensate, or would have the effect of compensating, the party entitled to the benefits thereof in an amount in excess of the actual loss suffered by such party. Insofar as this opinion relates to the enforceability of any document or instrument, it is subject to (a) all applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the rights of creditors generally, (b) judicial limitations on the right of specific performance and other general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law which may affect the remedies provided therein and (c) limitations on the enforceability of any indemnification or contribution provisions thereof as may be limited by federal or state securities laws or other applicable laws. In rendering the opinions expressed above, I have relied upon the representation of WCOM set forth in the Investment Agreement, without investigation, that WCOM is an "accredited" investors, as such term is defined under Rule 501(a) of Regulation D under the Securities Act of 1933 (the "1933 Exhibit 9-3 EX-10.4 21 $28,500,000 SEVEN PERCENT SUBORDINATED NOTE EXHIBIT 10.4 Registered Holder: WorldCom Inc. $28,500,000.00 NETCO COMMUNICATIONS CORPORATION 102 UNION PLAZA 333 NORTH WASHINGTON AVENUE MINNEAPOLIS, MINNESOTA 55401 7% Subordinated Note Due December 31, 2003 For Value Received, NETCO COMMUNICATIONS CORPORATION, a Minnesota corporation, (hereinafter called the "Issuer") hereby promises to pay to the order of WorldCom Inc., or the registered holder (hereinafter referred to as the "Holder") the principal amount of Twenty Eight Million Five Hundred Thousand Dollars ($28,500,000), or such lesser amount as has been actually advanced to Issuer by Holder pursuant to that certain Preferred Stock, Subordinated Note and Warrant Purchase Agreement dated November 14, 1996, as amended, 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 December 31, 2003, or sooner as hereinafter provided. 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 seven percent (7%) per annum. Interest shall accrue from the date of purchase of this Note (hereinafter, the "Note"), and be payable on June 30 and December 31 of each year, commencing with the first interest payment on December 31, 1996. The Issuer shall, upon request of the registered Holder, mail a check or draft representing such interest to the registered holder at the address designated by the registered holder and appearing on the books of registration maintained by the Issuer. Except as otherwise provided in Atricle 2, no interest shall accrue or be paid on this Note after December 31, 2003. If any payment due hereunder is not received by the Holder within 15 days from the date due, Issuer shall pay a late payment charge of Five Dollars ($5.00) or four percent (4%) of the amount of the delinquency, whichever is greater. The following terms, covenants, 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 of the principal and interest on all existing or future obligations of the Issuer for money borrowed from a bank, trust, insurance, or other financial institution engaged in the business of lending money, which is hereinafter referred to as "Senior Indebtedness." In the event of any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangement with creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Issuer, or in the event the Note shall be declared due and payable upon the occurrence of an event of default (as specified herein), (1) no amount shall be paid by the Issuer in respect of the principal or interest on this Note at the time outstanding, unless and until the principal of and interest on the Senior Indebtedness then outstanding shall have been paid in full, and (2) no claim or proof of claim shall be filed with the Issuer by or on behalf of the holder of this Note which shall assert any right to receive any payments in respect of the principal of and interest on this Note except subject to the payment in full of the principal and interest of all of the Senior Indebtedness then outstanding. ARTICLE 2 EVENT OF DEFAULT 2.1) Each of the following shall constitute an Event of Default: (a) Failure to pay interest when due, continued for thirty (30) days; (b) Failure to pay principal or premium when due; (c) 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 7 or 11 of the United States Bankruptcy Code, as the same may be amended. 2.2) Upon the occurrence of any Event of Default specified in Section 2.1(c) 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 Section 2.1 (a) or Section 2.1 (b) above, the holder of this Note shall have the sole option of declaring the unpaid principal 2 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 at a rate equal to two percent (2%) per annum in excess of the then 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 of 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 3.1) This Note may be prepaid at any time, in whole or in part, prior to maturity at the option of the Issuer, 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 payment. 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 cease to bear interest on the portion to be prepaid, as set forth in the notice, unless payment hereof is refused upon the presentation of the same at or after the time specified in such notice. ARTICLE 3 PAYMENT 4.1) 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. 4.2) No recourse shall be had for the payment of the principal, or interest, or for any claim based thereon, or otherwise, against any incorporator, shareholder, officer, director, or agent, past, present, or future, of the Issuer, whether by virtue of any 3 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 5 DIVIDENDS 5.1) Until payment in full 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. ARTICLE 6 NOTICE 6.1) All notices, requests, demands and other communications under this Note shall be in writing and shall be 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 6.1 by giving the other party written notice of the new address in the manner set forth above. ARTICLE 7 MISCELLANEOUS 7.1) 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. 7.2) 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. 7.3) The remedies of Holder as provided herein shall be cumulative and concurrent, and may be pursued singly, successively or together against Issuer at the 4 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. 7.4) 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 President and Secretary. Dated: December 16, 1996 NETCO COMMUNICATIONS CORPORATION By: /s/ Edward J. Driscoll, III -------------------------------- Edward J. Driscoll, III President and Secretary 5 EX-10.5 22 CERTIFICATE - CLASS A PREFERRED STOCK EXHIBIT 10.5 NUMBER SHARES - --------------- ----------------- A-1 100,000 - --------------- ----------------- [LOGO OF NETCO COMMUNICATIONS CORPORATION APPEARS HERE] THIS CERTIFIES THAT WorldCom Inc. is the ----------------------------------------------------- registered holder of One Hundred Thousand ----------------------------------------------------- Shares of Class A Preferred Stock, par value $10.00 per share (see reverse), 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 and its Corporate Seal to be hereunto affixed this 16th day of December A.D. 96 /s/ Edward J. Driscoll, III ---------------------------------- Edward J. Driscoll, III, President EX-10.6 23 WARRANTS TO PURCHASE SHARES EXHIBIT 10.6 EXERCISABLE ON OR BEFORE, AND VOID AFTER 5:00 P.M. MINNEAPOLIS TIME DECEMBER 31, 2000 Certificate for 4,157,500 Warrants WARRANTS TO PURCHASE COMMON STOCK OF NETCO COMMUNICATIONS CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA THIS CERTIFIES that 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 Netco Communications Corporation, a Minnesota corporation (the "Company"), at any time on or before 5:00 Minneapolis time, December 31, 2000, 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 $4.81 per share (the "Initial Exercise Price" subject to adjustments as noted subsequently). 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 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 or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of its 2 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) The Initial Exercise Price of $4.81 per share shall increase to $4.91 per share on March 31, 1997, and shall thereafter increase by the amount of $.08 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 (such increases beginning with the calendar quarter ending June 30, 1997, being referred to as the "Quarterly Increase"); provided, that to encourage earlier partial exercise of the Warrants, the amount of each Quarterly Increase shall be abated at the rate of $.00875 per share (the "Abatement") for each incremental purchase of aggregated amounts of Five Hundred Thousand (500,000) shares upon partial exercise of this Warrant. Each Abatement shall take effect on the last day of the calendar quarter during which such partial exercise and purchase occurred, as illustrated by the following examples: (i) the purchase of One Million Five Hundred Thousand (1,500,000) shares during the second calendar quarter of 1998 would result in a reduction, commencing June 30, 1998, of the Quarterly Increase to .05375 per share for each subsequent calendar quarter; (ii) the further purchase of Five Hundred Thousand (500,000) shares during the third calendar quarter of 1998 would result in a further reduction, commencing September 30, 1998, of the Quarterly Increase to $.045 per share for each subsequent calendar quarter. The exercise price computed from time to time in accordance with this provision shall be referred to as the "Current Exercise Price." (d) In case the Company shall at anytime hereafter subdivide or combine the outstanding shares of Common Stock or declare a dividend payable in Common Stock, the exercise price of this Warrant in effect immediately prior to the subdivision, combination or record date for such dividend payable in Common Stock shall forthwith be proportionately increased, in the case of combination, or decreased, in the case of subdivision or dividend payable in Common Stock, and each share of Common Stock purchasable upon exercise of the Warrant shall be changed to the number determined by dividing the then Current Exercise Price by the exercise price as adjusted after the subdivision, combination, or dividend payable in Common Stock. (e) No fractional shares of Common Stock are to be issued upon the exercise of the Warrant, but the Company shall pay a cash 3 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. (f) 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. (g) 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 4 (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). (h) Upon any adjustment of the Current Exercise Price, then and in each such case, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the registered holder of this Warrant at the address of such holder as shown on the books of the Company, which notice shall state the exercise price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 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 5 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. 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 three (3) years ------------------- from the date hereof until two (2) years after the complete exercise of this Warrant, but in any event no later March 31, 2003, 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. 6 IN WITNESS WHEREOF, Netco Communications Corporation, Inc. has caused this Warrant to be signed by its duly authorized officer and this Warrant to be dated December 16, 1996. NETCO COMMUNICATIONS CORPORATION By: /s/ Edward J. Driscoll, III ---------------------------------- Edward J. Driscoll, III President 7 EX-10.7 24 RIGHT OF REFUSAL AGREEMENT EXHIBIT 10.7 RIGHT OF REFUSAL AGREEMENT THIS RIGHT OF REFUSAL AGREEMENT (Agreement) is made effective as of this 16th day of December, 1996, by and among WorldCom, Inc., a Georgia corporation ("WCOM"), Edward J. Driscoll, III ("Driscoll") and Allen L. Witters ("Witters"). RECITALS Netco Communications Corporation, a Minnesota Corporation ("Netco"), is engaged in the design, development and deployment of a high-speed, transaction based electronic data transportation and delivery service. Netco presently serves as its own transfer agent for its Common Stock. Driscoll is the Chief Executive Officer of Netco. Driscoll owns four hundred thousand (400,000) shares of the Common Stock of Netco represented by Certificate No. 1 standing in his name on the books and records of Netco, and also enjoys an option to acquire, according to the terms thereof, an additional four hundred thousand (400,000) shares of the Common Stock of Netco. The four hundred thousand (400,000) shares of Netco Common Stock presently owned by Driscoll, together with any additional shares of Netco Common Stock which Driscoll may acquire in the future by reason of the exercise of the option or otherwise are herein referred to as the "Driscoll Shares". Witters is the Chief Technology Officer of Netco. Witters owns four hundred thousand (400,000) shares of the Common Stock of Netco represented by Certificate No. 2 standing in his name on the books and records of Netco, and also enjoys an option to acquire, according to the terms thereof, an additional four hundred thousand (400,000) shares of the Common Stock of Netco. The four hundred thousand (400,000) shares of Netco Common Stock presently owned by Witters, together with any additional shares of Netco Common Stock which Witters may acquire in the future by reason of the exercise of the option or otherwise are herein referred to as the "Witters Shares". Driscoll and Witters are each founders of Netco and comprise its principal executive and technical management. The Driscoll Shares and the Witters Shares are sometimes referred to herein as "Shares." WCOM and Netco have, contingent upon the execution hereof, entered into a certain Preferred Stock, Subordinated Note and Warrant Purchase Agreement, dated November 14, 1996, as amended (the "WCOM Agreement"), contemplating a substantial investment by WCOM into Netco. WCOM, Driscoll and Witters each desire preserve and provide for the successful continuity of Netco's management and thereby to provide for the orderly disposition of the Driscoll Shares and the Witters Shares under the circumstances contemplated in this Agreement. In consideration of WCOM entering into the WCOM Agreement with Netco, and in the further consideration of the mutual promises, covenants and conditions herein contained, and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, Driscoll, Witters and WCOM agree as follows: 1.) Restriction on Transfer. Neither Driscoll nor Witters may sell or ----------------------- engage in any transaction which will result in a change of beneficial or record ownership of any of the Shares held by them including, without limitation, a voluntary or involuntary sale, assignment, transfer, pledge, hypothecation, encumbrance, disposal, loan, gift, attachment or levy (a transfer) except as provided in this Agreement, and any transfer of the Shares or attempt to transfer the Shares in contravention of this Agreement shall be void and ineffective for any purpose or confer in any transferee or purported transferee any rights whatsoever. This restriction shall apply only to the Shares identified in the Recitals, and shall not apply to other shares of Netco which either Driscoll or Witters may acquire in the future. 2.) Rights of First and Second Refusal. In the event either Driscoll or ---------------------------------- Witters (the "Selling Shareholder") proposes to transfer or is required by operation of law or other involuntary transfer any or all of the Shares (the "Offered Shares") then standing in the his name during the term of this Agreement, he shall first offer such shares to the other ("Offeree") in accordance with the following provisions: (a) The Selling Shareholder shall deliver written notice (Notice) to the Offeree, to WCOM and to NETCO stating (i) the Selling Shareholder's intention to transfer the Offered Shares, (ii) the identity of the proposed transferee, (iii) the price at which the Selling Shareholder proposes to transfer the Offered Shares, and (iv) the terms of payment upon which the Offered Shares are proposed to be transferred. (b) Within thirty (30) days after receipt of the Notice, the Offeree shall have the first right to purchase or obtain such shares, upon the price and the terms of payment designated in the Notice. (c) If the Offeree elects not to purchase or obtain all of the Offered Shares designated the Notice, then WorldCom shall have thirty (30) days to purchase or obtain such of the Shares not acquired by the Offeree, at the price and terms of payment designated in the Notice. 2 (d) If neither the Offeree nor WCOM elect to purchase or obtain all of the shares designated in the Notice, then the Selling Shareholder may transfer the shares referred to in the Notice to the proposed transferee named therein, providing (i) such transfer is completed within sixty (60) days following expiration of WorldCom's right to purchase or obtain such shares, and (ii) is made at the price and on the terms designated in the Notice. (e) Any of the Shares once offered pursuant to this Paragraph 2 which are not sold and transferred in accordance with the provisions of Subparagraph 2(d) must be again offered to the Offeree Shareholder and to WCOM by Notice in accordance with this Paragraph 2 prior to any other or subsequent proposed transfer of Shares. 3.) Legend on Stock Certificates. (a) Each certificate representing the ---------------------------- Shares now owned (or hereafter issued pursuant to exercise of the stock options referred to in the Recitals) shall be endorsed prominently with the following legend: THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO A SHAREHOLDER RIGHT OF FIRST AND SECOND REFUSAL AGREEMENT BETWEEN WORLDCOM, INC., AND THE SHAREHOLDERS THAT ARE SIGNATORY THERETO, PROVIDING FOR, AMONG OTHER MATTERS, A RIGHT OF FIRST REFUSAL IN FAVOR OF THE SIGNATORY SHAREHOLDERS AND WORLDCOM TO PURCHASE THE SECURITIES REPRESENTED BY THIS CERTIFICATE. A COPY OF THE AGREEMENT IS ON FILE AT THE PRINCIPAL BUSINESS OFFICE OF NETCO COMMUNICATIONS CORPORATION, 102 UNION PLAZA, 333 N. WASHINGTON AVENUE, MINNEAPOLIS, MINNESOTA 55401. (b) Driscoll and Witters each agree to promptly present the certificates representing the Shares held by each, respectively, to Netco for endorsement with the above referenced legend. (c) Driscoll and Witters each agree that Netco may enter stop transfer instructions against any transfer of any of the Shares made in contravention of the provisions of Paragraph 2 of this Agreement, whether such shares be represented by a certificate issued to them or be uncertificated shares of Netco. 4.) Term of the Agreement. The restrictions on transfer of Shares set --------------------- forth in Paragraph 1 of this Agreement together with the obligations of Notice and offer set forth in Paragraph 2 of this Agreement shall immediately terminate upon the earlier to occur of any of the following: 3 (a) Upon the dissolution or bankruptcy of Netco. (b) Upon Netco's becoming required to file periodic reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934. (c) Upon December 31, 2000. (d) Upon consummation of a sale made in accordance with Paragraph 2 of this Agreement to a person who is not a party to this Agreement. 5.) Modification. This Agreement, as applied to any Shareholder, may ------------ be amended at any time by the written agreement of WorldCom and a Shareholder affected thereby. 6.) Notice. Any Notice required or permitted hereunder shall be ------ delivered in person or sent by telecopier, air courier, or certified mail, return receipt requested, postage and fees prepaid in all cases to the person entitled to receive such Notice addressed as follows: (a) If to Driscoll: Edward J. Driscoll 2500 Christian Drive Chaska, Minnesota 55318 (b) If to Witters: Allen L. Witters 9640 Eden Prairie Road Eden Prairie, Minnesota 55437 (c) If to WCOM: WorldCom Inc. 515 E. Amite Jackson, Mississippi 39201 Attention: K. William Grothe, Jr. Vice President (b) If to Netco: Netco Communications Corporation 104 Union Plaza 333 North Washington Ave. Minneapolis, MN 55401 4 with a copy to: WorldCom Inc. 515 E. Amite Jackson, Mississippi 39201 Attention: K. William Grothe, Jr. Vice President Notice shall be effective upon delivery if it is hand delivered; upon receipt if it is transmitted by telecopier, air courier or registered, certified, or express mail; upon expiration of the third business day after deposit on the United States mail if mailed from and to an address in the United States; and upon expiration of the tenth (10th) business day after deposit on the United States mail if mailed from or to an address outside the United States. 7.) Succession. This Agreement shall be binding upon and inure to the ---------- benefit of parties hereto and upon their permitted successors and interests of any kind whatsoever, their heirs, executives, administrators and personal representatives. 8.) Governing Law. This Agreement shall be governed in all respects by ------------- the laws of the State of Minnesota as such laws are applied to agreements between residents entered into and to be performed entirely within Minnesota and without regard to the conflicts of law provisions thereof. The parties hereby irrevocably consent to the exclusive jurisdiction and venue of the state or federal courts located in the State of Minnesota, County of Hennepin, for the resolution of any disputes arising out of this Agreement. 9.) Counterparts. This Agreement may be signed in any number of ------------ counterparts, each of which will be an original, but all of which together will constitute one and the same instrument. 10.) Sole Agreement. This Agreement constitutes the entire agreement -------------- and understanding of the parties hereto with respect to the subject matter hereof and supersedes any and all prior or contemporaneous agreements and understandings pertaining thereto whether oral or written. 11.) Construction. The titles of the sections of this Agreement are ------------ for convenience of reference only and are not to be considered in construing this Agreement. The language of this Agreement shall be construed for its fair meaning and not strictly for or against any party. 12.) Effectiveness. This Agreement shall become effective as of the ------------- day and year first above written upon the acknowledgment and consent of Netco in accordance with the Acknowledgment appended to this Agreement. 5 IN WITNESS WHEREOF, the parties have executed this Right of Refusal Agreement as of the day and year first above written. WORLDCOM, INC. EDWARD J. DRISCOLL, III By: /s/ K. William Grothe, Jr. /s/ Edward J. Driscoll, III -------------------------- ---------------------------- K. William Grothe, Jr. Edward J. Driscoll, III Vice President ALLEN L. WITTERS /s/ Allen L. Witters ---------------------------- Allen L. Witters 6 ACKNOWLEDGMENT Netco Communications Corporation, a Minnesota corporation, acting in its capacity as transfer agent for its Common Stock, hereby acknowledges its receipt of the Right of Refusal Agreement, dated as of December 16th, 1996, among Edward J. Driscoll, III, Allen L. Witters and WorldCom, Inc. NETCO COMMUNICATIONS CORPORATION Date: December 16, 1996 By: /s/ Edward J. Driscoll, III ------------------------------ Edward J. Driscoll, III President 7 EX-10.8 25 GUARANTY AGREEMENT Exhibit 10.8 GUARANTY AGREEMENT NETCO COMMUNICATIONS CORPORATION and WORLDCOM INC. September 26, 1997 GUARANTY AGREEMENT Guaranty Agreement (herein "Agreement") made this 26th day of September, 1997, by and between NETCO COMMUNICATIONS CORPORATION, a Minnesota corporation, having its principal place of business at 102 Union Plaza, 333 North Washington Avenue, Minneapolis, Minnesota 55401 ("NETCO") and WORLDCOM INC., a Georgia corporation, having its principal place of business at 515 East Amite Street, Jackson, Mississippi 39201 ("WCOM"). Whereas, NETCO is engaged in the development and implementation of high speed, digital data transportation delivery and ancillary data storage and remote proofing services addressed initially to the printing and prepress industries, and requires significant permanent financing to accomplish such development and implementation; and Whereas, WCOM is engaged in the sale and marketing of voice and data transmission over its multinational communications infrastructure; and Whereas, WCOM and NETCO are parties to a certain Convertible Note Purchase Agreement dated September 12, 1996 (the "Convertible Note Agreement") pursuant to which WCOM purchased from NETCO a 10% Convertible Subordinated Note due September 30, 1999, (the "Convertible Note") in principal amount of $5,000,000; and Whereas, WCOM and NETCO are parties to a certain Preferred Stock, Subordinated Note and Warrant Purchase Agreement dated November 14, 1996 pursuant to which WCOM purchased from NETCO 100,000 shares of Preferred Stock for $10,000,000 and 4,157,500 warrants to purchase Common Stock for $19,000,000.00 (the "Stock, Note and Warrant Purchase Agreement"); and Whereas, NETCO desires that WCOM agree to guaranty a certain three year revolving credit loan facility in favor of NETCO in the maximum principal amount of $35,000,000 by the First National Bank of Chicago ("FNBC") (the "First Chicago Facility") for the purpose of providing NETCO with long term financing to fund and facilitate the deployment and implementation of NETCO's services over WCOM's communications infrastructure; and Whereas, WCOM is agreeable to guaranteeing NETCO's obligations under the First Chicago Facility on the terms and conditions and for the consideration set forth in this Agreement; and Whereas, NETCO is unable to obtain long term financing on terms as favorable as those provided in the First Chicago Facility and this Agreement without the guaranty of WCOM, which WCOM is not obligated to provide. NOW THEREFORE, in consideration of the foregoing premises, and of the consideration provided herein, the parties agree as follows: I. THE GUARANTY 1.01 Guaranty of the First Chicago Facility. Subject to the terms and -------------------------------------- conditions set forth in this Agreement, and provided that the First Chicago Facility is acceptable to WCOM in form and content, WCOM hereby agrees to provide its limited guaranty, in form attached hereto as Exhibit A (the "WCOM Guaranty"), of the obligations of NETCO arising under the First Chicago Facility, not to exceed the principal amount of Thirty-Five Million Dollars ($35,000,000), in form acceptable to WCOM and NETCO. II. GRANT TO WCOM OF WARRANTS 2.01 Grant of the Warrants. Subject to the terms and conditions set forth --------------------- in this Agreement, and in consideration of the WCOM Guaranty, NETCO grants to WCOM 1,679,234 Class A and 2,840,967 Class B Common Stock Purchase Warrants entitling WCOM to purchase, until December 31, 2000, subject to the terms and conditions hereof, up to an aggregate total of 4,520,201 shares of NETCO's authorized and unissued Common Stock, par value $.0l per share, at an initial exercise price of Nineteen Dollars Fifty Cents ($19.50) per share, subject to adjustment, and upon the additional terms and conditions, set forth in the "Common Stock Purchase Warrant" in form appended to this Agreement as Exhibit B and incorporated herein by this reference. III. CREDIT FACILITIES 3.01 Provision of Credit Facilities. As further consideration for the ------------------------------ WCOM Guaranty, NETCO agrees that the WCOM Guaranty will satisfy all obligations of WCOM under Article V of the Stock, Note and Warrant Purchase Agreement. IV. REPRESENTATIONS AND WARRANTIES OF NETCO 4.01 NETCO hereby represents and warrants to WCOM that, as of the date hereof and as of the Closing provided for in Section 7.01 hereof: (a) Corporate Organization and Power; Qualification. NETCO is duly ----------------------------------------------- organized, validly existing and in good standing as a corporation under the laws of the state of Minnesota, 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 NETCO. (b) Subsidiaries. NETCO does not own, directly or indirectly, any capital ------------ stock or other equity securities of any corporation nor does NETCO have any direct or indirect ownership interest, including interests in partnerships and joint ventures, in any other entity or business, with the sole exceptions of WAMNET, Inc., a Minnesota corporation and Netco Communications Corporation of Canada, Inc., a Canadian corporation, each of which is a wholly owned subsidiary of NETCO. (c) Authorization; Enforceability. NETCO 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 First Chicago Facility and the Common Stock Purchase Warrant. This Agreement has been, and the First Chicago Facility and the Common Stock Purchase Warrant, when executed and delivered by NETCO to WCOM and FNBC, respectively, will have been, duly executed and delivered by NETCO and is, and when so delivered will be, legal, valid and binding obligations of NETCO, enforceable against NETCO in accordance with their respective terms. (d) No Violations; Consent. The execution, delivery and performance in ---------------------- accordance with their respective terms by NETCO of this Agreement, and of the First Chicago Facility and the Common Stock Purchase Warrant, 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 NETCO, 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 NETCO under, any contract to which NETCO is a party or by which NETCO or any of its properties may be bound. WCOM agrees that neither the First Chicago Facility nor the issuance of the Warrants hereunder is a violation of the Convertible Note Agreement. (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 threatened (nor, to the knowledge of NETCO, is there any basis therefor) against or in any other way relating to or affecting (a) NETCO or (b) any of its businesses or properties, other than as is disclosed in Schedule 4.01(e) hereto. (f) Taxes. NETCO 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. NETCO 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 NETCO consists of 20,000,000 shares of which 15,000,000 are Common Shares and 5,000,000 are undesignated shares. NETCO does not hold any of its shares in treasury. (ii) 1,295,971 Common Shares are issued and outstanding and have been validly issued and are fully paid and nonassessable and are not subject to preemptive rights. (iii) 100,000 of the undesignated shares have been designated as the Preferred Stock having the rights and preferences set forth on Exhibit 1 to the Stock, Note and Warrant Purchase Agreement, and have been duly authorized and validly issued to WCOM. (iv) Except as contemplated by this Agreement and the Stock, Note and Warrant Purchase Agreement, and as disclosed on Schedule 1 to that Agreement or Schedule 4.01 (g) (iv) to this Agreement, there are no outstanding subscriptions, options, warrants or other rights of any kind to acquire any additional shares of capital stock of NETCO, or other instruments or securities convertible into or exchangeable for, or which otherwise confer on the holder thereof any right to acquire, any such additional shares, nor is NETCO committed to issue any such option, warrant, right, or security, or any other instrument convertible into a security. (v) Except as expressly provided for in the Stock, Note and Warrant Purchase Agreement, there are no agreements relating to voting, purchase or sale of capital stock between NETCO and any of its stockholders or affiliates, and to the best of NETCO's knowledge, among any of its stockholders. (h) NETCO has delivered to 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 December 31, 1996 and for the six month period ended June 30, 1997. Such financial statements (x) fairly present the financial condition, assets and liabilities of NETCO 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 NETCO, which books and records are complete and correct and fairly reflect all material transactions of NETCO's business. V. REPRESENTATIONS AND WARRANTIES OF WCOM 5.01 WCOM hereby represents and warrants to NETCO that: (a) WCOM 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 WCOM desires or deems relevant to the decision to grant the WCOM Guaranty. (b) WCOM is an "accredited investor" within the meaning of Rule 501(a) of the General Rules and Regulations under the Securities Act of 1933. VI. COVENANTS OF NETCO 6.01 Affirmative Covenants. NETCO hereby agrees that until the payment in --------------------- full of all amounts due under, and the termination or the expiration of, the First Chicago Facility, and the payment and performance of all of its obligations under this Agreement, except with the prior written consent of WCOM, it shall: (a) Payment of Obligations. Pay, discharge or otherwise satisfy at or ---------------------- before maturity or before they become delinquent, as the case may be, all its material obligations and liabilities of whatever nature, including without limitation those arising under the First Chicago Facility, except when the amount or validity thereof is currently being contested in good faith by appropriate proceedings. (b) Conduct of Business and Maintenance of Existence. Continue to engage ------------------------------------------------ in business of the same general type as currently conducted by it and preserve, renew and keep in full force and effect its corporate existence; take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business; and comply with all applicable requirements of law except to the extent that the failure to comply therewith would not, individually or in the aggregate, have a material adverse effect on the business, operations, property, condition (financial or otherwise) or prospects of NETCO. (c) Use of Proceeds. NETCO will, and will cause each of its subsidiaries --------------- to, use the proceeds of any amounts drawn under the First Chicago Facility only for capital expenditures and operating capital expenditures approved by the Board of Directors of NETCO. (d) Insurance. NETCO will, and will cause each subsidiary to, maintain --------- with financially sound and reputable insurance companies insurance on all their property in such amounts and covering such risks as is consistent with sound business practice, and NETCO will furnish WCOM upon request full information as to the insurance carried. (e) Maintenance of Properties. NETCO will, and will cause each subsidiary ------------------------- to, do all things necessary to maintain, preserve, protect and keep its property in good repair, working order and condition, and make all necessary and proper repairs, renewals, and replacements so that its business carried on in connection therewith may be properly conducted at all times. (f) Additional Covenants. Comply with the additional covenants and -------------------- agreements set forth in Schedule 6.01(f) hereof. (g) Notices. Promptly give notice to WCOM: ------- (i) of the occurrence of any Event of Default as that may be defined in the First Chicago Facility or this Agreement; (ii) of any (i) default or event of default under any contractual obligation of NETCO or any of its Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between NETCO or any of its Subsidiaries and any governmental authority, which in the case of either (i) or (ii) above, if not cured or if adversely determined, as the case may be, would have a material adverse effect on the business, operations, properties, condition (financial or otherwise) or prospects of NETCO; (iii) of any litigation or proceeding affecting NETCO or any of its Subsidiaries in which the amount claimed is $100,000.00 or more and not covered by insurance or (ii) in which injunctive or similar relief is sought which, if obtained, would have a material adverse effect on the business, operations, properties, condition (financial or otherwise) or prospects of NETCO or (iii) arising out of this Agreement. 