-----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, BDTma2tw+9VcIeoxzb17Lve+R+XbbuQDDH3tGBJmXsjARfEm4ahSZbY4cAvLNi5N hVPV7bGsKsWtMPE0V9w9GQ== 0000940180-99-000353.txt : 19990413 0000940180-99-000353.hdr.sgml : 19990413 ACCESSION NUMBER: 0000940180-99-000353 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 25 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WAM NET INC CENTRAL INDEX KEY: 0001060274 STANDARD INDUSTRIAL CLASSIFICATION: 7374 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-53841 FILM NUMBER: 99583989 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 10-K 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File No.: 333-53841 WAM!NET INC. (Exact Name of Registrant as specified in its charter) Minnesota 41-1795247 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 6100 West 110th Street Minneapolis, Minnesota 55438 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (612) 886-5100
Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all Reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. X No --- As of March 15, 1999, there were 9,297,427 shares of the Company's Common Stock outstanding. The aggregate market value of the voting stock of the company held by non-affiliates is $36,522,096. Documents Incorporated by Reference--Not applicable. FORM 10-K TABLE OF CONTENTS
ITEM PAGE - - ---- ---- PART I ITEM 1. BUSINESS........................................................................................ 1 ITEM 2. PROPERTIES...................................................................................... 24 ITEM 3. LEGAL PROCEEDINGS............................................................................... 24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................. 25 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................... 25 ITEM 6. SELECTED FINANCIAL DATA......................................................................... 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 28 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................... 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................................... 38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............ 39 PART II ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................. 40 ITEM 11. EXECUTIVE COMPENSATION.......................................................................... 43 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................. 49 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................. 51 PART III ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K................................ 57 IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS.................................................. 62 SIGNATURES - WAM!NET INC.................................................................................. 63 FINANCIAL STATEMENT SCHEDULES............................................................................. F-1
(i) PART I ITEM 1. BUSINESS. OVERVIEW The Company provides a managed, high speed, digital data delivery network service (the "WAM!NET(R) Service"). The WAM!NET Service allows users to transmit, receive and store large digital data files. The Company has developed applications for companies in the graphic arts, the printing, publishing, advertising, pre-press and, corporate communication (collectively, "Graphic Arts") and entertainment industries, and is evaluating applications of the WAM!NET Service for the medical imaging industry as well. The Company integrates industry-specific software applications with commercially available computer and telephony technologies to provide its customers with rapid, secure and reliable transportation and storage of digital data. The Company provides customers with a choice of solutions for their data transportation and workflow needs, ranging from a turn-key, single source solution for high-volume data requirements to solutions for subscribers having less intensive data requirements. The Company focuses its software development, service, sales and marketing efforts on vertical markets within targeted industries by providing services and products specifically tailored for an industry sector, "Industry Smart(TM)" applications, which serve to improve a customer's productivity and output under a simple, monthly fee and usage pricing plan that requires no up-front capital investment by the customer. The WAM!NET Service connects customers and trading partners within an industry, thereby implementing the Company's Industry Smart approach. The Company's applications combine rapid, secure data transportation services with industry specific software applications that allow remote users to work together, eliminate production deadlines imposed by courier schedules, eliminate delays and copying errors associated with the transportation of physical media (such as disks or tapes) and permit access to and use of the Company's remote storage and retrieval services. The Company has initially capitalized on the growing need to transmit data in the Graphic Arts industry. The Company believes that the WAM!NET Service is achieving wide acceptance among leading firms within the Graphic Arts industry. This acceptance will in turn encourage other industry participants with whom such firms share digital information (their "workflow community of interest") to subscribe to the WAM!NET Service. Since March 1996, when the Company first commercially released and commenced marketing the WAM!NET Service to the Graphic Arts industry, the Company has a customer base of more than 1,450 customer locations. In November 1997, the WAM!NET Service received an award from the Graphic Arts Technical Foundation (an independent trade association) for developing the product or service that will most likely change the manner in which the Graphic Arts industry conducts business. WAM!NET customers include Graphics Arts industry leaders such as Time Inc., RR Donnelley & Sons Company ("RR Donnelley"), Quad Graphics, The Walt Disney Company ("Disney"), J.C. Penney Company and Fox Broadcasting Company ("Fox Broadcasting"). The WAM!NET Service was released in the United Kingdom during the fourth quarter of 1998. The Company has also developed and released to its Graphic Arts customers advanced software applications, such as an on-line "Customer Information System" ("CIS") that includes digital job tracking and a billing system, and WAM!PROOF(R), an application enabling remote proofing. The WAM!PROOF(R) service was commercially released in the second quarter of 1998. The WAM!BASE(R) service, a remote data archiving, retrieval and distribution system, was commercially released to the 1 printed catalog division of Sears and four of its primary vendors on November 1, 1998, and is expected to be released nationally in the second quarter of, 1999. The WAM!NET Service was also released in the United Kingdom during the fourth quarter of 1998. The Company's diversified product line addresses the requirements of customers exchanging data with workflow partners, regardless of the volume of data transmitted or stored. In addition to the Company's current single source, turn-key solution for data-intensive customers, the Company has developed software applications which permit access to the WAM!NET Service by customers with lower data volume requirements. The first such application is a fifth generation graphical user interface, Transmission Manager, which provides worldwide access to the Company's redundantly interconnected proprietary purpose-built network hubs ("Distribution Hubs") via leased high-bandwidth telephone circuits (the "WAM!NET Network"). The dial-up version of Transmission Manager utilizes ISDN telephone circuits and was released in March of 1999. The Company intends to continue its strategy of providing Industry Smart solutions for vertical markets requiring mass transport and storage of digital data beyond the Graphics Arts industry. The Company has created two new business units, WAM!NET Entertainment and WAM!NET Medical, to develop and market Industry Smart network services and applications for the entertainment and medical industries. In particular, the Company is developing Industry Smart solutions to address the video data transportation and storage and related workflow needs of the entertainment industry and is also considering applications for its WAM!NET Service for the transportation, storage and retrieval of medical images and data for use by the medical industry. RECENT DEVELOPMENTS . SGI Investment. On March 4, 1999, the Company consummated the "SGI Investment," a transaction with Silicon Graphics, Inc. ("SGI"), which provided for an equity investment by SGI of $75.0 million and the establishment of certain strategic relationships between the Company and SGI, including a preferred provider relationship pursuant to which the Company will be able to purchase hardware, software and services from SGI based on SGI's most favored pricing models. In addition, SGI will also act as sales agent for the Company's products in the entertainment industry. The Company believes that the SGI Investment will provide many strategic benefits, including: - a networking and storage partnering relationship with an established industry leader; - access to a powerful new distribution channel for the WAM!NET Service, including premier accounts in the entertainment industry; and - the ability to partner with SGI's professional services group on large, multi-year, multi-site deals which require customization and involve complex implementation. . Global Infrastructure Expansion. Building an international network to provide trans-Atlantic, trans-Pacific and intra-European connectivity was one of the Company's primary goals in 1998. At the beginning of 1998, the Company had 16 Distribution Hubs and two network operations centers ("NOCS") in North America. During 1998, the Company added nine Distribution Hubs in North America, seven in Europe, and one in Asia (Tokyo). The Company has also added a third NOC in Brussels, Belgium, to support the Company's European expansion. 