6.02 Negative Covenants. NETCO agrees that until payment in full of all ------------------ amounts due under, and the termination or expiration of, the First Chicago Facility, and the payment and performance by NETCO of all its obligations under this Agreement, except with the prior written consent of WCOM, it shall not: (a) Limitation on Indebtedness and Guarantee Obligations. Create, incur, ---------------------------------------------------- assume or suffer to exist any Indebtedness or Guarantee Obligations other than: (i) Indebtedness arising under this Agreement; (ii) Indebtedness and Guaranty Obligations of NETCO and its Subsidiaries existing on the date of this Agreement and listed in Schedule 6.02; (iii) Additional Indebtedness incurred to finance the acquisition of equipment or indebtedness incurred as a part of the sale and leaseback of NETCO equipment in an aggregate principal amount not exceeding the amount which may be approved by NETCO's Board of Directors from time to time for such purposes; (iv) Indebtedness arising under (i) standby letters of credit issued to secure performance obligations in the ordinary course of business, and (ii) Indebtedness of NETCO or any Subsidiary in respect of surety, utility, appeal or similar bond issued in the ordinary course of business, the aggregate amount of such Indebtedness not exceeding the amount which may be approved by NETCO's Board of Directors from time to time for such purposes; (v) any extension, renewal or refinancing of the Indebtedness permitted pursuant to clause (b) above on terms and conditions satisfactory to WCOM and in an aggregate principal amount not exceeding the amount of such Indebtedness outstanding at the time of such extension, renewal or refinancing; and (vi) in addition to the Indebtedness permitted by clauses (a) through (c) above, Indebtedness of NETCO incurred in the ordinary course of business in an aggregate principal amount not to exceed the amount which may be approved by NETCO's Board of Directors from time to time for such purposes. (b) Prohibition of Fundamental Changes. Make any material change in the ---------------------------------- present method of conducting business or engage in any type of business other than of the same general type now conducted by it. (c) Prohibition of Investments, Loans and Advances. Make any advance, ---------------------------------------------- loan, extension of credit or capital contribution to, purchase or acquire any stock, bonds, notes, debentures or other securities of, purchase or acquire any assets constituting an ongoing business of or make any other investment in, any other person, except: ------ (i) investments in Cash Equivalents; (ii) extensions of trade credit in the ordinary course of business; and (iii) acquisitions approved by NETCO's Board of Directors and consented to by WCOM pursuant to the Convertible Note Agreement. (d) Limitation on Capital Expenditures. Make or commit to make (by way of ---------------------------------- the acquisition of securities of a person or otherwise) any expenditures in respect of the purchase or other acquisition of fixed or capital assets (excluding any such asset acquired in connection with normal replacement and maintenance programs properly charged to current operations) except for expenditures in the ordinary course of business not exceeding the amount approved by NETCO's Board of Directors during any fiscal year of NETCO. (e) Liens. NETCO will not, nor will it permit any subsidiary to, create, ----- incur, or suffer to exist any lien in, of or on any property of NETCO or any of its subsidiaries, except: (i) Liens for taxes, assessments or governmental charges or levies on its Property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with Generally Accepted Accounting Principles shall have been set aside on its books. (ii) Liens imposed by law, such as carriers', warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business which secure payment of obligations not more than 60 days past due or which are being contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on its books. (iii) Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation. (iv) Utility easements, building restrictions and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of NETCO or its Subsidiaries. (v) Liens existing on the date hereof and described in Schedule 6.02(e). (f) Sale of Accounts. NETCO will not, nor will it permit any Subsidiary ---------------- to, sell or otherwise dispose of any notes receivable or accounts receivable, with or without recourse, except as may be permitted by the Board of Directors of NETCO. (g) Amendment of Credit Agreement. Agree or consent or otherwise permit ----------------------------- any amendment to the Credit Agreement without the prior written consent of WCOM. 6.03 Reimbursement and Indemnification. --------------------------------- (a) Reimbursement. Upon notice by WCOM that it has paid or advanced ------------- pursuant to the WCOM Guaranty any funds to FNBC in payment of any principal, interest or any other amounts whatever due or payable, or asserted by FNBC to be due or payable, under the First Chicago Facility, NETCO shall immediately pay and reimburse WCOM all such funds before 1:00 p.m. on the first business day following the date of such notice. (b) Indemnification. NETCO shall indemnify and hold harmless WCOM, and --------------- its directors, officers, employees, agents and representatives, from and against any and all claims, demands, actions, causes of action, payments, losses, costs, damages, liabilities and expenses, including, without limitation, reasonable legal fees (collectively, "Losses") arising out of (i) any breach by NETCO of any representation, warranty, covenant or obligation in the First Chicago Facility, and (ii) any breach by NETCO of any representation, warranty, covenant or obligation in this Agreement. Upon notice by WCOM that it has incurred Losses, NETCO shall immediately pay such Losses to WCOM before 1:00 p.m. on the first business day following the date of such notice. VII. CLOSING 7.01 Closing. Closing shall occur at the offices of NETCO, at such time ------- as may be agreed by NETCO and WCOM, on or before September 26, 1997. 7.02 Conditions to Closing. The Closing shall be conditioned upon --------------------- satisfaction of all of the following requirements; (a) The approval of this Agreement by NETCO's Board of Directors and by WCOM; (b) The due authorization and approval by NETCO's Board of Directors of the Common Stock Purchase Warrant; (c) Such certificates, dated as of the Closing, from officers of NETCO as WCOM may reasonably request relating to the representations, warranties and covenants given by NETCO herein or to the satisfaction of these conditions of closing; 7.03 Delivery. At Closing, NETCO shall deliver the Common Stock Purchase -------- Warrant to WCOM upon WCOM's execution of the Guaranty Agreement required in connection with the First Chicago Facility. VIII. TERMINATION; EVENTS OF DEFAULT 8.01 Termination. ----------- (a) Prior to Closing. 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 7.02 hereof. (b) Post Closing. Either party may terminate this Agreement if, within ------------ 30 days after Closing, NETCO has not entered into the First Chicago Facility, and, in such event, the Warrants issued at Closing shall be deemed cancelled. 8.02 Consequences of Termination. Neither party shall be liable to the --------------------------- other upon any termination in accordance with Section 8.01 hereof. 8.03 Events of Default. Upon the occurrence of any of the following ----------------- events: (a) NETCO shall fail to pay any principal of or interest on the First Chicago Facility when due in accordance with the terms thereof or shall fail to pay any amount payable hereunder within five days after any such amount becomes due in accordance with the terms thereof or hereof; (b) Any representation or warranty made or deemed made by NETCO in the First Chicago Facility or in this Agreement or in any certificate or other statement furnished at any time under or in connection with the First Chicago Facility or this Agreement shall prove to have been incorrect in any material respect on or as of the date made or deemed made; (c) NETCO shall default in the observance or performance of any agreement contained in this Agreement; (d) NETCO shall default in the observance or performance of any other covenant or agreement contained in the First Chicago Facility or this Agreement; (e) NETCO or any of its Subsidiaries shall default in any payment of principal of or interest on any Indebtedness (other than indebtedness under the First Chicago Facility) or in the payment of any Guarantee Obligation, in either case where the principal amount thereof then outstanding exceeds $25,000.00 beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness or Guarantee Obligation was created; or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Guarantee Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity, any applicable grace period having expired, or such Guarantee Obligation to become payable, any applicable grace period having expired; (f) (i) NETCO or any of its Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or NETCO or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against NETCO or any of its Subsidiaries in any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against NETCO or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) NETCO or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) NETCO or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) One or more judgments or decrees shall be entered against NETCO or any of its Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance) of $25,000.00 or more and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof; then, and in any such event, (a) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) above with respect to NETCO, automatically this Agreement shall immediately terminate and the reimbursement and indemnification obligations of NETCO hereunder (with accrued interest thereon) and all other amounts owing under this Agreement shall immediately become due and payable notwithstanding any provision herein which may otherwise require the giving of prior notice by WCOM and (b) if such event is any other Event of Default, so long as any such Event of Default shall be continuing, either or both of the following actions may be taken: (i) WCOM may by notice to NETCO and FNBC declare the WCOM Guaranty and this Agreement terminated immediately, provided that Section VI, Section VIII and Section IX of this Agreement shall survive any such termination until all NETCO's obligations to WCOM under Sections VI and VIII have been fully paid and discharged, and (ii) WCOM may by notice to NETCO declare all reimbursement and indemnification obligations hereunder and all other amounts owing under this Agreement to be due and payable forthwith, whereupon the same shall immediately become due and payable. Except as expressly provided above in this Section 8.03, presentment, demand, protest and all other notices of any kind are hereby expressly waived. IX. MISCELLANEOUS ------------- 9.01 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 WCOM and NETCO. 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. 9.02 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 WCOM: WorldCom Inc. 515 E. Amite Jackson, Mississippi 39201 Attention: K. William Grothe, Jr. Vice President Telephone: (601)360-8051 Telecopy: (601)974-8233 with a copy to: WorldCom Inc. 515 E. Amite Jackson, Mississippi 39201 Attention: William Anderson General Counsel Telephone: (601)360-8977 (601)360-8282 (b) If to the NETCO: Netco Communications Corporation 102 Union Plaza 333 North Washington Ave. Minneapolis, MN 55401 Attention: Edward J. Driscoll, III President Telephone: (612)204-3100 Telecopy: (612)204-3101 with a copy to: George H. Frisch 5030 Woodlawn Boulevard Minneapolis, Minnesota 55417 Telephone: (612)724-2929 Telecopy: (612)724-8387 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. 9.03 Binding Effect; Assignment. This Agreement shall be binding upon and -------------------------- inure to the benefit of the NETCO and 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. 9.04 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 construed to give to any person, other than the parties hereto and such assigns, any legal or equitable right hereunder. 9.05 Entire Agreement; Savings. This Agreement, the Stock, Note and ------------------------- Warrant Purchase Agreement and the Convertible Note and Convertible Note Agreement and the Common Stock Purchase Warrant constitute the entire agreement between the parties hereto with respect to the subject matter contained herein and therein and supersede all other prior understandings or agreements, both written and oral, between the parties with respect to the matters contained herein and therein; provided, however, that nothing in this Agreement shall be deemed in any way to affect the Convertible Note Agreement or the Convertible Note, or the Stock, Note and Warrant Purchase Agreement or the instruments contemplated thereby or hereby which shall each continue in accordance with their respective terms, unaffected by this Agreement. 9.06 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. 9.07 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. 9.08 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. 9.09 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. 9.10 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. IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. "NETCO" NETCO COMMUNICATIONS CORPORATION By: /s/ Edward J. Driscoll, III ----------------------------------- Edward J. Driscoll, III Its: President and Secretary "WCOM" WORLDCOM INC. By: /s/ K. William Grothe, Jr. ____________________________________ K. William Grothe, Jr. Its: Vice President Schedule 4.01 (e) 1. Arbitration proceeding entitled, Piper Jaffray, Inc., Claimant vs. Netco Communications Corporation, Respondent, before the National Association of Securities Dealers, Inc., case no. 9703288, claiming a commission of $1,450,000. 2. Related litigation being commenced by NETCO against Piper Jaffray, Inc., and Joseph Caruso in the District Court of Hennepin, County, State of Minnesota. The suit against Piper Jaffray seeks a declaratory judgment invalidating the engagement letter upon which the claim identified above is based, on the grounds that the engagement letter violates a particular provision of Minnesota law which requires all fees and commissions charged by a licensed broker-dealer to be "reasonable" and also violates a related rule requiring a licensed broker-dealer to abide by "high standards of commercial honor and just and equitable principles of trade." The suit against Caruso will seek damages arising from his representations and conduct in connection with his obtaining and performing the engagement. EX-10.9 26 CERTIFICATE FOR CLASS A & B WARRANTS EXHIBIT 10.9 EXERCISABLE ON OR BEFORE, AND VOID AFTER 5:00 P.M. MINNEAPOLIS TIME DECEMBER 31, 2000 Certificate for 1,679,234 Class A Warrants 2,840,967 Class B Warrants WARRANTS TO PURCHASE COMMON STOCK OF NETCO COMMUNICATIONS CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA THIS CERTIFIES that THE HOLDER INC., ("Holder") or assigns, is the owner of the number of Warrants set forth above, each of which represents the right to purchase from Netco Communications Corporation, a Minnesota corporation (the "Company"), at any time on or before 5:00 Minneapolis time, December 31, 2000, upon compliance with and subject to the conditions and limitations set forth herein, one share (subject to adjustments referred to below) of the Common Stock of the Company, par value $.0l 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 $19.50 per share (the "Initial Exercise Price" is subject to adjustments as noted subsequently. For purposes hereof, "Current Exercise Price" means the Initial Exercise Price as may be adjusted from time to time in accordance with the provisions hereof). 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 of shares of Class A Preferred Shares, par 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 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. The Class A and B Warrants; Adjustments. The above provisions are, --------------------------------------- however, subject to the following provisions: (a) The Class A Warrants. The total number of shares which may be -------------------- purchased by the Holder upon exercise of the Class A Warrants shall be the number set forth above, subject to adjustment as set forth in Sections 4(e) and (h). The Class A Warrants may be exercised at any time prior to expiration as set forth herein. (b) The Class B Warrants. The total number of shares which may be -------------------- purchased upon exercise of The Class B Warrants shall be a maximum of the number set forth above, subject to adjustment as set forth in Sections 4(e) and (h). The number of Class B Warrants which shall accrue to the Holder hereunder shall be based on the maximum amount of the Outstanding Balance, as defined in Section 4(c), which is outstanding at any time during months 25-36 of the First Chicago Facility prior to the time the First Chicago Facility is paid in full, and based on the time when the Outstanding Balance is repaid by Qualified Repayments, as defined in Section 4(d). Exhibit A hereto contains a number of examples illustrating the determination of the Outstanding Balance and the number of Class B Warrants to which the Holder will be entitled hereunder. The Holder shall obtain the number of Class B Warrants determined as follows: (i) Determine the highest Outstanding Balance at any time outstanding during months 25-36 ("Highest OB") and multiply the amount thereof up to $25,000,000, times a factor of .06313259 and for any amount above $25,000,000 by a factor of .12626518 and credit the Holder with the number of Class B Warrants which is the total of these calculations; (ii) Reduce the number of Class B Warrants credited to the Holder by virtue of Subsection (i) by that number of Class B Warrants which is determined as follows: Determine the Net Qualified Repayment ("NQR"), as defined in Subsection (iii), during months 25-30 (herein referred to as "NQRX") and the Net Qualified Repayment during months 31-36 (herein referred to as "NQRY"). Multiply the amount of NQRX representing the net reduction of the amount of the Highest OB in excess of $25,000,000 by .0842189 and the remainder of NQRX by .04210944. Multiply the amount of NQRY representing the net reduction of the amount of the Highest OB in excess of $25,000,00 by .0420463 and the remainder of NQRY by .02102316. The number of Class B Warrants credited to the Holder by virtue of Subsection (i) shall be reduced by the aggregate of these four calculations. (iii) For all purposes of this Section in calculating the Warrants accruing to the Holder, the NQR shall be determined as the amount, if any, by which the Highest OB, if it has been reached prior to the end of that period, has been reduced as of the end of that particular time period by Qualified Repayments; the sum of NQRX and NQRY cannot exceed the Highest OB and will not equal the Highest OB unless the Company repays all obligations under the First Chicago Facility with Qualified Repayments; any increases in the Outstanding Balance during months 31-36 shall be deemed to offset dollar for dollar any Qualified Repayments occurring during months 25-30; and obtaining the absolute release of the WorldCom, Inc. Guaranty of the First Chicago Facility shall be deemed to be a Qualified Repayment of the Outstanding Balance at that time. (iv) The accrued Class B Warrants may be exercised at any time after they have accrued, prior to expiration as set forth herein. (c) Determination of the Outstanding Balance. ---------------------------------------- The Outstanding Balance shall be calculated at any relevant point in time as the aggregate of all draws by the Company against the First Chicago Facility, all other amounts advanced or for which the Company becomes obligated thereunder, including all accrued interest, compounded monthly, reduced by Qualified Repayments, as hereinafter defined in Section 4(d). (d) Qualified Repayments. Repayments of the First Chicago Facility shall -------------------- be considered Qualified Repayments if the Company repays amounts borrowed under the First Chicago Facility using EBITDA, as defined herein, and not funds from loans, sale of Company assets or equity invested in the Company, except that the proceeds of a public offering of the securities of the Company which is used to repay the First Chicago Facility may be considered as Qualified Repayments. Furthermore, if the Company obtains the absolute release of the WorldCom, Inc. Guaranty of the First Chicago Facility, it shall be deemed to be a Qualified Repayment of the Outstanding Balance at that time. "EBITDA" shall mean earnings before interest, taxes, depreciation and amortization or is otherwise stated as gross revenue, less cost of goods sold, less operating expenses, determined in accordance with generally accepted accounting principles applied on a consistent basis. (e) In case the Company shall at any time hereafter subdivide or combine the outstanding shares of Common Stock or declare a dividend payable in Common Stock, the exercise price of this Warrant in effect immediately prior to the subdivision,, combination or record date for such dividend payable in Common Stock shall forthwith be proportionately increased, in the case of combination, or decreased, in the case of subdivision or dividend payable in Common Stock, and each share of Common Stock purchasable upon exercise of the Warrant shall be changed to the number determined by dividing the Current Exercise Price by the exercise price as adjusted after the subdivision, combination, or dividend payable in Common Stock. (f) If the Company shall at any time issue any Common Stock, or any option, warrant, right or interest excercisable or convertible into Common Stock, at a price per share that is less than the then Current Exercise Price, then and in each such case such Current Exercise Price shall be adjusted to the equivalent price of the Common Stock or exercise of conversion price, as the case may be. (g) 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. (h) 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 receivables 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. (i) 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 divide 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). (j) Upon any adjustment of the Current Exercise Price, then and in each such case, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the registered holder of this Warrant at the address of such holder as shown on the books of the Company, which notice shall state the exercise price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 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. 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 three (3) years ------------------- from the date hereof until two (2) years after the complete exercise of this Warrant, but in any event no later than March 31, 2003, 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. 9. Related Agreement. The Class A Warrants and the Class B Warrants ----------------- provided herein are being issued pursuant to, and in connection with a certain Guaranty Agreement ("Guaranty Agreement") of even date herewith between the Company and the Holder. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Guaranty Agreement. IN WITNESS WHEREOF, Netco Communications Corporation, Inc. has caused this Warrant to be signed by its duly authorized officer and this Warrant to be dated September 26, 1997. NETCO COMMUNICATIONS CORPORATION By: /s/ Edward J. Driscoll, III ----------------------------- Edward J. Driscoll, III President EX-10.10 27 SUBLEASE DATED SEPTEMBER 24, 1997 EXHIBIT 10.10 SUBLEASE This Building Sublease ("Sublease") is made this 24th day of September, 1997, by and between NETCO COMMUNICATIONS CORPORATION, a Minnesota corporation ("Sublessee"), and 1250895 Ontario Limited, an Ontario corporation ("Sublessor"). RECITALS: A. Bradley A. Hoyt ("Prime Landlord") is the fee owner of the land and improvements, consisting of approximately 44,977 square feet of office and warehouse, commonly known as 6100 110th Street West, Bloomington, Minnesota ("Premises"). B. Prime Landlord, as landlord, and Technology Marketing Group, Inc. (now known as Globelle, Inc.), as tenant, have heretofore entered into that certain Standard Commercial Lease dated July 11, 1995, as amended, (the "Prime Lease"). C. Globelle, Inc. has assigned all of its right, title and interest in the Prime Lease to Sublessor; D. Sublessee desires to lease the Premises and Sublessor desires to sublease the Premises to Sublessee, all on the terms and conditions hereafter set forth. NOW, THEREFORE, in consideration of the foregoing recitals incorporated herein by this reference, and the mutual covenants and agreements hereinafter set forth, the receipt and adequacy of which are acknowledged, the parties agree as follows: 1. BASIC SUBLEASE PROVISIONS AND IDENTIFICATIONS OF EXHIBITS --------------------------------------------------------- 1.01 BASIC SUBLEASE PROVISIONS: ------------------------- A. PREMISES ADDRESS: 6100 110th Street West Bloomington, Minnesota 55428 B. SUBLESSOR'S ADDRESS: 5101 Orbitor Drive Mississauqa, Ontario, Canada L4W 4V1 C. SUBLESSEE'S ADDRESS: 6100 110th Street West Bloomington, Minnesota 55428 D. EXECUTION DATE: September 24th, 1997 E. TERM: The period beginning on the Commencement Date and ending on the Expiration Date (hereafter defined), subject to earlier cancellation or termination as herein provided. F. COMMENCEMENT DATE: The last to occur of (x) September 15, 1997, and (y) the date Sublessor, after obtaining Prime Landlord's mortgagee approval of the Sublease, makes the Premises available for occupancy by the Subtenant. G. EXPIRATION DATE: November 29, 2005, subject to earlier cancellation or termination as herein provided. H. SECURITY DEPOSIT: $150,528.00, subject to the provisions of Section 4.01. I. EXHIBITS: The following Exhibits are attached hereto and incorporated herein: EXHIBIT A - Description of Subleased Premises EXHIBIT B - Prime Lease EXHIBIT C - Furniture, Fixtures and Equipment included in Sublease Premises EXHIBIT D - Sublessee and Prime Landlord Non-Disturbance Agreement 2. SUBLEASED PREMISES AND TERM; PRIME LEASE ---------------------------------------- 2.01 SUBLEASED PREMISES AND FURNITURE, FIXTURES AND EQUIPMENT LOCATED THEREON: ------------------------------------------------------------------------ A. Sublessor hereby leases to Sublessee and Sublessee hereby leases from Sublessor approximately 41,699 square feet of office space and ?,278 square feet of warehouse space in a two (2) story building (sometimes referred to herein as the "Subleased Premises"), which Subleased Premises are described in Exhibit "A" ----------- attached hereto, subject to all of the terms, covenants and conditions contained herein and in the Prime Lease. The leasable area of the Subleased Premises includes an allocation of the Common Areas (as defined in the Prime Lease). B. Sublessee acknowledges that it has thoroughly inspected the Subleased Premises. The Subleased Premises are accepted by the Sublessee in an AS IS, WHERE IS condition without any representations or warranties, whatsoever, express or implied, except as specifically set forth herein. More particularly, Sublessee expressly acknowledges that Sublessor has not made and will not make any warranties to the Sublessee with respect to the quality of construction of any leasehold improvements or finishes or as to the condition of the Subleased Premises, whether express, 2 statutorily implied or otherwise, and that Sublessor expressly disclaims any implied warranty that the Subleased Premises are or will be suitable for Sublessee's use or intended commercial purposes. Sublessee shall have the right to take possession of the Subleased Premises upon execution of this Sublease by all parties hereto. Any construction, alterations or improvements made to the Subleased Premises by Sublessee shall be subject to (i) the prior approval of both Prime Landlord and Sublessor, including, without limitation, approval of the plans, specifications, contractors and subcontractors therefor, (ii) all applicable terms and conditions of the Prime Lease relating to construction, alterations or improvements of the Subleased Premises, and (iii) such other reasonable requirements or conditions as Prime Landlord may impose. C. The Subleased Premises shall include the furniture, fixtures and equipment set forth in the schedule attached hereto as Exhibit "C"; provided, --- however, title to such furniture, fixtures and equipment shall remain in Sublessor. Upon the expiration of the Sublease Term not resulting from a default by Sublessee, title to such furniture, fixtures and equipment shall be deemed to have been transferred to the Sublessee. 2.02 TERM: ---- A. The term of this Sublease ("Term") shall commence on the Commencement Date as set forth in Section 1.01F. B. The term shall end on the Expiration Date set forth in Subsection 1.01G, unless sooner canceled or terminated as otherwise provided in this Sublease. 2.03 RELATION TO PRIME LEASE. ----------------------- Except to the extent hereinafter provided, this Sublease is subject and subordinate to all of the covenants, agreements, terms, provisions, conditions and obligations of the Prime Lease. Sublessee agrees that all rights and privileges granted hereunder are subject to the limitations imposed on the Sublessor by the Prime Lease and that, except as expressly provided herein, Sublessor is not granting any rights or privileges to Sublessee that are not expressly granted to Sublessor under the Prime Lease. All of the covenants, agreements, terms, provisions, conditions, obligations and rules and regulations of the Prime Lease are incorporated herein, with the same force and effect as if they were fully set forth herein. Sublessee agrees to be bound by and comply with the terms of the Prime Lease and to perform Sublessor's obligations with respect to the Subleased Premises for the benefit of Prime Landlord and Sublessor, except that: (x) Any reference in the Prime Lease to: (i) "Landlord" shall mean Prime Landlord; (ii)"Tenant" shall mean 3 Sublessee; and (iii) "Premises" shall mean Subleased Premises. (y) In all instances where consent or approval of the Prime Landlord is required pursuant to the Prime Lease, the consent or approval of each of Prime Landlord and Sublessor shall be required hereunder and Sublessor agrees to send to Prime Landlord, at Sublessee Is expense, copies of Sublessee's written request for any consents required. In the event Sublessor does not notify Sublessee of any objections to a request for Sublessor's consent within ten (10) business days of Sublessor's receipt of such request, such request shall be deemed approved by Sublessor. The Prime Lease is attached hereto as Exhibit "B". Each party agrees that it ----------- will not, by its act or omission to act, cause a default under the Prime Lease. In furtherance of the foregoing, Sublessor and Sublessee hereby confirm, each to the other, that it is not practical in this Sublease to enumerate all of the rights and obligations of the various parties under the Prime Lease and specifically to allocate those rights and obligations in this Sublease. Accordingly, in order to afford to Sublessee the benefits of this Sublease and of those provisions of the Prime Lease which by their nature are intended to benefit the party in possession of the Premises, and in order to protect Sublessor against a default by Sublessee which might cause a default or event of default by Sublessor under the Prime Lease: A. Subject to the provisions of Section 3.03 herein, without limiting the obligations of Sublessor under the Prime Lease, as between Sublessor and Sublessee, Sublessor shall pay, when and as due, all Base Rent, Additional Rent and other charges payable by Sublessor to Prime Landlord under the Prime Lease provided Sublessee shall timely pay all Rent when and as due under this Sublease. B. Sublessee shall perform and observe all terms, affirmative covenants and conditions and shall refrain from performing any act which is prohibited by the negative covenants of the Prime Lease, where the obligation to perform, observe or refrain from performing is by its nature imposed upon the party in possession of the Premises and all such affirmative covenants and negative covenants shall be deemed incorporated herein and shall be performed or observed for the benefit of Sublessor as though Sublessor were the landlord thereunder. If practicable, Sublessee shall perform affirmative covenants which are also covenants of Sublessor under the Prime Lease at least five (5) days prior to the date when Sublessor's performance is required under the Prime Lease and shall indemnify Sublessor and Guarantor (as defined in the Prime Lease) against all claims liabilities, demands, losses, 4 actions, causes of action, damages, costs and expenses (including reasonable attorneys' fees) arising out of Sublessee's failure to perform or observe any such terms, covenants or conditions, subject however to all the express terms and conditions of this Sublease. Sublessor shall have the right, after notice and failure to cure by Sublessee (except in events of emergency), but not the obligation to enter the Subleased Premises to cure any default by Sublessee under this Sublease. C. Provided Sublessee is not in default hereunder and such default is continuing uncured, Sublessor shall not agree to an amendment to the Prime Lease, unless Sublessor shall first obtain Sublessee's prior written approval thereof, not to be unreasonably withheld. D. Sublessor shall not be required to make any improvements, replacements or repairs of any kind or character to the Premises. Sublessor hereby grants to Sublessee the right to receive all of the services and benefits with respect to the Subleased Premises which are to be provided by Prime Landlord under the Prime Lease; provided, however, Sublessor shall have no duty to perform any terms, covenants, conditions to be performed or observed by the Prime Landlord under the Prime Lease. For example, and without limitation, Sublessor shall not be required to provide the services or repairs which the Prime Landlord is required to provide under the Prime Lease. Sublessor shall have no responsibility for or be liable to Sublessee for any default, failure or delay on the part of Prime Landlord in the performance or observance by Prime Landlord of any of the terms, covenants and conditions under the Prime Lease, nor shall such default by Prime Landlord affect this Sublease or waive or defer the performance of any of Sublessee's obligations hereunder except to the extent that such default by Prime Landlord excuses performance by Sublessor under the Prime Lease. Notwithstanding the foregoing, the parties contemplate that Prime Landlord shall, in fact, perform and observe its obligations under the Prime Lease and in the event of any default or failure of such performance by Prime Landlord, Sublessor agrees that it will, upon notice from Sublessee, make demand upon Prime Landlord to perform its obligations under the Prime Lease and, provided that Sublessee specifically agrees to pay all reasonable costs and expenses of Sublessor and provides Sublessor with security reasonably satisfactory to Sublessor to pay such costs and expenses, Sublessor will take appropriate legal action to enforce the Prime Lease. E . Nothing contained in this Sublease shall be construed to create a privity of estate of contract between 5 Sublessee and Prime Landlord except as may be created pursuant to Exhibit C. F. Notwithstanding anything contained herein to the contrary, Sublessee and Sublessor hereby acknowledge that the terms and provisions of this Sublease are specifically contingent upon the delivery to Sublessee and Sublessor of a fully executed agreement by and between Sublessee and Prime Landlord in the same form attached hereto as Exhibit "D". ---------- G. Without limiting its obligations hereunder, Sublessee hereby acknowledges the Prime Landlord's rights as set forth in Sections 10.1, 12.1, 13.3 and 14.10 of the Prime Lease. 3. RENT 3.01 BASE RENT. Sublessee shall pay Sublessor the Base Rent payable in --------- equal monthly installments, set forth below on or before the first day of each calendar month during the Term, except that Base Rent for the first full and any initial partial calendar month shall be paid when Sublessee executes this Sublease.
Lease Year Annual Rate Monthly Installment ---------- ----------- ------------------- Commencement Date - Four Hundred Thirteen $34,432.00 November 30, 2000 Thousand One Hundred Eighty-Four Dollars ($413,184)
(except that the Sublessor will forbear from collecting Base Rent for the four (4) calendar months commencing with the first full month next succeeding the Commencement Date, provided, however, that if the Commencement Date is on the first day of a calendar month, such month shall be the first calendar month which Sublessor forbears collection, (Sublessee shall pay all Additional Rent due for such period), and Sublessee shall instead repay such amounts by way of payments to Sublessor, directly, of an additional $8,500.00 per month in Base Rent from February 1, 1998 to January 31, 1999) December 1, 2000 - Four Hundred Sixty-one Thousand $38,432.00 November 29, 2005 One Hundred Eight-Four Dollars ($461,184) Except as provided in Section 3.03 herein, Sublessee shall pay all Rent, and forward all insurance certificates to Sublessor at the address set forth in Section 1.01B, or such other address or to such other entity as Sublessor shall designate from time to time in writing. 6 3.02 ADDITIONAL RENT. If and to the extent that Sublessor is obligated to --------------- pay Additional Rent under the Prime Lease, Sublessee shall, effective as of the Commencement Date, pay to Sublessor such Additional Rent (to the extent such Additional Rent is attributable to events occurring during the Term of this Sublease). Such payment shall be due from Sublessee to Sublessor at least five (5) days prior to the date upon which Sublessor's payment of such Additional Rent is due to the Prime Landlord, provided that Sublessee shall have been billed therefor at least ten (10) days prior to such due date (which bill shall be accompanied by a copy of Prime Landlord's bill and other material furnished to Sublessor in connection therewith). If any such payments are estimated and paid monthly by Sublessor under the Prime Lease, Sublessee shall pay its share of the estimated monthly payments on the first (1st) day of every month in which a payment is due by Sublessor under the Prime Lease. As of the date hereof, Sublessee's share of such expenses is 100%, subject to adjustment as provided in Section 1.8 and 2.2 of the Prime Lease. Section 2.2 of the Prime Lease provides for an adjustment of the monthly operating Expenses actually paid by Prime Landlord during said year with Sublessor's pro rata share of operating expenses actually paid with respect to such year. To the extent Prime Landlord pays Sublessor any overpayment with respect to Sublessor's pro rata share of operating expenses, Sublessor shall remit to Sublessee such overpayment. Likewise, to the extent Sublessor is obligated to pay any deficiency in the payment of Sublessor's pro rata share of operating expenses, Sublessee shall, within five (5) days after written demand therefor by Sublessor, pay to Sublessor such deficiency. 3.03 SUBLESSEE'S PAYMENT OF RENT DIRECTLY TO PRIME LANDLORD. Sublessee ------------------------------------------------------ shall make all Rent, including Base Rent and Additional Rent, payments due under this Sublease directly to Landlord at Landlord's address set forth in the Prime Lease, except that Sublessor agrees to pay to Prime Landlord the Base Rent due for the four (4) calendar months commencing with the first full month next succeeding the Commencement Date, and Sublessee agrees to pay the additional $8,500.00 per month rent due during the year 1998 directly to the Sublessor. Upon Sublessee's receipt of a notice from Sublessor directing Rent to be paid to Sublessor, Sublessee shall thereafter make all such payments directly to the Sublessor. Except as provided in the Prime Landlord and Sublessee NonDisturbance Agreement, in the event the Sublessee fails to pay any Rent, after notice and within the time set forth in the notice, thereafter, until Sublessee has cured such failure to pay Rent, all Rent due under the Sublease shall be paid directly to Sublessor at the address set forth in Section 1.01 B herein. 4. SECURITY DEPOSIT. ---------------- 7 4.01 SECURITY DEPOSIT. The Sublessee has delivered to Sublessor a ---------------- security deposit in the amount of $150,528.00 as a security deposit for the full and faithful performance of each and every provision of this Sublease to be performed by Sublessee, on the understanding that: (a) the Security Deposit or any portion thereof not previously applied, or from time to time, such one or more portions thereof, may be applied to cure any default that may then exist, without prejudice to any other remedy or remedies which Sublessor may have on account thereof, and upon such application Sublessee shall pay Sublessor on demand the amount so applied which shall be added to the Security Deposit so the same may be restored to its original amount; (b) should the Prime Lease be assigned by Sublessor, the Security Deposit or any portion thereof not previously applied may be paid to the Sublessor's assignee and if the same is paid as aforesaid, Sublessee hereby releases Sublessor from any and all liability with respect to the Security Deposit and/or its application or return; (c) if permitted by law, Sublessor or its successor shall not be obligated to hold the Security Deposit as a separate fund, but on the contrary may commingle the same with its other funds; (d) if Sublessee shall faithfully perform and observe all of the terms, covenants, and conditions in this Sublease and in the Prime Lease set forth and contained on the part of Sublessee to be fulfilled, kept, performed and observed, the sum deposited or the portion thereof not previously applied, shall be returned to Sublessee without interest no later than thirty (30) days after the expiration of the Term of this Sublease or any renewal or extension thereof, provided Sublessee has vacated the Premises and surrendered possession thereof to Sublessor at the expiration of the Term or any extension or renewal thereof as provided herein; (e) in the event that Sublessor terminates this Sublease or Sublessee's right to possession by reason of a Default by Sublessee, Sublessor may apply the Security Deposit against damages suffered to the date of such termination and/or may retain the Security Deposit to apply against such damages as may be suffered or shall accrue thereafter by reason of Sublessee's default; (f) in the event any bankruptcy, insolvency, reorganization or other creditor-debtor proceedings shall be instituted by or against Sublessee, or its successors or assigns, the Security Deposit shall be deemed to be applied first to the payment of any Rent due Sublessor for all periods prior to the institution of such proceedings, and the balance, if any, of the Security Deposit may be retained or paid to Sublessor in partial liquidation of Sublessor's damages. Sublessor's parent corporation, Globelle Corporation, an Ontario corporation, ("Guarantor") has executed the Sublease solely for the purpose of agreeing to guaranty the performance of the Sublessor with respect to the Security Deposit. The Guarantor hereby submits to personal jurisdiction in the State of Minnesota for the enforcement of this Guaranty and waives any and all personal rights to object to such jurisdiction for the purposes of litigation to enforce this Guaranty. In the event such litigation is commenced at any time when Guarantor is not permanently domiciled in the State of 8 Minnesota, Guarantor agrees that service of process may be made and personal jurisdiction over Guarantor obtained, by service of a copy of the summons, complaint and other pleadings required to commence such litigation upon appointed Agent for Service of Process in the State of Minnesota, which Agent Guarantor hereby designates to be: Mary L. Galvin, Bassford, Lockhart, Truesdell & Briggs, Lawyers, 3550 Multifoods Tower, 33 South Sixth Street, Minneapolis, Minnesota, 55402-3787, (612) 333-3000. A copy of all documents served as aforesaid shall be simultaneously sent by mail, Certified, postage prepaid to: Goodman and Carr, Barristers and Solicitors, 200 King Street West, Toronto, Ontario, Canada M5H 3W5, Attention: Mr. J. Blidner Guarantor agrees that this appointment of an agent for service of process is made for the mutual benefit of Guarantor and Sublessee and may not be revoked without Sublessee's consent. Guarantor hereby agrees and consents that any such service of process upon such agent shall be taken and held to be valid personal service upon Guarantor whether or not Guarantor shall be then physically present, residing within, or doing business within the State of Minnesota, and that any such service of process shall be of the same force and validity as if service were made upon Guarantor when physically present, residing within, or doing business in the State of Minnesota. Guarantor waives all claim of error by reason of any such service. Guarantor hereby consents to the exclusive jurisdiction of either the District Court of Hennepin County, Minnesota, or the United States District Court for Minnesota, in any action, suit or proceeding which Owner may at any time wish to file in connection with this Guaranty or any related matter. Guarantor hereby agrees that an action, suit or proceeding to enforce this Guaranty shall be brought in any State or Federal Court in the State of Minnesota and hereby waives any objection which Guarantor may have to the laying of the venue of any such action, suit or proceeding in any such Court; provided, however, that the provisions of this Section shall not be deemed to preclude Sublessee from filing any such action, suit or proceeding in any other appropriate forum. 5. SUBLESSEE'S USE. --------------- 5.01 USE OF THE SUBLEASED PREMISES. Sublessee shall occupy and use the ----------------------------- Subleased Premises only for warehouse and office uses. Sublessee's use of the Subleased Premises shall comply in all respects with Section 3.1 of the Prime Lease. 5.02 PERMITS/CERTIFICATE OF OCCUPANCY. If any governmental license or --------------------------------- permit shall be required for the proper and lawful conduct of Sublessee's business in or occupancy of the Subleased Premises, then Sublessee, at its sole cost and expense, shall procure (and Sublessor and Prime Landlord shall assist and fully cooperate in such efforts to procure, at Sublessee's cost and expense), and thereafter maintain such license(s) or permit(s) and submit the same to Sublessor for inspection. Sublessee shall also be responsible for obtaining the certificate of occupancy, if any, 9 for the Subleased Premises. Sublessee shall comply with the terms and conditions of each such license or permit. 6. RIGHT OF QUIET ENJOYMENT. If the Sublessee pays the Rent and other sums ------------------------ herein provided, and observes and performs all the terms, covenants and conditions on the Sublessee's part to be observed and performed, Sublessee's right of quiet enjoyment of the Subleased Premises, subject to the terms, covenants and conditions of this Lease, shall not be disturbed by Sublessor or those claiming through Sublessor. 7. LATE PAYMENT CHARGE. Other remedies for nonpayment of Rent notwithstanding, ------------------- if the monthly rental payment or any other payment due from the Sublessee to Sublessor is not received by the Sublessor or the Prime Landlord for the account of Sublessor on or before the fifth (5th) day of the month for which rent or such other payments are due, a late payment charge of five per cent (5%) of such past due amount shall become due and payable in addition to such amounts owed under the Sublease. 8. ASSIGNMENT AND SUBLETTING. ------------------------- 8.01 TRANSFER BY SUBLESSEE. Sublessee shall not sublease, assign, pledge, --------------------- mortgage, hypothecate, grant licenses or concessions or otherwise transfer or permit the transfer of Sublessee's interest in this Sublease or the Subleased Premises, in whole or in part, by operation of law or otherwise (including without limitation by transfer of a majority interest of stock, merger, or dissolution, which transfer of majority interest of stock, merger or dissolution shall be deemed an assignment) without the prior written consent of Sublessor and Prime Landlord, which consents may be withheld or granted on the same conditions as are applicable under the Prime Lease with respect to assignments and other transfers of Sublessor's interest thereunder. Any assignee or sublessee of Sublessee or any further assignment or sublease of the Subleased Premises shall be subject to the same terms and provisions set forth in this Section 8.01. 8.02 TRANSFER BY SUBLESSOR. Sublessor may, subject to the Prime Lease, --------------------- assign, transfer, pledge, mortgage, hypothecate or otherwise transfer its interest in this Sublease without consent of Sublessee, provided, Sublessor shall not hereafter assign its interest under this Sublease separate from its interest under the Prime Lease and any such assignee shall assume Sublessor's obligations under this Sublease, including the return of any security deposit. 9. INDEMNITY --------- 9.01 SUBLESSOR INDEMNITY. Sublessor agrees to indemnify, defend, and hold ------------------- harmless Sublessee and its agents and employees, against any and all claims, liabilities, losses, actions, causes of action, judgments, awards, demands, costs and expenses of every kind and nature (including reasonable attorneys' fees and administrative costs), arising from (i) any injury or damage to any 10 person, property or business resulting from the negligence of Sublessor, its employees, agents, contractors, subcontractors, servants, invitees, licensees or Sublessees or (ii) the breach or violation by Sublessor of any term, covenant or condition of this Sublease or the Prime Lease; provided, however, that Sublessor's obligations under this Section shall not apply to injury or damage resulting from the negligence of Sublessee or its agents or employees, the failure of Sublessee to perform its obligations hereunder or under the Prime Lease, or for which Sublessee has insurance. If any such proceeding is brought against Sublessee or its agents or employees, Sublessor covenants to defend such proceeding at its sole cost by legal counsel reasonably satisfactory to Sublessee. Sublessor may satisfy its obligations under this Section from available insurance coverage. 9.02 SUBLESSEE INDEMNITY. Sublessee agrees to indemnify, defend, and hold ------------------- harmless Sublessor, Guarantor and their respective agents and employees, against any and all claims, liabilities, losses, actions, causes of action, judgments, awards, demands, costs and expenses of every kind and nature (including attorneys' fees and administrative costs), including, without limitation, arising from (i) any injury or damage to any person or property resulting from the negligence of Sublessee, its employees, agents, or contractors; or (ii) the breach or violation by Sublessee of any term, covenant or condition of this Sublease or the Prime Lease; provided, Sublessee's obligations under this Section shall not apply to injury or damage resulting from the negligence of Sublessor, its agents and employees, or the failure of Sublessor to perform its obligations hereunder or under the Prime Lease for which Sublessor has insurance coverage. If any such proceeding is brought against Sublessor or its agents or employees, Sublessee covenants to defend such proceeding at its sole cost by legal counsel reasonably satisfactory to Sublessor. Sublessee may satisfy its obligations under the Section from available insurance coverage. 10. DEFAULT. ------- 10.01 EVENTS OF DEFAULT. ----------------- (1) If a party fails to make any payment required when due hereunder, and such failure continues for five (5) business days after written demand for payment of such payment; or (2) If a party fails in the prompt and full performance of any other provisions of this Sublease (including, without limitation, the terms of the Prime Lease which have been incorporated herein) other than the nonpayment of Rent or other payments due under this Sublease, and does not cure such failure within ten (10) days after written demand from the other party that the failure be cured (unless the failure involves a hazardous 11 condition, which shall be cured forthwith or as quickly as reasonably possible); or (3) Sublessee shall, by its act or omission to act, cause a default under the Prime Lease and such default is not cured within the time, if any, permitted for such cure under the Prime Lease; (4) Sublessee shall abandon any substantial portion of the Subleased Premises; (5) Sublessee shall file a petition or, if an involuntary petition is filed against Sublessee, or becomes insolvent, under any applicable federal or state bankruptcy or insolvency law or admits that it cannot meet its financial obligations, or a receiver or trustee shall be appointed for the benefit of creditors; or (6) Sublessee shall do or permit to be done any act which results in a lien being filed against the Subleased Premises. In the event that an order for relief is entered in any case under Title 11, U.S.C. (the "Bankruptcy Code") in which the Sublessee is the debtor and: (A) Sublessee as debtor in possession, or any trustee who may be appointed in the case (the "Trustee") seeks to assume the Sublease, then Sublessee, or Trustee, if applicable, in addition to providing adequate assurance described in applicable provisions of the Bankruptcy Code, shall provide adequate assurance to Sublessor of Sublessee's future performance under the Sublease by depositing with Sublessor a sum equal to the lesser of twenty-five per cent (25%) of the rental and other charges due for the balance of the Sublease term of six (6) months' rent ("Security"), to be held (without an allowance for interest thereon) to secure Sublessee's obligations under the Sublease, and (B) Sublessor, or Trustee, if applicable, seeks to assign the Sublease after assumption of the same, then Sublessor, in addition to providing adequate assurance described in applicable provisions of the Bankruptcy Code shall provide Adequate assurance to Sublessor of the proposed assignee's future performance under the Sublease by depositing with Landlord a sum equal to the Security to be held (without any allowance or interest thereon) to secure performance under the Lease by depositing with Sublessor a sum equal to the Security to be held (without any allowance or interest thereon) to secure performance under the Sublease. Nothing contained herein expresses or implies, or shall be construed to express or imply, that Sublessor is consenting to assumption and/or assignment of the Sublease. Neither Sublessee nor any Trustee shall conduct or permit the conduct of any "lien," "bankruptcy," "going out of business" or auction sale in or from the Subleased Premises. Then, and in any such event (sometimes referred to as an "Event of Default") such party ("Defaulting party") shall be in default. 12 10.02 DEFAULT BY SUBLESSEE. Upon a default by Sublessee, Sublessor may -------------------- exercise any remedy against Sublessee which Prime Landlord may exercise in the event of a default by Sublessor under the Prime Lease, including, without limitation, termination of the Sublease and termination of Sublessee's right to possession of the Subleased Premises. 10.03 DEFAULT OF SUBLESSOR. Upon a default by Sublessor, Sublessee may -------------------- exercise any remedy against Sublessor which Sublessor may exercise in the event of a default by Prime Landlord under the Prime Lease, provided, however, so long as Sublessor is not in default under the Prime Lease for a monetary amount in excess of $5,000, Sublessee shall have no right to terminate this Sublease. 11. SURRENDER OF SUBLEASED PREMISES. Upon any expiration or termination of this ------------------------------- Sublease or termination of Sublessee's right of possession of the Subleased Premises, or any part thereof, Sublessee shall surrender and vacate the Subleased Premises immediately and surrender the Subleased Premises to Sublessor, including the alterations, additions, improvements, equipment, and fixtures requested by Sublessor to remain on the Subleased Premises other than Sublessee moveable trade fixtures, in good condition and repair, shall remove all alterations, additions, improvements and fixtures not requested by Sublessor to remain on the Subleased Premises and shall repair all damage to the Subleased Premises caused by such removal prior to the Expiration Date. Any property not removed from the Subleased Premises upon expiration or termination hereof shall, subject to the rights of Prime Landlord under the Prime Lease, be conclusively presumed to have been abandoned by Sublessee, and Sublessor, or Prime Landlord may, at its option, retain, store and/or dispose of such property at Sublessee's expense. All such property shall, at Sublessor's or Prime Landlord's option, be conclusively deemed to have been conveyed to Sublessor by Sublessee as if by bill of sale without payment by Sublessor. 12. UTILITIES. Sublessee shall obtain and pay for all utilities supplied to the --------- Subleased Premises. Sublessor warrants that electrical, mechanical and plumbing systems are in good working order. 13. INSURANCE. Sublessee shall procure and maintain, at its own cost and --------- expense, such insurance as is required to be carried by Sublessor under the Prime Lease, naming Sublessor as an additional insured, as well as Prime Landlord, in the same manner required for naming Prime Landlord as provided therein. Sublessee shall furnish Sublessor a certificate of Sublessee's insurance required hereunder not later than Sublessee's taking possession of the Subleased Premises. Each party hereby waives claims against the other for property damage provided such waiver shall not invalidate the waiving party's property insurance; each party shall attempt to obtain from its insurance carrier a waiver of its right of 13 subrogation. Sublessee hereby waives claims against Prime Landlord and Sublessor for property damage to the Subleased Premises or its contents if and to the extent that Sublessor waives such claims against Prime Landlord under the Prime Lease. Sublessee agrees to obtain, for the benefit of Prime Landlord and Sublessor, such waivers of subrogation rights from its insurer as are required of Sublessor under the Prime Lease. Sublessor agrees to use reasonable efforts in good faith to obtain from Prime Landlord a waiver of subrogation rights in Prime Landlord's property insurance if and to the extent that Prime Landlord waives such claims against Sublessor under the Prime Lease or is required under the Prime Lease to obtain such waiver of subrogation rights. 14. HAZARDOUS SUBSTANCES. -------------------- 14.01 Representation By Sublessor. Sublessor represents that to the --------------------------- best of Sublessor's knowledge there are no hazardous substances or hazardous wastes, as those terms are defined by the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (SS)9601, et seq. and the Resource Conservation and Recovery Act, 42 U.S.C. (SS)960, et seq., in, on, or about the Subleased Premises. If subsequent to the date Sublessee accepts possession of the Subleased Premises it is determined that there are any Hazardous Materials (as defined below) in the Subleased Premises which were installed after Sublessor obtained possession of the Subleased Premises under the Prime Lease, and such Hazardous Materials are required by applicable federal, state or local law to be removed, encapsulated or otherwise treated ("Remediated"), Sublessor, at Sublessor's expense, shall as soon as practicable after notice thereof from Sublessee, remediate said Hazardous Materials as Sublessor deems appropriate so that all applicable federal, state and local laws are complied with. Such Remediation shall be Sublessee's sole remedy on account of such Hazardous Materials. 14.02 REPRESENTATION BY SUBLESSEE. Sublessee shall not transport, use, --------------------------- store, maintain, generate, manufacture, handle, dispose, release or discharge any "Hazardous Material" (as defined below) upon or about the Subleased Premises or permit Sublessee's employees, agents, contractors, invitees and other occupants of the Subleased Premises to engage in such activities upon or about the Subleased Premises. Sublessee shall promptly notify Sublessor of: (i) any enforcement, cleanup or other regulatory action taken or threatened by any governmental or regulatory authority with respect to the presence of any Hazardous Material on the Subleased Premises or the migration thereof from or to other property, (ii) any demands or claims made or threatened by any party relating to any loss or injury resulting from any Hazardous Material on the Subleased Premises, (iii) any release, discharge or nonrouting, improper or unlawful disposal or transportation of any Hazardous Material on or from the Subleased Premises or in violation of this Section, and (iv) any matters where Sublessee is required by Law to 14 give a notice to any governmental or regulatory authority respecting any Hazardous Material on the Subleased Premises. Sublessor and Prime Landlord shall have the right (but not the obligation) to join and participate, as a party, in any legal proceedings or actions affecting the Subleased Premises initiated in connection with any environmental, health or safety law. The term "Hazardous Material" for purposes hereof shall mean any chemical, substance, material or waste or component thereof which is now or hereafter listed, defined or regulated as a hazardous or toxic chemical, substance, material or waste or component thereof by any federal, state or local governing or regulatory body having jurisdiction, or which would trigger any employee or community "right-to- know" requirements adopted by any such body, or for which any such body has adopted any requirements for the preparation or distribution of an Material Safety Data Sheet. 14.03 USE OF HAZARDOUS MATERIAL. If any Hazardous Material is released, ------------------------- discharged or disposed of by Sublessee or any other occupant of the Subleased Premises, or their employees, agents or contractors, on or about the Subleased Premises in violation of the foregoing provisions, Sublessee shall immediately, properly and in compliance with applicable Laws clean up and remove the Hazardous Material from the Subleased Premises and any other affected property and clean or replace any affected personal property (whether or not owned by Sublessor or Prime Landlord), at Sublessee's expense (without limiting Sublessor's other remedies therefor). Such clean up and removal work shall be subject to Sublessor's and Prime Landlord's prior written approval (except in emergencies), and shall include, without limitation, any testing, investigation, and the preparation and implementation of any remedial action plan required by any court or governmental body having jurisdiction or reasonably required by Sublessor or Prime Landlord. If Sublessor, Prime Landlord or any Lender or governmental body arranges for any tests or studies showing that this Section has been violated, Sublessee shall pay for the costs of such tests. If any Hazardous Material is released, discharged or disposed of on or about the Subleased Premises and such release, discharge or disposal is not caused by Sublessee or other occupants of the Subleased Premises, or their employees, agents or contractors, such release, discharge or disposal shall be deemed casualty damages to the extent that the Subleased Premises are affected thereby; in such case, Sublessee and Sublessor shall have the obligations and rights respecting such casualty damage provided under such Section 15 of this Sublease. 15. DAMAGE BY FIRE OR OTHER CASUALTY. If (i) all or any portion of either the -------------------------------- Subleased Premises are damaged by fire or other casualty, (ii) such event gives Sublessor the right to terminate the Prime Lease or Prime Landlord the right to terminate the Prime Lease, and (iii) either Sublessor (Sublessor shall not exercise such right without the written consent of Sublessee) or Prime Landlord exercises such right; then this Sublease shall terminate 15 in accordance with the provisions of the Prime Lease and all Base Rent and Additional Rent shall be apportioned in accordance with the provisions of the Prime Lease. If Sublessor or Prime Landlord is not entitled to terminate or does not exercise their respective right of termination with respect to a fire or other casualty, then (i) this Sublease shall continue in full force and the Subleased Premises shall be repaired or restored in the same manner and under the same conditions for repair and restoration as provided and required in the Prime Lease and (ii) Base Rent and Additional Rent shall abate in the same manner and for such period as Rent abates under the Prime Lease. 16. EMINENT DOMAIN -------------- 16.01 RESULTING IN TERMINATION. In the event (i) any part of the ------------------------ Subleased Premises is taken or condemned by any competent authority for any public use or purpose or conveyed under threat of such condemnation, (ii) such event gives Prime Landlord the right to terminate the Prime Lease or Sublessor (Sublessor shall not exercise such right without the prior written consent of Sublessee) the right to terminate the Prime Lease, and (iii) either Sublessor or Prime Landlord exercises such right; then this Sublease shall terminate in accordance with the provisions of the Prime Lease, and all Base Rent and Additional Rent shall be apportioned in accordance with the provisions of Prime Lease. 16.02 RESTORATION. In the event any part of the Building or the ----------- Subleased Premises is taken or condemned by any competent authority for any public use or purpose, or is conveyed under threat of condemnation, and the Prime Lease is not terminated by Sublessor or Prime Landlord as a result thereof, then Base Rent and Additional Rent shall be adjusted in the same manner as provided for the adjusted Rent under the Prime Lease. 16.03 CONDEMNATION AWARD. All condemnation awards shall, subject to the ------------------ rights of Prime Landlord under the Prime Lease, be allocated to Sublessee in the manner set forth in Article 8 of the Prime Lease. Sublessee shall be entitled to seek a separate award in accordance with the provisions of the Prime Lease. 17. BROKERAGE COMMISSIONS. Sublessee and Sublessor represent and warrant to --------------------- each other than no real estate brokers, consultants or finders have participated in the negotiation or execution of this Sublease or the Prime Lease, except for Cushman & Wakefield of Minnesota, Inc. Sublessor shall pay Cushman & Wakefield of Minnesota, Inc. a commission of $1.70 per sq. foot, due upon full execution of the Sublease and Sublessee's delivery of the Security Deposit to Sublessor. Sublessee and Sublessor shall defend, indemnify and hold each other and Prime Landlord harmless from all damages, judgments, liabilities and expenses (including attorneys' fees) arising from any claims or demands of any broker, agent or finder with whom Sublessee or Sublessor has dealt for any 16 commission or fee alleged to be due in connection with its participation in the procurement of Sublessee or the negotiation with Sublessee of this Sublease, other than Cushman & Wakefield of Minnesota, Inc. 18. ESTOPPEL CERTIFICATE -------------------- 18.01 Each party shall from time to time, upon not less than ten (10) days prior written request by the other, deliver a statement in writing certifying, if such is the case, (1) this Sublease is unmodified and in full force and effect or, if there have been modifications, that this Sublease, as modified, is in full force and effect; (2) the Commencement Date and the Expiration Date of the Term; (3) all work to be completed by Sublessee to the Subleased Premises has been completed and if not, specifying what has not been completed; (4) the amount of Base Rent then payable hereunder and the date to which such rent has been paid; (5) the other party is not, to such party's knowledge, in default under this Sublease or, if in default, a detailed description of such default(s); and (6) such other information as Sublessee, Sublessor or their respective mortgagee or third party may reasonably request. Each party acknowledges that any statement delivered pursuant to this Section may be relied upon by: (a) any purchaser or sublessee of the Premises or any part thereof or any improvement thereon; (b) any holder of a mortgage (as defined hereafter); and (c) any assignee of any mortgagee under any such mortgage. 19. SIGNAGE. Subject to Prime Landlord's and Sublessor's prior written ------- approval and provided said signage complies with the requirements set forth in the Prime Lease and Exhibit E of the Prime Lease, Sublessee shall have the right to place monument signage on the existing structure located on the grounds of the Premises as well as signage above the entry door. Sublessor shall provide Sublessee with an allowance of $5,000.00 in connection with such signage. 20. NOTICES. All notices required or permitted to be given hereunder shall be ------- in writing and shall be deemed given and delivered: (1) if by personal or courier service delivery, on the date of such delivery; (2) if by mail, whether or not received, three (3) business days after being deposited in the United States Mail, postage prepaid and properly addressed, certified or registered mail, return receipt requested; (3) if by recognized overnight mail, air-express or courier service (or by telecopy if the addressed is not in the United States), on the date of such delivery, at the following addressed: (1) To Sublessee at the address specified in Section 1.01B or such other address as Sublessee shall designate by written notice to Sublessor and a copy to Larkin, Hoffman, Daly and Lindgren, Ltd., Attention: Thomas P. Stoltman, 1500 Norwest Financial Center, 7900 Xerxes Avenue South, Bloomington, Minnesota 55431; and (2) To Sublessor at the address specified in Subsection 1.01C, with a copy to Holleb & Coff, 55 E. 17 Monroe Street, Suite 4100, Chicago, IL 60603, Attention: Allan S. Brilliant, or at such other address(es) as Sublessor shall hereafter designate by written notice to Sublessee. 21. MISCELLANEOUS. ------------- 21.01 ENTIRE AGREEMENT. This Sublease and the Exhibits attached hereto ---------------- contain the entire agreement between Sublessee and Sublessor concerning the Subleased Premises and supersedes all other prior agreements, either oral or written, except the Prime Lease. Sublessee acknowledges that neither Sublessor nor its respective agents or employees have made any representations, warranties or promises with respect to the Subleased Premises or the making or entry into of this Sublease except as expressly set forth in this Sublease. 21.02 EXECUTION. This Sublease shall be of no force or effect unless --------- and until executed and delivered by all parties hereto. No provision of this Sublease may be amended except in writing signed by all parties hereto or their successors. By execution hereof, Sublessee acknowledges that it has receive a complete and correct copy of the Prime Lease. 21.03 BINDING EFFECT. This Sublease shall be binding upon and inure to -------------- the benefit of Sublessee and Sublessor and their respective permitted legal representatives, successors and assigns. 21.04 FORCE MAJEURE. Except as otherwise provided in the Prime Lease, ------------- neither party shall be deemed to be in default with respect to any of the terms, covenants and conditions of this Sublease on the part of such party to be performed if the party whose performance is delayed fails to timely perform the same and such failure is due in whole or in part to any strike, lockout, labor trouble (whether legal or illegal), civil disorder, inability to procure required materials, failure of power, restrictive governmental laws and regulations, riots, insurrections, war, fuel shortages, accidents, casualties, acts of God, acts caused directly or indirectly by the other party (or such other party's agents or employees) or any other cause beyond the reasonable control of the party whose performance is so delayed; provided, however, that the time for performance shall in no event be extended due to financial or economic problems of either party, their architects, contractors, agents or employees. It shall be a condition of either party's right to claim an extension of time under this Section that such party notify the other in writing within ten (10) days after the occurrence of such cause, specifying the nature thereof and the period of time contemplated or necessary for performance. 21.05 CAPTIONS. The Article and Section captions in this Sublease are -------- inserted only as a matter of convenience and in no way 18 define, limit, construe, or describe the scope or intent of such Articles and Sections. 21.06 DEFINITIONS. All capitalized terms not defined herein shall have ----------- the meanings ascribed thereto in the Prime Lease. 21.07 APPLICABLE LAW. This Sublease shall be construed in accordance -------------- with the laws of the State of Minnesota. 21.08 TIME. Time is of the essence of this Sublease with respect to the ---- performance of all monetary obligations hereunder. 21.09 PARTIAL INVALIDITY. Each term, covenant and condition of this ------------------ Sublease shall be valid and be enforced to the fullest extent permitted by law. If any term, covenant, or condition of this Sublease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Sublease, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby. 21.10 TRIAL BY JURY. SUBLESSEE AND SUBLESSOR AGREE THAT THEY HEREBY ------------- WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES TO THIS SUBLEASE AGAINST THE OTHER ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS SUBLEASE, THE RELATIONSHIP OF SUBLESSEE AND SUBLESSOR, THE USE OR OCCUPANCY OF THE SUBLEASED PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE, OR FOR THE ENFORCEMENT OF ANY REMEDY UPON ANY STATUTE, EMERGENCY OR OTHERWISE. 21.11 CUSTOM AND USAGE; CONSTRUCTION. Failure of either party to ------------------------------ enforce its rights under any provision of this Sublease or any other agreement between Sublessee and Sublessor shall not be construed as having created a custom in any way or course of dealing of manner contrary to the specific terms, provisions and covenants of this Sublease or as having in any manner modified the same. If any term, covenant, condition or agreement of this Sublease is capable of two or more constructions, one or more of which would render the provision void, and the other or others of which would render the provision valid, then the provision shall have the meaning or meanings which would render it valid. Both parties have participated in the negotiation and preparation of this Sublease with the assistance of competent legal counsel. Accordingly, this Sublease shall not be construed for or against Sublessee or Sublessor, but this Sublease shall be interpreted in accordance with the general tenor of the language in an effort to reach the intended result. 21.12 RECORDING. Upon written request of either party, the parties --------- shall execute and acknowledge a memorandum of this Sublease in form contained in Exhibit "E" which shall be recorded at the - ----------- 19 expense of the party requesting such recording. Sublessor shall record no other memorandum, affidavit or copy of this Sublease. 21.13 JURISDICTION. Sublessee hereby consents to the jurisdiction of ------------ either the District Court of Hennepin County, Minnesota, or the United States District Court for Minnesota, in any action, suit or proceeding which Sublessor may at any time wish to file in connection with this Sublease or any related matter. Sublessee hereby agrees that an action, suit or proceeding to enforce this Sublease shall be brought in any State or Federal Court in the State of Minnesota and hereby waives any objection which Sublessee may have to the laying of the venue of any such action, suite or proceeding in any such Court; provided, however, that the provisions of this Section shall not be deemed to preclude Sublessor from filing any such action, suit or proceeding in any other appropriate forum. 21.14 ATTORNEYS' FEES. If any legal action, arbitration or other --------------- proceeding is brought for the enforcement of this Sublease, or because of an alleged dispute, breach, default, or misrepresentation in connection with any of the provisions of this Sublease, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other expenses and costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled. As used herein, the term "successfully or prevailing party" shall be the party which by law is entitled to recover its costs of suit, whether or not the action proceeds to final judgment. If the party which instituted the suit shall dismiss as against the other party without the concurrence of the other party, the nondismissing party shall be deemed the successful or prevailing party. 21.15 CONSENT BY MORTGAGEE. This Sublease shall not become effective -------------------- and Sublessee shall not take possession of the Subleased Premises until such time as Prime Landlord's mortgagee, IDS Life Insurance Company, has consented in writing, to the Sublease and entered into an agreement with Sublessee providing for the Sublessee's continued possession of the Subleased Premises if Sublessee is not in default under the Sublease and Sublessee's agreement to attorn to such mortgagee. 20 21.16 COUNTERPARTS. This Agreement may be executed in multiple ------------ counterparts, both of which shall constitute one and the same instrument. Additionally, this Agreement may contain more than one counterpart of the signature page and this Agreement may be executed by affixing counterpart signature page(s) containing the signatures of both of the parties hereto. All of such counterpart signature pages shall be read as though one and they shall have the same force and effect as though all of the signers had signed a single signature page. IN WITNESS WHEREOF, this Sublease has been executed as of the date set forth above. SUBLESSOR: SUBLESSEE: 1250895 ONTARIO LIMITED, NETCO COMMUNICATIONS CORPORATION, an Ontario corporation a Minnesota corporation By [SIGNATURE ILLEGIBLE] By______________________________ ---------------------------- Its___________________________ Its_____________________________ Executed this ____ day of September, 1997, solely for the purposes described in Section 4.01 of the Sublease: GLOBELLE CORPORATION, an Ontario corporation By [SIGNATURE ILLEGIBLE] ------------------------------ Its_____________________________ 21 21.16 COUNTERPARTS. This Agreement may be executed in multiple ------------ counterparts, both of which shall constitute one and the same instrument. Additionally, this Agreement may contain more than one counterpart of the signature page and this Agreement may be executed by affixing counterpart signature page(s) containing the signatures of both of the parties hereto. All of such counterpart signature pages shall be read as though one and they shall have the same force and effect as though all of the signers had signed a single signature page. IN WITNESS WHEREOF, this Sublease has been executed as of the date set forth above. SUBLESSOR: SUBLESSEE: 1250895 ONTARIO LIMITED, NETCO COMMUNICATIONS CORPORATION, an Ontario corporation a Minnesota corporation By______________________________ By /s/ John Washburn ----------------------------- Its_____________________________ Its Executive Vice President ----------------------------- Executed this ____ day of September, 1997, solely for the purposes described in Section 4.01 of the Sublease: GLOBELLE CORPORATION, an Ontario corporation By______________________________ Its_____________________________ 22 LEGAL DESCRIPTION ----------------- 6100 West 110th Street Bloomington, MN Block 1, Lot 2, Nesbitt Industrial Park 2nd Addition EXHIBIT A EX-10.13 28 EMPLOYMENT AGREEMENT - EDWARD J. DRISCOLL III EXHIBIT 10.13 EXECUTIVE EMPLOYMENT AGREEMENT ------------------------------ AGREEMENT, made and entered into as of the 14th day of November, 1996, by and between Netco Communications Corporation, a Minnesota corporation (the "Corporation"), and Edward J. Driscoll, III ("Executive"). RECITALS: -------- WHEREAS, the Executive is the President and Chief Executive Officer of the Corporation; WHEREAS, the Executive's leadership and services have constituted a major factor in the successful growth and development of the Corporation's business; and WHEREAS, the Corporation desires to employ and retain the unique experience, ability and services of the Executive as a principal executive officer; and WHEREAS, the Corporation and the Executive desire to record the terms of Executive's continued employment by the Corporation; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1.) Term of Employment. Subject to the terms and conditions of this ------------------ Agreement, the Corporation hereby employs Executive and Executive hereby accepts employment for the period commencing October 1, 1996, and ending December 31, 1998, and thereafter for successive one year periods ending December 31 of each succeeding year unless and until the employment is terminated in accordance with the provisions of this Agreement. Each December 31, commencing December 31, 1998, shall be designated the "Annual Renewal Date." 2) Duties, Responsibilities, and Authority. During the term of this --------------------------------------- Agreement, Executive shall serve as Chief Executive Officer of the Corporation. As such, Executive shall be responsible for the overall direction of the Corporation and he shall have such duties as are generally appropriate to his 1 position and such authority as shall be required to enable him to perform these duties, including but not limited to the authorities and duties currently prescribed in the Articles of Incorporation and the Bylaws of the Corporation, subject to the power of the shareholders and/or directors of the Corporation to amend or modify such Articles of Incorporation or Bylaws. The Executive shall exert his best efforts and devote substantially all of his time and attention to the Corporation's business. The Executive shall be in complete charge of the operations of the Company, and shall have full authority and responsibility, subject only to the general direction, approval, and control of the Corporation's Board of Directors, for formulating policies and administering the Corporation in all respects. His powers shall include authority to hire and fire Corporation personnel, except for members of the Board of Directors who are also employees of the Corporation, and to retain consultants when he deems necessary to implement Corporation policies. 