2 . Network Traffic Growth. As the Company has grown its installed base of customers to over 1,450, the data traffic traveling over the WAM!NET Network has increased more than six-fold in 1998 compared to 1997. During October 1998, the Company posted its first month of billable network traffic greater than two terabytes (1 terabyte = 1 thousand gigabytes = 1 million megabytes), up from 0.9 terabytes in January, 1998. Traffic for the month ended February 1999 totaled 2.5 terabytes. . International Market Expansion. On March 13, 1998, the Company acquired 4- Sight Limited, a private limited company incorporated under the laws of England and Wales ("4-Sight"), which was subsequently integrated into Wam!Net Limited, a wholly-owned subsidiary of the Company ("WAM!NET U.K."). With the acquisition and integration of 4-Sight Limited into WAM!NET U.K., the WAM!NET Service is being introduced in Europe and Japan. The Company is utilizing WAM!NET U.K.'s existing distribution infrastructure in these regions to convert the previous 4-Sight Limited business from selling software and hardware bundles to selling WAM!NET service contracts. The Company believes it can convince the more than 30,000 WAM!NET U.K. software users to upgrade to the WAM!NET Service. In September 1998, the WAM!NET Service was launched in the U.K., followed by Germany, the nations of the Benelux region and Scandinavia in October and November 1998. In September 1998, the Company and Hermstedt AG, the leading manufacturer of ISDN card equipment in Germany, announced a joint, global marketing and promotion campaign for the WAM!NET Service and Hermstedt hardware. The Company believes that this will enable it to address Hermstedt's 50,000 installed customer base and provide an opportunity to present those customers with the WAM!NET Service. Additionally, in September 1998, WAM!NET entered into a co-marketing agreement with Deutsche Telekom AG to provide the WAM!NET Service to Deutsche Telekom customers in Germany. The combination of these two co-marketing agreements, with the leading ISDN equipment manufacturer and telephony services provider, respectively, places the Company in a strong position to address the German market. . Greater Network Accessibility. The release of Transmission Manager will provide a common user interface for both high and low data volume customers and will enable WAM!NET U.K. customers (more than 30,000 worldwide) to upgrade to this product and connect to the WAM!NET Network. The Company's goal is to digitally connect both high and low volume customers through the WAM!NET Network worldwide beginning in early 1999. Increasing the number of customers, both large and small, significantly increases the value of the WAM!NET Network and product offerings. Transmission Manager was released in March of 1999. . WAM!BASE. Sears' printed catalog division and four of its primary vendors became the Company's first commercial WAM!BASE service customers on November 1, 1998, following a six month beta test. During the beta test, the amount of data being moved over the WAM!NET Network resulting from digital images being loaded into the WAM!BASE application grew from an average of three gigabytes per month per customer to over 150 gigabytes in one month for one of the primary vendors. During 1998, the Company also developed an innovative distribution channel made up of "Digital Asset Management" ("DAM") firms who will market the WAM!BASE service to their client base in the Graphic Arts industry. In the third quarter of 1998, the Company signed-up over 35 DAM distributors as part of the Company's "MasterMind" channel. The WAM!BASE service is expected to be released nationally in the second quarter of 1999. 3 . Entertainment Industry. In February 1999, WAM!NET's entertainment group began offering its entertainment customers the WAM!NET Service and a compressed video viewing application. The Company expects its initial focus to be on selling existing WAM!NET transportation and storage service to the post- production market connecting post-production facilities with advertising agencies for the delivery of review quality video during the television advertisement creation process. Additional segments, including network clearance for television advertisements, large data file transfer and storage applications and video on demand are also being targeted. The Company expects that this opportunity will be further expanded and leveraged by WAM!NET's relationship with SGI and will target higher bandwidth transport applications, video storage and distribution and rendering applications. MARKET OPPORTUNITY The Company believes that the increasing digitalization of work product and workflow in data intensive and time sensitive industries is driving the demand for managed, secure and reliable electronic data transportation and archiving services. Based on information derived from independent studies, the Company believes that the Graphic Arts industry will spend approximately $10.0 billion between 1998 and 2000 on the digitalization of its production and printing process, ranging from computer publishers investing at the desktop level to commercial printers investing in computer-to-plate ("CTP") technology, which facilitates a fully digital work product. Despite this movement toward the digital transport and storage of data, many companies continue to use overland or air courier services to deliver magnetic tape or optical disk copies of data to others who desire access to such data due to the lack of reliable, cost effective electronic transport mechanisms. This non-digital step results in a method of transporting data which can both significantly lengthen production cycle time and lead to possible errors. The same fundamental issues exist in the movie, television and entertainment industry and in medical imaging. The Company believes the current potential market for managed digital data transportation and asset storage services is $4.3 billion and $2.3 billion, respectively, in the Graphic Arts industry, and $1.8 billion and more than $10.0 billion, respectively, in the entertainment industry. The Company believes that existing electronic means for transporting large digital data files have proven to be ineffective and/or prohibitively expensive for most companies. Large files may take up to several days to transport using the Internet or the fastest standard telephone modems (56,000 bps) and may lose significant quality in transmission. The use of the Internet and standard telephone modems can also lead to other significant disadvantages, most notably high telephone usage charges and a lack of security, accountability and reliability of transmission. Other dedicated technologies, such as point-to- point telephone lines, offer more speed than the Internet (which is not managed) or a standard telephone modem, but at a significantly higher cost. Such technologies may also lead to data degradation and integration obstacles. Large data files can be transported reliably in minutes over dedicated point to point telephone lines (such as DS1 and DS3 lines); however, the substantial equipment necessary at each dedicated connecting point and the sizable costs of leasing a dedicated point to point telephone line makes this means of transport uneconomical for most companies transporting large data files. 4 COMPETITIVE ADVANTAGES The Company believes it is uniquely positioned to meet the growing need for a cost-effective and reliable means of electronically transporting, storing and retrieving digital data based on the following competitive advantages: . Purpose-Built Network. The WAM!NET Service allows customers to move large data files via the WAM!NET Network, a global network that integrates the Company's Industry Smart software applications with a purpose-built network of Company-owned Distribution Hubs. The Distribution Hubs are interconnected redundantly with high-bandwidth leased telephone circuits. The Company currently maintains 33 Distribution Hubs, located in 23 major U.S. and Canadian cities as well as in London and Manchester, England; Paris, France; Amsterdam, The Netherlands; Stockholm, Sweden; Frankfurt, Hamburg and Munich, Germany; Brussels, Belgium; and Tokyo, Japan. The Company operates three mirrored NOCs in Minneapolis, Las Vegas and Brussels through which it monitors all data transmission on a 24 hour a day, seven day a week basis. The Company believes that the WAM!NET Network provides reliable and secure data transmission with guaranteed delivery and no degradation in quality. . Diversified Solutions. The Company offers its customers a choice of solutions based on their particular needs. For example, the Company provides each data intensive subscriber with all of the hardware, software, transmission facilities and management services necessary to use the WAM!NET Service. Installation of the service, which is performed on behalf of the Company by national service providers, consists of connecting data intensive customers to the nearest Distribution Hub through a Company-owned network access device and an appropriate communications link (such as T1, ISDN, frame relay, SMDS, ADSL or other suitable facility) matched to the customer's transfer speed and throughput requirements. The WAM!NET Service is designed for ease of use, with a point and click e-mail type interface and a simple "pay by the megabyte" pricing model. The WAM!NET Service can also be accessed remotely by less data-intensive customers, through a dial-up connection to the WAM!NET Network. The Company's strategy is to offer customers the WAM!NET Service at rates competitive with overland and air courier services furnished on an annual or multi-year subscription basis. There is no up-front capital investment by the customer, who is charged based on a minimum monthly usage fee and volume of data sent per transaction. . Industry Smart Applications. The Company collaborates with leading participants in its target markets and designs software applications addressing industry-specific workflow requirements. These Industry Smart applications, combined with the guaranteed delivery of the WAM!NET Service, allow work partners in separate locations to collaborate digitally in real time. The WAM!PROOF application allows customers to directly output across the WAM!NET Network to remote locations, thereby eliminating the need to deliver physical proofs by overnight courier. The WAM!BASE application allows users to store and retrieve data, eliminating the need for redundant archives and shrinking work cycle time by providing more immediate remote access to desired data files. . Customer Support and Customer Information System. The Company has implemented extensive customer service functions, including customer support technicians who are available 24 hours a day, seven days a week, who are trained extensively in the Company's service offerings and who understand the industry-specific workflow of the Company's customers. The CIS allows customers to view data files, verify account information and check the status of transactions on-line, as well 5 as to log help requests. The Company also provides its customers itemized information regarding the size, cost, and destination of each "shipment" that may be electronically imported directly into the customer's own accounting system. This information facilitates capturing of project-specific costs and billing of services on a job-by-job basis. . First to Market Advantage. By being the first to market a managed, high-speed digital data delivery network with Industry Smart applications, the Company believes it is becoming the industry standard in the Graphic Arts industry and is positioned to become the industry standard in its other target industries. The Company has found that industry leaders such as Time, Inc., RR Donnelley and World Color, each of which were early WAM!NET Service customers, actively