3.) Location of Employment. Executive's services shall be rendered ---------------------- principally in Minneapolis, Minnesota and Executive shall not be required, without his consent, to change his residence or work location from either Hennepin County or Ramsey County, Minnesota by virtue of his employment with the Corporation. 4.) Compensation, Benefits, Expenses. -------------------------------- (a) Salary. The Corporation shall pay Executive a base salary at an ------ annual rate of $150,000.00 commencing October 1, 1996. Salary shall be paid in accordance with the Corporation's regular payroll procedure, but not less frequently than monthly. Executive's base salary shall be reviewed periodically (at intervals of not more than 12 months) by the Board of Directors of the Corporation ("the Board of Directors" or "Board") or a committee thereof for the purpose of considering increases thereof. In evaluating increases in salary, such factors as corporate performance, individual merit, inflation and other appropriate considerations shall be taken into account. (b) Stock Option. In addition to any other compensation or benefits ------------ to which the Executive may be entitled under this Agreement or otherwise, Executive shall receive options to acquire Four Hundred Thousand (400,000) shares of the capital stock of the Corporation in accordance with the terms of that certain Stock Option Agreement which is attached hereto and marked Exhibit A. (c) Bonus and Other Compensation. The Executive shall be entitled to ---------------------------- additional bonus and other compensation as may be established from time to time by the Board of Directors based upon an annual business plan which shall set goals (which shall include achievement of revenue and 2 profit measures which are reasonable at the time established) for the Corporation. (d) Vacation. During each year of his employment, Executive will be -------- entitled to reasonable vacations not exceeding five weeks per year, holidays and time off when ill, all at full pay. Vacations shall be at such time or times and for such periods as Employer and Executive shall agree. (e) Automobiles. The Corporation recognizes the Executive's need for ----------- an automobile or automobiles for business purposes. It, therefore, shall provide the Executive with a reasonably suitable automobile or automobiles, including all related maintenance, repairs, insurance and other costs associated with such automobiles during the term of this Agreement or any renewal or extension thereof. (f) Expenses. The Corporation recognizes that Executive will have to -------- incur certain out-of-pocket expenses related to his services and the Corporation's business and that it will be extremely difficult to account for such expenses. It is understood that Executive's compensation is intended to cover all such out-of-pocket expenses. The Corporation, however, shall reimburse Executive for any specific expenditures incurred for travel, lodging, entertainment, and the like upon submission of appropriate receipts and documentation sufficient to substantiate them as reasonable and necessary business expenses. (g) Employee Benefits. This Agreement shall not be in lieu of any ----------------- rights, benefits and privileges to which Executive may be entitled as an employee of the Corporation under any retirement, pension, profit-sharing, insurance, group life insurance, hospitalization, surgical and major medical coverage, and long-term disability or other plans which may now be in effect or which may hereafter be adopted. Executive shall have the same rights and privileges to participate in such plans and benefits as any other employee during his period of employment. In addition, to the extent appropriate for a senior executive of the Corporation, Executive shall be entitled to participate in any pension and retirement plans, bonus plans and such other fringe benefit programs or plans as are or may be made available from time to time to executive and/or other salaried Executives of the Corporation. 5.) Termination. ----------- (a) Events of Termination. This Agreement may be terminated upon --------------------- the occurrence of any one of the following events: 3 (1) Voluntary. Executive may terminate this Agreement at any time --------- during the term of this Agreement by giving 30 days prior written notice of termination to the Board. (2) Involuntary Without Cause. The Board, without cause, may ------------------------- terminate this Agreement on any Annual Renewal Date during the term of this Agreement upon written notice to Executive at least 90 days prior to an Annual Renewal Date. (3) Involuntary With Cause. The Board, upon written notice effective ---------------------- immediately, may terminate this Agreement at any time during the term of this Agreement for cause. "Cause" for purposes of such termination shall mean the following: a. admission or conviction of an act of dishonesty by Executive with respect to the material interests of the Corporation; b. willful misfeasance or willful nonfeasance of a duty intended to injure or having the effect of injuring the reputation, business relationships of the Corporation, provided that for purposes hereof Executive shall not be deemed to have committed willful misfeasance or willful nonfeasance by reason of any act or failure to act by Executive done in good faith; c. conviction of Executive upon a charge of any crime involving moral turpitude or any felony reflecting unfavorably upon the Corporation; or d. Failure, neglect or refusal by Executive to perform his duties and responsibilities as set forth in this agreement (other than by reason of disability due to physical or mental illness or by reason of permitted vacations or holidays) without the same being corrected upon ninety (90) business days prior written notice from the Corporation specifying such non-performance. (4) Bankruptcy. This Agreement may be terminated by either party upon ---------- written notice to the other effective immediately if the other party to this Agreement: a. is adjudicated as a bankrupt; 4 b. is subject to the entry of an order, judgment, or decree by any court of competent jurisdiction approving a petition appointing a trustee, receiver, or liquidator of all or a substantial part of the party's assets; c. makes or attempts to make an assignment for the benefit of creditors; or d. institutes or attempts to institute voluntary bankruptcy proceedings. (5) Death. This Agreement shall terminate upon the death of the ----- Executive. (6) Disability. This Agreement shall terminate upon the permanent ---------- disability of Executive. For the purposes of this Agreement, Executive shall be deemed permanently disabled if any ailment, illness or other incapacity prevents him from performing his duties as specified in this Agreement for a period of six consecutive months or for an aggregate of six months in any twelve month period from the date of this Agreement. (7) Purchase of Executive's Shares by WorldCom Inc. This Agreement ---------------------------------------------- shall terminate on the Annual Renewal Date next following sale by Executive of all shares and options to purchase shares of the Corporation owned by him to WorldCom Inc. pursuant to Section 4.02 of that certain Preferred Stock, Subordinated Note and Warrant Purchase Agreement between WorldCom Inc. and the Corporation ("Preferred Stock Purchase Agreement"). (b) Consequences of Termination. --------------------------- (1) In the event of the termination of this Agreement in accordance with Subparagraph 5(a)(1) or 5(a)(3) above (voluntary termination or involuntary termination with cause), Executive shall be entitled to the base salary earned by him prior to the date of termination as provided herein computed on a pro rata basis to and including such date of termination. In addition, Executive shall also be reimbursed for his reasonable business expenses incurred prior to the date of termination. (2) In the event of the termination of this Agreement in accordance with Subparagraph 5(a)(7) above (purchase of 5 Executive's shares by WorldCom), Executive shall be entitled to the base salary earned by him prior to the date of termination as provided herein computed on a pro rata basis to and including such date of termination. In addition, Executive shall also be reimbursed for his reasonable business expenses incurred prior to the date of termination. In the event termination pursuant to Subparagraph 5(a)(7) above occurs on or prior to December 31, 1999, then, to the extent that the consideration received by Executive in exchange for his options to purchase shares of the Corporation is a non-cash consideration, all stock options under the Stock Option Agreement (Exhibit A) that have not theretofore vested (including any and all options or rights received or exchanged therefor by Executive as a consequence of the transaction occurring pursuant to Section 4.02 of the Preferred Stock Purchase Agreement) shall immediately vest and become exercisable in accordance with the provisions of said Stock Option Agreement thereto applicable. In addition, in the event termination pursuant to Subparagraph 5(a)(7) occurs on or prior to December 31, 2000, then Executive shall also receive a lump sum payment in the amount of Seventy Five Thousand Dollars ($75,000). (3) If the Corporation terminates this Agreement without cause pursuant to Subparagraph 5(a)(2) above (involuntary without cause), Executive shall be entitled to receive a severance cash payment as liquidated damages for, and in lieu of, any and all damages which he may incur as a result of such termination in an amount equal to the greater of (i) the Executive's then base salary for two years, or (ii) the amounts reasonably estimated to be due hereunder for the two year period following the Annual Renewal Date upon which the termination becomes effective, which shall be payable within 30 days from the date of termination plus, in either case, one half of the cash bonus (determined pursuant to Paragraph 4(c) above relating to Bonus and Other Compensation), to which Executive would have been entitled had he continued in the employment of the Corporation for the year following termination, which payment shall be payable in accordance with Paragraph 4(b). Additionally, If the Corporation terminates this Agreement without cause pursuant to Subparagraph 5(a)(2) above, an stock options under the Stock Option Agreement (Exhibit A) that have not theretofore vested shall immediately vest and become exercisable in 6 accordance with the provisions of said Stock Option Agreement. (4) In the event this Agreement is terminated due to the death (pursuant Subparagraph 6(a)(5)) or disability (pursuant to Subparagraph 6(a)(6)) of Executive, Executive (or his estate) shall be entitled to his then base salary for a period of six months, plus the cash bonus payable with respect to the fiscal year of death or disability, in accordance with normal payment procedures under this Agreement. 6.) Non-Competition. Executive covenants and agrees that: --------------- (a) During the term of this Agreement, he shall not without the prior written consent of the Corporation, directly or indirectly, as an Executive, employer, agent, principal, proprietor, partner, stockholder, consultant, director, or corporate officer, engage in any business engaged in the high-speed, transaction based electronic data transportation and delivery business (the "Competitive Business") or render any services to any business that is engaged in a Competitive Business. (b) For a period of two years (the "Non-Competition Period") after Executive has ceased to be employed by the Corporation or any subsidiary of the Corporation, Executive shall not without the prior written consent of the Corporation: (1) directly or indirectly engage in, or (2) be employed by any person, firm, partnership, association, corporation or business organization, entity or enterprise that is, or is about to become, directly or indirectly engaged in, any Competitive Business. For purposes hereof, "Competitive Business" shall mean engaging or having a material interest, directly or indirectly as owner, employee, officer, director, partner, venturer or stockholder, capital investor, consultant, agent, principal advisor or otherwise, either alone or in association with others, in the operation of a high speed, transaction based, electronic data transportation and delivery business; provided, however, that the restrictions contained in this Subparagraph (b) shall not apply to any business that does not meet both of the following requirements: (1) the Corporation or a subsidiary of the Corporation shall have operated such business, or had such business in the planning or development stage therein, during the 120-day period 7 immediately prior to Executive's ceasing to be employed by the Corporation or any subsidiary of the Corporation, and (2) Executive, during such period, shall have had substantial planning, development, administrative or operational responsibilities for such business of the corporation or such subsidiary of the Corporation in such area. (c) Executive shall not during the Non-Competition Period (i) solicit any employee of the Corporation to engage in a Competitive Business, or (ii) personally solicit customers of the Corporation in a manner which is competitive with the Corporation. (d) If the scope of any restrictions contained in Subparagraphs 6(a), (b) or (c) hereof are too broad to permit enforcement of such restrictions to their full extent, then such restrictions shall be enforced to the maximum extent permitted by law, and Executive hereby consents and agrees that such scope may be judicially modified accordingly in any proceeding brought to enforce such restrictions. Ownership of less than five (5%) percent of the outstanding stock of a corporation traded on a national securities exchange shall not be deemed to breach or conflict with the provisions of Subparagraphs (a) or (b) of this Section 6. 7.) Trade Secrets. Executive 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, 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 this paragraph shall be a material breach of this Agreement. 8.) Disclosure and Assignment. Except as provided elsewhere in this ------------------------- Agreement, Executive 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, relating to high-speed, transaction based electronic data transportation and delivery services, which while the Executive is employed by the Corporation are made, conceived or reduced to practice by Executive, alone or with others, during or after usual working hours, either on or off the job, and Executive hereby 8 assigns to the Corporation all such ideas, discoveries, inventions and improvements relating to high-speed, transaction based electronic data transportation and delivery to be the Corporation's exclusive property. 9.) Disclosure and Right of First Refusal. Paragraph 8 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 Executive's own time, and (1) --- --- which does not relate (a) directly to high-speed, transaction based electronic data transportation and delivery or (b) to the Corporation's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Executive for the Corporation. Executive 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 Executive and the Corporation. In the event the Corporation and Executive cannot agree on terms and Executive 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 Executive shall have the obligation to offer to the Corporation the idea, discovery, invention or improvement on such terms as offered to the other party. 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 Executive 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 which was developed --- entirely on the Executive'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 Executive 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. 9 10.) Assistance to the Corporation. Executive shall give the Corporation, ----------------------------- at the Corporation's expense, all assistance the Corporation reasonably requires to perfect, protect, and exercise the rights to all ideas, discoveries, inventions or improvements acquired by the Corporation pursuant to the assignment provisions of Paragraph 8 of this Agreement or the right of first refusal provisions of Paragraph 9 of this Agreement. 11.) Documents and Tangible Property. All documents or other tangible -------------------------------- property relating in any way to the business of the Corporation which are conceived or generated by Executive or come into Executive's possession during Executive's employment shall be and remain the Corporation's exclusive property, and Executive agrees to return all such documents and tangible property to the Corporation upon termination of Executive's employment by the Corporation or at such earlier or later time the Corporation may request Executive to do so. 12.) Remedies for Breach of Covenants of Executive. The covenants set --------------------------------------------- forth in Paragraphs 6, 7, 8, 9, 10 and 11 of this Agreement shall continue to be binding upon Executive, notwithstanding the termination of his employment with the Corporation for any reason whatsoever. Such covenants shall be deemed and construed as separate agreements independent of any other provisions of this Agreement. The existence of any claim or cause of action by Executive against the Corporation, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Corporation or any or all of such covenants. It is expressly agreed that the remedy at law for the breach of any such covenant is inadequate and that temporary and permanent injunctive relief shall be available to prevent the breach or any threatened breach thereof, without the necessity of proof of actual damages; provided, however, that it is expressly agreed that the provisions of Subparagraph 6(b) shall immediately become void and no longer of any effect whatsoever in the event of a merger or consolidation of the Corporation into another corporation in which the Corporation is not the surviving corporation or which requires the stockholders of the Corporation to exchange their shares of Common Stock of the Corporation for any other class of capital stock, expressly excepting any transaction involving the issuance of the capital stock of WorldCom Inc. The termination of such provision shall be effective on the effective date of such merger or consolidation. 13.) Notices. Any notices to be given hereunder by either party to the ------- other may be effected either by personal delivery in writing or by mail, registered or certified, postage prepaid, with return receipt requested. Personal delivery to the Corporation shall mean personal delivery to the Chairman of the Board of Directors. Mailed notices shall be addressed to the respective addresses shown below. Either party may change its address for notice by giving written notice in accordance with the terms of this Paragraph 13. 10 (a) If to Executive: Edward J. Driscoll 2500 Christian Drive Chaska, Minnesota 55318 (b) If to the Corporation: Netco Communications Corporation 104 Union P1aza 333 North Washington Ave. Minneapolis, MN 55401 with a copy to: WorldCom Inc. 515 E. Amite Jackson, Mississippi 39201 Attention: K. William Grothe, Jr. Vice President 14.) Successors and Assigns: Sale of Business. ---------------------------------------- (a) The Corporation's rights and obligations under this Agreement shall inure to the benefit of and shall be binding upon the Corporation's successors and assigns. (b) In the event of a merger or consolidation of the Corporation with any other corporation or corporations, the sale by the Corporation of a major portion of its assets or of its business and goodwill, or any other corporate reorganization involving the Corporation, this Agreement shall be assigned and transferred to such successor in interest as an asset of the Corporation; and the Corporation agrees that it shall make it a condition of such sale or transfer agreement that the purchaser or assignee shall assume the Corporation's obligations under this Agreement. (c) In the event of any such assignment, the Executive agrees to continue to perform his duties according to the terms of this Agreement to or for such assignee or transferee of this Agreement; provided, however, the Corporation shall remain secondarily liable as a guarantor of such assignee's or transferee's obligations to the Executive under this Agreement. The Executive acknowledges that his services are unique and personal, and, accordingly, the Executive may not assign his rights (except the right to receive payments due to him) or delegate his duties or obligations under this Agreement. 11 15.) General Provisions. ------------------ (a) Law Governing. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of Minnesota. (b) Invalid Provisions. If any provision of this Agreement is held to ------------------ be illegal, invalid, or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and still be legal, valid or enforceable. (c) Entire Agreement. This Agreement sets forth the entire ---------------- understanding of the parties and supersedes all prior agreements or understandings, whether written or oral, with respect to the subject matter hereof. The prior Employment Agreement dated September 24, 1994 between the parties hereto is terminated. No terms, conditions, warranties, other than those contained herein, and no amendments or modifications hereto shall be binding unless made in writing and signed by the parties hereto. (d) Binding Effect. This Agreement shall extend to and be binding upon -------------- and inure to the benefit of the parties hereto, their respective heirs, representatives, successors and assigns. This Agreement may not be assigned by Executive. (e) Waiver. The failure of either party to insist in any one or more ------ instances upon performance of any term or condition of this Agreement shall not be construed a waiver of its future performance. The obligations of either party with respect to such term, covenant or condition shall continue in full force and effect. (f) Titles. Titles of the paragraphs herein are used solely for ------ convenience and shall not be used for interpretation or construing any word, clause, paragraph, or provision of this Agreement. (g) Counterparts. This Agreement may be executed in two or more ------------ counterparts each of which shall be deemed an original, but which together shall constitute one and the same instrument. 12 IN WITNESS WHEREOF, the Corporation and Executive have executed this Agreement as of the date and year first written "EXECUTIVE" NETCO COMMUNICATIONS CORPORATION /s/ Edward J. Driscoll, III /s/ Edward J. Driscoll, III ________________________________ By:_________________________________ Edward J. Driscoll, III Edward J. Driscoll, III Chief Executive Officer 13 Exhibit A to Executive Employment Agreement STOCK OPTION AGREEMENT THIS AGREEMENT, made and entered into as of and effective this 14th day of November 1996, by and between NETCO COMMUNICATIONS CORPORATION, a Minnesota corporation (hereinafter referred to as the "Corporation") and EDWARD J. DRISCOLL, III, a resident of the State of Minnesota (hereinafter referred to as the "Executive"). WHEREAS, the Corporation considers it desirable and in its best interests that the Executive 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: Section I - Grant of Option 1.01 Grant of Option. The Corporation grants to Executive an Option --------------- (the "Option") to purchase FOUR HUNDRED THOUSAND (400,000) common shares of the Corporation at a purchase price of $4.81 per share. Section II - Term and Duration 2.01 Term and Duration. The Option shall have a term commencing with ----------------- the date first above written and expiring on December 31, 2007. Section III - Vesting 3.01 Vesting of Option. Subject to earlier vesting and exercise ----------------- provisions of Paragraph 3.02 hereof, the Option shall vest and may be exercised in incremental amounts at the rate of fifty (50) shares for each Installed Customer Site that becomes first installed during a calendar quarter during the term of the Option, commencing with the calendar quarter ending March 31, 1997, and for each successive calendar quarter through expiration of the term of the Option. 3.02 Earlier Vesting of Option. The provisions of Paragraph 3.01 to ------------------------- the contrary notwithstanding, the Option shall immediately vest and become immediately exercisable in its entirety in any of the following events: A-1 Edward J. Driscoll, III Stock Option Agreement November 14, 1996 (a) Executive's employment by the Corporation is terminated "involuntarily without cause" as that phrase is defined in that certain Employment Agreement (the "Employment Agreement") between the Corporation and the Executive, dated of even date with this Stock Option Agreement; (b) The Employment Agreement is terminated pursuant to Section 5(a)(7) of the Employment Agreement prior to December 31, 1999. (c) An Acquisition or Change of Control occurs during the period commencing January 1, 1997 and ending January 31, 1999. 3.03 Definitions. For purposes of this Section 3, the following words ----------- shall have the meanings ascribed to them. (a) Acquisition. "Acquisition" means either (i) the purchase of all or ----------- substantially all of the assets of the Corporation by any person or party, or (ii) the merger or consolidation of the Corporation with any person or party; provided that neither (i) the purchase of all or substantially all of the assets of the Corporation by WorldCom Inc., nor (ii) a merger or consolidation in which the shares of the Corporation are exchanged for shares WorldCom Inc., of a class that is registered under the Securities Exchange Act of 1934 shall be deemed to be an "acquisition" for purposes hereof. (b) Change of Control. "Change of Control" means the election by ----------------- shareholders of the Corporation of a majority of directors of the Corporation who were not recommended by the Corporation's executive management for nomination for election as directors, provided that election of a majority of the directors of the Corporation who receive the affirmative vote of WorldCom Inc., shall not be deemed a change of control. (c) Customer. "Customer" shall mean a customer of the Corporation -------- who has subscribed to, and agreed to pay for, Use Fees for use of the Corporation's WAM!NET Service. (d) Installed Customer Site. "Installed Customer Site" shall mean a ----------------------- customer that has been continually connected to the Corporation's WAM!NET Service for at least Ninety (90) days or has begun either (i) to pay minimum monthly Use Fees under a service agreement or (ii) to incur use charges under an agreement having no minimum monthly Use Fees. A-2 Edward J. Driscoll, III Stock Option Agreement November 14, 1996 (e) Use Fees. "Use Fees" shall mean fees payable by a Customer for use of -------- WAM!NET Services, and shall include fees payable by a Customer relating to remote proofing and digital image archiving and retrieval services. (f) WAM!NET Service. "WAM!NET Service" shall mean the Corporation's --------------- WAM!NET(TM) Electronic Data Transportation and Delivery Service (the "WAM!NET Service") as presently configured or as may be configured in the future, and shall include services relating to remote proofing and digital image archiving and retrieval services. Section IV - Exercise and Payment 4.01 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, accompanied by payment in cash or exercise of the Conversion Right as provided, respectively, in Paragraphs 4.02 or 4.03 hereof, or by some combination thereof. The notice shall specify how many shares are being acquired for cash in accordance with Paragraph 4.02 hereof, and how many by exercise of the Conversion Right in accordance with Paragraph 4.03 hereof. The notice shall also be accompanied by any document reasonably required by the Corporation to be executed by Executive acknowledging the applicable restrictions on the transfer of the common shares being purchased as set forth under Section 7.02 of this Agreement. 4.02 Payment in Cash. The notice specified in Paragraph 4.01 hereof shall --------------- be accompanied by payment of the option price for the shares being purchased for cash, which shall be in the form of cash or 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 acceptable to the Corporation. 4.03 Payment by Exercise of Conversion Right. In the alternative, the --------------------------------------- notice specified in Paragraph 4.01 hereof shall be accompanied by payment for the shares being purchased by exercise of the Conversion Right provided in this paragraph. The holder of this option shall have the right to require the Corporation to convert this option, to the extent then vested, to shares of Common Stock of the Corporation at any time prior to December 31, 2006. Upon exercise of the Conversion Right, the Corporation shall deliver to the holder of this Option (without payment of the exercise price in cash or check as provided in Paragraph 4.02 thereof) shares of the Corporation's common Stock in number equal to the quotient obtained by dividing A-3 Edward J. Driscoll, III Stock Option Agreement November 14, 1996 (a) 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, as determined immediately prior to the exercise of the Conversion Right, of the aggregate Fair Market Value of the shares for which the Option may be exercised by (b) the Fair Market Value of one share of common stock immediately prior to the exercise of the Conversion Right. The immediately preceding formula is illustrated by the following example where (i) the number of optioned shares being acquired by exercise of the Conversion Right is 10,000, (ii) the per share exercise price of the Option is $4.81, and (iii) the applicable Fair Market Value is $14.43: [(10,000 x 14.43) - (10,000 x 4.81)] / 14.43 = [144,300 - 48,100] / 14.43 = 96,200 / 14.43 = 6,667 shares. 4.04 Delivery of Certificates. Upon receipt of the Notice of Exercise, ------------------------ together with any document specified in Paragraph 4.01 hereof accompanied by payment in accordance with either Paragraph 4.02 or 4.03 hereof, the Corporation will deliver to the holder of this Option a certificate or certificates for the number of shares of common stock issuable thereupon, together with a payment in cash in lieu of any fraction of a share. 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. 4.05 Fair Market Value. "Fair Market Value" of a share of the Corporation's ----------------- common stock as of a particular date (the "Determination Date") shall mean: (a) If the Corporation'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 Corporation's common stock is not traded on an exchange or on NASDAQ, but is traded in the over-the-counter securities market, then the average closing bid and asked prices reported for the ten (10) business days immediately preceding the Determination Date; and A-4 Edward J. Driscoll, III Stock Option Agreement November 14, 1996 (c) If the Corporation'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 a national investment banking firm whom, upon request of the holder of this Option, the Corporation shall select and retain to render such valuation. Section V - Termination 5.01 Termination of Option. Except as herein otherwise provided, the --------------------- Option granted under this Agreement, to the extent not theretofore exercised, shall terminate upon the first to occur of the following events: (a) Ninety (90) days following the Executive's voluntary termination of Executive's employment by the Corporation. (b) Ninety (90) days following the Executive's termination of employment by the Corporation "involuntarily for cause" as that phrase is defined in the Employment Agreement. (c) The expiration of twelve months from the date of Executive's death should Executive die within three months of termination of employment by the Corporation. (d) 11:59 PM Minneapolis, Minnesota, local time on December 31, 2007. 5.02 Governing Date. 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 after Dec. 31, 2007. Section VI - Reclassification, Consolidation or Merger 6.01 Reclassification, Split or Dividend. 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. 6.02 Consolidation or Merger. If the Corporation is reorganized or ----------------------- consolidated or merged with another corporation, the Executive shall be entitled to receive an option (the "New Option") covering common shares of such A-5 Edward J. Driscoll, III Stock Option Agreement November 14, 1996 reorganized, consolidated or merged Corporation 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 Executive additional benefits which he does not have under this Option, or deprive him of benefits which he has under this Option. VII - Rights and Restrictions 7.01 Rights Prior to Exercise of Option. This Option is non-transferable by ---------------------------------- Executive, 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 in accordance with Section 4.02 or 4.03 hereof, and delivery to him of such common shares as herein provided. 7.02 Restriction on Disposition. All common shares acquired by Executive -------------------------- 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 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 except in accordance with applicable exemptions from registration under applicable federal and state laws or pursuant to registration thereunder. 7.03 Refusal Option. All common shares acquired by Executive pursuant -------------- to this Agreement shall be subject to the Right of Refusal Agreement among Executive, Allen L. Witters and WorldCom Inc. VIII - Miscellaneous 8.01 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. 8.02 Construction. This Agreement shall be construed in accordance with ------------ the laws of the State of Minnesota, excluding the conflicts of laws provisions thereof. This Agreement shall also be construed, to the extent A-6 Edward J. Driscoll, III Stock Option Agreement November 14, 1996 practicable, consistently with the Employment Agreement between the Corporation and the Executive dated as of the date first above written. In witness whereof, the parties have signed this Incentive Stock Option Agreement the day and year first above written. "Executive" "Corporation" Netco Communications Corporation By: /s/ Edward J. Driscoll, III By: /s/ Edward J. Driscoll, III ___________________________ _______________________________ Edward J. Driscoll, III Edward J. Driscoll, III A-7 EX-10.14 29 EMPLOYMENT AGREEMENT - ALLEN WITTERS EXHIBIT 10.14 EXECUTIVE EMPLOYMENT AGREEMENT ------------------------------ AGREEMENT, made and entered into as of the 14th day of November, 1996, by and between Netco Communications Corporation, a Minnesota corporation (the "Corporation"), and Allen L. Witters ("Executive"). RECITALS: --------- WHEREAS, the Executive is the Chief Technology Officer of the Corporation; WHEREAS, the Executive's leadership and services have constituted a major factor in the successful growth and development of the Corporation's business; and WHEREAS, the Corporation desires to employ and retain the unique experience, ability and services of the Executive as a principal executive officer; and WHEREAS, the Corporation and the Executive desire to record the terms of Executive's continued employment by the Corporation; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1.) Term of Employment. Subject to the terms and conditions of this ------------------ Agreement, the Corporation hereby employs Executive and Executive hereby accepts employment for the period commencing October 1, 1996, and ending December 31, 1998, and thereafter for successive one year periods ending December 31 of each succeeding year unless and until the employment is terminated in accordance with the provisions of this Agreement. Each December 31, commencing December 31, 1998, shall be designated the "Annual Renewal Date." 2.) Duties, Responsibilities, and Authority. During the term of this --------------------------------------- Agreement, Executive shall serve as Chief Technology Officer of the Corporation. As such, Executive shall be responsible for the overall management and direction of the technology, infrastructure and technical network operations of the Corporation, and he shall have such duties as are generally appropriate to his position and such authority as shall be required to enable him to perform these duties, including but not limited to the authorities and duties currently prescribed in the Articles of Incorporation and the Bylaws of the Corporation, subject to the power of the shareholders and/or directors of the Corporation to amend or modify such Articles of Incorporation or Bylaws. The Executive shall exert his best efforts and devote 1 substantially all of his time and attention to the Corporation's business. The Executive shall be in charge of the development of technology and infrastructure of the Corporation, and shall have full authority and responsibility, subject only to the direction, approval, and control of the Corporation's Chief Executive Officer, and to the general direction, approval and control of the Corporation's Board of Directors, for formulating technology policies and administering the Corporation's technology services and products in all respects. His powers shall include authority, upon consultation of the Corporation's Chief Executive Officer, to hire and fire Corporation personnel in his department and, with the permission of the Corporation's Chief Executive Officer, to retain consultants when he deems necessary to implement Corporation policies. 3.) Location of Employment. Executive's services shall be rendered ---------------------- principally in Minneapolis, Minnesota and Executive shall not be required, without his consent, to change his residence or work location from either Hennepin County or Ramsey County, Minnesota by virtue of his employment with the Corporation. 4.) Compensation, Benefits, Expenses. -------------------------------- (a) Salary. The Corporation shall pay Executive a base salary at an annual ------ rate of $150,000.00 commencing October 1, 1996. Salary shall be paid in accordance with the Corporation's regular payroll procedure, but not less frequently than monthly. Executive's base salary shall be reviewed periodically (at intervals of not more than 12 months) by the Board of Directors of the Corporation ("the Board of Directors" or "Board") or a committee thereof for the purpose of considering increases thereof. In evaluating increases in salary, such factors as corporate performance, individual merit, inflation and other appropriate considerations shall be taken into account. (b) Stock Option. In addition to any other compensation or benefits to ------------ which the Executive may be entitled under this Agreement or otherwise, Executive shall receive options to acquire Four Hundred Thousand (400,000) shares of the capital stork of the Corporation in accordance with the terms of that certain Stock Option Agreement which is attached hereto and marked Exhibit A. (c) Bonus and Other Compensation. The Executive shall be entitled to ---------------------------- additional bonus and other compensation as may be established from time to time by the Board of Directors based upon an annual business plan which shall set goals (which shall include achievement of revenue and profit measures which are reasonable at the time established) for the Corporation. (d) Vacation. During each year of his employment, Executive will be -------- entitled to reasonable vacations not exceeding five weeks per year, holidays 2 and time off when ill, all at full pay. Vacations shall be at such time or times and for such periods as Employer and Executive shall agree. (e) Automobiles. The Corporation recognizes the Executive's need for an ----------- automobile or automobiles for business purposes. It, therefore, shall provide the Executive with a reasonably suitable automobile or automobiles, including all related maintenance, repairs, insurance and other costs associated with such automobiles during the term of this Agreement or any renewal or extension thereof. (f) Expenses. The Corporation recognizes that Executive will have to incur -------- certain out-of-pocket expenses related to his services and the Corporation's business and that it will be extremely difficult to account for such expenses. It is understood that Executive's compensation is intended to cover all such out-of-pocket expenses. The Corporation, however, shall reimburse Executive for any specific expenditures incurred for travel, lodging, entertainment, and the like upon submission of appropriate receipts and documentation sufficient to substantiate them as reasonable and necessary business expenses. (g) Employee Benefits. This Agreement shall not be in lieu of any rights, ----------------- benefits and privileges to which Executive may be entitled as an employee of the Corporation under any retirement, pension, profit-sharing, insurance, group life insurance, hospitalization, surgical and major medical coverage, and long-term disability or other plans which may now be in effect or which may hereafter be adopted. Executive shall have the same rights and privileges to participate in such plans and benefits as any other employee during his period of employment. In addition, to the extent appropriate for a senior executive of the Corporation, Executive shall be entitled to participate in any pension and retirement plans, bonus plans and such other fringe benefit programs or plans as are or may be made available from time to time to executive and/or other salaried Executives of the Corporation. 5.) Termination. ----------- (a) Events of Termination. This Agreement may be terminated upon the --------------------- occurrence of any one of the following events: (1) Voluntary. Executive may terminate this Agreement at any time --------- during the term of this Agreement by giving 30 days prior written notice of termination to the Board. (2) Involuntary Without Cause. The Board, without cause, may ------------------------- terminate this Agreement on any Annual Renewal Date during the term of this Agreement upon written notice to Executive at least 90 days prior to an Annual Renewal Date. 3 (3) Involuntary With Cause. The Board, upon written notice effective ---------------------- immediately, may terminate this Agreement at any time during the term of this Agreement for cause. "Cause" for purposes of such termination shall mean the following: a. admission or conviction of an act of dishonesty by Executive with respect to the material interests of the Corporation; b. willful misfeasance or willful nonfeasance of a duty intended to injure or having the effect of injuring the reputation, business relationships of the Corporation, provided that for purposes hereof Executive shall not be deemed to have committed willful misfeasance or willful nonfeasance by reason of any act or failure to act by Executive done in good faith; c. conviction of Executive upon a charge of any crime involving moral turpitude or any felony reflecting unfavorably upon the Corporation; or d. Failure, neglect or refusal by Executive to perform his duties and responsibilities as set forth in this agreement (other than by reason of disability due to physical or mental illness or by reason of permitted vacations or holidays) without the same being corrected upon ninety (90) business days prior written notice from the Corporation specifying such non-performance. (4) Bankruptcy. This Agreement may be terminated by either party ---------- upon written notice to the other effective immediately if the other party to this Agreement: a. is adjudicated as a bankrupt; b. is subject to the entry of an order, judgment, or decree by any court of competent jurisdiction approving a petition appointing a trustee, receiver, or liquidator of all or a substantial part of the party's assets; c. makes or attempts to make an assignment for the benefit of creditors; or d. institutes or attempts to institute voluntary bankruptcy proceedings. 4 (5) Death. This Agreement shall terminate upon the death of the Executive. ----- (6) Disability. This Agreement shall terminate upon the permanent ---------- disability of Executive. For the purposes of this Agreement, Executive shall be deemed permanently disabled if any ailment, illness or other incapacity prevents him from performing his duties as specified in this Agreement for a period of six consecutive months or for an aggregate of six months in any twelve month period from the date of this Agreement. (7) Purchase of Executive's Shares by WorldCom Inc. This Agreement shall --------------------------------------------- terminate on the Annual Renewal Date next following sale by Executive of all shares and options to purchase shares of the Corporation owned by him to WorldCom Inc. pursuant to Section 4.02 of that certain Preferred Stock, Subordinated Note and Warrant Purchase Agreement between WorldCom Inc. and the Corporation ("Preferred Stock Purchase Agreement"). (b) Consequences of Termination. --------------------------- (1) In the event of the termination of this Agreement in accordance with Subparagraph 5(a)(1) or 5(a)(3) above (voluntary termination or involuntary termination with cause), Executive shall be entitled to the base salary earned by him prior to the date of termination as provided herein computed on a pro rata basis to and including such date of termination. In addition, Executive shall also be reimbursed for his reasonable business expenses incurred prior to the date of termination. (2) In the event of the termination of this Agreement in accordance with Subparagraph 5(a)(7) above (purchase of Executive's shares by WorldCom), Executive shall be entitled to the base salary earned by him prior to the date of termination as provided herein computed on a pro rata basis to and including such date of termination. In addition, Executive shall also be reimbursed for his reasonable business expenses incurred prior to the date of termination. In the event termination pursuant to Subparagraph 5(a)(7) above occurs on or prior to December 31, 1999, then, to the extent that the consideration received by Executive in exchange for his options to purchase shares of the Corporation is a non-cash consideration, all stock options under the Stock Option Agreement (Exhibit A) that have not theretofore vested (including any and all options or rights received or exchanged therefor by Executive as a consequence of 5 the transaction occurring pursuant to Section 4.02 of the Preferred Stock Purchase Agreement) shall immediately vest and become exercisable in accordance with the provisions of said Stock Option Agreement thereto applicable. In addition, in the event termination pursuant to Subparagraph 5(a)(7) occurs on or prior to December 31, 2000, then Executive shall also receive a lump sum payment in the amount of Seventy Five Thousand Dollars ($75,000). (3) If the Corporation terminates this Agreement without cause pursuant to Subparagraph 5(a)(2) above (involuntary without cause), Executive shall be entitled to receive a severance cash payment as liquidated damages for, and in lieu of, any and all damages which he may incur as a result of such termination in an amount equal to the greater of (i) the Executive's then base salary for two years, or (ii) the amounts reasonably estimated to be due hereunder for the two year period following the Annual Renewal Date upon which the termination becomes effective, which shall be payable within 30 days from the date of termination plus, in either case, one half of the cash bonus (determined pursuant to Paragraph 4(c) above relating to Bonus and Other Compensation), to which Executive would have been entitled had he continued in the employment of the Corporation for the year following termination, which payment shall be payable in accordance with Paragraph 4(b). Additionally, If the Corporation terminates this Agreement without cause pursuant to Subparagraph 5(a)(2) above, all stock options under the Stock Option Agreement (Exhibit A) that have not theretofore vested shall immediately vest and become exercisable in accordance with the provisions of said Stock Option Agreement. (4) In the event this Agreement is terminated due to the death (pursuant to Subparagraph 6(a)(5)) or disability (pursuant to Subparagraph 6(a)(6)) of Executive, Executive (or his estate) shall be entitled to his then base salary for a period of six months, plus the cash bonus payable with respect to the fiscal year of death or disability, in accordance with normal payment procedures under this Agreement. 6.) Non-Competition. Executive covenants and agrees that: --------------- (a) During the term of this Agreement, he shall not without the prior written consent of the Corporation, directly or indirectly, as an Executive, employer, agent, principal, proprietor, partner, stockholder, consultant, director, or corporate officer, engage in any business engaged in the high- 6 speed, transaction based electronic data transportation and delivery business (the "Competitive Business") or render any services to any business that is engaged in a Competitive Business. (b) For a period of two years (the "Non-Competition Period") after Executive has ceased to be employed by the Corporation or any subsidiary of the Corporation, Executive shall not without the prior written consent of the Corporation: (1) directly or indirectly engage in, or (2) be employed by any person, firm, partnership, association, corporation or business organization, entity or enterprise that is, or is about to become, directly or indirectly engaged in, any Competitive Business. For purposes hereof, "Competitive Business" shall mean engaging or having a material interest, directly or indirectly as owner, employee, officer, director, partner, venturer or stockholder, capital investor, consultant, agent, principal advisor or otherwise, either alone or in association with others, in the operation of a high speed, transaction based, electronic data transportation and delivery business; provided, however, that the restrictions contained in this Subparagraph (b) shall not apply to any business that does not meet both of the following requirements: (1) the Corporation or a subsidiary of the Corporation shall have operated such business, or had such business in the planning or development stage therein, during the 120-day period immediately prior to Executive's ceasing to be employed by the Corporation or any subsidiary of the Corporation, and (2) Executive, during such period, shall have had substantial planning development, administrative or operational responsibilities for such business of the corporation or such subsidiary of the Corporation in such area. (c) Executive shall not during the Non-Competition Period (i) solicit any employee of the Corporation to engage in a Competitive Business, or (ii) personally solicit customers of the Corporation in a manner which is competitive with the Corporation. (d) If the scope of any restrictions contained in Subparagraphs 6(a), (b) or (c) hereof are too broad to permit enforcement of such restrictions to their full extent, then such restrictions shall be enforced to the maximum extent permitted by law, and Executive hereby consents and agrees that such scope may be judicially modified accordingly in any proceeding brought to enforce such restrictions. Ownership of less than five (5%) percent of the outstanding 7 stock of a corporation traded on a national securities exchange shall not be deemed to breach or conflict with the provisions of Subparagraphs (a) or (b) of this Section 6. 7.) Trade Secrets. Executive 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, 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 this paragraph shall be a material breach of this Agreement. 8.) Disclosure and Assignment. Except as provided elsewhere in this ------------------------- Agreement, Executive 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, relating to high-speed, transaction based electronic data transportation and delivery services, which while the Executive is employed by the Corporation are made, conceived or reduced to practice by Executive, alone or with others, during or after usual working hours, either on or off the job, and Executive hereby assigns to the Corporation all such ideas, discoveries, inventions and improvements relating to high-speed, transaction based electronic data transportation and delivery to be the Corporation's exclusive property. 9.) Disclosure and Right of First Refusal. Paragraph 8 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 Executive's own time, and (1) --- --- which does not relate (a) directly to high-speed, transaction based electronic data transportation and delivery or (b) to the Corporation's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Executive for the Corporation. Executive 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 Executive and the Corporation. In the event the Corporation and Executive cannot agree on terms and Executive 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 8 Corporation, then the Corporation shall have the right and Executive shall have the obligation to offer to the Corporation the idea, discovery, invention or improvement on such terms as offered to the other party. 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 Executive 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 --- which was developed entirely on the Executive'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 Executive 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.) Assistance to the Corporation. Executive shall give the Corporation, ----------------------------- at the Corporation's expense, all assistance the Corporation reasonably requires to perfect, protect, and exercise the rights to all ideas, discoveries, inventions or improvements acquired by the Corporation pursuant to the assignment provisions of Paragraph 8 of this Agreement or the right of first refusal provisions of Paragraph 9 of this Agreement. 11.) Documents and Tangible Property. All documents or other tangible ------------------------------- property relating in any way to the business of the Corporation which are conceived or generated by Executive or come into Executive's possession during Executive's employment shall be and remain the Corporation's exclusive property, and Executive agrees to return all such documents and tangible property to the Corporation upon termination of Executive's employment by the Corporation or at such earlier or later time the Corporation may request Executive to do so. 12.) Remedies for Breach of Covenants of Executive. The covenants set --------------------------------------------- forth in Paragraphs 6, 7, 8, 9, 10 and 11 of this Agreement shall continue to be binding upon Executive, notwithstanding the termination of his employment with the Corporation for any reason whatsoever. Such covenants shall be deemed and construed as separate agreements independent of any other provisions of this Agreement. The existence of any claim or cause of action by Executive against the 9 Corporation, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Corporation or any or all of such covenants. It is expressly agreed that the remedy at law for the breach of any such covenant is inadequate and that temporary and permanent injunctive relief shall be available to prevent the breach or any threatened breach thereof, without the necessity of proof of actual damages; provided, however, that it is expressly agreed that the provisions of Subparagraph 6(b) shall immediately become void and no longer of any effect whatsoever in the event of a merger or consolidation of the Corporation into another corporation in which the Corporation is not the surviving corporation or which requires the stockholders of the Corporation to exchange their shares of Common Stock of the Corporation for any other class of capital stock, expressly excepting any transaction involving the issuance of the capital stock of WorldCom Inc. The termination of such provision shall be effective on the effective date of such merger or consolidation. 13.) Notices. Any notices to be given hereunder by either party to the ------- other may be effected either by personal delivery in writing or by mail, registered or certified, postage prepaid, with return receipt requested. Personal delivery to the Corporation shall mean personal delivery to the Chairman of the Board of Directors. Mailed notices shall be addressed to the respective addresses shown below. Either party may change its address for notice by giving written notice in accordance with the terms of this Paragraph 13. (a) If to Executive: Allen L. Witters 9640 Eden Prairie Road Eden Prairie, Minnesota 55487 (b) If to the Corporation: Netco Communications Corporation 104 Union Plaza 333 North Washington Ave. Minneapolis, MN 55401 with a copy to: WorldCom Inc. 515 E. Amite Jackson, Mississippi 39201 Attention: K. William Grothe, Jr. Vice President 10 14.) Successors and Assigns; Sale of Business. ---------------------------------------- (a) The Corporation's rights and obligations under this Agreement shall inure to the benefit of and shall be binding upon the Corporation's successors and assigns. (b) In the event of a merger or consolidation of the Corporation with any other corporation or corporations, the sale by the Corporation of a major portion of its assets or of its business and goodwill, or any other corporate reorganization involving the Corporation, this Agreement shall be assigned and transferred to such successor in interest as an asset of the Corporation; and the Corporation agrees that it shall make it a condition of such sale or transfer agreement that the purchaser or assignee shall assume the Corporation's obligations under this Agreement. (c) In the event of any such assignment, the Executive agrees to continue to perform his duties according to the terms of this Agreement to or for such assignee or transferee of this Agreement; provided, however, the Corporation shall remain secondarily liable as a guarantor of such assignee's or transferee's obligations to the Executive under this Agreement. The Executive acknowledges that his services are unique and personal, and, accordingly, the Executive may not assign his rights (except the right to receive payments due to him) or delegate his duties or obligations under this Agreement. 15.) General Provisions. ------------------ (a) Law Governing. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of Minnesota. (b) Invalid Provisions. If any provision of this Agreement is held to be ------------------ illegal, invalid, or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and still be legal, valid or enforceable. (c) Entire Agreement. This Agreement sets forth the entire understanding ---------------- of the parties and supersedes all prior agreements or understandings, whether written or oral, with respect to the subject matter hereof. The prior Employment Agreement dated September 24, 1994 between the parties hereto 11 is terminated. No terms, conditions, warranties, other than those contained herein, and no amendment or modifications hereto shall be binding unless made in writing and signed by the parties hereto. (d) Binding Effect. This Agreement shall extend to and be binding upon -------------- and inure to the benefit of the parties hereto, their respective heirs, representatives, successors and assigns. This Agreement may not be assigned by Executive. (e) Waiver. The failure of either party to insist in any one or more ------ instances upon performance of any term or condition of this Agreement shall not be construed a waiver of its future performance. The obligations of either party with respect to such term, covenant or condition shall continue in full force and effect. (f) Titles. Titles of the paragraphs herein are used solely for ------ convenience and shall not be used for interpretation or construing any word, clause, paragraph, or provision of this Agreement. (g) Counterparts. This Agreement may be executed in two or more ------------ counterparts each of which shall be deemed an original, but which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Corporation and Executive have executed this Agreement as of the date and year first written "EXECUTIVE" NETCO COMMUNICATIONS CORPORATION /s/ Allen L. Witters /s/ Edward J. Driscoll, III ___________________________ By: ________________________________ Allen L. Witters Edward J. Driscoll, III Chief Executive Officer 12 Exhibit A to Executive Employment Agreement STOCK OPTION AGREEMENT THIS AGREEMENT, made and entered into as of and effective this 14th day of November 1996, by and between NETCO COMMUNICATIONS CORPORATION, a Minnesota corporation (hereinafter referred to as the "Corporation") and ALLEN WITTERS, a resident of the State of Minnesota (hereinafter referred to as the "Executive"). WHEREAS, the Corporation considers it desirable and in its best interests that the Executive 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: Section I - Grant of Option 1.01 Grant of Option. The Corporation grants to Executive an Option --------------- (the "Option") to purchase FOUR HUNDRED THOUSAND (400,000) common shares of the Corporation at a purchase price of $4.81 per share. Section III - Term and Duration 2.01 Term and Duration. The Option shall have a term commencing with the ----------------- date first above written and expiring on December 31, 2007. Section III - Vesting 3.01 Vesting of Option. Subject to earlier vesting and exercise provisions ----------------- of Paragraph 3.02 hereof, the Option shall vest and may be exercised in incremental amounts at the rate of fifty (50) shares for each Installed Customer Site that becomes first installed during a calendar quarter during the term of the Option, commencing with the calendar quarter ending March 31, 1997, and for each successive calendar quarter through expiration of the term of the Option. 3.02 Earlier Vesting of Option. The provisions of Paragraph 3.01 to the ------------------------- contrary notwithstanding, the Option shall immediately vest and become immediately exercisable in its entirety in any of the following events: A-1 Allen Witters Stock Option Agreement November 14, 1996 (a) Executive's employment by the Corporation is terminated "involuntarily without cause" as that phrase is defined in that certain Employment Agreement (the "Employment Agreement") between the Corporation and the Executive, dated of even date with this Stock Option Agreement; (b) The Employment Agreement is terminated pursuant to Section 5(a)(7) of the Employment Agreement prior to December 31, 1999. (c) An Acquisition or Change of Control occurs during the period commencing January 1, 1997 and ending January 31, 1999. 3.03 Definitions. For purposes of this Section 3, the following words shall ----------- have the meanings ascribed to them. (a) Acquisition. "Acquisition" means either (i) the purchase of all or ----------- substantially all of the assets of the Corporation by any person or party, or (ii) the merger or consolidation of the Corporation with any person or party; provided that neither (i) the purchase of all or substantially all of the assets of the Corporation by WorldCom Inc., nor (ii) a merger or consolidation in which the shares of the Corporation are exchanged for shares WorldCom Inc., of a class that is registered under the Securities Exchange Act of 1934 shall be deemed to be an "acquisition" for purposes hereof. (b) Change of Control. "Change of Control" means the election by ----------------- shareholders of the Corporation of a majority of directors of the Corporation who were not recommended by the Corporation's executive management for nomination for election as directors, provided that election of a majority of the directors of the Corporation who receive the affirmative vote of WorldCom Inc., shall not be deemed a change of control. (c) Customer. "Customer" shall mean a customer of the Corporation who has -------- subscribed to, and agreed to pay for, Use Fees for use of the Corporation's WAM!NET Service. (d) Installed Customer Site. "Installed Customer Site" shall mean a ----------------------- customer that has been continually connected to the Corporation's WAM!NET Service for at least Ninety (90) days or has begun either (i) to pay minimum monthly Use Fees under a service agreement A-2 Allen Witters Stock Option Agreement November 14, 1996 or (ii) to incur use charges under an agreement having no minimum monthly Use Fees. (e) Use Fees. "Use Fees" shall mean fees payable by a Customer for use of -------- WAM!NET Services, and shall include fees payable by a Customer relating to remote proofing and digital image archiving and retrieval services. (f) WAM!NET Service. "WAM!NET Service" shall mean the Corporation's --------------- WAM!NET(TM) Electronic Data Transportation and Delivery Service (the "WAM!NET Service") as presently configured or as may be configured in the future, and shall include services relating to remote proofing and digital image archiving and retrieval services. Section IV - Exercise and Payment 4.01 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, accompanied by payment in cash or exercise of the Conversion Right as provided, respectively, in Paragraphs 4.02 or 4.03 hereof, or by some combination thereof. The notice shall specify how many shares are being acquired for cash in accordance with Paragraph 4.02 hereof, and how many by exercise of the Conversion Right in accordance with Paragraph 4.03 hereof. The notice shall also be accompanied by any document reasonably required by the Corporation to be executed by Executive acknowledging the applicable restrictions on the transfer of the common shares being purchased as set forth under Section 7.02 of this Agreement. 4.02 Payment in Cash. The notice specified in Paragraph 4.01 hereof shall --------------- be accompanied by payment of the option price for the shares being purchased for cash, which shall be in the form of cash or 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 acceptable to the Corporation. 4.03 Payment by Exercise of Conversion Right. In the alternative, the --------------------------------------- notice specified in Paragraph 4.01 hereof shall be accompanied by payment for the shares being purchased by exercise of the Conversion Right provided in this paragraph. The holder of this option shall have the right to require the Corporation to convert this option, to the extent then vested, to shares of Common Stock of the Corporation at any time prior to December 31, 2006. Upon exercise of the Conversion Right, the Corporation shall deliver to the holder of this Option (without payment of the exercise price in cash or check as provided A-3 Allen Witters Stock Option Agreement November 14, 1996 in Paragraph 4.02 hereof) shares of the Corporation's common Stock in number equal to the quotient obtained by dividing (a) 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, as determined immediately prior to the exercise of the Conversion Right, of the aggregate Fair Market Value of the shares for which the Option may be exercised by (b) the Fair Market Value of one share of common stock immediately prior to the exercise of the Conversion Right. The immediately preceding formula is illustrated by the following example where (i) the number of optioned shares being acquired by exercise of the Conversion Right is 10,000, (ii) the per share exercise price of the Option is $4.81, and (iii) the applicable Fair Market Value is $14.43: [(10,000 x 14.43) - (10,000 x 4.81)] / 14.43 = [144,300 - 48,100] / 14.43 = 96,200/14.43 = 6,667 shares. 4.04 Delivery of Certificates. Upon receipt of the Notice of Exercise, ------------------------ together with any document specified in Paragraph 4.01 hereof accompanied by payment in accordance with either Paragraph 4.02 or 4.03 hereof, the Corporation will deliver to the holder of this Option a certificate or certificates for the number of shares of common stock issuable thereupon, together with a payment in cash in lieu of any fraction of a share. 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. 4.05 Fair Market Value. "Fair Market Value" of a share of the ----------------- Corporation's common stock as of a particular date (the "Determination Date") shall mean: (a) If the Corporation'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 Corporation's common stock is not traded on an exchange or on NASDAQ but is traded in the over-the-counter securities market, then the average closing bid and asked prices reported for A-4 Allen Witters Stock Option Agreement November 14, 1996 the ten (10) business days immediately preceding the Determination Date; and (c) If the Corporation'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 a national investment banking firm whom, upon request of the holder of this Option, the Corporation shall select and retain to render such valuation. Section V - Termination 5.01 Termination of Option. Except as herein otherwise provided, the --------------------- Option granted under this Agreement, to the extent not theretofore exercised, shall terminate upon the first to occur of the following events: (a) Ninety (90) days following the Executive's voluntary termination of Executive's employment by the Corporation. (b) Ninety (90) days following the Executive's termination of employment by the Corporation "involuntarily for cause" as that phrase is defined in the Employment Agreement. (c) The expiration of twelve months from the date of Executive's death should Executive die within three months of termination of employment by the Corporation. (d) 11:59 PM Minneapolis, Minnesota, local time on December 31, 2007. 5.02 Governing Date. 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 after Dec. 31, 2007. Section VI - Reclassification, Consolidation or Merger 6.01 Reclassification, Split or Dividend. 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. A-5 Allen Witters Stock Option Agreement November 14, 1996 6.02 Consolidation or Merger. If the Corporation is reorganized or ----------------------- consolidated or merged with another corporation, the Executive shall be entitled to receive an option (the "New Option") covering common shares of such reorganized, consolidated or merged Corporation 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 Executive additional benefits which he does not have under this Option, or deprive him of benefits which he has under this Option. VII - Rights and Restrictions 7.01 Rights Prior to Exercise of Option. This Option is non- ---------------------------------- transferable by Executive, 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 in accordance with Section 4.02 or 4.03 hereof, and delivery to him of such common shares as herein provided. 7.02 Restriction on Disposition. All common shares acquired by -------------------------- Executive 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 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 except in accordance with applicable exemptions from registration under applicable federal and state laws or pursuant to registration thereunder. 7.03 Refusal Option. All common shares acquired by Executive pursuant -------------- to this Agreement shall be subject to the Right of Refusal Agreement among Executive, Edward J. Driscoll, III and WorldCom Inc. VIII - Miscellaneous 8.01 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. A-6 Allen Witters Stock Option Agreement November 14, 1996 8.02 Construction. This Agreement shall be construed in accordance with ------------ the laws of the State of Minnesota, excluding the conflicts of laws provisions thereof. This Agreement shall also be construed, to the extent practicable, consistently with the Employment Agreement between the Corporation and the Executive dated as of the date first above written. In witness whereof, the parties have signed this Incentive Stock Option Agreement the day and year first above written. "Executive" "Corporation" Netco Communications Corporation By: /s/ Allen Witters By: /s/ Edward J. Driscoll, III _______________________ _______________________________ Allen Witters Edward J. Driscoll, III A-7 EX-10.15 30 EMPLOYMENT AGREEMENT - JAMES R. CLANCY EXHIBIT 10.15 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is made effective as of April 16, 1996, by and between NetCo Communications Corporation, ("NetCo"), of Union Plaza - - Suite 102,333 North Washington Avenue, Minneapolis, MN 55401, and James R. Clancy, ("the Employee") of 4363 Coolidge Avenue, St. Louis Park, MN 55424. WHEREAS, NetCo is engaged in the business of marketing 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; WHEREAS, NetCo desires to have the services of the Employee; and WHEREAS, the Employee is willing to be employed by NetCo. Therefore, the parties agree as follows: 1. EMPLOYMENT. Effective 5/14, 1996, Employee shall serve NetCo as Chief Marketing 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 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 an annual salary of $85,000.00 payable in accordance with NetCo's usual payroll procedures. 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. Accrued vacation will be paid in accordance with state law and NetCo's customary procedures. 4. ACHIEVEMENT PAYMENTS. In addition to the payments under the preceding paragraph, NetCo will make payments, not to exceed $40,000, to the Employee based on achievement of four specific objectives that shall be established between the Employee and NetCo. Payments will be made in increments of $10,000 each. a. FIRST PAYMENT. The first payment shall be made at the end of the first full payroll period following completion by the Employee and acceptance by NetCo of the first objective, a detailed written plan and timeline (hereinafter referred to as the "Plan") for development and implementation of a comprehensive marketing plan for NetCo products during 1996 and 1997. The written Plan will include at least three additional specific objectives that the Employee must be achieve during the twelve month period following the effective date of this Agreement, that will serve as the basis for NetCo to make each of the payments of $10,000. b. REMAINING THREE PAYMENTS. After achievement of the first objective in the under "A." in the preceding paragraph, the Employee shall be compensated for achieving the remaining three objectives in five equal payments of $10,000 each (totaling an amount not to exceed $30,0000). 1 c. DEATH OF EMPLOYEE. If Employee dies during the term of this Agreement, Employee shall be entitled to partial achievement payments on a pro rata basis for the period ending with the date of Employee's death. d. DISABILITY OF EMPLOYEE. If the Employee becomes disabled during the term of this Agreement. Employee shall be entitled to partial achievement payments on a pro rata basis for the period ending on the date the Employee's disability is determined to have occurred. 5. 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 Five Thousand (75,000) 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 Seven and 50/100 dollars ($7.50) per share, being the fair market value on the date of the grant. 6. 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. 7. 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. 8. 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 shall be a material violation of this Agreement and will justify legal and/or equitable relief. 9. 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. 10. 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 2 or permit the making of any public announcement or statement of any kind that Employee was formerly employed by or connected with NetCo. 11. 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 18 months following the termination of this Agreement, whether such termination is voluntary or involuntary, Employee will not directly or indirectly engage in any business competitive with NetCo. This covenant shall apply to the geographical area that includes the United States and Canada. Directly or indirectly 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 or indirectly 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. 12. 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. 13. HOLIDAYS. Employee shall be entitled to the following holidays with pay during each calendar year: - New Year's Day - Thanksgiving Day - Memorial Day - Christmas Eve and Christmas Day - Independence Day - The Friday after Thanksgiving Day - Labor Day - Two weeks vacation 14. OTHER BENEFITS. Employee shall be entitled to insurance benefits, in accordance with the NetCo's applicable insurance contract(s) and policies, and applicable state law. These benefits shall include: - Health insurance - Short term Disability Insurance - Dental - 401 (k) Retirement Plan - Life Insurance as such benefits are provided in accordance with NetCo policies in effect from time to time. 15. 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 upon 30 days written notice. If Employee is in violation of this Agreement, NetCo may terminate employment without prior notice and with compensation to Employee only to the date of such termination. The compensation paid under this Agreement shall be the Employee's exclusive remedy. 16. TERMINATION FOR DISABILITY. NetCo shall have the option to terminate this Agreement, if Employee becomes permanently disabled and is no longer able to perform the essential functions of the position with reasonable accommodation. NetCo shall exercise this option by giving 30 days' written notice to Employee. 17. 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 3 18. 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: NetCo: ----- NetCo Communications Corporation Edward J. Driscoll, III President & CEO Union Plaza - Suite 102 333 North Washington Avenue Minneapolis, MN 55401 Employee: -------- James R. Clancy 4363 Coolidge Avenue St. Louis Park, MN 55424 Such addresses may be changed from time to time by either party by providing written notice in the manner set forth above. 19. 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. 20. AMENDMENT. This Agreement may be modified or amended, if the amendment is made in writing and is signed by both parties. 21. 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. 22. 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. 23. APPLICABLE LAW. This Agreement shall be governed by the laws of the State of Minnesota. AGREED TO AND ACCEPTED NetCo: Employee: NetCo Communications Corporation By: /s/ Edward J. Driscoll III By: /s/ James R. Clancy --------------------------------- ------------------------- Edward J. Driscoll III James R. Clancy President and CEO 4 EX-10.16 31 EMPLOYMENT AGREEMENT - MARK MARLOW EXHIBIT 10.16 AMENDMENT NO. 3 TO MARK MARLOW EMPLOYMENT AGREEMENT NetCo Communications Corporation (hereinafter referred to as the "Corporation") and Mark Marlow (hereinafter referred to as the "Employee" are parties to an Employment Agreement dated May 10, 1995 (the "Employment Agreement"). It is agreed between the parties that paragraph 3.1 of the Employment Agreement be amended to read: 3.1 Base Salary. The Corporation shall pay Employee a Base Salary ("Base Salary") of Seven Thousand Seven Hundred Eight Dollars Thirty Three Cents ($7,708.33) per month commencing January 1, 1998. The Base Salary shall be paid according to the Corporation's regular payroll procedure, in equal increments not less frequently than monthly. It is further agreed between the parties that, except as expressly amended by this Amendment No. 3, 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. "Employee" "Corporation" Mark Marlow NetCo Communications Corporation /s/ Mark Marlow By: /s/ John Washburn ----------------------- ------------------------------- An Authorized Agent or Officer AMENDMENT NO. 2 TO MARK MARLOW EMPLOYMENT AGREEMENT NetCo Communications Corporation (hereinafter referred to as the "Corporation") and Mark Marlow (hereinafter referred to as the "Employee" are parties to an Employment Agreement dated May 10, 1995 (the "Employment Agreement"). It is agreed between the parties that paragraph 3.1 of the Employment Agreement be amended to read: 3.1 Base Salary. The Corporation shall pay Employee a Base Salary ("Base Salary") of Seventy Five Thousand Dollars ($75,000) per annum commencing January 1, 1997. The Base Salary shall be paid according to the Corporation's regular payroll procedure, in equal increments not less frequently than monthly. It is further agreed between the parties that, except as expressly amended by this Amendment No. 2, 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. "Employee" "Corporation" Mark Marlow NetCo Communications Corporation /s/ Mark Marlow By: /s/ Edward J. Driscoll, III ---------------------- -------------------------------- Edward J. Driscoll, III President and CEO AMENDMENT NO. 1 TO MARK MARLOW EMPLOYMENT AGREEMENT NetCo Communications Corporation (hereinafter referred to as the "Corporation") and Mark Marlow (hereinafter referred to as the "Employee" are parties to an Employment Agreement dated May 10, 1995 (the "Employment Agreement"). It is agreed between the parties that paragraph 3.1 of the Employment Agreement be amended to read: 3.1 Base Salary. The Corporation shall pay Employee a Base Salary ("Base Salary") of Forty Five Thousand Dollars ($45,000) per annum commencing October 16, 1995. The Base Salary shall be increased to Fifty Thousand Dollars ($50,000) per annum commencing on March 18, 1996 providing that the Employee receives a written, six month performance review and written recommendation by the Chief Financial Officer for this base salary increase. The Base Salary shall be paid according to the Corporation's regular payroll procedure, in equal increments not less frequently than monthly. 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. "Employee" "Corporation" Mark Marlow NetCo Communications Corporation /s/ Mark Marlow By: /s/ Edward J. Driscoll, III ----------------------- ----------------------------------- Edward J. Driscoll, III Chief Executive Officer EMPLOYMENT AGREEMENT -------------------- AGREEMENT, made and entered into this 10th day of May, 1995, by and between Netco Communications Corporation, a Minnesota corporation (the "Corporation"), and MARK MARLOW ("Employee"). WHEREAS, the Corporation and the Employee desire to record the terms of Employee's employment by the Corporation; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. TERM OF EMPLOYMENT. Subject to the terms and conditions of this ------------------ Agreement, the Corporation hereby employs Employee and Employee hereby accepts employment for the period commencing _______________________, 1995, and continuing thereafter until the employment is terminated according to the provisions of this Agreement. 2. DUTIES. During the term of this Agreement, Employee shall perform the ------ duties of Controller and such additional duties as may be prescribed from time to time by the Board of Directors or the Chief Executive Officer of the Corporation. 3. BASE SALARY, COMMISSION, BONUS AND OTHER COMPENSATION. ----------------------------------------------------- 3.1 Base Salary. The Corporation shall pay Employee a Base Salary ("Base ----------- Salary") of Thirty Six Thousand Dollars ($36,000) per annum commencing 10th May, 1995. The Base Salary shall be paid according to the Corporation's regular payroll procedure, in equal increments not less frequently than monthly. 3.2 Incentive Stock Option. In addition to any other compensation to ---------------------- which Employee may be entitled by this agreement, Employee shall be entitled to receive an Incentive Stock Option for Two Thousand (2,000) shares of the Corporation under the Corporation's 1994 Stock Option Plan according to the Incentive Stock Option Agreement appended hereto as Exhibit 1. The exercise price of the Incentive Stock Option shall be in the amount of Two Dollars Twenty Five Cents ($2.25) per share, being the fair market value on the date of grant. 3.3 Bonus. In addition to any other compensation to which Employee may be ----- entitled by this agreement, Employee shall be entitled participate in a bonus plan to be adopted by the Corporation based upon the Corporation's performance and achievement of defined goals, including sales growth, profitability and other factors contributing the Corporation's success, as may be established annually by the Corporation. The Corporation intends to adopt such a bonus plan prior to December 31, 1995, to be applicable to following years. 4. BENEFITS. -------- 4.1 Vacation. During each year of his employment, Employee will be -------- entitled to reasonable vacations, holidays and sick leave. Vacations shall be at such time or times and for such periods as Corporation and Employee shall agree. 4.2 Benefit Programs, Insurance. Employee shall be entitled to --------------------------- participate in customary employee benefit programs as may be from time to time determined by the Board of Directors including, but not limited to, life insurance, hospitalization, surgical and major medical coverage, and long-term disability as are or may be made available from time to time to other salaried employees of the Corporation. Before such time as the Corporation provides medical coverage to all employees, Employee shall be entitled to cash compensation equivalent to monthly Cobra expense. 5. TERMINATION. ----------- 5.1 Events of Termination. This Agreement may be terminated upon the --------------------- occurrence of any one of the following events: (a) Voluntary. Employee may terminate this Agreement at any time --------- during the term of this Agreement by giving 30 days prior written notice of termination to the Board. (b) Involuntary Without Cause. The Corporation may terminate this ------------------------- Agreement without cause by 30 days written notice to Employee. (c) Involuntary With Cause. The Corporation may terminate this ---------------------- Agreement immediately for cause for (i) Employee's material breach of any agreement with the Corporation, (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 (d) Death. This Agreement shall automatically terminate upon the ----- death of the Employee. (e) Disability. This Agreement shall automatically terminate upon ---------- the permanent disability of Employee. For the purposes of this Agreement, Employee shall be deemed permanently disabled if any ailment, illness or other incapacity prevents him from performing his duties as specified in this Agreement for a period of three consecutive months or for an aggregate of three months in any twelve month period from the date of this Agreement. 5.2 Consequences of Termination. --------------------------- (a) In the event of the termination of this Agreement in accordance with Subparagraph 5.1(a) or 5.1(c) above, Employee shall be entitled to Base Salary, and Bonus, if any, earned by him prior to the date of termination as provided herein computed on a pro rata basis to and including such date of termination. In addition, Employee shall also be reimbursed for his reasonable business expenses incurred prior to the date of termination. (b) If the Corporation terminates this Agreement without cause pursuant to Subparagraph 5.1(b) above, Employee shall be entitled to receive a severance cash payment as liquidated damages for, and in lieu of, any and all damages which he may incur as a result of such termination in the amount of Twelve Thousand Dollars ($12,000). (c) In the event this Agreement is terminated due to the death (pursuant to Subparagraph 5.1(d)) or disability (pursuant to Subparagraph 5.1(e)) of Employee, Employee (or his estate) shall be entitled to the base salary earned by him prior to the date of termination as provided herein computed on a pro rata basis to and including such date of termination plus any cash bonus payable with respect to the fiscal year of death or disability according to normal payment procedures of the Corporation. 6. NON-COMPETITION; INVENTIONS. --------------------------- 6.1 Definitions. For purposes of this Section 6, the following words ----------- and phrases have the meanings ascribed to them, respectively: (a) "Confidential Information" means all formulas, processes, customer lists, computer user identifiers and passwords, and all purchasing, engineering, accounting, marketing and other information that is proprietary to the Corporation and not generally known or readily ascertainable by proper means, relating to research, development, manufacture or sale of the Corporation's products, as well as formulas, processes and other information received by the Corporation from third parties under an obligation of secrecy. All information disclosed to Employee or to which Employee has access during the period of his employment, which he has reasonable basis to believe to be Confidential Information, or which is treated by the Corporation as being Confidential Information, shall be presumed to be Confidential Information. (b) "Inventions" means all formulas, processes, discoveries, improvements, ideas and works of authorship, whether patentable or copyrightable or not, which Employee learns, has access to, has a part in developing, first conceives or first reduces to practice, alone or with others (1) that are developed on the Corporation's time, or (2) that relate directly to the Corporation's business or actual or anticipated research, or (3) for which any of the Corporation's property, including Confidential Information, is used, or (4) that result from any of Employee's work for the Corporation. 6.2. 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. 6.3 Further Documents. Employee will acknowledge and deliver ----------------- promptly with reasonable charge all documents to the Corporation, and will do such other acts as may be necessary in the Corporation's opinion to obtain and maintain patents (including divisional, reissued or extended Letters Patent) or copyrights and to vest the entire right and title in the Corporation to such patents, copyrights and Inventions in all countries. 6.4 Confidentiality. Employee will not use or disclose any --------------- Confidential Information, either during or after employment by the Corporation, except as required by his duties to the Corporation, and Employee acknowledges and understands that the obligation to maintain the confidentiality of the Corporation's Confidential Information is unconditional and shall not be excused by any conduct on the part of the Corporation except its prior voluntary disclosure of the information. Upon termination of employment, Employee agrees that (a) all Confidential Information, including all copies, excerpts and summaries in his possession or control (whether prepared by the Corporation, the Employee or others), and also all other the Corporation property, including keys, credit cards, software, reports and the like, shall be left with the Corporation and (b) Employee will stop use of all Confidential Information. 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, 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 this Section 6 shall be a material breach of this Agreement. 6.5 Limitation; First Refusal. The obligations of Section 6.2 and ------------------------- 6.3 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: SECTION 6 HEREOF REQUIRES EMPLOYEE TO ASSIGN RIGHTS TO INVENTIONS TO THE CORPORATION OR ITS SUCCESSORS. MINNESOTA STATUTES $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 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 SECTION 6 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. 6.6 Assistance to the Corporation. Employee shall give the ----------------------------- Corporation, at the Corporation's expense, all assistance the Corporation reasonably requires to perfect, protect, and exercise the rights to all ideas, discoveries, inventions or improvements acquired by the Corporation pursuant to the assignment provisions or the right of first refusal provisions of this Section 6. 