encourage their workflow partners to subscribe to the WAM!NET Service to increase workflow efficiencies. Potential entrants into the managed digital data delivery field would need to deploy a global, purpose-built network integrated with customized value-added applications, and simultaneously convert industry leaders and their workflow partners, more than 1,450 of whom already subscribe to the WAM!NET Service. Current customers of the WAM!NET Service include 14 of the 20 largest publishers, 12 of the 20 largest printers, 17 of the 20 largest advertising agencies, and 14 of the 20 largest pre-press graphic arts agencies in the U.S., as well as the corporate marketing communications departments of many U.S. corporations. . Strategic Relationships with MCI WorldCom and SGI. Both MCI WorldCom, Inc. ("MCI WorldCom") and SGI have made strategic investments and created alliances with the Company. MCI WorldCom provides telecommunication and other services to the Company on a non-exclusive basis. The Company anticipates that its relationship with MCI WorldCom will enable it to access the worldwide infrastructure, sales and marketing work force, telephony technologies, high bandwidth carrier service and other services of MCI WorldCom and its affiliates, including UUNet. In addition, in connection with SGI Investment, the Company and SGI have entered into a preferred provider relationship pursuant to which the Company will purchase hardware, software and services from SGI based on SGI's most favored pricing models, and SGI will act as sales agent for the Company's products in the entertainment industry. BUSINESS STRATEGY The Company's objective is to become the leading provider of enhanced, managed digital data delivery and archiving services to industries comprised of participants requiring high-speed digital access to shared data. WAM!NET's strategy to achieve this objective and to build a long-term sustainable competitive advantage is to: . Increase its Customer Base to Create Critical Mass. The Company's sales and marketing strategy has been designed to rapidly penetrate its initial target market, the Graphic Arts industry. Elements of this strategy include: (i) creating the WAM!NET Service as a turn-key, single source service solution; (ii) implementing an easy to understand "pay by the megabyte" pricing model, eliminating the need for any capital investment by customers; (iii) designing aggressive advertising, trade show attendance, event marketing and direct selling to drive trials, including introductory product trials for industry leaders; (iv) building a direct sales force to target leading industry participants who, in turn, encourage their workflow partners to subscribe to the WAM!NET Service; and (v) implementing programs in which large receivers of data (e.g., printers) promote and market the WAM!NET Service, along with the WAM!NET direct sales force, to customers and workflow partners. As the Company increases its number of installed customer locations and 6 as its customers increase the number of workflow partners with whom they exchange data, the amount of data transmitted through the WAM!NET Service is expected to increase exponentially. . Apply Industry Smart Network Model to Other Industries. The Company believes that the WAM!NET Industry Smart network model can provide the benefits and advantages it offers the Graphic Arts industry to other industries with similar data transportation, storage and retrieval requirements. Some of the Company's entertainment industry prospective customers, such as Fox Broadcasting and Disney, currently subscribe to the WAM!NET Service for their Graphic Arts-related needs. Through its relationship with SGI, the Company will continue to develop Industry Smart applications and sales and marketing strategies suitable to the entertainment industry. The Company is also collaborating with industry leaders in the medical imaging industry to develop and implement Industry Smart applications in connection with marketing to that industry. . Maximize WAM!NET Network Accessibility. The Company's product line is designed to maximize customer access to the WAM!NET Service worldwide, regardless of the volume of data to be transmitted or stored. While data- intensive customers may be connected to the WAM!NET Service through a single source, turn-key solution utilizing a Company-owned network access device and an appropriate communications link matched to the customer's requirements, lower data-intensive customers may access the WAM!NET Service remotely through the currently available dial-up version of Transmission Manager or through wireless technologies. The Company is presently testing and expects to provide access to the WAM!NET Service through the Internet during 1999. . Drive Utilization Through Value-Added Services and Volume Discounts. The Company believes that Industry Smart applications, such as the Customer Information System, the WAM!PROOF service, the WAM!BASE service and compressed video viewing, will provide significant benefits to its customers and stimulate increased usage of the WAM!NET Service. The Company also offers volume discounts and a variety of promotional programs for industry leaders to induce customers to connect with their trading partners and send increasingly large volumes of data traffic across the WAM!NET Network. The combination of additional customers and increased utilization of the WAM!NET Network is expected to lower the Company's average network cost per subscriber. . Expand and Enhance Infrastructure and Develop Worldwide Capabilities. The Company intends to invest in resources and systems to ensure that the Company's operating infrastructure and support services provide its subscribers with optimal digital connectivity with guaranteed performance at competitive rates. Primarily through its acquisition of 4-Sight, the Company is currently expanding into parts of Europe and Asia for the purpose of providing its customers with desired international connectivity. The Company has expanded the WAM!NET Network into seven countries beyond the U.S. and Canada, with Distribution Hubs in London and Manchester, England; Frankfurt, Hamburg and Munich, Germany; Paris, France; Amsterdam, the Netherlands; Stockholm, Sweden; Brussels, Belgium; and Tokyo, Japan. During 1999, the Company expects to further develop its international service infrastructure by providing installation and customer support via third parties, expanding local sales and distribution relationships and establishing additional Distribution Hubs and regional NOCs in selected countries. The Company released Transmission Manager(R), the fifth generation software application developed by the newly integrated Company and WAM!NET U.K. applications and network engineering departments, on March 1, 1999 which will permit less volume intensive customers to gain remote access to the WAM!NET Network. The Company believes that WAM!NET U.K.'s more than 30,000 customers in 42 countries are prime candidates for the Transmission Manager application. The 7 Company is transitioning WAM!NET U.K.'s existing distribution infrastructure in Europe and Japan from selling software and hardware bundles to selling WAM!NET Service contracts. By utilizing WAM!NET U.K.'s infrastructure and investment, the Company believes it has reduced the time that it would have taken to enter certain international markets by at least twelve months. The Company may also establish its international presence through other acquisitions, joint ventures or other similar business transactions. . Reduce Costs and Improve Operating Margins. The Company seeks to reduce costs and improve operating margins by (i) spreading the cost of installing and operating the WAM!NET Network over a large base of customers; (ii) designing the network to use more expensive hub equipment in a few national and regional operational centers and less expensive equipment at each customer site; (iii) deploying the dial-up version of the Transmission Manager application ("On Ramps") for less volume intensive customers; (iv) pursuing programs to reduce the costs of capital equipment, including obtaining mass purchasing discounts for network infrastructure and customer premises equipment; (v) utilizing network management tools to optimize existing and planned network capacity as volume increases and traffic patterns begin to emerge; (vi) deploying new, lower-cost last mile local loop technologies to connect customer sites to Distribution Hubs, including wireless technologies and remote dial-up capabilities; and (vii) deriving other incremental revenue from value-added services such as the WAM!BASE service, which can be delivered over the existing WAM!NET Network infrastructure. The Company also expects its operating margins to improve as a result of anticipated cost reductions associated with increasing competition in both the local and long distance markets. TARGET MARKET OVERVIEW The WAM!NET Service has been designed to support a community of interest among interdependent participants in time sensitive and data intensive industries with highly collaborative workflows. The Company is currently providing its services to the Graphic Arts industry, and is beginning to market the WAM!NET Service to other communities of interest with similar data transportation and archiving needs as those found in the Graphic Arts industry, including the entertainment and medical imaging industries. The Company intends to apply its business strategy to these other industries by capitalizing on the network, operations, service, application engineering and sales/marketing infrastructure already developed by the Company and by developing and offering Industry Smart applications that are tailored to the workflow requirements of those industries. Graphic Arts. The Graphic Arts industry is comprised of printers, pre-press production firms, advertising agencies, publishing firms, graphic artists and list management firms who design, prepare and produce printed materials. Based on industry information and research performed for the Company, the Company estimates the total potential size of the managed data delivery service and the digital asset storage markets for the Graphic Arts industry in the United States to be $4.3 billion and $2.3 billion, respectively. The Company's estimate of the number of potential sites in key segments of the Graphic Arts industry is outlined below, based on information contained in industry research reports. 8 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 ===== ====== ======= =======