6.7 Non-Competition. For one (1) year after termination of Employee's --------------- employment with Corporation (hereafter referred to as the "Non-Competition Period") for any reason and by either party: (a) Before accepting new employment Employee will give a copy of this Agreement to any employer engaged in or planning to become engaged in Conflicting Product development or activity or those engaged in related product development or activity; (b) Employee will not sell or solicit orders for any Conflicting Product to or from any customer whom Employee solicited or rendered service or technical assistance to, or whose account Employee supervised or serviced for the Corporation, at any time during the last two years of Employee's employment with the Corporation; (c) Employee will not engage in or be employed in the development, production or provision of a Conflicting Product; (d) Employee will not serve any organization or person engaged in the development, production or sale of any Conflicting Product except after furnishing the Corporation with written assurances, satisfactory to the Corporation, both from Employee and from Employee's new employer, stating that Employee will not render services prohibited by subparagraphs (b) or (c) of this Section 6.7. (e) For purposes of this Section 6.7, "Conflicting Products" means any product, process, equipment, concept or service (in existence or under development) of any person or organization (other than the Corporation), which resembles or competes with a product, process, equipment, concept or service upon which I may have worked or which I may have sold during the last two (2) years of my employment by the Corporation, or concerning which I acquired Confidential Information at any time through my work with the Corporation. (f) If Employee has any questions about whether particular activities may violate my Non-Competition obligations, Employee will contact the President of the Corporation in writing, and the Corporation agrees to advise Employee of its position and/or, in Netco's sole discretion, provide Employee with a written release. 6.8 Remedies. The Employee's obligations set forth in Section 6 of this -------- Agreement shall continue to be binding upon Employee, notwithstanding the termination of his employment with the Corporation for any reason whatsoever. Such obligations shall be deemed and construed as separate agreements independent of any other provisions of this Agreement. The existence of any claim or cause of action by Employee against the Corporation, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Corporation or any or all of such obligations. It is expressly agreed that the remedy at law for the breach of any such obligation is inadequate and that temporary and permanent injunctive relief shall be available to prevent the breach or any threatened breach thereof, without the necessity of proof of actual damages 7. Notices. Any notices to be given hereunder by either party to the ------- other may be effected either by personal delivery in writing or by mail, registered or certified, postage prepaid, with return receipt requested. Personal delivery to the Corporation shall mean personal delivery to the Chief Executive Officer of the Corporation. Mailed notices shall be addressed to the respective addresses shown below. Either party may change its address for notice by giving written notice according to the terms of this Section 7. (a) If to Employee: Mark Marlow 7228 Garfield Ave. South Richfield, MN 55423 (b) If to the Corporation: Netco Communications Corporation 104 Union Plaza 333 North Washington Ave Minneapolis, MN 55401 Att'n: President 8. GENERAL PROVISIONS. ------------------ 8.1 Law Governing. This Agreement shall be governed by and construed ------------- according to the laws of the State of Minnesota. 8.2 Invalid Provisions. If any provision of this Agreement is held ------------------ to be illegal, invalid, or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and still be legal, valid or enforceable. 8.3 Entire Agreement. This Agreement sets forth the entire ---------------- understanding of the parties and supersedes all prior agreements or understandings, whether written or oral, with respect to the subject matter hereof. No terms, conditions, warranties, other than those contained herein, and no amendments or modifications hereto shall be binding unless made in writing and signed by the parties hereto. 8.4 Binding Effect. This Agreement shall extend to and be binding -------------- upon and inure to the benefit of the parties hereto, their respective heirs, representatives, successors and assigns. This Agreement may not be assigned by Employee. 8.5 Waiver. The waiver by either party hereto of a breach of any ------ term or provision of this Agreement shall not operate or be construed as a waiver of a subsequent breach of the same provision by any party or of the breach of any other term or provision of this Agreement. 8.7 Titles. Titles of the paragraphs herein are used solely for ------ convenience and shall not be used for interpretation or construing any word, clause, paragraph, or provision of this Agreement. 8.8 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Corporation and Employee have executed this Agreement as of the date and year first written above. "Employee" "Corporation" Mark Marlow Netco Communications Corporation /s/ Mark Marlow By:/s/ Edward J. Driscoll, III - -------------------------- ---------------------------------- Edward J. Driscoll, III Chief Executive Officer EX-10.18 32 1994 STOCK OPTION PLAN EXHIBIT 10.18 WAM!NET INC. AMENDED AND RESTATED 1994 STOCK OPTION PLAN 1. Purpose. The purpose of the WAM!NET Inc. Amended and Restated 1994 ------- Stock Option Plan is to provide a continuing long-term incentive to selected eligible officers and key employees of WAM!NET Inc. (the "Corporation") and of any subsidiary corporation of the Corporation (the "Subsidiary"), as herein defined, and to Non-Employee Directors of the Corporation; to provide a means of rewarding outstanding performance; and to enable the Corporation to maintain a competitive position to attract and retain key personnel necessary for continued growth and profitability. 2. Definitions. The following words and phrases as used herein shall ----------- have the meanings set forth below: 2.1. "Board" shall mean the Board of Directors of the Corporation. 2.2. "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.3. "Committee" shall mean the Stock Option Committee of the Board, or such other committee of the Board as may be designated by the Board, from time to time, for the purpose of administering this plan as contemplated by Section 4 hereof. 2.4. "Common Stock" shall mean the common stock, $0.01 par value, of the Corporation. 2.5. "Corporation" shall mean WAM!NET Inc., a Minnesota corporation. 2.6. "Non-Employee Director" shall mean a member of the Board who is not an employee of the Corporation or any Subsidiary. 2.7. "Fair Market Value" of any security on any given date shall be determined by the Committee as follows: (a) if the security is listed for trading on one or more national securities exchanges, or is quoted on NASDAQ National Market, the last reported sales price on the principal such exchange or NASDAQ on the date in question, or if such security shall not have been traded on such principal exchange on such date, NASDAQ on the first day prior thereto on which such security was so traded; or (b) if the security is not listed for trading on a national securities exchange or NASDAQ National Market, but is traded in the over-the-counter market, including NASDAQ, closing bid price for such security on the date in question, or if there is no such bid price for such security on such date, the closing bid price on the first day prior thereto on which such price existed; or (c) if neither (a) nor (b) is applicable, by any means deemed fair and reasonable by the Committee, which determination shall be final and binding on all parties. WAM!NET Inc. Amended and Restated 1994 Stock Option Plan 2.8. "ISO" shall mean any stock option granted pursuant to this Plan as an "incentive stock option" within the meaning of Section 422 of the Code. 2.9. "NQO" shall mean any stock option granted pursuant to this Plan, which is not an ISO. 2.10. "Option" shall mean any stock option granted pursuant to this Plan, whether an ISO or an NQO. 2.11. "Optionee" shall mean any person who is the holder of an Option granted pursuant to this Plan. 2.12. "Plan" shall mean this 1994 Stock Option Plan of the Corporation. 2.13. "Subsidiary" shall mean any corporation which at the time qualifies as a subsidiary of the Corporation under Section 425(f) of the Code. 2.14. "Tax Date" shall mean the date on which the amount of tax to be withheld is determined under the Code. 3. Shares Available Under Plan. The number of shares which may be --------------------------- issued pursuant to Options granted under this Plan shall not exceed 22,071,400 shares of the Common Stock of the Corporation; provided, however, that shares which become available as a result of canceled, unexercised, lapsed or terminated Options granted under this Plan shall be available for issuance pursuant to Options subsequently granted under this Plan, and the number of shares for which Options have been granted or are available for grant under this Plan shall be proportionately increased or decreased in accordance with Section 8 hereof upon occurrence of any event described therein. The shares issued upon exercise of Options granted under this Plan may be authorized and unissued shares or shares previously acquired or to be acquired by the Corporation. 4. Administration. -------------- 4.1. The Plan will be administered by the Board of Directors or by a Committee (the "Committee") selected by the Board and consisting of at least three members, none of whom for at least one year prior to service on the Committee has been eligible to receive any Option under the Plan, or under any other benefit plan of the Corporation or any of its affiliates entitling the participants therein to acquire stock or stock options of the Corporation or any of its Subsidiaries. The Board or such Committee are hereinafter described as the Committee. 4.2. The Committee will have plenary authority, subject to provisions of the Plan, to determine when and to whom Options will be granted, the term of each Option, the number of shares covered by it, the participation by the Optionee in other plans, and any other terms or conditions of each Option. The Committee shall determine with respect to each grant of an Option whether a participant shall receive an ISO or an NQO. The number of shares, the term 2. WAM!NET Inc. Amended and Restated 1994 Stock Option Plan and the other terms and conditions of a particular kind of Option need not be the same, even as to options granted at the same time. The Committee's recommendations regarding option grants and terms and conditions thereof will be conclusive. 4.3. The Committee will have the sole responsibility for construing and interpreting the Plan, for establishing and amending any rules and regulations as it deems necessary or desirable for the proper administration of the Plan, and for resolving all questions arising under the Plan. Any decision or action taken by the Committee arising out of or about the construction, administration, interpretation and effect of the Plan and of its rules and regulations will, to the extent permitted by law, be within its absolute discretion, except as otherwise specifically provided herein, and will be conclusive and binding on all Optionees, all successors, and any other person, whether that person is claiming under or through any Optionee or otherwise. 4.4. The Committee will designate one of its members as chairman. It will hold its meetings at the times and places as it may determine. A majority of its members will constitute a quorum, and all determinations of the Committee will be made by a majority of its members. Any determination reduced to writing and signed by all members will be fully as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary, who need not be a member of the Committee, and may make such rules and regulations for the conduct of its business as it may deem advisable. 4.5. No member of the Committee will be liable, in the absence of bad faith, for any act or omission with respect to his services on the Committee. Service on the Committee will constitute service as a member of the Board, so that the members of the Committee will be entitled to indemnification and reimbursement as Board members pursuant to the Corporation's Bylaws. 4.6. The Committee will regularly inform the Board as to its actions with respect to all Options granted under the Plan and the terms and conditions and any such Options in a manner, at any times, and in any form as the Board may reasonably request. 5. Participants. ------------ 5.1. Participation in this Plan shall be limited to officers and regular full-time executive, administrative, professional, production and technical employees of the Corporation, or of a Subsidiary, who are salaried employees of the Corporation or of a Subsidiary, and consultants of the Corporation or of a Subsidiary. Non-Employee Directors of the Company shall participate under this Plan only as specified in Section 14 hereof. 5.2. Subject to other provisions of this Plan, Options may be granted to the same participants on more than one occasion. 5.3. Except with respect to Options granted to Non-Employee Directors under Section 14, the Committee's determination under the Plan including, without limitation, 3. WAM!NET Inc. Amended and Restated 1994 Stock Option Plan determination of the persons to receive Options, the form, amount and type of such Options, and the terms and provisions of Options need not be uniform and may be made selectively among otherwise eligible participants, whether or not the participants are similarly situated. 6. Terms and Conditions. -------------------- 6.1. Each Option granted under the Plan shall be evidenced by a written agreement, which shall be subject to the provisions of this Plan and to such other terms and conditions as the Corporation may deem appropriate. 6.2. Each Option agreement shall specify the period for which the Option thereunder is granted which in no event shall exceed ten years from the date of the grant for any Option designated by the Committee as an ISO or ten years and one day from the date of grant for any Option designated by the Committee as an NQO and shall provide that the Option shall expire at the end of such period. 6.3. The exercise price per share shall be determined by the Committee at the time any Option is granted and, if the Option is an ISO, shall be no less than one hundred percent (100%) of Fair Market Value of the Common Stock of the Corporation on the date the Option is granted, as determined by the Committee. 6.4. The aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which an ISO under this Plan or any other plan of the Corporation or its Subsidiaries is exercisable for the first time by an Optionee during any calendar year shall not exceed $100,000. 6.5. An Option shall be exercisable at such time or times, and with respect to such minimum number of shares, as may be determined by the Corporation at the time of the grant. The Option agreement may require, if so determined by the Corporation, that no part of the Option may be exercised until the Optionee shall have remained in the employ of the Corporation or of a Subsidiary for such period after the date of the Option as the Corporation may specify. 6.6. The Corporation may prescribe the form of legend which shall be affixed to the stock certificate representing shares to be issued and the shares shall be subject to the provisions of any repurchase agreement or other agreement restricting the sale or transfer thereof. Such agreements or restrictions shall be noted on the certificate representing the shares to be issued. 6.7. No Option issued under the Plan shall be transferable by the Optionee other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or rules thereunder. 4. WAM!NET Inc. Amended and Restated 1994 Stock Option Plan 7. Exercise of Option. ------------------ 7.1. Each exercise of an Option granted hereunder, whether in whole or in part shall be by written notice thereof, delivered to the Secretary of the Corporation (or such other person as may be designated). The notice shall state the number of shares with respect to which the Options are being exercised and shall be accompanied by payment in full for the number of shares so designated. Shares shall be registered in the name of the Optionee unless the Optionee otherwise directs in his or her notice of election. 7.2. Payment shall be made to the Corporation either (i) in cash, including certified check, bank draft or money order, (ii) at the discretion of the Corporation, by delivering Common Stock of the Corporation already owned by the participant, (iii) at the discretion of the Corporation, by delivering a promissory note, containing such terms and conditions acceptable to the Corporation, for all or a portion of the purchase price of the shares so purchased, or a combination of (i), (ii) and (iii). With respect to (ii), the Fair Market Value of stock so delivered shall be determined as of the date immediately preceding the date of exercise. 7.3. Upon notification of the amount due and prior to, or concurrently with, the delivery to the Optionee of a certificate representing any shares purchased pursuant to the exercise of an Option, the Optionee shall promptly pay to the Corporation any amount necessary to satisfy applicable federal, state or local withholding tax requirements. 8. Adjustment of Option Stock. In case the shares issuable upon exercise -------------------------- of any Option granted under the Plan at any time outstanding shall be subdivided into a greater or combined into a lesser number of shares (whether with or without par value), the number of shares purchasable upon exercise of such Option immediately prior thereto shall be adjusted so that the Optionee shall be entitled to receive a number of shares which he or she would have owned or have been entitled to receive after the happening of such event had such Option been exercised immediately prior to the happening of such subdivision or combination or any record date with respect thereto. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such subdivision or combination retroactive to the record date, if any, for such subdivision or combination. The option price (as such amount may have theretofore been adjusted pursuant to the provisions hereof) shall be adjusted by multiplying the option price immediately prior to the adjustment of the number of shares purchasable under the Option by a fraction, of which the numerator shall be the number of shares purchasable upon the exercise of the Option immediately prior to such adjustment, and of which the denominator shall be the number of shares so purchasable immediately thereafter. Substituted shares of stock shall be deemed shares under Section 3 of the Plan. 9. Assignments. Any Option granted under this Plan shall be ----------- exercisable only by the Optionee to whom granted during his or her lifetime and shall not be assignable or transferable otherwise than by will or by the laws of descent and distribution. 5. WAM!NET Inc. Amended and Restated 1994 Stock Option Plan 10. Severance; Death; Disability. An Option shall terminate, and no ---------------------------- rights thereunder may be exercised, if the person to whom it is granted ceases to be employed by the Corporation or by a Subsidiary except that: 10.1. If the employment of the Optionee is terminated by any reason other than his or her death or disability, the Optionee may at any time within not more than three months after termination of his or her employment, exercise his or her Option rights but only to the extent they were exercisable by the Optionee on the date of termination of his or her employment; provided, however, that if the employment is terminated as a result of the Optionee's deliberate, willful or gross misconduct as determined by the Committee, all rights under the Option shall terminate and expire upon such termination. 10.2. If the Optionee dies while in the employ of the Corporation or a Subsidiary, or within not more than three months after termination of his or her employment, the Optionee's rights under the Option may be exercised at any time within one year following such death by his or her personal representative or by the person or persons to whom such rights under the Option shall pass by will or by the laws of descent and distribution, but only to the extent they were exercisable by the Optionee on the date of death. 10.3. If the employment of the Optionee is terminated because of permanent disability, the Optionee, or his or her legal representative, may at any time within not more than one year after termination of his or her employment, exercise his or her Option rights but only to the extent they were exercisable by the Optionee on the date of termination of his or her employment. 10.4. Any provision of Sections 10.1, 10.2 and 10.3 to the contrary notwithstanding, no Option or any right claimed thereby, therein or thereunder shall be exercisable by anyone after the expiration of the term of the Option. 10.5. Transfers of employment between the Corporation and a Subsidiary, or between Subsidiaries, will not constitute termination of employment for purposes of any Option granted under this Plan. The Committee may specify in the terms and conditions of an Option whether any authorized leave of absence or absence for military or government service or for any other reasons will constitute a termination of employment for purposes of the Option and the Plan. 11. Rights of Participants. Neither the participant nor the personal ---------------------- representatives, heirs, or legatees of such participant shall be or have any of the rights or privileges of a shareholder of the Corporation in respect of any of the shares issuable upon the exercise of an Option granted under this Plan unless and until certificates representing such shares shall have been issued and delivered to the participant or to such personal representatives, heirs or legatees. 12. Securities Registration. If any law or regulation of the Securities ----------------------- and Exchange Commission or of any other body having jurisdiction shall require the Corporation or the participant to take any action in connection with the exercise of an Option, then notwithstanding 6. WAM!NET Inc. Amended and Restated 1994 Stock Option Plan any contrary provision of an Option agreement or this Plan, the date for exercise of such Option and the delivery of the shares purchased thereunder shall be deferred until the completion of the necessary action. In the event that the Corporation shall deem it necessary, the Corporation may condition the grant or exercise of an Option granted under this Plan upon the receipt of a satisfactory certificate that the Optionee is acquiring the Option or the shares obtained by exercise of the Option for investment purposes and not with the view or intent to resell or otherwise distribute such Option or shares. In such event, the stock certificate evidencing such shares shall bear a legend referring to applicable laws restricting transfer of such shares. In the event that the Corporation shall deem it necessary to register under the Securities Act of 1933, as amended, or any other applicable statute, any Options or any shares with respect to which an Option shall have been granted or exercised, then the participant shall cooperate with the Corporation and take such action as is necessary to permit registration or qualification of such Options or shares. 13. Duration and Amendment. ---------------------- 13.1. There is no express limitation upon the duration of the Plan, except for the requirement of the Code that all ISO's must be granted within ten years from the date the Plan is approved by the shareholders. 13.2. The Board may terminate or may amend the Plan at any time; provided, however, that the Board may not, without approval of the shareholders of the Corporation, (i) increase the maximum number of shares as to which Options may be granted under the Plan, (ii) permit the granting of ISO's at less than 100% of Fair Market Value at time of grant, (iii) change the class of employees eligible to receive Options under the Plan, or (iv) permit Directors to receive options under the Plan other than pursuant to Section 14 hereof; and, provided further, that the Board may not amend the Plan more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or rules thereunder. 14. Granting of Options to Non-Employee Directors. --------------------------------------------- 14.1. Non-Employee Directors shall be entitled to receive such Options under this Plan as may be granted to them from time to time. 14.2. All Options granted to Non-Employee Directors shall be designated as NQOs, shall be evidenced by a written option agreement signed by the Corporation and the Non-Employee Director, and shall be subject to the same terms and provisions as are then in effect with respect to granting of NQOs to salaried officers and key employees of the Corporation, except that the Option shall be exercisable as to all or any part of the shares subject to the Option from the date the Option is granted, and shall expire on the earliest of (i) twelve months after the Optionee ceases to be a director (except by death), (ii) one year after the death of the optionee, or (iii) seven years after the date of grant. Subject to the foregoing, all provisions of this Plan not inconsistent with the foregoing shall apply to Options granted to 7. WAM!NET Inc. Amended and Restated 1994 Stock Option Plan Directors, except that Directors shall always have the right to deliver stock in exercise of options as provided in Section 7.2. 15. Approval of Shareholders. This Plan expressly is subject to approval ------------------------ of holders of a majority of the outstanding shares of Common Stock of the Corporation, and if it is not so approved on or before one year after the date of adoption of this Plan by the Board, the Plan shall not come into effect, and any Options granted pursuant to this Plan shall be deemed canceled. 16. Conditions of Employment. The granting of an Option to a participant ------------------------ under this Plan who is an employee shall impose no obligation on the Corporation to continue the employment of any participant and shall not lessen or affect the right of the Corporation to terminate the employment of the participant. 17. Other Options. Nothing in the Plan will be construed to limit the ------------- authority of the Corporation to exercise its corporate rights and powers, including, by way of illustration and not by way of limitation, the right to grant options for proper corporate purposes otherwise than under the Plan to any employee or any other person, firm, corporation, association, or other entity, or to grant options to, or assume options of, any person for the acquisition by purchase, lease, merger, consolidation, or otherwise, of all or any part of the business and assets of any person, firm, corporation, association, or other entity. Adopted by the Board of Directors on September 24, 1994 Approved by Shareholders on October 17, 1994 Amendments Approved by Shareholders on February 7, 1998 Restated as of February 28, 1998 8. EX-10.19 33 AMENDED & RESTATED 1994 STOCK OPTION PLAN Exhibit 10.19 WAM!NET INC. AMENDED AND RESTATED 1994 STOCK OPTION PLAN 1. Purpose. The purpose of the WAM!NET Inc. 1994 Stock Option Plan ------- (formerly the Netco Communications Corporation 1994 Stock Option Plan) (the "Plan") has been to provide a continuing long-term incentive to selected eligible officers and key employees of WAM!NET Inc. (the "Corporation") and of any subsidiary corporation of the Corporation (the "Subsidiary"), as herein defined, and to Non-Employee Directors of the Corporation; to provide a means of rewarding outstanding performance; and to enable the Corporation to maintain a competitive position to attract and retain key personnel necessary for continued growth and profitability. This amendment and restatement of the Plan was adopted by the Corporation's Board of Director's on April 24th, 1998, in conjunction with the adoption of the WAM!NET Inc. 1998 Combined Stock Option Plan, to reflect the Corporation's name change to WAM!NET Inc., to incorporate prior amendments to the Plan, to provide that no new Options will be granted after April 24, 1998 under the Plan, and to limit the number of shares available under the Plan to those with respect to which Options were granted prior to April 25,1998. 2. Definitions. The following words and phrases as used herein shall have ----------- the meanings set forth below: 2.1. "Board" shall mean the Board of Directors of the Corporation. 2.2. "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.3. "Committee" shall mean the Stock Option Committee of the Board, or such other committee of the Board as may be designated by the Board, from time to time, for the purpose of administering this plan as contemplated by Section 4 hereof. 2.4. "Common Stock" shall mean the common stock, $0.01 par value, of the Corporation. 2.5. "Corporation" shall mean WAM!NET Inc., (f/k/a Netco Communications Corporation), a Minnesota corporation. 2.6. "Non-Employee Director" shall mean a member of the Board who is not an employee of the Corporation or any Subsidiary. 2.7. "Fair Market Value" of any security on any given date shall be determined by the Committee as follows: (a) if the security is listed for trading on one or more national securities exchanges, or is quoted on NASDAQ National Market, the last reported sales price on the principal such exchange or NASDAQ on the date in question, or if such security shall not have been traded on such principal exchange on such date, NASDAQ on the first day prior thereto on which such security was so traded; or (b) if the security is not listed for trading on a national WAM!NET Inc. Amended and Restated 1994 Stock Option Plan securities exchange or NASDAQ National Market, but is traded in the over-the- counter market, including NASDAQ, closing bid price for such security on the date in question, or if there is no such bid price for such security on such date, the closing bid price on the first day prior thereto on which such price existed; or (c) if neither (a) nor (b) is applicable, by any means deemed fair and reasonable by the Committee, which determination shall be final and binding on all parties. 2.8. "ISO" shall mean any stock option granted pursuant to this Plan as an "incentive stock option" within the meaning of Section 422 of the Code. 2.9. "NQO" shall mean any stock option granted pursuant to this Plan, which is not an ISO. 2.10. "Option" shall mean any stock option granted pursuant to this Plan, whether an ISO or an NQO. 2.11. "Optionee" shall mean any person who is the holder of an Option granted pursuant to this Plan. 2.12. "Plan" shall mean this 1994 Stock Option Plan of the Corporation. 2.13. "Subsidiary" shall mean any corporation which at the time qualifies as a subsidiary of the Corporation under Section 425(f) of the Code. 2.14. "Tax Date" shall mean the date on which the amount of tax to be withheld is determined under the Code. 3. Shares Available Under Plan. The number of shares which may be issued --------------------------- pursuant to Options granted under this Plan shall not exceed 7,000,000 shares (after adjustment pursuant Section 8 hereof to reflect the 5-for-1 stock split effected by the Corporation on February 26, 1998) of the Common Stock of the Corporation; provided, however, that shares which become available as a result of canceled, unexercised, lapsed or terminated Options granted under this Plan shall be available for issuance pursuant to Options subsequently granted under this Plan, and the number of shares for which Options have been granted or are available for grant under this Plan shall be proportionately increased or decreased in accordance with Section 8 hereof upon occurrence of any event described therein. The shares issued upon exercise of Options granted under this Plan may be authorized and unissued shares or shares previously acquired or to be acquired by the Corporation. 4. Administration. -------------- 4.1. The Plan will be administered by the Board of Directors or by a Committee (the "Committee") selected by the Board and consisting of at least three members, none of whom for at least one year prior to service on the Committee has been eligible to receive any Option under the Plan, or under any other benefit plan of the Corporation or any of its affiliates entitling the 2. WAM!NET Inc. Amended and Restated 1994 Stock Option Plan participants therein to acquire stock or stock options of the Corporation or any of its Subsidiaries. The Board or such Committee are hereinafter described as the Committee. 4.2. The Committee will have plenary authority, subject to provisions of the Plan, to determine when and to whom Options will be granted, the term of each Option, the number of shares covered by it, the participation by the Optionee in other plans, and any other terms or conditions of each Option. The Committee shall determine with respect to each grant of an Option whether a participant shall receive an ISO or an NQO. The number of shares, the term and the other terms and conditions of a particular kind of Option need not be the same, even as to options granted at the same time. The Committee's recommendations regarding option grants and terms and conditions thereof will be conclusive. 4.3. The Committee will have the sole responsibility for construing and interpreting the Plan, for establishing and amending any rules and regulations as it deems necessary or desirable for the proper administration of the Plan, and for resolving all questions arising under the Plan. Any decision or action taken by the Committee arising out of or about the construction, administration, interpretation and effect of the Plan and of its rules and regulations will, to the extent permitted by law, be within its absolute discretion, except as otherwise specifically provided herein, and will be conclusive and binding on all Optionees, all successors, and any other person, whether that person is claiming under or through any Optionee or otherwise. 4.4. The Committee will designate one of its members as chairman. It will hold its meetings at the times and places as it may determine. A majority of its members will constitute a quorum, and all determinations of the Committee will be made by a majority of its members. Any determination reduced to writing and signed by all members will be fully as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary, who need not be a member of the Committee, and may make such rules and regulations for the conduct of its business as it may deem advisable. 4.5. No member of the Committee will be liable, in the absence of bad faith, for any act or omission with respect to his services on the Committee. Service on the Committee will constitute service as a member of the Board, so that the members of the Committee will be entitled to indemnification and reimbursement as Board members pursuant to the Corporation's Bylaws. 4.6. The Committee will regularly inform the Board as to its actions with respect to all Options granted under the Plan and the terms and conditions and any such Options in a manner, at any times, and in any form as the Board may reasonably request. 5. Participants. ------------ 5.1. Participation in this Plan shall be limited to officers and regular full-time executive, administrative, professional, production and technical employees of the Corporation, or of a Subsidiary, who are salaried employees of the Corporation or of a Subsidiary, and 3. WAM!NET Inc. Amended and Restated 1994 Stock Option Plan consultants of the Corporation or of a Subsidiary. Non-Employee Directors of the Company shall participate under this Plan only as specified in Section 14 hereof. 5.2. Subject to other provisions of this Plan, Options may be granted to the same participants on more than one occasion. 5.3. Except with respect to Options granted to Non-Employee Directors under Section 14, the Committee's determination under the Plan including, without limitation, determination of the persons to receive Options, the form, amount and type of such Options, and the terms and provisions of Options need not be uniform and may be made selectively among otherwise eligible participants, whether or not the participants are similarly situated. 6. Terms and Conditions. -------------------- 6.1. Each Option granted under the Plan shall be evidenced by a written agreement, which shall be subject to the provisions of this Plan and to such other terms and conditions as the Corporation may deem appropriate. 6.2. Each Option agreement shall specify the period for which the Option thereunder is granted which in no event shall exceed ten years from the date of the grant for any Option designated by the Committee as an ISO or ten years and one day from the date of grant for any Option designated by the Committee as an NQO and shall provide that the Option shall expire at the end of such period. 6.3. The exercise price per share shall be determined by the Committee at the time any Option is granted and, if the Option is an ISO, shall be no less than one hundred percent (100%) of Fair Market Value of the Common Stock of the Corporation on the date the Option is granted, as determined by the Committee. 6.4. The aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which an ISO under this Plan or any other plan of the Corporation or its Subsidiaries is exercisable for the first time by an Optionee during any calendar year shall not exceed $100,000. 6.5. An Option shall be exercisable at such time or times, and with respect to such minimum number of shares, as may be determined by the Corporation at the time of the grant. The Option agreement may require, if so determined by the Corporation, that no part of the Option may be exercised until the Optionee shall have remained in the employ of the Corporation or of a Subsidiary for such period after the date of the Option as the Corporation may specify. 6.6. The Corporation may prescribe the form of legend which shall be affixed to the stock certificate representing shares to be issued and the shares shall be subject to the provisions of any repurchase agreement or other agreement restricting the sale or transfer thereof. Such agreements or restrictions shall be noted on the certificate representing the shares to be issued. 4. WAM!NET Inc. Amended and Restated 1994 Stock Option Plan 6.7. Each Incentive Stock Option granted hereunder shall not be transferable by the Optionee other than by will or by the laws of descent and distribution, and shall be, during the Optionee's lifetime, exercisable only by the Optionee or Optionee's guardian or legal representative. Each Non-Qualified Stock Option granted hereunder may be transferred by the Optionee for estate planning purposes subject to prior or other written approval by the Committee in its sole discretion or pursuant to any policy and requirements concerning such transfers then in effect as the Committee may in its discretion establish, amend or revoke from time to time; by will or the laws of descent and distribution; or pursuant to a qualified domestic relations order as defined in Section 414 of the Code or Section 206 of the Employee Retirement Income Security Act, or rules thereunder. Except as permitted by the preceding sentences, each Option granted under the Plan and the rights and privileges thereby conferred shall not be transferred, assigned or pledged in any way (whether by operation of law or otherwise), and shall not be subject to execution, attachment or similar process. Any attempt to so transfer, assign, pledge or otherwise dispose of the Option, or of any right or privilege conferred thereby, contrary to the provisions of the Option or the Plan, or any levy of any attachment or similar process upon such rights and privileges, shall be void and unenforceable against the Corporation. 7. Exercise of Option. ------------------ 7.1. Each exercise of an Option granted hereunder, whether in whole or in part, shall be by written notice thereof, delivered to the Secretary of the Corporation (or such other person as may be designated). The notice shall state the number of shares with respect to which the Options are being exercised and shall be accompanied by payment in full for the number of shares so designated. Shares shall be registered in the name of the Optionee unless the Optionee otherwise directs in his or her notice of election. 7.2. Payment shall be made to the Corporation either (i) in cash, including certified check, bank draft or money order, (ii) at the discretion of the Corporation, by delivering Common Stock of the Corporation already owned by the participant, (iii) at the discretion of the Corporation, by delivering a promissory note, containing such terms and conditions acceptable to the Corporation, for all or a portion of the purchase price of the shares so purchased, or a combination of (i), (ii) and (iii). With respect to (ii), the Fair Market Value of stock so delivered shall be determined as of the date immediately preceding the date of exercise. 7.3. Upon notification of the amount due and prior to, or concurrently with, the delivery to the Optionee of a certificate representing any shares purchased pursuant to the exercise of an Option, the Optionee shall promptly pay to the Corporation any amount necessary to satisfy applicable federal, state or local withholding tax requirements. 8. Adjustment of Option Stock. In case the shares issuable upon exercise -------------------------- of any Option granted under the Plan at any time outstanding shall be subdivided into a greater or combined into a lesser number of shares (whether with or without par value), the number of shares purchasable upon exercise of such Option immediately prior thereto shall be adjusted so that the Optionee shall be entitled to receive a number of shares which he or she would have 5. WAM!NET Inc. Amended and Restated 1994 Stock Option Plan owned or have been entitled to receive after the happening of such event had such Option been exercised immediately prior to the happening of such subdivision or combination or any record date with respect thereto. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such subdivision or combination retroactive to the record date, if any, for such subdivision or combination. The option price (as such amount may have theretofore been adjusted pursuant to the provisions hereof) shall be adjusted by multiplying the option price immediately prior to the adjustment of the number of shares purchasable under the Option by a fraction, of which the numerator shall be the number of shares purchasable upon the exercise of the Option immediately prior to such adjustment, and of which the denominator shall be the number of shares so purchasable immediately thereafter. Substituted shares of stock shall be deemed shares under Section 3 of the Plan. 9. Assignments. Other than as provided in Section 6.7, any Option ----------- granted under this Plan shall be exercisable only by the Optionee to whom granted during his or her lifetime and shall not be assignable or transferable otherwise than by will or by the laws of descent and distribution. 10. Severance; Death; Disability. An Option shall terminate, and no ---------------------------- rights thereunder may be exercised, if the person to whom it is granted ceases to be employed by the Corporation or by a Subsidiary except that: 10.1. If the employment of the Optionee is terminated by any reason other than his or her death or disability, the Optionee may at any time within not more than three months after termination of his or her employment, exercise his or her Option rights but only to the extent they were exercisable by the Optionee on the date of termination of his or her employment; provided, however, that if the employment is terminated as a result of the Optionee's deliberate, willful or gross misconduct as determined by the Committee, all rights under the Option shall terminate and expire upon such termination. 10.2. If the Optionee dies while in the employ of the Corporation or a Subsidiary, or within not more than three months after termination of his or her employment, the Optionee's rights under the Option may be exercised at any time within one year following such death by his or her personal representative or by the person or persons to whom such rights under the Option shall pass by will or by the laws of descent and distribution, but only to the extent they were exercisable by the Optionee on the date of death. 10.3. If the employment of the Optionee is terminated because of permanent disability, the Optionee, or his or her legal representative, may at any time within not more than one year after termination of his or her employment, exercise his or her Option rights but only to the extent they were exercisable by the Optionee on the date of termination of his or her employment. 6. WAM!NET Inc. Amended and Restated 1994 Stock Option Plan 10.4. The same exercise periods as provided in Sections 11.1, 11.2 and 11.3 shall also apply with respect to a tranferee of an Option pursuant to Section 6.7, including the extension of the exercise period under Section 11.2 upon the death of the tranferee. 10.5. Any provision of Sections 10.1, 10.2 and 10.3 to the contrary notwithstanding, no Option or any right claimed thereby, therein or thereunder shall be exercisable by anyone after the expiration of the term of the Option. 10.6. Transfers of employment between the Corporation and a Subsidiary, or between Subsidiaries, will not constitute termination of employment for purposes of any Option granted under this Plan. The Committee may specify in the terms and conditions of an Option whether any authorized leave of absence or absence for military or government service or for any other reasons will constitute a termination of employment for purposes of the Option and the Plan. 11. Rights of Participants. Neither the participant nor the personal ---------------------- representatives, heirs, or legatees of such participant shall be or have any of the rights or privileges of a shareholder of the Corporation in respect of any of the shares issuable upon the exercise of an Option granted under this Plan unless and until certificates representing such shares shall have been issued and delivered to the participant or to such personal representatives, heirs or legatees. 12. Securities Registration. If any law or regulation of the Securities ----------------------- and Exchange Commission or of any other body having jurisdiction shall require the Corporation or the participant to take any action in connection with the exercise of an Option, then notwithstanding any contrary provision of an Option agreement or this Plan, the date for exercise of such Option and the delivery of the shares purchased thereunder shall be deferred until the completion of the necessary action. In the event that the Corporation shall deem it necessary, the Corporation may condition the grant or exercise of an Option granted under this Plan upon the receipt of a satisfactory certificate that the Optionee is acquiring the Option or the shares obtained by exercise of the Option for investment purposes and not with the view or intent to resell or otherwise distribute such Option or shares. In such event, the stock certificate evidencing such shares shall bear a legend referring to applicable laws restricting transfer of such shares. In the event that the Corporation shall deem it necessary to register under the Securities Act of 1933, as amended, or any other applicable statute, any Options or any shares with respect to which an Option shall have been granted or exercised, then the participant shall cooperate with the Corporation and take such action as is necessary to permit registration or qualification of such Options or shares. 13. Duration and Amendment. ---------------------- 13.1. There is no express limitation upon the duration of the Plan, except for the requirement of the Code that all ISO's must be granted within ten years from the date the Plan is approved by the shareholders. 7. WAM!NET Inc. Amended and Restated 1994 Stock Option Plan 13.2. The Board may terminate or may amend the Plan at any time; provided, however, that the Board may not, without approval of the shareholders of the Corporation, (i) increase the maximum number of shares as to which Options may be granted under the Plan, (ii) permit the granting of ISO's at less than 100% of Fair Market Value at time of grant, (iii) change the class of employees eligible to receive Options under the Plan, or (iv) permit Directors to receive options under the Plan other than pursuant to Section 14 hereof; and, provided further, that the Board may not amend the Plan more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or rules thereunder. 14. Granting of Options to Non-Employee Directors. --------------------------------------------- 14.1. Non-Employee Directors shall be entitled to receive such Options under this Plan as may be granted to them from time to time. 14.2. All Options granted to Non-Employee Directors shall be designated as NQOs, shall be evidenced by a written option agreement signed by the Corporation and the Non-Employee Director, and shall be subject to the same terms and provisions as are then in effect with respect to granting of NQOs to salaried officers and key employees of the Corporation, except that the Option shall be exercisable as to all or any part of the shares subject to the Option from the date the Option is granted, and shall expire on the earliest of (i) twelve months after the Optionee ceases to be a director (except by death), (ii) one year after the death of the optionee, or (iii) seven years after the date of grant. Subject to the foregoing, all provisions of this Plan not inconsistent with the foregoing shall apply to Options granted to Directors, except that Directors shall always have the right to deliver stock in exercise of options as provided in Section 7.2. 15. Approval of Shareholders. This Plan expressly is subject to approval ------------------------ of holders of a majority of the outstanding shares of Common Stock of the Corporation, and if it is not so approved on or before one year after the date of adoption of this Plan by the Board, the Plan shall not come into effect, and any Options granted pursuant to this Plan shall be deemed canceled. 16. Conditions of Employment. The granting of an Option to a participant ------------------------ under this Plan who is an employee shall impose no obligation on the Corporation to continue the employment of any participant and shall not lessen or affect the right of the Corporation to terminate the employment of the participant. 17. Other Options. Nothing in the Plan will be construed to limit the ------------- authority of the Corporation to exercise its corporate rights and powers, including, by way of illustration and not by way of limitation, the right to grant options for proper corporate purposes otherwise than under the Plan to any employee or any other person, firm, corporation, association, or other entity, or to grant options to, or assume options of, any person for the acquisition by purchase, lease, merger, consolidation, or otherwise, of all or any part of the business and assets of any person, firm, corporation, association, or other entity. 8. EX-10.20 34 1998 COMBINED STOCK OPTION PLAN EXHIBIT 10.20 WAM!NET INC. 1998 COMBINED STOCK OPTION PLAN 1. Purpose. The purpose of the WAM!NET Inc. 1998 Combined Stock Option ------- Plan (the "Plan") is to provide a continuing long-term incentive to selected eligible officers and key employees (including foreign nationals) of WAM!NET Inc. (the "Corporation") and of any subsidiary corporation of the Corporation (the "Subsidiary"), as herein defined, to Non-Employee Directors of the Corporation and to Non-Employee Consultants to the Corporation; to provide a means of rewarding outstanding performance; and to enable the Corporation to maintain a competitive position to attract and retain key personnel necessary for continued growth and profitability. 2. Definitions. The following words and phrases as used herein shall ----------- have the meanings set forth below: 2.1. "Addendum" shall mean an addendum attached to the Plan which provides for certain grants of Options to employees of the Corporation or a Subsidiary who are foreign nationals, and is intended to conform to the laws of such employees' country of citizenship with respect to such Options and the granting thereof. 2.2. "Board" shall mean the Board of Directors of the Corporation. 2.3. "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.4. "Committee" shall mean the Stock Option Committee of the Board, or such other committee of the Board as may be designated by the Board, from time to time, for the purpose of administering this plan as contemplated by Section 4 hereof. 2.5. "Common Stock" shall mean the common stock, $0.01 par value, of the Corporation. 2.6. "Corporation" shall mean WAM!NET Inc., (f/k/a Netco Communications Corporation), a Minnesota corporation. 2.7. "Non-Employee Consultant" shall mean an individual who is retained to provide consulting or legal services to the Corporation or a Subsidiary, and who is not an employee of the Corporation or any Subsidiary. 2.8. "Non-Employee Director" shall mean a member of the Board who is not an employee of the Corporation or any Subsidiary. 2.9. "Fair Market Value" of any security on any given date shall be determined by the Committee as follows: (a) if the security is listed for trading on one or more national securities exchanges, or is quoted on NASDAQ National Market, the last reported sales price on the principal such exchange or NASDAQ on the date in question, or if such security shall not have WAM!NET Inc. 1998 Combined Stock Option Plan been traded on such principal exchange on such date, NASDAQ on the first day prior thereto on which such security was so traded; or (b) if the security is not listed for trading on a national securities exchange or NASDAQ National Market, but is traded in the over-the-counter market, including NASDAQ, closing bid price for such security on the date in question, or if there is no such bid price for such security on such date, the closing bid price on the first day prior thereto on which such price existed; or (c) if neither (a) nor (b) is applicable, by any means deemed fair and reasonable by the Committee, which determination shall be final and binding on all parties. 2.10. "ISO" shall mean any stock option granted pursuant to this Plan as an "incentive stock option" within the meaning of Section 422 of the Code. 2.11. "NQO" shall mean any stock option granted pursuant to this Plan, which is not an ISO. 2.12. "Option" shall mean any stock option granted pursuant to this Plan. 2.13. "Optionee" shall mean any person who is the holder of an Option granted pursuant to this Plan. 2.14. "Plan" shall mean this 1998 Combined Stock Option Plan of the Corporation. 2.15. "Subsidiary" shall mean any corporation which at the time qualifies as a subsidiary of the Corporation under Section 425(f) of the Code. 2.16. "Tax Date" shall mean the date on which the amount of tax to be withheld is determined under the Code. 3. Shares Available Under Plan. The number of shares which may be --------------------------- issued pursuant to Options granted under this Plan, including Options granted pursuant to an Addendum, shall not exceed 25,000,000 shares of the Common Stock of the Corporation; provided, however, that shares which become available as a result of canceled, unexercised, lapsed or terminated Options granted under this Plan shall be available for issuance pursuant to Options subsequently granted under this Plan, and the number of shares for which Options have been granted or are available for grant under this Plan shall be proportionately increased or decreased in accordance with Section 8 hereof upon occurrence of any event described therein. The shares issued upon exercise of Options granted under this Plan may be authorized and unissued shares or shares previously acquired or to be acquired by the Corporation. 4. Administration. -------------- 4.1. The Plan will be administered by the Board of Directors or by a Committee (the "Committee") selected by the Board and consisting of at least three members, none of whom for at least one year prior to service on the Committee has been eligible to receive any Option under the Plan, or under any other benefit plan of the Corporation or any of its affiliates entitling the participants therein to acquire stock or stock options of the Corporation or any of its Subsidiaries. The Board or such Committee are hereinafter described as the Committee. 2. WAM!NET Inc. 1998 Combined Stock Option Plan 4.2. The Committee will have plenary authority, subject to provisions of the Plan, to determine when and to whom Options will be granted, the term of each Option, the number of shares covered by it, the participation by the Optionee in other plans, and any other terms or conditions of each Option. The Committee shall determine with respect to each grant of an Option whether a participant shall receive an ISO or an NQO, or an Option pursuant to the provisions of an Addendum. The number of shares, the term and the other terms and conditions of a particular kind of Option need not be the same, even as to options granted at the same time. The Committee's recommendations regarding option grants and terms and conditions thereof will be conclusive. 4.3. The Committee will have the sole responsibility for construing and interpreting the Plan, for establishing and amending any rules and regulations as it deems necessary or desirable for the proper administration of the Plan, and for resolving all questions arising under the Plan. Any decision or action taken by the Committee arising out of or about the construction, administration, interpretation and effect of the Plan and of its rules and regulations will, to the extent permitted by law, be within its absolute discretion, except as otherwise specifically provided herein, and will be conclusive and binding on all Optionees, all successors, and any other person, whether that person is claiming under or through any Optionee or otherwise. 4.4. The Committee will designate one of its members as chairman. It will hold its meetings at the times and places as it may determine. A majority of its members will constitute a quorum, and all determinations of the Committee will be made by a majority of its members. Any determination reduced to writing and signed by all members will be fully as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary, who need not be a member of the Committee, and may make such rules and regulations for the conduct of its business as it may deem advisable. 4.5. No member of the Committee will be liable, in the absence of bad faith, for any act or omission with respect to his services on the Committee. Service on the Committee will constitute service as a member of the Board, so that the members of the Committee will be entitled to indemnification and reimbursement as Board members pursuant to the Corporation's Bylaws. 4.6. The Committee will regularly inform the Board as to its actions with respect to all Options granted under the Plan and the terms and conditions and any such Options in a manner, at any times, and in any form as the Board may reasonably request. 5. Participants. ------------ 5.1. Participation in this Plan shall be limited to employees of the Corporation or of a Subsidiary and to Non-Employee Directors and Non-Employee Consultants. Non-Employee Directors and Non-Employee Consultants shall participate under this Plan only as specified in Section 14 hereof. 3. WAM!NET Inc. 1998 Combined Stock Option Plan 5.2. Without amending the Plan, the Committee may grant Options to eligible employees who are foreign nationals on such terms and conditions different from those specified in this Plan as may in the judgment of the Committee be necessary or desirable to foster and promote achievement of the purposes of the Plan, and, in furtherance of such purposes the Committee may make such Addenda, modification, amendments, procedures, subplans and the like as may be necessary or advisable to comply with provisions of laws in other countries in which the Company operates or has employees. 5.3. Subject to other provisions of this Plan, Options may be granted to the same participants on more than one occasion. 5.4. Except with respect to Options granted to Non-Employee Directors or Non Employee Consultants under Section 15, the Committee's determination under the Plan including, without limitation, determination of the persons to receive Options, the form, amount and type of such Options, and the terms and provisions of Options need not be uniform and may be made selectively among otherwise eligible participants, whether or not the participants are similarly situated. 6. Terms and Conditions. -------------------- 6.1. Each Option granted under the Plan shall be evidenced by a written agreement, which shall be subject to the provisions of this Plan and to such other terms and conditions as the Corporation may deem appropriate. 6.2. Each Option agreement shall specify the period for which the Option thereunder is granted which in no event shall exceed ten years from the date of the grant for any Option designated by the Committee as an ISO or ten years and one day from the date of grant for any Option and shall provide that the Option shall expire at the end of such period. 6.3. The exercise price per share shall be determined by the Committee at the time any Option is granted and, if the Option is an ISO, shall be no less than one hundred percent (100%) of Fair Market Value of the Common Stock of the Corporation on the date the Option is granted, as determined by the Committee. 6.4. The aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which an ISO under this Plan or any other plan of the Corporation or its Subsidiaries is exercisable for the first time by an Optionee during any calendar year shall not exceed $100,000. 6.5. An Option shall be exercisable at such time or times, and with respect to such minimum number of shares, as may be determined by the Corporation at the time of the grant. The Option agreement may require, if so determined by the Corporation, that no part of the Option may be exercised until the Optionee shall have remained in the employ of the Corporation or of a Subsidiary for such period after the date of the Option as the Corporation may specify. 4. WAM!NET Inc. 1998 Combined Stock Option Plan 6.6. The Corporation may prescribe the form of legend which shall be affixed to the stock certificate representing shares to be issued and the shares shall be subject to the provisions of any repurchase agreement or other agreement restricting the sale or transfer thereof. Such agreements or restrictions shall be noted on the certificate representing the shares to be issued. 6.7. Each Incentive Stock Option granted hereunder shall not be transferable by the Optionee other than by will or by the laws of descent and distribution, and shall be, during the Optionee's lifetime, exercisable only by the Optionee or Optionee's guardian or legal representative. Each Non-Qualified Stock Option granted hereunder may be transferred by the Optionee for estate planning purposes subject to prior or other written approval by the Committee in its sole discretion or pursuant to any policy and requirements concerning such transfers then in effect as the Committee may in its discretion establish, amend or revoke from time to time; by will or the laws of descent and distribution; or pursuant to a qualified domestic relations order as defined in Section 414 of the Code or Section 206 of the Employee Retirement Income Security Act, or rules thereunder. Except as permitted by the preceding sentences, each Option granted under the Plan and the rights and privileges thereby conferred shall not be transferred, assigned or pledged in any way (whether by operation of law or otherwise), and shall not be subject to execution, attachment or similar process. Any attempt to so transfer, assign, pledge or otherwise dispose of an Option, or of any right or privilege conferred thereby, contrary to the provisions of the Option or the Plan, or any levy of any attachment or similar process upon such rights and privileges, shall be void and unenforceable against the Corporation. 7. Exercise of Option. ------------------ 7.1. Each exercise of an Option granted hereunder, whether in whole or in part, shall be by written notice thereof, delivered to the Secretary of the Corporation (or such other person as may be designated). The notice shall state the number of shares with respect to which the Options are being exercised and shall be accompanied by payment in full for the number of shares so designated. Shares shall be registered in the name of the Optionee unless the Optionee otherwise directs in his or her notice of election. 7.2. Payment shall be made to the Corporation either (i) in cash, including certified check, bank draft or money order, (ii) at the discretion of the Corporation, by delivering Common Stock of the Corporation already owned by the participant, (iii) at the discretion of the Corporation, by delivering a promissory note, containing such terms and conditions acceptable to the Corporation, for all or a portion of the purchase price of the shares so purchased, or a combination of (i), (ii) and (iii). With respect to (ii), the Fair Market Value of stock so delivered shall be determined as of the date immediately preceding the date of exercise. 7.3. Upon notification of the amount due and prior to, or concurrently with, the delivery to the Optionee of a certificate representing any shares purchased pursuant to the exercise of an Option, the Optionee shall promptly pay to the Corporation any amount necessary to satisfy applicable federal, state or local withholding tax requirements. 5. WAM!NET Inc. 1998 Combined Stock Option Plan 8. Adjustment of Option Stock. In case the shares issuable upon -------------------------- exercise of any Option granted under the Plan at any time outstanding shall be subdivided into a greater or combined into a lesser number of shares (whether with or without par value), the number of shares purchasable upon exercise of such Option immediately prior thereto shall be adjusted so that the Optionee shall be entitled to receive a number of shares which he or she would have owned or have been entitled to receive after the happening of such event had such Option been exercised immediately prior to the happening of such subdivision or combination or any record date with respect thereto. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such subdivision or combination retroactive to the record date, if any, for such subdivision or combination. The option price (as such amount may have theretofore been adjusted pursuant to the provisions hereof) shall be adjusted by multiplying the option price immediately prior to the adjustment of the number of shares purchasable under the Option by a fraction, of which the numerator shall be the number of shares purchasable upon the exercise of the Option immediately prior to such adjustment, and of which the denominator shall be the number of shares so purchasable immediately thereafter. Substituted shares of stock shall be deemed shares under Section 3 of the Plan. 9. Change in Control. ----------------- 9.1. For purposes of this Section 9, a "Change in Control" of the Corporation will mean (i) the sale, lease, exchange or other transfer of substantially all of the assets of the Corporation (in one transaction or in a series of related transactions) to a person or entity that is not controlled, directly or indirectly, by the Corporation, (ii) a merger or consolidation to which the Corporation is a party if the stockholders of the Corporation immediately prior to effective date of such merger or consolidation do not have "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act) immediately following the effective date of such merger or consolidation of more than 80% of the combined voting power of the surviving corporation's outstanding securities ordinarily having the right to vote at elections of directors, or (iii) a change in control of the Corporation of a nature that would be required to be reported pursuant to Section 13 or 15(d) of the Exchange Act, whether or not the Corporation is then subject to such reporting requirements, including, without limitation, such time as (1) any person becomes, after the effective date of the Plan, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 40% or more of the combined voting power of the Corporation's outstanding securities ordinarily having the right to vote at elections of directors, or (2) individuals who constitute the Board of Directors on the effective date of the Plan cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the effective date of the Plan whose election, or nomination for election by the Corporation's stockholders, was approved by a vote of at least a majority of the directors comprising the Board on the effective date of the Plan will, for purposes of this clause (2), be considered as though such persons were a member of the Board of Directors on the effective date of the Plan. 9.2. Without limiting the authority of the Committee under Section 4 of the Plan, if a Change in Control of the Corporation occurs, then, if approved by the Committee in its sole discretion either in an agreement evidencing an Option grant at the time of grant or at any time 6. WAM!NET Inc. 1998 Combined Stock Option Plan after the grant of an Option, all Options will become immediately exercisable in full and will remain exercisable in accordance with the terms of the Plan; provided, however, that a recipient of Incentive Stock Options may elect that such acceleration of vesting not apply with respect to some or all of the Incentive Stock Options granted to him by so notifying the Committee in writing within three (3) business days of being notified of the Committee's actions pursuant to this Section 9. 9.3. If a Change in Control of the Corporation occurs, then the Committee in its sole discretion either in an agreement evidencing an Option grant at the time of grant or at any time after the grant of an Option, and without the consent of any Option recipient effected thereby, may determine that some or all recipients holding outstanding Options will receive, with respect to and in lieu of some or all of the shares of Option Stock, as of the effective date of any such Change in Control of the Corporation, cash in an amount equal to the excess of the Fair Market Value of such shares either immediately prior to the effective date of such Change in Control of the Corporation or, if greater, determined on the basis of the amount paid as consideration by the other party(ies) to the Change in Control transaction over the exercise price per share of such Options. 9.4. Notwithstanding anything in Section 9.2 or 9.3 of the Plan to the contrary, if the Corporation is then subject to the provisions of Section 280G of the Code, and if the acceleration of the vesting of an Option as provided in Section 9.2 or the payment of cash in exchange for all or part of an Option as provided in Section 9.3 (which acceleration or payment could be deemed a "payment" within the meaning of Section 28OG(b)(2) of the Code), together with any other payments which such recipient has the right to receive from the Corporation or any corporation that is a member of an "affiliated group" (as defined in Section 1504(a) of the Code without regard to Section 1504(b) of the Code) of which the Corporation is a member, would constitute a "parachute payment" (as defined in Section 28OG(b)(2) of the Code), then the payments to such recipient pursuant to Section 9.2 or 9.3 will be reduced to the largest amount as will result in no portion of such payments being subject to the excise tax imposed by Section 4999 of the Code; provided, however, that if such recipient is subject to a separate agreement with the Corporation or a Subsidiary which specifically provides that payments attributable to one or more forms of employee stock incentives or to payments made in lieu of employee stock incentives will not reduce any other payments under such agreement, even if it would constitute an excess parachute payment, then the limitations of this Section 9.4 will, to that extent, not apply. 10. Assignments. Other than as provided in Section 6.7, any Option ----------- granted under this Plan shall be exercisable only by the Optionee to whom granted during his or her lifetime and shall not be assignable or transferable otherwise than by will or by the laws of descent and distribution. 11. Severance; Death; Disability. An Option shall terminate, and no ---------------------------- rights thereunder may be exercised, if the person to whom it is granted ceases to be employed by the Corporation or by a Subsidiary except that: 7. WAM!NET Inc. 1998 Combined Stock Option Plan 11.1. If the employment of the Optionee is terminated by any reason other than his or her death or disability, the Optionee may at any time within not more than three months after termination of his or her employment, exercise his or her Option rights but only to the extent they were exercisable by the Optionee on the date of termination of his or her employment; provided, however, that if the employment is terminated as a result of the Optionee's deliberate, willful or gross misconduct as determined by the Committee, all rights under the Option shall terminate and expire upon such termination. 11.2. If the Optionee dies while in the employ of the Corporation or a Subsidiary, or within not more than three months after termination of his or her employment, the Optionee's rights under the Option may be exercised at any time within one year following such death by his or her personal representative or by the person or persons to whom such rights under the Option shall pass by will or by the laws of descent and distribution, but only to the extent they were exercisable by the Optionee on the date of death. 11.3. If the employment of the Optionee is terminated because of permanent disability, the Optionee, or his or her legal representative, may at any time within not more than one year after termination of his or her employment, exercise his or her Option rights but only to the extent they were exercisable by the Optionee on the date of termination of his or her employment. 11.4. The same exercise periods as provided in Sections 11.1, 11.2 and 11.3 shall also apply with respect to a tranferee of an Option pursuant to Section 6.7, including the extension of the exercise period under Section 11.2 upon the death of the tranferee. 11.5. Any provision of Sections 11.1, 11.2 and 11.3 to the contrary notwithstanding, no Option or any right claimed thereby, therein or thereunder shall be exercisable by anyone after the expiration of the term of the Option. 11.6. Transfers of employment between the Corporation and a Subsidiary, or between Subsidiaries, will not constitute termination of employment for purposes of any Option granted under this Plan. The Committee may specify in the terms and conditions of an Option whether any authorized leave of absence or absence for military or government service or for any other reasons will constitute a termination of employment for purposes of the Option and the Plan. 12. Rights of Participants. Neither the participant nor the personal ---------------------- representatives, heirs, or legatees of such participant shall be or have any of the rights or privileges of a shareholder of the Corporation in respect of any of the shares issuable upon the exercise of an Option granted under this Plan unless and until certificates representing such shares shall have been issued and delivered to the participant or to such personal representatives, heirs or legatees. 13. Securities Registration. If any law or regulation of the ----------------------- Securities and Exchange Commission or of any other body having jurisdiction shall require the Corporation or the participant to take any action in connection with the exercise of an Option, then notwithstanding any contrary provision of an Option agreement or this Plan, the date for exercise of such Option 8. WAM!NET Inc. 1998 Combined Stock Option Plan and the delivery of the shares purchased thereunder shall be deferred until the completion of the necessary action. In the event that the Corporation shall deem it necessary, the Corporation may condition the grant or exercise of an Option granted under this Plan upon the receipt of a satisfactory certificate that the Optionee is acquiring the Option or the shares obtained by exercise of the Option for investment purposes and not with the view or intent to resell or otherwise distribute such Option or shares. In such event, the stock certificate evidencing such shares shall bear a legend referring to applicable laws restricting transfer of such shares. In the event that the Corporation shall deem it necessary to register under the Securities Act of 1933, as amended, or any other applicable statute, any Options or any shares with respect to which an Option shall have been granted or exercised, then the participant shall cooperate with the Corporation and take such action as is necessary to permit registration or qualification of such Options or shares. 14. Duration and Amendment. ---------------------- 14.1. There is no express limitation upon the duration of the Plan, except for the requirement of the Code that all ISO's must be granted within ten years from the date the Plan is approved by the shareholders. 14.2. The Board may terminate or may amend the Plan at any time; provided, however, that the Board may not, without approval of the shareholders of the Corporation, (i) increase the maximum number of shares as to which Options may be granted under the Plan, (ii) permit the granting of ISO's at less than 100% of Fair Market Value at time of grant, (iii) change the class of employees eligible to receive Options under the Plan, or (iv) permit Directors to receive options under the Plan other than pursuant to Section 15 hereof; and, provided further, that the Board may not amend the Plan more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or rules thereunder. 15. Granting of Options to Non-Employee Directors and Non-Employee -------------------------------------------------------------- Consultants. - ----------- 15.1. Non-Employee Directors and Non-Employee Consultants shall be entitled to receive such Options under this Plan as may be granted to them from time to time. 15.2. All Options granted to Non-Employee Directors and Non-Employee Consultants shall be designated as NQOs, shall be evidenced by a written option agreement signed by the Corporation and the Non-Employee Director or Non- Employee Consultant, and shall be subject to the same terms and provisions as are then in effect with respect to granting of NQOs to salaried officers and key employees of the Corporation, except that the Option shall be exercisable as to all or any part of the shares subject to the Option from the date the Option is granted, and shall expire on the earliest of (i) twelve months after the Optionee ceases to be a Non-Employee Director or a Non-Employee Consultant (except by death), (ii) one year after the death of the optionee, or (iii) seven years after the date of grant. Subject to the foregoing, all provisions of this Plan not inconsistent with the foregoing shall apply to Options granted to Non- Employee Directors, except that Non-Employee Directors shall always have the right to deliver stock in exercise of options as provided in Section 7.2. 9. WAM!NET Inc. 1998 Combined Stock Option Plan 16. Approval of Shareholders. This Plan expressly is subject to ------------------------ approval of holders of a majority of the outstanding shares of Common Stock of the Corporation, and if it is not so approved on or before one year after the date of adoption of this Plan by the Board, the Plan shall not come into effect, and any Options granted pursuant to this Plan shall be deemed canceled. 17. Conditions of Employment. The granting of an Option to a ------------------------ participant under this Plan who is an employee shall impose no obligation on the Corporation to continue the employment of any participant and shall not lessen or affect the right of the Corporation to terminate the employment of the participant. 18. Other Options. Nothing in the Plan will be construed to limit the ------------- authority of the Corporation to exercise its corporate rights and powers, including, by way of illustration and not by way of limitation, the right to grant options for proper corporate purposes otherwise than under the Plan to any employee or any other person, firm, corporation, association, or other entity, or to grant options to, or assume options of, any person for the acquisition by purchase, lease, merger, consolidation, or otherwise, of all or any part of the business and assets of any person, firm, corporation, association, or other entity. 10. EX-12 35 STATEMENT RE COMPUTATION OF RATIOS EXHIBIT 12 Statement re Computation of Ratios Ratio of Earnings to Fixed Charges for 4-Sight Limited
8/31/96 9/30/97 12/31/97 Income before income taxes 2084 2436 3387 Interest expense 48 64 28 1/3 operating leases 6 6 6 ------------------------------ 2138 2506 3421 Fixed charges Interest 48 64 28 Leases 6 6 6 ------------------------------ 54 70 34 Ratio 39.6 35.8 100.6
Page 1 EX-15 36 ACKNOWLEDGMENT OF ERNST & YOUNG CHARTERED ACCOUNTANTS EXHIBIT 15 [Letterhead of Ernst & Young Chartered Accountants] 28 May 1998 The Directors WAM!NET, Inc. 6100 West 110th Street Minneapolis, MN 55438 We are aware of the inclusion in the Registration Statement (Form S-4) of WAM!NET, Inc. for the registration of $208,530,000 of its 13 1/4% Senior Discount Notes due 2005 of our compilation report dated February 20, 1998 relating to the unaudited consolidated balance sheet of 4-Sight Limited as of December 31, 1997 and the related unaudited consolidated statement of operations for the twelve months then ended. Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part of the registration statement prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. Yours faithfully /s/ Ernst & Young EX-23.1 37 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 [Letterhead of Ernst & Young LLP] CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 9, 1998 (except Note 2, as to which the date is March 12, 1998), in the Registration Statement (Form S-4) and related Prospectus of WAM!NET, Inc. for the registration of $208,530,000 of 13 1/4% Senior Discount Notes due 2005, Series B. /s/ Ernst & Young LLP Minneapolis, Minnesota May 26, 1998 EX-23.2 38 CONSENT OF ERNST & YOUNG, CHARTERED ACCOUNTANTS EXHIBIT 23.2 [Letterhead of Ernst & Young, Chartered Accountants] 28 May 1998 The Directors WAM!NET Inc. 6100 West 110th Street Minneapolis MN 55438 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-4) of WAM!NET, Inc. for the registration of $208,530,000 of its 13 1/4% Senior Discount Notes due 2005 and to the inclusion therein of our report dated May 28, 1998 with respect to the consolidated financial statements of 4-Sight Limited. Yours faithfully, /s/ Ernst & Young EX-25 39 STATEMENT ON FORM T-1 EXHIBIT 25 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________ FORM T-1 Statement of Eligibility Under the Trust Indenture Act of 1939 of a Corporation Designated to Act as Trustee U.S. BANK TRUST NATIONAL ASSOCIATION FORMERLY KNOWN AS FIRST TRUST NATIONAL ASSOCIATION (Exact name of Trustee as specified in its charter) United States 41-0257700 (State of Incorporation) (I.R.S. Employer Identification No.) U.S. Bank Trust Center 180 East Fifth Street St. Paul, Minnesota 55101 (Address of Principal Executive Offices) (Zip Code) WAM!NET INC. (Exact name of Registrant as specified in its charter) Minnesota 41-1795247 (State of Incorporation) (I.R.S. Employer Identification No.) 6100 West 110th Street, Minneapolis, Minnesota 55438 (Address of Principal Executive Offices) (Zip Code) 13 1/4% Senior Discount Notes due 2005 (Title of the Indenture Securities) GENERAL ------- 1. General Information Furnish the following information as to the ------------------- Trustee. (A) Name and address of each examining or supervising authority to which it is subject. Comptroller of the Currency Washington, D.C. (B) Whether it is authorized to exercise corporate trust powers. Yes 2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or any ------------------------------------------ underwriter for the obligor is an affiliate of the Trustee, describe each such affiliation. None See Note following Item 16. Items 3-15 are not applicable because to the best of the Trustee's knowledge the obligor is not in default under any Indenture for which the Trustee acts as Trustee. 16. LIST OF EXHIBITS List below all exhibits filed as a part of this ---------------- statement of eligibility and qualification. 1. Copy of Articles of Association.* 2. Copy of Certificate of Authority to Commence Business.* 3. Authorization of the Trustee to exercise corporate trust powers (included in Exhibits 1 and 2; no separate instrument).* 4. Copy of existing By-Laws.* 5. Copy of each Indenture referred to in Item 4. N/A. 6. The consents of the Trustee required by Section 321(b) of the act. 7. Copy of the latest report of condition of the Trustee published pursuant to law or the requirements of its supervising or examining authority is incorporated by reference to Registration Number 333-42147. * Incorporated by reference to Registration Number 22-27000. NOTE The answers to this statement insofar as such answers relate to what persons have been underwriters for any securities of the obligors within three years prior to the date of filing this statement, or what persons are owners of 10% or more of the voting securities of the obligors, or affiliates, are based upon information furnished to the Trustee by the obligors. while the Trustee has no reason to doubt the accuracy of any such information, it cannot accept any responsibility therefor. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee, U.S. Bank Trust National Association f/k/a First Trust National Association, an Association organized and existing under the laws of the United States, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, and its seal to be hereunto affixed and attested, all in the City of Saint Paul and State of Minnesota on the 12th day of May, 1998. U.S. BANK TRUST NATIONAL ASSOCIATION f/k/a FIRST TRUST NATIONAL ASSOCIATION /s/ Richard H. Prokosch ------------------------------ Richard H. Prokosch Assistant Vice President /s/ Kathe M. Barrett - ------------------------ Kathe M. Barrett Assistant Secretary EXHIBIT 6 CONSENT In accordance with Section 321(b) of the Trust Indenture Act of 1939, the undersigned, U.S. BANK TRUST NATIONAL ASSOCIATION f/k/a FIRST TRUST NATIONAL ASSOCIATION hereby consents that reports of examination of the undersigned by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor. Dated: May 12, 1998 U.S. BANK TRUST NATIONAL ASSOCIATION f/k/a FIRST TRUST NATIONAL ASSOCIATION /s/ Richard H. Prokosch ----------------------------- Richard H. Prokosch Assistant Vice President EX-27 40 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS OF THE COMPANY AS OF DECEMBER 31, 1997 AND MARCH 31, 1998 YEAR 3-MOS DEC-31-1997 DEC-31-1998 JAN-01-1997 JAN-01-1998 DEC-31-1997 MAR-31-1998 274,000 66,759,659 0 0 469,000 3,502,985 (10,000) (10,000) 0 940,000 1,287,000 71,957,272 22,197,000 33,796,973 (2,877,000) (4,402,272) 21,086,000 137,770,348 8,108,000 12,149,089 42,649,000 139,936,749 1,000,000 1,000,000 0 0 14,000 92,655 11,824,000 53,712,223 21,086,000 137,770,348 0 0 1,555,000 1,880,026 0 0 31,037,000 25,412,384 0 0 0 0 4,356,000 3,419,282 (33,636,000) (26,657,969) 0 (25,000) (33,636,000) (26,682,969) 0 0 0 0 0 0 (33,706,000) (26,682,969) (5.19) (3.65) (5.19) (3.65)
EX-99.1 41 FORM OF LETTER OF TRANSMITTAL Exhibit 99.1 THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., EASTERN STANDARD TIME, ON ________ __, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M., EASTERN STANDARD TIME, ON THE EXPIRATION DATE. WAM!NET INC. 6100 West 110th Street Minneapolis, Minnesota 55438 LETTER OF TRANSMITTAL For 13 1/4% Senior Discount Notes due 2005, Series A Exchange Agent: U.S. Bank Trust National Association (f/k/a First Trust National Association) By Facsimile: (612) 244-1537 Attention: Specialized Finance Confirm by telephone: (612) 244-1572 By Registered or Certified Mail: U.S. Bank Trust National Association 180 East 5th Street St. Paul, Minnesota 55101 Attention: Specialized Finance, 4th Floor By Hand/Overnight Courier: U.S. Bank Trust National Association 180 East 5th Street St. Paul, Minnesota 55101 Attention: Specialized Finance, 4th Floor or U.S. Bank Trust New York (f/k/a First Trust New York) 100 Wall Street Bond Window, 20th Floor New York, New York 10005 Delivery of this instrument to an address other than as set forth above does not constitute a valid delivery. The undersigned acknowledges receipt of the Prospectus dated _______, 1998 (the "Prospectus") of WAM!NET Inc., a Minnesota corporation ("WAM!NET" or the "Issuer"), and this Letter of Transmittal for 13 1/4% Senior Discount Notes due 2005, Series A, which may be amended from time to time (this "Letter"), which together constitute the Issuer's offer (the "Exchange Offer") to exchange, for each $1,000 in principal amount of its outstanding 13 1/4% Senior Discount Notes due 2005, Series A (the "Original Notes") issued and sold in a transaction exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), $1,000 in principal amount of 13 1/4% Senior Discount Notes due 2005, Series B (the "Exchange Notes"). The undersigned has completed, executed and delivered this Letter to indicate the action he or she desires to take with respect to the Exchange Offer. All holders of Original Notes who wish to tender their Original Notes must, prior to the Expiration Date: (1) complete, sign, date and mail or otherwise deliver this Letter to the Exchange Agent, in person or to the address set forth above; and (2) tender his or her Original Notes or, if a tender of Original Notes is to be made by book-entry transfer to the account maintained by the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer Facility"), confirm such book-entry transfer (a "Book-Entry Confirmation"), in each case in accordance with the procedures for tendering described in the Instructions to this Letter. Holders of Original Notes whose certificates are not immediately available, or who are unable to deliver their certificates or Book-Entry Confirmation and all other documents required by this Letter to be delivered to the Exchange Agent on or prior to the Expiration Date, must tender their Original Notes according to the guaranteed delivery procedures set forth under the caption "The Exchange Offer -- How to Tender" in the Prospectus. (See Instruction 1). The Letter is to be used: (i) by all holders of Original Notes who are not members of the Automated Tender Offering Program ("ATOP") at the Depository Trust Company; (ii) by holders of Original Notes who are ATOP members but choose not to use ATOP; or (iii) if the Original Notes are to be tendered in accordance with the guaranteed delivery procedures set forth in "The Exchange Offer -- How to Tender -- Guaranteed Delivery Procedures" section of the Prospectus. (See Instruction 1). Delivery of this Letter to the Depository Trust Company does not constitute delivery to the Exchange Agent. The Instructions included with this Letter must be followed in their entirety. Questions and requests for assistance or for additional copies of the Prospectus or this Letter may be directed to the Exchange Agent, at the address listed above. 2 PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL, INCLUDING THE INSTRUCTIONS TO THIS LETTER, CAREFULLY BEFORE CHECKING ANY BOX BELOW. Capitalized terms used in this Letter and not defined herein shall have the respective meanings ascribed to them in the Prospectus. List in Box 1 below the Original Notes of which you are the holder. If the space provided in Box 1 is inadequate, list the certificate numbers and principal amount of Original Notes on a separate signed schedule and affix that schedule to this Letter.