_______________ (1) Large, medium and small means having at least 100, at least 25 but less than 100 or less than 25 employees, respectively. (2) Large, medium and small means having at least 250, at least 50 but less than 250 or less than 50 employees, respectively. (3) Large, medium and small means (i) advertising agencies having at least 100, at least 25 but less than 100 or less than 25 employees, respectively; and (ii) direct mail advertising, commercial photography and graphic art design firms having at least 25, at least 5 but less than 25 or less than 5 employees, respectively. (4) Large, medium and small means having at least 25, at least 5 but less than 25 or less than 5 employees, respectively. The materials created and printed by the Graphic Arts industry include books, magazines, newspapers, catalogues, circular advertisements, billboard advertisements, marketing materials, brochures, packaging and multi-media materials. According to industry data, approximately 50% of content in the Graphic Arts industry is currently created in a digital format using specialized software applications such as Adobe PhotoShop(R) and QuarkXpress(R), and by the year 2000, more than 64% of the Graphic Arts industry is expected to be using digital page/imaging software. File assembly and printing preparation activities are also becoming digital with the increasing use of digital scanners and cameras. Analog images, including photographs, can now be easily scanned and digitally incorporated into the production process. Additionally, adoption of CTP technologies by large- and medium-sized printers facilitates a fully digital workflow throughout the entire creation and printing process. The digitalization of the printing process has resulted in the need for both higher bandwidth connectivity to move data intensive printing jobs through the print production process and for storage solutions which provide asset management capabilities and collaborative access to the stored digital assets. Today, the majority of work files are stored on magnetic or optical disks and transported via local or overnight couriers, such as Federal Express and United Parcel Service. The Company anticipates that large portions of data will increasingly be delivered via digital networks, driven primarily by the need to compress time schedules and reduce production costs. The Company expects that once market leaders and other influential participants in these industries become significant users 9 of managed data delivery services, other industry participants will follow in an effort to remain competitive. The Company believes it is well positioned to take advantage of the following factors, identified by industry research reports, which indicate that between 1996 and the year 2000: (i) the percentage of print jobs transferred across networks will quadruple, representing over 40% of all print jobs and two thirds of print job revenue; (ii) more than 50% of all publishing workflow and more than 60% of all creative services workflow will be conducted almost entirely over networks; (iii) businesses with the equivalent of T1 wide area connectivity will increase 5 times; (iv) manufacturers will integrate CTP equipment creating a total digital pre-press workflow; (v) high resolution digital cameras will be affordable for most Graphic Arts users; and (vi) most medium to large printers and pre-press firms will offer digital content management services to support re-purposing of digital data into other products. Entertainment Industry. The entertainment industry, which in terms of data transport needs is similar to the Graphic Arts industry, provides another potential community of interest for the expansion of the WAM!NET Service. This industry consists of many subsectors, including television and radio advertising, feature films, broadcast, cable and satellite video, high- definition television, home video, video games and video applications on the Internet. An adjunct market to the entertainment industry is the distance learning market, which includes corporate (training, marketing and communications) and educational distance learning. Each of these subsectors is moving away from traditional analog media, such as film, photographs and other physical media expression, and toward digital media. Digital tools previously available only to large media customers (such as television networks and major film studios) are now widely available to the entire industry. The Company believes the WAM!NET Service will be attractively priced for a wide spectrum of customers, including the independent contractor/artist, small to large production and post-production studios and global media conglomerates. In contrast to the Graphic Arts industry, however, which involves the creation of static or still imagery, the entertainment industry principally produces motion imagery coupled with digital audio. As a comparison, the range of data transmission requirements varies to a much greater extent. While some applications involve the transport of compressed video many involve the transport of uncompressed video and HDTV. For comparison, an uncompressed 30- second television advertisement is comprised of approximately 40 times the amount of digital data found in a typical full page magazine advertisement. The Company believes the WAM!NET Network is capable of accommodating the high-speed data transfer rates necessary to transport motion imaging in the entertainment industry. The Company's initial entry into the entertainment industry is focused on connecting post production facilities with advertising agencies to transfer compressed television advertisements for review purposes during the advertisement production cycle. Review quality work is typically transported via couriers and disk. The Company believes that by using the WAM!NET Service, companies will be able to reduce their advertisement production cycles by several days. In addition, network clearance applications are also being pursued. The network clearance process involves sending compressed version of completed advertisements to the various network clearance groups for their approval to air advertisements. Additionally, the large data transport and video storage and retrieval represents a dynamic opportunity for the WAM!BASE service and compressed video viewing and is expected to drive the rapid growth of this business unit. Both of these opportunities will be pursued jointly with SGI. 10 Medical Imaging. The emergence of digital imaging in the medical industry has created another community of interest with potentially promising applications for the WAM!NET Service. The increasing availability of advanced computer technology combined with continued pressures to contain health care costs is resulting in significant portions of the medical imaging workflow being completely digitalized, including output from medical scanning equipment such as Computed Tomography ("CT") and Magnetic Resonance Imaging ("MRI") devices. These devices capture and display patient data in digital formats, generating data files often in excess of 35 megabytes per file. The Company has identified multiple steps in the medical imaging workflow process which may effectively be addressed by the WAM!NET Service. For example, radiologists and other healthcare professionals who examine the output generated by CT and MRI devices are often located in facilities separate from the facilities where the digital images are created. Furthermore, the increasing prominence of health maintenance organizations and other provider alliances, where member patients can go to any facility within the provider's network, may require an increased ability to retrieve and transport medical data between physically separate facilities. Currently, most files are either printed to film or copied to optical disks and then physically transported via courier services between facilities. In cases where digital images are printed to film, healthcare professionals lose the ability to do real time reads of the images. Current methods of storing medical images also present file transportation and storage problems. Analog files need to be manually located, copied and couriered to the healthcare professional for examination. It is estimated that 10%-25% of images stored in a non-digital film format are not readily accessible when needed and often lost entirely. Digital file storage is emerging as an option, but optical disks still need to be located, copied and then transported to remote sites. As a result, hospitals are beginning to explore real-time remote imaging and archiving creating efficiencies by, for example, allowing radiologists to collaborate more effectively. As documented in the January 1998 Journal of Diagnostic Imaging, Hammersmith Hospital in London, England, found that the change from hardcopy to digital archiving reduced staffing requirements by eight positions, saved an estimated $0.7 million per year, and increased workload by 4,500 exams per year without adding additional radiologists. The Company believes the industry will need to eliminate multiple archives to adopt full digital implementation and provide affordable long-term on-line storage. The Company believes that medical service providers, particularly those of substantial size or that span a number of separate facilities, have significant medical imaging requirements. The Company is presently conducting a pilot project of the WAM!NET Service with two medical facilities that are transporting and retrieving medical images through the WAM!NET Network. The WAM!NET Service has been configured to comply with Digital Imaging and Communications in Medicine ("DICOM") industry standards for compatibility with medical imaging equipment which are the industry accepted standards utilized by major medical imaging equipment manufacturers in the domestic healthcare industry. If and when WAM!NET Service is offered for treatment or diagnostic purposes, it would be subject to regulation by the Food and Drug Administration. WAM!NET U.K. BUSINESS On March 13, 1998, the Company acquired 4-Sight, which was subsequently integrated into WAM!NET U.K. (the "4-Sight Acquisition"). WAM!NET U.K. is a provider of data transmission software and related products and applications targeted to the Graphic Arts industry, primarily utilizing ISDN lines, with particular emphasis on European, Asian and North American markets and is engaged primarily in software development and distribution on a global basis through resellers. As a result of the Company's acquisition of WAM!NET U.K. and the companies' shared resources and facilities, 11 WAM!NET U.K. is currently able to provide certain managed network services related to delivering files. This is accomplished by modifying its software applications to allow access to the WAM!NET Network. The software user is generally responsible for all software and hardware installation, procuring an ISDN telephony connection and verifying the integrity of their files being sent over a public network infrastructure. By exploiting the synergies in coupling 4- Sight's data transportation software with the Company's managed, network infrastructure the Company has been able to achieve broader market coverage in the Graphic Arts industry by combining WAM!NET U.K.'s international presence and penetration of the lower volume user market with the Company's domestic presence and penetration of the higher volume user market. At December 31, 1998, WAM!NET U.K. had a customer base of more than 30,000 customer locations, including 3,000 sites in the United States, prior to its acquisition by the Company. WAM!NET U.K.'s products have been designed to work with public ISDN telephony infrastructures used widely in Europe and Japan and to a lesser extent in the United States. WAM!NET U.K. has formal sales agreements with resellers who distribute WAM!NET U.K.'s products in 19 countries. WAM!NET U.K.'s software products are installed at over 12,000 sites in the United Kingdom, where the Company estimates it has a 90% market share in the Graphic Arts market segment. Key users of WAM!NET U.K. software in the United States include Xerox Corporation ("Xerox"), Ogilvy & Mather Worldwide, Inc., McCann-Erickson and the National Geographic Society. Key Benefits from the 4-Sight. Acquisition. The Company has realized multiple benefits from the 4-Sight Acquisition including: . Providing Additional Network Access. WAM!NET U.K.'s software applications have been modified to allow access to the WAM!NET Network. New versions of WAM!NET U.K. software can be introduced which are WAM!NET Service compatible and can be used to send to and receive data from other WAM!NET locations. The Company believes this will significantly improve its ability to attract and retain customers at the lower end of the market segment where ISDN lines are most common. The Company has achieved broader market coverage in the Graphic Arts market by combining WAM!NET U.K.'s international presence and penetration of the lower volume user market with the Company's domestic presence and penetration of the higher volume user market. In addition, many of the Company's current customers have workflow partners who use WAM!NET U.K. software. Modifying WAM!NET U.K. technology has allowed WAM!NET U.K. customers to transmit data to WAM!NET Service customers with whom they require periodic data exchange and thereby increase traffic over the WAM!NET Network. . Facilitating WAM!NET U.K. Customer Upgrades. WAM!NET U.K. software upgrades that are WAM!NET Service compatible are marketed to existing WAM!NET U.K. customers and bundled with WAM!NET Service contracts. In addition, the Company could potentially re-provision local loop ISDN lines for the current WAM!NET U.K. customer base or upgrade higher traffic sites to network access devices. . Accelerating International Expansion. WAM!NET U.K. has already invested in developing distribution channels in the United Kingdom, Germany, the nations of the Benelux region, Scandinavia and Japan, and has plans to expand distribution capabilities in France and other Asian markets. The Company has greatly benefited from the formal working relationships WAM!NET U.K. has developed with dealers, by the people it employs to manage dealer 12 relationships in these international markets and by the working knowledge WAM!NET U.K. employees have developed regarding unique business practices in these international markets. The Company believes that it can utilize WAM!NET U.K.'s existing distribution infrastructure and investment to bundle the WAM!NET Services with new versions of WAM!NET U.K.'s transmission software, such as Transmission Manager. By utilizing WAM!NET U.K.'s infrastructure and investment, the Company has reduced the time that it would have taken it to enter certain international markets by nine to twelve months. . Accelerate Development Activities. WAM!NET U.K. has invested significant resources to build software development competencies in data transmission user applications. In addition, WAM!NET U.K. has developed capabilities to localize its software applications for use in specific international markets including the French, German, Benelux and Japanese markets. These capabilities may augment the Company's development staff and help increase application development staffing expertise. PRODUCTS AND SERVICES The WAM!NET Service. To send or receive a data file over the WAM!NET Network, a customer uses a proprietary software program designed and furnished by the Company. High volume customers use proprietary software-driven network access devices to access the WAM!NET Network, while lower volume customers use Transmission Manager. Whether the customer accesses the network remotely or by using a network access device, the WAM!NET Service appears as an icon on the customer's desktop, like a multi-layered e-mail or fax application. Clients can use the application to manage an address book of WAM!NET users with whom they both send and receive packages of files and to set application default parameters. To send a package, the user "highlights" and "drags" a file to the appropriate address which appears across the top of the user interface. Once a file is dropped onto an address tile, a packing slip is automatically opened and the user is prompted to fill out basic packing slip information. Additional files can be added to the package to be included in the transmission. Similarly, additional sites can be identified for simultaneous package delivery. The user then selects the send button and the package is automatically delivered to the user's network access device for processing, coding and routing. Once a package has been delivered to a network access device, the package will be transported regardless of whether the sending or receiving computer is operating. If the destination computer is unavailable, the package will be held for delivery until the destination computer becomes available to receive the file. Unlike a dial-up network, where both computers need to be on and available at either end or there will be a busy signal, the WAM!NET Service store and forward function holds the file in transit until the file can be delivered. To receive a package, customers are prompted on screen to view packages that have been received by their network access device. Files can be transferred from the network access device to the client's local area network ("LAN") either by dragging and dropping files from the network access device icon to the local network or by using a file retrieval menu. The WAM!NET Network can also be accessed remotely by Transmission Manager. This software allows current users who upgrade to the new software as well as new subscribers to utilize WAM!NET's range of services without the use of customer premise equipment. Each transaction over the WAM!NET Service is tracked and accounted for as an individual "shipment" of data. On a monthly basis, the Company furnishes its customers with an invoice summarizing the customer's WAM!NET Service use and charges. If requested by a customer, the Company will also deliver to such customer an electronic data file over the WAM!NET Service that 13 contains itemized information regarding the size, cost and destination of each shipment as well as information regarding other services used by the customer. This data file may be imported directly into the customer's own accounting system, providing what the Company believes to be a valuable service for customers who need to capture costs and bill for services on a job-by-job basis. Customer Care and the Customer Information System. The Company has implemented extensive customer support functions, including customer support technicians available 24 hours a day, seven days a week. These technicians are trained to understand the Company's product and service offerings, and the industry specific workflow of the Company's customers. Customer support technicians routinely answer customer questions concerning product functions, update address books, handle upgrade requests, and resolve product use issues. In addition, customer calls are logged into call management software for tracking and analysis purposes. The Company's CIS application allows customers to verify account information and check the status of their transactions on-line. The CIS appears as an icon on the customer's computer desk-top. When activated, the CIS accesses a menu which provides the customer with several options, including viewing packages, viewing account information or logging a help request. The "view packages" option allows customers to view sent and received package activity for user definable time periods between one hour and 90 days. This option also provides key transmission statistics for each package sent or received including date, time, size, content and file type. The account information option allows customers to view relevant account information, including billing information, site contact names and phone numbers and also enables customers to update account information on-line. The "help" option allows customers to log a help request by e-mailing questions or requests directly to the Company's customer support group. WAM!PROOF. The Company has developed an application, the WAM!PROOF application, which allows customers to directly output across the WAM!NET Network to proofing devices located at remote locations. The WAM!PROOF service was released in the second quarter of 1998. Proofs, which are physical representations of printed output, are created throughout the production process at major check points. Because workflow participants are often located in geographically diverse locations, proofs have historically been printed and delivered by overnight couriers to remote participants. WAM!PROOF application enables customers to print proofs in geographically diverse locations as if they were printing to a workflow participant on their LAN, thereby reducing turnaround times and creating workflow efficiencies. The Company has collaborated with leading manufacturers of printing/proofing devices to ensure compatibility with the WAM!PROOF application. "WAM!PROOF Ready" printing/proofing devices include devices made by Canon, Inc., Hewlett Packard Company ("HP"), Ambition Corp., Eastman Kodak Company, Tektronix, Inc. and Xerox. Heavy users of the WAM!PROOF service often generate 100% more traffic per month than before their use of the application. WAM!BASE. The Company has also developed a wide area data repository service, the WAM!BASE service, which provides WAM!NET Service users access to a remote data archive and allows them to store, retrieve and manage data on a per- megabyte cost basis. The first customer to use the WAM!BASE service, Sears, completed beta testing and began commercial usage of the WAM!BASE service on November 1, 1998, and the WAM!BASE service is expected to be released nationally in the second quarter of 1999. The ability to manage and access digital assets is becoming significantly more challenging due to increasing digitalization in the Company's target industries. The implementation of a workable and cost- effective data management solution requires the integration of hardware, software and networking to make data accessible to multiple workflow partners and to 14 eliminate redundant processes and storage facilities. The implementation of such a system requires substantial investments in capital equipment, systems integration