BOX 1 TO BE COMPLETED BY ALL TENDERING HOLDERS - ----------------------------------------------------------------------------------------------------------------------------------- Name(s) and Address(es) of Registered Holder(s) Certificate Principal Amount Principal (Please fill in if blank) Number(s)(1) of Original Notes Amount of Original Notes Tendered(2) - ----------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- Totals: ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- (1) Need not be completed if Original Notes are being tendered by book-entry transfer. (2) Unless otherwise indicated, the entire principal amount of Original Notes represented by a certificate or Book-Entry Confirmation delivered to the Exchange Agent will be deemed to have been tendered. - ----------------------------------------------------------------------------------------------------------------------------------
Ladies and Gentlemen: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned tenders to the Issuer the principal amount of Original Notes indicated above. Subject to, and effective upon, the acceptance for exchange of the Original Notes tendered with this Letter, the undersigned exchanges, assigns and transfers to, or upon the order of, the Issuer all right, title and interest in and to the Original Notes tendered. The undersigned constitutes and appoints the Exchange Agent as his or her agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as the agent of the Issuer) with respect to the tendered Original Notes, with full power of substitution, to: (a) deliver certificates for such Original Notes; (b) deliver Original Notes and all accompanying evidence of transfer and authenticity to or upon the order of the Issuer upon receipt by the Exchange Agent, as the undersigned's agent, of the Exchange Notes to which the undersigned is entitled upon the acceptance by the Issuer of the Original Notes tendered under the Exchange Offer; and (c) receive all benefits and otherwise exercise all rights of beneficial ownership of the Original Notes, all in accordance with the terms of the Exchange Offer. The power of attorney granted in this paragraph shall be deemed irrevocable and coupled with an interest. The undersigned hereby represents and warrants that he or she has full power and authority to tender, exchange, assign and transfer the Original Notes tendered hereby and that the Issuer will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The undersigned will, upon request, execute and deliver any additional documents deemed by the Issuer to be necessary or desirable to complete the assignment and transfer of the Original Notes tendered. 3 The undersigned agrees that acceptance of any tendered Original Notes by the Issuer and the issuance of Exchange Notes in exchange therefor shall constitute performance in full by the Issuer of their obligations under the Registration Rights Agreement (as defined in the Prospectus) and that, upon the issuance of the Exchange Notes, the Issuer will have no further obligations or liabilities thereunder (except in certain limited circumstances). By tendering Original Notes, the undersigned certifies (a) that it is not an "affiliate" of the Issuer within the meaning of Rule 405 under the Securities Act, that it is not a broker-dealer that owns Original Notes acquired directly from the Issuer or an affiliate of the Issuer, that it is acquiring the Exchange Notes in the ordinary course of the undersigned's business and that the undersigned has no arrangement with any person to participate in the distribution of the Exchange Notes or (b) that it is an "affiliate" (as so defined) of the Issuer or of the initial purchasers in the original offering of the Original Notes, and that it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable to it. The undersigned acknowledges that, if it is a broker-dealer holding Original Notes acquired for its own account as a result of market-making activities or other trading activities, it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resales of Exchange Notes received in respect of such Original Notes pursuant to the Exchanger Offer. By so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned understands that the Issuer may accept the undersigned's tender by delivering written notice of acceptance to the Exchange Agent, at which time the undersigned's right to withdraw such tender will terminate. All authority conferred or agreed to be conferred by this Letter shall survive the death or incapacity of the undersigned, and every obligation of the undersigned under this Letter shall be binding upon the undersigned's heirs, personal representatives, successors and assigns. Tenders may be withdrawn only in accordance with the procedures set forth in the Instructions contained in this Letter. Unless otherwise indicated under "Special Delivery Instructions" below, the Exchange Agent will deliver Exchange Notes (and, if applicable, a certificate for any Original Notes not tendered but represented by a certificate also encompassing Original Notes which are tendered) to the undersigned at the address set forth in Box 1. The undersigned acknowledges that the Exchange Offer is subject to the more detailed terms set forth in the Prospectus and, in case of any conflict between the terms of the Prospectus and this Letter, the Prospectus shall prevail. |_| CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK- ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution: ------------------------------------- Account Number: ---------------------------------------------------- Transaction Code Number: ------------------------------------------- |_| CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Owner(s): ------------------------------------ Date of Execution of Notice of Guaranteed Delivery: ---------------- Window Ticket Number (if available): ------------------------------- Name of Institution which Guaranteed Delivery: --------------------- 4 PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY BOX 2 - -------------------------------------------------------------------------------- PLEASE SIGN HERE WHETHER OR NOT ORIGINAL NOTES ARE BEING PHYSICALLY TENDERED HEREBY X -------------------------- --------------- X -------------------------- --------------- Signature(s) of Owner(s) Date or Authorized Signatory Area Code and Telephone Number: ------------------------------ This box must be signed by registered holder(s) of Original Notes as their name(s) appear(s) on certificate(s) for Original Notes, or by person(s) authorized to become registered holder(s) by endorsement and documents transmitted with this Letter. If signature is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, such person must set forth his or her full title below. (See Instruction 3) Name(s) ------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Please Print) Capacity ------------------------------------------------------------------------ Address ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- (Include Zip Code) Signature(s) Guaranteed --------------------------------------------------------- by an Eligible Institution: (Authorized Signature) (If required by Instruction 3) --------------------------------------------------------- (Title) --------------------------------------------------------- (Name of Firm) - -------------------------------------------------------------------------------- 5
BOX 3 - --------------------------------------------------------------------------------------------------------------------------- TO BE COMPLETED BY ALL TENDERING HOLDERS - --------------------------------------------------------------------------------------------------------------------------- PAYOR'S NAME: U.S. BANK TRUST NATIONAL ASSOCIATION - --------------------------------------------------------------------------------------------------------------------------- Part 1--PLEASE PROVIDE YOUR TIN IN THE BOX AT THE RIGHT AND CERTIFY BY ----------------------------------------- SIGNING AND DATING BELOW. Social Security Number or Employer Identification Number - --------------------------------------------------------------------------------------------------------------------------- SUBSTITUTE Form W-9 Part 2--Check the box if you are NOT subject to back-up withholding under the provisions Department of the of Section 2406(a)(1)(C) of the Internal Revenue Code because (1) you have not been Treasury Internal notified that you are subject to back-up withholding as a result of failure to report Revenue Service all interest or dividends or (2) the Internal Revenue Service has notified you that you are no longer subject to back-up withholding. |_| Payor's Request for Taxpayer Identification Number (TIN) ---------------------------------------------------------------------------------------------------- CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE Part 3 INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE. Check if Awaiting TIN SIGNATURE DATE |_| -------------------------- -------------------- - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------- -------------------------------------------------------- BOX 4 BOX 5 SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (See Instructions 3 and 4) (See Instructions 3 and 4) To be completed ONLY if certificates for Original Notes To be completed ONLY if certificates for Original in a principal amount not exchanged, or Exchange Notes, Notes in a principal amount not exchanged, or Exchange are to be issued in the name of someone other than the Notes, are to be sent to someone other than the person person whose signature appears in Box 2, or if Original whose signature appears in Box 2 or to an address Notes delivered by book-entry transfer which are not other than that shown in Box 1. accepted for exchange are to be returned by credit to an account maintained at the Book-Entry Transfer Facility Deliver: other than the account indicated above. (check appropriate boxes) Issue and deliver: |_| Original Notes not tendered (check appropriate boxes) |_| Exchange Notes, to: |_| Original Notes not tendered Name |_| Exchange Notes, to: ------------------------------------------------------- (Please Print) Name Address - ------------------------------------------------------- ------------------------------------------------------ (Please Print) ------------------------------------------------------------- Address Please complete the Substitute Form W-9 at Box 3 Tax I.D. or Social Security Number: ----------- - ---------------------------------------------------------- --------------------------------------------------------
6 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER AND CERTIFICATES. Certificates for Original Notes or a Book-Entry Confirmation, as the case may be, as well as a properly completed and duly executed copy of this Letter and any other documents required by this Letter, must be received by the Exchange Agent at one of its addresses set forth herein on or before the Expiration Date. The method of delivery of this Letter, certificates for Original Notes or a Book-Entry Confirmation, as the case may be, and any other required documents is at the election and risk of the tendering holder, but except as otherwise provided below, the delivery will be deemed made when actually received by the Exchange Agent. If delivery is by mail, the use of registered mail with return receipt requested, properly insured, is suggested. Holders whose Original Notes are not immediately available or who cannot deliver their Original Notes or a Book-Entry Confirmation, as the case may be, and all other required documents to the Exchange Agent on or before the Expiration Date may tender their Original Notes pursuant to the guaranteed delivery procedures set forth in the Prospectus. Pursuant to such procedure: (i) tender must be made by or through an Eligible Institution (as defined in the Prospectus under the caption "The Exchange Offer"); (ii) prior to the Expiration Date, the Exchange Agent must have received from the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by telegram, telex, facsimile transmission, mail or hand delivery) (x) setting forth the name and address of the holder, the description of the Original Notes and the principal amount of Original Notes tendered, (y) stating that the tender is being made thereby and (z) guaranteeing that, within five New York Stock Exchange trading days after the date of execution of such Notice of Guaranteed Delivery, this Letter together with the certificates representing the Original Notes or a Book-Entry Confirmation, as the case may be, and any other documents required by this Letter will be deposited by the Eligible Institution with the Exchange Agent; and (iii) the certificates for all tendered Original Notes or a Book-Entry Confirmation, as the case may be, as well as all other documents required by this Letter, must be received by the Exchange Agent within five New York Stock Exchange trading days after the date of execution of such Notice of Guaranteed Delivery, all as provided in the Prospectus under the caption "The Exchange Offer -- How to Tender." This Letter of Transmittal is to be used: (i) by all holders of Original Notes who are not ATOP members, (ii) by holders of Original Notes who are ATOP members but choose not to use ATOP or (iii) if the Original Notes are to be tendered in accordance with the guaranteed delivery procedures set forth in the Prospectus under "The Exchange Offer -- How to Tender -- Guaranteed Delivery Procedures." To validly tender Original Notes, a holder must physically deliver a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees and all other required documents to the Exchange Agent at its address set forth on the cover of this Letter of Transmittal prior to the Expiration Date, as described in the preceding paragraph, or the holder must properly complete and duly execute an ATOP ticket in accordance with the Depository Trust Company's procedures. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Original Notes will be determined by the Issuer, whose determination will be final and binding. The Issuer reserves the absolute right to reject any or all tenders that are not in proper form or the acceptance of which, in the opinion of the Issuer's counsel, would be unlawful. The Issuer also reserves the right to waive any irregularities or conditions of tender as to particular Original Notes. All tendering holders, by execution of this Letter, waive any right to receive notice of acceptance of their Original Notes. Neither the Issuer, the Exchange Agent nor any other person shall be obligated to give notice of defects or irregularities in any tender, nor shall any of them incur any liability for failure to give any such notice. 2. PARTIAL TENDERS; WITHDRAWALS. If less than the entire principal amount of any Original Note evidenced by a submitted certificate or by a Book- Entry Confirmation is tendered, the tendering holder must fill in the principal amount tendered in the fourth column of Box 1 above. All of the Original Notes represented by a certificate or by a Book-Entry Confirmation delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. A certificate for Original Notes not tendered will be sent to the holder, unless otherwise provided in Box 5, as soon as practicable after the Expiration Date, in the event that less than the entire principal amount of Original Notes represented by a submitted certificate is tendered (or, in the case of Original Notes tendered by book-entry transfer, such non- 7 exchanged Original Notes will be credited to an account maintained by the holder with the Book-Entry Transfer Facility). If not yet accepted, a tender pursuant to the Exchange Offer may be withdrawn prior to the Expiration Date. To be effective with respect to the tender of Original Notes, a notice of withdrawal must: (i) be received by the Exchange Agent before the Issuer notifies the Exchange Agent that they have accepted the tender of Original Notes pursuant to the Exchange Offer; (ii) specify the name of the person who tendered the Original Notes; (iii) contain a description of the Original Notes to be withdrawn, the certificate numbers shown on the particular certificates evidencing such Original Notes and the principal amount of Original Notes represented by such certificates; and (iv) be signed by the holder in the same manner as the original signature on this Letter (including any required signature guarantee). 3. SIGNATURES ON THIS LETTER; ASSIGNMENTS; GUARANTEE OF SIGNATURES. If this Letter is signed by the holder(s) of Original Notes tendered hereby, the signature must correspond with the name(s) as written on the face of the certificate(s) for such Original Notes, without alteration, enlargement or any change whatsoever. If any of the Original Notes tendered hereby are owned by two or more joint owners, all owners must sign this Letter. If any tendered Original Notes are held in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter as there are names in which certificates are held. If this Letter is signed by the holder of record and (i) the entire principal amount of the holder's Original Notes are tendered; and/or (ii) untendered Original Notes, if any, are to be issued to the holder of record, then the holder of record need not endorse any certificates for tendered Original Notes, nor provide a separate bond power. If any other case, the holder of record must transmit a separate bond power with this Letter. If this Letter or any certificate or assignment is signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing and proper evidence satisfactory to the Issuer of their authority to so act must be submitted, unless waived by the Issuer. Signatures on this Letter must be guaranteed by an Eligible Institution, unless Original Notes are tendered: (i) by a holder who has not completed the Box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on this Letter; or (ii) for the account of an Eligible Institution. In the event that the signatures in this Letter or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantees must be by an eligible guarantor institution which is a member of The Securities Transfer Agents Medallion Program (STAMP), The New York Stock Exchanges Medallion Signature Program (MSP) or The Stock Exchanges Medallion Program (SEMP) (collectively, "Eligible Institutions"). If Original Notes are registered in the name of a person other than the signer of this Letter, the Original Notes surrendered for exchange must be endorsed by, or be accompanied by a written instrument or instruments of transfer or exchange, in satisfactory form as determined by the Issuer, in their sole discretion, duly executed by the registered holder with the signature thereon guaranteed by an Eligible Institution. 4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders should indicate, in Box 4 or 5, as applicable, the name and address to which the Exchange Notes or certificates for Original Notes not exchanged are to be issued or sent, if different from the name and address of the person signing this Letter. In the case of issuance in a different name, the tax identification number of the person named must also be indicated. Holders tendering Original Notes by book-entry transfer may request that Original Notes not exchanged be credited to such account maintained at the Book-Entry Transfer Facility as such holder may designate. 5. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a holder whose tendered Original Notes are accepted for exchange must provide the Exchange Agent (as payor) with his or her correct taxpayer identification number ("TIN"), which, in the case of a holder who is an individual, is his or her social security number. If the Exchange Agent is not provided with the correct TIN, the holder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, delivery to the holder of the Exchange Notes pursuant to the Exchange Offer may be subject to back-up withholding. (If withholding results in overpayment of taxes, a refund may be obtained.) Exempt holders (including, among others, all corporations and certain foreign individuals) are not subject to these back-up withholding and reporting requirements. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. 8 Under federal income tax laws, payments that may be made by the Issuer on account of Exchange Notes issued pursuant to the Exchange Offer may be subject to back-up withholding at a rate of 31%. In order to prevent back-up withholding, each tendering holder must provide his or her correct TIN by completing the "Substitute Form W-9" referred to above, certifying that the TIN provided is correct (or that the holder is awaiting a TIN) and that: (i) the holder has not been notified by the Internal Revenue Service that he or she is subject to back-up withholding as a result of failure to report all interest or dividends; or (ii) the Internal Revenue Service has notified the holder that he or she is no longer subject to back-up withholding; or (iii) certify in accordance with the Guidelines that such holder is exempt from back-up withholding. If the Original Notes are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for information on which TIN to report. 6. TRANSFER TAXES. The Issuer will pay all transfer taxes, if any, applicable to the transfer of Original Notes to it or its order pursuant to the Exchange Offer. If, however, the Exchange Notes or certificates for Original Notes not exchanged are to be delivered to, or are to be issued in the name of, any person other than the record holder, or if tendered certificates are recorded in the name of any person other than the person signing this Letter, or if a transfer tax is imposed by any reason other than the transfer of Original Notes to the Issuer or its order pursuant to the Exchange Offer, then the amount of such transfer taxes (whether imposed on the record holder or any other person) will be payable by the tendering holder. If satisfactory evidence of payment of taxes or exemption from taxes is not submitted with this Letter, the amount of transfer taxes will be billed directly to the tendering holder. Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the certificates listed in this Letter. 7. WAIVER OF CONDITIONS. The Issuer reserves the absolute right to amend or waive any of the specified conditions in the Exchange Offer in the case of any Original Notes tendered. 8. MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES. Any holder whose certificates for Original Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above, for further instructions. 9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering, as well as requests for additional copies of the Prospectus or this Letter, may be directed to the Exchange Agent. 9 EX-99.2 42 FORM OF NOTICE OF GUARANTEED DELIVERY Exhibit 99.2 WAM!NET Inc. Exchange Offer to holders of their 13 1/4% Senior Discount Notes due 2005, Series A NOTICE OF GUARANTEED DELIVERY As set forth in the Prospectus dated ________ __, 1998 (the "Prospectus") of WAM!NET Inc. ("WAM!NET" or the "Issuer"), and all of the subsidiaries of the Issuer under "The Exchange Offer -- How to Tender" and in the Letter of Transmittal (the "Letter of Transmittal") relating to the offer (the "Exchange Offer") by the Issuer to exchange up to $208,530,000 in principal amount of their 13 1/4% Senior Discount Notes due 2005, Series A issued and sold in a transaction exempt from registration under the Securities Act of 1933, as amended (the "Original Notes"), for $208,530,000 in principal amount of their 13 1/4% Senior Discount Notes due 2005, Series B (the "Exchange Notes"), this form or one substantially equivalent hereto must be used to accept the Exchange Offer of the Issuer if: (i) certificates for the Original Notes are not immediately available; or (ii) time will not permit all required documents to reach the Exchange Agent (as defined below) on or prior to the Expiration Date (as defined in the Prospectus) of the Exchange Offer. Such form may be delivered by hand or transmitted by telegram, telex, facsimile transmission or letter to the Exchange Agent. TO: U.S. BANK TRUST NATIONAL ASSOCIATION (f/k/a First Trust National Association) (the "Exchange Agent") By Facsimile: (612) 244-1537 Attention: Specialized Finance Confirm by telephone: (612) 244-1572 By Registered or Certified Mail: U.S. Bank Trust National Association 180 East 5th Street St. Paul, Minnesota 55101 Attention: Specialized Finance, 4th Floor By Hand/Overnight Courier: U.S. Bank Trust National Association 180 East 5th Street St. Paul, Minnesota 55101 Attention: Specialized Finance, 4th Floor or U.S. Bank Trust New York (f/k/a First Trust National Association) 100 Wall Street Bond Window, 20th Floor New York, New York 10005 Delivery of this instrument to an address other than as set forth above or transmittal of this instrument to a facsimile or telex number other than as set forth above does not constitute a valid delivery. - ------------------------------------------------------------------------------- Ladies and Gentlemen: The undersigned hereby tenders to the Issuer, upon the terms and conditions set forth in the Prospectus and the Letter of Transmittal (which together constitute the "Exchange Offer"), receipt of which are hereby acknowledged, the principal amount of Original Notes set forth below pursuant to the guaranteed delivery procedure described in the Prospectus and the Letter of Transmittal. --------------------------------------------------------------------------- Principal Amount of Original Notes Sign Here Tendered Signature(s) -------------------------- -------------------- -------------------------------- Certificate Nos. Please Print the Following Information (if available) -------------------- Name(s) -------------------------- Total Principal Amount Address Represented by Original Notes ------------------------- Certificate(s) -------------------------------- ------------------- Area Code and Tel. No(s). ------- -------------------------------- - ------------------------------------------------------------------------------- GUARANTEE The undersigned, a member of a recognized signature guarantee medallion program within the meaning of Rule 17A(d)-15 under the Securities Exchange Act of 1934, as amended, hereby guarantees that delivery to the Exchange Agent of certificates tendered hereby, in proper form for transfer, or delivery of such certificates pursuant to the procedure for book-entry transfer, in either case with delivery of a properly completed and duly executed Letter of Transmittal (or facsimile thereof) and any other required documents, is being made within five trading days after the date of execution of a Notice of Guaranteed Delivery of the above-named person. Name of Firm ---------------------------------- Authorized Signature -------------------------- Name(s) ---------------------------------------- ---------------------------------------------- Address --------------------------------------- ---------------------------------------------- Area Code and Tel. No. ------------------------ Dated: _____________, 1998 - ------------------------------------------------------------------------------- 2 EX-99.3 43 FORM OF LETTER TO CLIENTS Exhibit 99.3 IMPORTANT: THIS LETTER (TOGETHER WITH CERTIFICATES REPRESENTING TENDERED ORIGINAL NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS) MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE. WAM!NET Inc. Offer to Exchange Up to $208,530,000 in principal amount of 13 1/4% Senior Discount Notes due 2005, Series A sold in a transaction exempt from registration under the Securities Act of 1933, as amended, for $208,530,000 in principal amount of 13 1/4% Senior Discount Notes due 2005, Series B To Our Clients: Enclosed for your consideration is a Prospectus dated ________ , 1998 (as the same may be amended or supplemented from time to time, the "Prospectus") and a form of Letter of Transmittal (the "Letter of Transmittal") relating to the offer (the "Exchange Offer") by WAM!NET Inc. ("WAM!NET" or the "Issuer") and all of the subsidiaries of the Issuer to exchange up to $208,530,000 in principal amount of their 13 1/4% Senior Discount Notes due 2005, Series A issued and sold in a transaction exempt from registration under the Securities Act of 1933, as amended (the "Original Notes"), for $208,530,000 in principal amount of their 13 1/4% Senior Discount Notes due 2005, Series B (the "Exchange Notes"). The material is being forwarded to you as the beneficial owner of the Original Notes carried by us for your account or benefit but not registered in your name. A tender of any Original Notes may be made only by us as the registered holder and pursuant to your instructions. Therefore, the Issuer urges beneficial owners of Original Notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee to contact such registered holder promptly if they wish to tender Original Notes in the Exchange Offer. Accordingly, we request instructions as to whether you wish us to tender any or all Original Notes, pursuant to the terms and conditions set forth in the Prospectus and Letter of Transmittal. We urge you to read carefully the Prospectus and Letter of Transmittal before instructing us to tender your Original Notes. YOUR INSTRUCTIONS TO US SHOULD BE FORWARDED AS PROMPTLY AS POSSIBLE IN ORDER TO PERMIT US TO TENDER ORIGINAL NOTES ON YOUR BEHALF IN ACCORDANCE WITH THE PROVISIONS OF THE EXCHANGE OFFER. The Exchange Offer will expire at 5:00 p.m., Eastern Standard Time, on _______, ________ __, 1998, unless extended (the "Expiration Date"). Original Notes tendered pursuant to the Exchange Offer may be withdrawn, subject to the procedures described in the Prospectus, at any time prior to the Expiration Date. If you wish to have us tender any or all of your Original Notes held by us for your account or benefit, please so instruct us by completing, executing and returning to us the instruction form that appears below. The accompanying Letter of Transmittal is furnished to you for informational purposes only and may not be used by you to tender Original Notes held by us and registered in our name for your account or benefit. INSTRUCTIONS The undersigned acknowledge(s) receipt of your letter and the enclosed material referred to therein relating to the Exchange Offer of WAM!NET Inc. This will instruct you to tender the principal amount of Original Notes indicated below held by you for the account or benefit of the undersigned, pursuant to the terms of and conditions set forth in the Prospectus and the Letter of Transmittal. Box 1 [_] Please tender my Original Notes held by you for my account or benefit. I have identified on a signed schedule attached hereto the principal amount of Original Notes to be tendered if I wish to tender less than all of my Original Notes. Box 2 [_] Please do not tender any Original Notes held by you for my account or benefit. Date: , 1998 ---------------------------------- ---------------------------------- Signature(s) ---------------------------------- ---------------------------------- Please print name(s) here Unless a specific contrary instruction is given in a signed Schedule attached hereto, your signature(s) hereon shall constitute an instruction to us to tender all of your Original Notes. 2 EX-99.4 44 FORM OF LETTER TO NOMINEES Exhibit 99.4 WAM!NET Inc. Offer to Exchange Up to $208,530,000 in principal amount of 13 1/4% Senior Discount Notes due 2005, Series A sold in a transaction exempt from registration under the Securities Act of 1933, as amended, for $208,530,000 in principal amount of 13 1/4% Senior Discount Notes due 2005, Series B To Securities Dealers, Commercial Banks Trust Companies and Other Nominees: Enclosed for your consideration is a Prospectus dated _______ __, 1998 (as the same may be amended or supplemented from time to time, the "Prospectus") and a form of Letter of Transmittal (the "Letter of Transmittal") relating to the offer (the "Exchange Offer") by WAM!NET Inc. ("WAM!NET" or the "Issuer") and all of the subsidiaries of the Issuer to exchange up to $208,530,000 in principal amount of their 13 1/4% Senior Discount Notes due 2005, Series A issued and sold in a transaction exempt from registration under the Securities Act of 1933, as amended (the "Original Notes"), for $208,530,000 in principal amount of their 13 1/4% Senior Discount Notes due 2005, Series B (the "Exchange Notes"). We are asking you to contact your clients for whom you hold Original Notes registered in your name or in the name of your nominee. In addition, we ask you to contact your clients who, to your knowledge, hold Original Notes registered in their own name. The Issuer will not pay any fees or commissions to any broker, dealer or other person in connection with the solicitation of tenders pursuant to the Exchange Offer. You will, however, be reimbursed by the Issuer for customary mailing and handling expenses incurred by you in forwarding any of the enclosed materials to your clients. The Issuer will pay all transfer taxes, if any, applicable to the tender of Original Notes to it or its order, except as otherwise provided in the Prospectus and the Letter of Transmittal. Enclosed are copies of the following documents: 1. The Prospectus; 2. A Letter of Transmittal for your use in connection with the tender of Original Notes and for the information of your clients; 3. A form of letter that may be sent to your clients for whose accounts you hold Original Notes registered in your name or the name of your nominee, with space provided for obtaining the clients' instructions with regard to the Exchange Offer; 4. A form of Notice of Guaranteed Delivery; and 5. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. Your prompt action is requested. The Exchange Offer will expire at 5:00 p.m., Eastern Standard Time, on _________, ________ __, 1998, unless extended (the "Expiration Date"). Original Notes tendered pursuant to the Exchange Offer may be withdrawn, subject to the procedures described in the Prospectus, at any time prior to the Expiration Date. To tender Original Notes, certificates for Original Notes or a Book- Entry Confirmation, a duly executed and properly completed Letter of Transmittal or a facsimile thereof, and any other required documents, must be received by the Exchange Agent as provided in the Prospectus and the Letter of Transmittal. Additional copies of the enclosed material may be obtained from U.S. Bank Trust National Association, the Exchange Agent, by calling (612) 244-1572. NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY PERSON AS AN AGENT OF THE ISSUER OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS ON BEHALF OF EITHER OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS AND THE LETTER OF TRANSMITTAL. 2 -----END PRIVACY-ENHANCED MESSAGE-----