and archive management and often takes months to complete. Typical problems that can occur include inadequate scalability, high operations costs and lack of high-speed and secure network infrastructure needed to share large digital data files, all of which are eliminated through the use of the WAM!BASE service. The Company believes that the WAM!BASE service provides a collaborative digital asset management service that addresses significant data management and storage issues for its customers, and can potentially eliminate the need for investment in capital and archive management. Given the speed at which technology changes and the need to ensure reliable access to stored images, many participants are unwilling to make these investments. Because it has been designed to be scaleable to the needs of entire industries, the WAM!BASE service can spread infrastructure and operating costs across numerous users. The WAM!BASE service is designed to offer a turn-key archiving system that is cost competitive in relation to an individual customer's investment in a local, stand-alone archiving system. Customers send their data files over the WAM!NET Service to the WAM!BASE repository where files are stored in customer configurable libraries. Customers are charged a monthly per megabyte fee for storage. Since customers are using the WAM!NET Service to retrieve data from the WAM!BASE repository, they can obtain quick and secure access to their data. The WAM!BASE service provides collaborative access to stored data files. With existing systems, industry participants working on the same job often store multiple copies of the same data files because they do not have a collaborative means of sharing file access. Participants who use the WAM!BASE service and store files in their private library space, can control security access to each individual file in their library, and can change security access privileges at any time. This eliminates the need to store redundant copies of files at multiple participant sites, can shrink cycle time by providing more immediate access to important data files, and supports the job driven workflow by enabling customers to control security access to images on a job-by-job basis. The WAM!BASE service uses two mirrored storage facilities linked by high bandwidth data connections. The initial WAM!BASE storage centers are located in Minneapolis and Las Vegas within the NOCs already located in each city. Each storage facility is connected to the WAM!NET Network through redundant links and customer data files are stored in both locations. Customers may use proprietary software provided by the Company to upload data to the storage facilities and to browse, retrieve and forward files stored in the repository. Customers are able to restrict access to individual files, groupings of files or complete libraries of files, manage the distribution of files, and are also able to catalogue, identify and search for stored files using assigned attributes. SERVICE CONTRACTS The Company believes that the WAM!NET Service is achieving wide acceptance among leading participants in the Graphic Arts industry, which in turn encourages those with whom information is shared to subscribe to the WAM!NET Service. As of December 31, 1998, more than 1,450 network access device customer locations were connected to the WAM!NET Network. As of December 31, 1998, the Company's mix of service contracts was as follows: 15
SERVICE LEVEL (IN MEGABYTES PER HOUR) # OF CONTRACTS % OF CONTRACTS ------------------------------------- -------------- -------------- 40 MPH Service............................. 94 7 % 120 MPH Service............................ 724 49 200 MPH Service*........................... 75 5 400 MPH Service............................ 459 31 1,000 MPH Service.......................... 19 1 Other...................................... 106 7 ----- --- Total...................................... 1,477 100% ===== ===
___________________ *Released in January 1998. The Company's standard WAM!NET Service contract is structured to assess charges based on the minimum throughput capability (i.e., the minimum number of megabytes per hour of the customer's data that the Company is obligated to transfer via the WAM!NET Network), the monthly minimum volume and any usage in excess of such monthly minimum volume. The pricing structure varies depending on the monthly minimum fee and on volume, with higher minimum fees and higher volumes generally resulting in lower per megabyte charges. During most of 1998, the pricing structure required each WAM!NET customer to sign a service contract for a fixed term of one to three years, at a specified location with minimum monthly fees ranging from $250 to $2,500 per month up to the specified volume. The standard service contract is automatically renewable for additional one year periods at the Company's then prevailing pricing structure, unless the customer gives notice of termination at least 60 days prior to any automatic renewal date. During the fourth quarter of 1998, the Company implemented a new three zone pricing model in the U.S. and Canada. The new pricing model maintains much of the original model's simplicity but charges higher monthly minimums outside major metropolitan areas where local loop telecommunication charges are more expensive. Each service contract also grants the customer a limited, non-transferable license to use the Company's proprietary software and certain other intellectual property solely in connection with the customer's use of the WAM!NET Service. Under each service contract, a customer generally agrees to pay all taxes and fees imposed by governmental authorities, to be responsible for all loss or damage to the network access device, to maintain certain insurance coverage for the network access device, to preserve the Company's ownership of the licensed intellectual property, to keep the network access device at the leased location, to return the network access device and all licensed intellectual property at the termination of the service contract, and to pay all of the Company's costs of enforcement in the event the customer breaches the service contract. In addition to the standard service contract, the Company also negotiates custom service contracts with large users of the Company's services. These custom service contracts generally address specific customer workflow requirements or multi-site installations and typically contain scheduled 16 rebates and discounts based upon the number of third party trading partners who become connected to the WAM!NET Network and upon the volume of data received from those third parties. These custom service contracts also typically contain negotiated provisions relating to issues of non-infringement, indemnification and damages for breach. The Company has begun to offer the WAM!BASE and the WAM!PROOF service as add-on features to the WAM!NET Service. Subscribers for the WAM!BASE and WAM!PROOF service sign an addendum to their WAM!NET service contract that separately licenses the software necessary to utilize the WAM!BASE or WAM!PROOF service, as the case may be, and contains other appropriate terms. The Company furnishes the WAM!BASE software without charge to customers who agree to minimum monthly WAM!BASE storage fees. WAM!PROOF customers are charged for usage on a per megabyte basis like any other transmission over the WAM!NET Network. The Company requires a nominal one-time license fee covering the costs incurred by the Company to furnish the WAM!PROOF software. Additional WAM!BASE fees are charged to the customer for library set up and administration which is often done through an authorized third party. Additionally, the Company is evaluating digital storage of large (terabyte and petabyte-sized) entertainment industry files currently being stored on tape. SALES AND MARKETING Over the course of the year ended December 31, 1998, the Company has spent significant time and resources developing and building international marketing and sales expertise. The Company's sales force has been expanded from 15 U.S. based sales people to over 150 sales and marketing people worldwide, located in major markets such as New York, Chicago, Los Angeles, Boston, Washington D.C., Minneapolis, San Francisco, Dallas, Atlanta, Denver, Seattle, Toronto, Montreal, London, Amsterdam, Hamburg, and Oslo. Originally focused on just the Graphic Arts market, the sales division also covers the entertainment industry. In addition, the Company has grown its marketing effort, which now has responsibility for the definition, commercialization, promotion, pricing and ongoing management of the Company's products and services. The marketing division is divided into three functional groups, based on customer needs and demands, including a product marketing group, a segment marketing group and communications group. The product marketing group is concerned with definition, development and integration of service products across all vertical market segments. The segment marketing group is responsible for planning, launching and coordinating ongoing marketing activities (promotions, pricing, etc.) within specific vertical market segments, including the Graphic Arts industry, the medical industry and the entertainment industry. The communications group is responsible for working with segment groups to design and create marketing materials and integrated marketing programs including direct mail promotions, brochures, advertisements, web-based marketing materials and public relations. The sales organization is also divided into specific groups, including a new sales group, an account management group, a national accounts group, an entertainment group and WAM!BASE group. Primary marketing and sales strategies focus on making inroads with major participants in the Company's target industries. In the Graphic Arts industry, the Company's initial sales focus was on signing large commercial printers, the final data destination in the digital workflow. Once several printers subscribed to the WAM!NET Service, the Company's sales organization sought to connect the printer's customers (pre-press firms, advertising agencies and publishers) to the WAM!NET Network using a combination of sales and marketing strategies. Such strategies include implementing promotional programs in which printers promoted and marketed the WAM!NET Service to their 17 customers and workflow partners along with the Company's direct sales force. Similar strategies are being applied by the Company to its entertainment and medical imagery initiatives. In connection with the SGI Investment, the Company and SGI have entered into a strategic relationship where, among other things, SGI will act as sales agent for the Company's products in the entertainment industry. As more customers subscribe to the WAM!NET Service, the Company expects the rate of growth and strategic focus of its sales force to balance new site acquisition and increasing utilization from its existing customers. As a result, the sales organization may employ additional digital consultants to work with customers to help them better utilize WAM!NET services, increase their acceptance of Industry Smart applications such as the WAM!BASE and WAM!PROOF applications, and expand the circle of WAM!NET users with whom they send and receive data. The Company's product marketing will focus on commercializing new features and new products that are also intended to help increase the utilization of the WAM!NET Network. This will include full scale commercialization of Industry Smart applications such as the WAM!PROOF and WAM!BASE applications and the addition of new Industry Smart features into existing products, including directory services with white and yellow pages functionality, and directed billing capabilities which will enable customers to reverse bill or bill third parties for data transportation services. The Company has network access devices in 44 states, Canada and the United Kingdom. No single state or province accounted for more than 10% of the Company's revenues for 1998 on a consolidated basis. For the year ended December 31, 1998, the Company derived approximately 46.8% of its revenues from sales in the United States, 42.2% from the United Kingdom, 8.9% from the rest of Europe, and 2.1% from the rest of the world. INSTALLATION SERVICES The Company believes its ability to deliver consistently high quality installation services will materially affect its ability to attract and retain customers. The Company, therefore, has expended considerable resources to build an installation function which coordinates and performs all aspects of service installation for the customer. When a new contract is signed, an installation project manager is assigned to manage the installation. Site surveys are completed to capture and confirm key customer information including network access device placement, appropriate service level, account information and network connectivity requirements. The project manager coordinates installation of the network access device with on-site third-party installers and the Company's circuit engineers, who test and certify connectivity and throughput between the customer's site and the Distribution Hub. Installation of the WAM!NET Service consists of installing a simple, graphical user interface ("GUI") on the customer's computer or LAN, connecting the customer's computer or network to a network access device, and connecting the network access device through telephone service to the nearest Distribution Hub. The Company has entered into arrangements with third-party field maintenance providers, to offer installation, maintenance and repair services on customer sites. NETWORK ARCHITECTURE The WAM!NET Network is comprised of international, domestic, regional and local Distribution Hubs that are owned by the Company and interconnected redundantly with high- 18 bandwidth leased telephone circuits. The Company currently maintains 33 Distribution Hubs, located in 23 major U.S. and Canadian cities, nine cities in Europe and one in Asia. The Company also operates three mirrored NOCs located in Minneapolis, Las Vegas and Brussels through which it manages and operates all data transport. The Company has also contracted with an independent third-party for the provision of satellite transmission services for added redundancy with respect to services provided to Time. The Company is currently negotiating to employ satellite services to add redundancy and last mile local loop capabilities to the WAM!NET Network. The WAM!NET Service uses technology similar to the Internet, such as ISDN, DS1 lines, DS3 lines, frame relay and ATM. Because the WAM!NET Service provides managed data package traffic, the available bandwidth of the WAM!NET Network is not cluttered with large amount of random data traffic that typically exists on a public network such as the Internet. The Company has sized aggregation points throughout the WAM!NET Network to ensure that no backbone connection (a connection between Distribution Hubs) is smaller than any "last mile" connection (i.e., from a customer site to a Distribution Hub). The hub infrastructure consists of large Cisco Systems, Inc. ("Cisco") routers which are co-located with MCI WorldCom or other facility management providers points of presence and which primarily route data traffic across the Company's network of Distribution Hubs. The 33 Distribution Hubs are interconnected with a meshed DS3 asynchronous transfer mode (a communications protocol that divides digital data into small packets of fixed length to facilitate high speed switching ("ATM")) backbone provided by MCI WorldCom. Additional network diversity is provided by a layer of private lines leased from Sprint Corporation ("Sprint") which primarily serve as network back-up. Local loop connections between Distribution Hubs and network access devices at customer sites are provided almost exclusively by MCI WorldCom and regional Bell operating companies. The Company's policy is to procure local loop lines from the lowest-cost, highest-quality provider. Network traffic patterns are continuously monitored. Operating agreements with MCI WorldCom enable the Company to increase backbone bandwidth to accommodate planned growth on an as- needed basis. The WAM!NET Network incorporates multiple firewalls, constant monitoring and other security features to prevent unauthorized access or tampering with either the Company's or the customers' data systems. For security purposes, the WAM!NET Network is designed to prevent customers from gaining unauthorized access to the WAM!NET Network through a network access device, from logging onto any other device attached to the WAM!NET Network and from exploring the WAM!NET Service or activating or controlling any of its other functions. The Company's software installed on the user's computer only delivers files to or from authorized network access devices. NETWORK MANAGEMENT The Company provides customers toll-free access to its technical services support team 24 hours a day, seven days a week. The Company believes that because its customers are in time sensitive, data intensive industries, they rely on the WAM!NET Service to provide guaranteed delivery and throughput. The Company has sought to build reliability into its network by interconnecting all Distribution Hubs and NOCs with at least two redundant paths so that in the event of network line failures data can still be transmitted. In addition, automated network monitoring software from Hewlett Packard has been installed and configured to provide continuous monitoring capabilities, including an alarm system that automatically alerts network engineers of problems. Key aspects of the WAM!NET Network are continuously monitored, including NOC equipment, Distribution Hub equipment, 19 backbone lines, local customer connections and the network access devices. The network management team is trained to proactively work with telephony and on- site service providers using specially developed processes to identify and resolve network issues quickly and efficiently. MANUFACTURING The Company currently conducts limited equipment assembly functions. The Company presently installs proprietary software and assembles standard computer, router and power management equipment components into steel housings for use as network access devices, Distribution Hubs and equipment in the NOCs. The equipment housing is manufactured by a third party to the Company's specifications. The Company currently contracts with third parties for installation of network access devices at customer sites. The Company installs Distribution Hubs and equipment in the NOCs. The Company intends to outsource the assembly of network access devices. SUPPLIER RELATIONSHIPS Equipment. In connection with the SGI Investment, the Company and SGI entered into a preferred provider agreement with SGI dated March 4, 1999 (the "Preferred Provider Agreement") pursuant to which the Company will be able to purchase hardware, software and services from SGI based on SGI's most favored pricing models. The Company also has procurement arrangements with Cisco and Osicom Technologies, Inc. for certain computer equipment, routers and computer interface cards used in the WAM!NET Network. These arrangements qualify the Company for discounts off participant list pricing for such equipment. The Company is presently negotiating more formal supply arrangements with Cisco. The Company also purchases certain high volume data storage equipment from HP and Hitachi Data Systems Corporation under supply agreements. Installation and Field Maintenance. The Company has an agreement with third-party field maintenance providers to offer installation, maintenance and repair services on customer sites. Telephone Carriage and Infrastructure Support. The Company currently leases local loop and long distance telephone services in the United States from MCI WorldCom. In addition, the Company has procurement agreements with Sprint, Deutsche Telecom, Inc., Madge Network Ltd. and Tanet Ltd. The supplier agreements described or contemplated above contain commitments on behalf of the suppliers from one to three years. COMPETITION Despite what the Company believes to be meaningful product differentiation, the Company faces competition in the provision of digital data transportation and archiving services, including from companies that have substantially greater financial, technological, marketing, and research and development resources than it and which have an established presence in markets that the Company serves. The Company's competitors (or potential competitors, including MCI WorldCom) include major long-distance companies, regional Bell operating companies, Internet service providers, systems integrators, such as Digital Art Exchange, and other smaller companies which manage routers as part of more comprehensive public, private and virtual private wide area network service offerings. Some companies have begun to offer data communications networks which use standard communication technology in conjunction with emerging frame-relay and ATM technology. The architecture of these 20 networks is similar to that of the WAM!NET Service. These competitors, including the Sprint DRUMS network, MCI SMDS telecommunications service and a joint venture arrangement between AT&T Corp. and Xerox, offer some of the services the Company offers or plans to offer in the future. Additionally, a new competitive service called the Graphic Arts Digital Network by VIO which directly targets the WAM!NET Service was announced in Spring 1997, and was released in October of 1998. This service is provided by a joint venture between British Telecommunications and Scitex. Pricing is similar to WAM!NET's with a monthly service fee and per megabyte pricing for transport. In addition, while the Internet is not currently an effective competitor to the WAM!NET Service, efforts are under way, through a consortium of research universities, the Federal Government's Very-High-Performance Backbone Network Service and several major corporations, to create "Internet2." Press stories on Internet2 suggest that it will include commercial channels through which large amounts of data can be moved securely between researchers or companies. The commercial availability of Internet2 is not expected before 2003. In addition, the Company faces competition from overland and air courier services, who transport magnetic tape or optical disk copies of digital data to their desired locations. The Company believes the major competitive factors in the digital data delivery industry are price, reliability and capacity. The Company's technologically higher-end competitors that offer high bandwidth dedicated lines have the capability of reliably providing high capacity transmission, but with the comparatively higher user costs involved in leasing dedicated point to point lines, dedicated equipment costs and attendant information management fees. Lower-end competitors, such as standard telephone modems or the Internet, can compete with the Company on a cost basis, but do not provide the managed reliability or capacity of the WAM!NET System. The Company believes that it is the only provider of a turn-key, managed digital data delivery service with a purpose-built network tailored to target industries' needs which addresses the price, reliability and capacity requirements of data intensive industries. GOVERNMENT REGULATION, STANDARDS North America. The Company purchases telephone equipment, routers and relays that are used in the WAM!NET Network from telecommunications equipment manufacturers and combines that equipment with Company-provided software and telephone circuits provided by common carriers regulated by the Federal Communications Commission (the "FCC"), the Canadian Radio-Television and Telecommunications Commission (the "CRTC") and various state regulatory agencies. The Company believes that under the FCC's interpretation of the Communications Act of 1934, as amended, the services which it offers to its customers are interstate information (enhanced) services. Consequently, it is not required to obtain licenses or other approvals from the FCC or state regulatory agencies to offer such services. If the Company's services were deemed to be intrastate services, certain state regulatory agencies might seek to assert jurisdiction over the Company's offerings. If that were to occur, the Company could be required to expend substantial time and money to acquire the appropriate licenses and to comply with state regulations. The Company also believes that, under the CRTC's interpretation of Canadian law, the services that the Company offers do not require it to obtain telecommunications permits or approvals in Canada. Worldwide. The Company believes that European Union directives require that member states permit the provision of the Company's services on a competitive basis. Bilateral agreements exist between the United States and Japan and the United States and Hong Kong which encourage cross-border provision of enhanced services like those offered by the Company. Pursuant to commitments in 21 the World Trade Organization ("WTO") General Agreement on Trade and Services, over fifty governments have agreed to permit provision of enhanced services (i.e., value-added) by nationals of WTO member countries. Nevertheless, certain other countries in Europe, Asia and elsewhere in the world might seek to license and regulate the Company's services. Any such license or regulation may limit, delay or increase the costs of operations as associated with the international locations to which the Company may desire to expand. Medical Imaging. The Company intends to offer its WAM!NET Service and WAM!BASE service as medical imaging applications for transmitting, storing and retrieving medical data for primary diagnostic purposes. The Company is currently participating in a test of the medical image transmission application of the WAM!NET Service between a hospital and a remotely located clinic. Any medical imaging applications offered for primary diagnostic purposes are required to comply with the Food and Drug Act, and regulations promulgated thereunder by the FDA. Under recently adopted FDA regulations, both the WAM!NET Service's data transmission application and the WAM!BASE data storage and retrieval application are classified as Class I devices that do not perform "irreversible data compression." Prior to adoption of those regulations, both the transmission and storage functions were classified as Class II devices, and the Company had received marketing clearance from the FDA for data transmission pursuant to a 510(k) Premarket Notification filing. The Company's medical image transmission, storage and retrieval applications conform to the DICOM standards. The Company works with medical imaging equipment manufacturers to ensure compatibility of the WAM!NET and WAM!BASE applications with their medical imaging equipment. The manufacture of network access devices for medical imaging applications and their provision as part of the Company's services are subject to regulation by numerous governmental authorities, principally the FDA and corresponding foreign agencies, including regulations concerning compliance with Quality Systems Regulation ("QSR"), or good manufacturing practices, and labeling. The Company is also required to register with the FDA as a medical device manufacturer. As such, the Company's facilities are subject to inspection by the FDA for compliance with QSR. These regulations require that the Company manufacture its products and maintain its documents in a prescribed manner. As a medical device manufacturer, the Company is further required to comply with FDA requirements regarding the reporting of adverse events and malfunctions that would likely cause or contribute to death or serious injury. FDA regulations also govern product labeling and can prohibit a manufacturer from marketing an approved device for unapproved applications. If the FDA believes that a manufacturer is not in compliance with the law, it can institute enforcement proceedings to detain or seize products, issue a recall, enjoin future violations and assess criminal and civil penalties against the manufacturer, its officers and employees. PRODUCT DEVELOPMENT Certain of the Company's employees have significant experience in the development, design, engineering, implementation and management of complex software and networking systems. The Company's current development activities are focused on completing development of additional functions, including the next generation of network and transportation management software and protocols necessary to provide applications such as broadcast transmissions, queue management, directed billing, directory services and job ticketing, including integrating such features into the shipping and customer information management facilities. The Company utilizes its technical capabilities to monitor and evaluate developments in computer hardware and software and in relay and telephony equipment and, to the extent possible, to incorporate appropriate advancements or enhancements into the WAM!NET Service in a timely fashion. 22 INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS It is the Company's policy to protect its intellectual property, to seek patent protection for those aspects of its technology that the Company believes may be patentable and to preserve any copyrights or trade secrets (to the extent not disclosed in any patent) that may be applicable to the WAM!NET Service, the WAM!PROOF and WAM!BASE services and their related software. The Company is designing or has designed most of the proprietary software necessary for the management of the WAM!NET Service, including network access device operations and the GUI, CIS, WAM!PROOF and WAM!BASE applications. The Company believes that its proprietary software and trade secrets applicable to the operation of the WAM!NET Service and the WAM!BASE data archiving system may be of equal or greater importance to the Company than patent or copyright protection. The Company is not aware of any claims of infringement of patents or other intellectual property belonging to others. However, the Company has conducted only a limited inquiry regarding the possibility of other infringement. Given the recent acquisition of WAM!NET U.K., with its substantial international presence, the Company will increasingly offer its products and services in foreign countries. However, some of these countries may lack intellectual property protection that is comparable to that afforded by the intellectual property laws of the United States. The Company has entered into confidentiality agreements with certain of its employees, consultants and others to protect the Company's proprietary information and trade secrets. LIABILITY AND INSURANCE The WAM!NET Service uses an assemblage of telecommunications equipment, software, operating protocols and proprietary applications for high speed transmission of large quantities of data among multiple locations. In such operations, it is possible that data files may be lost, altered or distorted. Moreover, the Company's targeted industries' businesses are extremely time sensitive, and delays in delivering data may cause a significant loss to a customer using the network for managed data delivery service. The WAM!NET Service, and future enhancements or adaptations, may contain undetected design faults and software "bugs" that, despite testing by the Company, are discovered only after the system has been installed and used by customers. Such faults or errors could cause delays or require design modifications that could adversely affect the Company's competitive position and results of operations. The Company obtains contractual agreements from its customers limiting the Company's liability for damages resulting from errors in the transportation of data to a maximum of $100 per transmission. Nevertheless, the Company may still be subject to significant claims for data losses in the transportation of data over the WAM!NET Service. In addition to general business liability insurance coverage, the Company presently maintains errors and omissions insurance coverage issued by Chubb Custom Insurance Company in the amount of $2.0 million per occurrence and $5.0 million for all occurrences relating to the transportation of data over the WAM!NET Service. The Company also presently maintains $2.0 million of business interruption insurance coverage against losses from floods, earthquakes and other natural disasters. EMPLOYEES Including its officers, as of March 15, 1999, the Company employed 631 persons. The Company's executive and technical personnel have significant experience in the design, programming, implementation, marketing, sales and support of complex data networks and software programs. The 23 Company considers its employee relations to be good. None of the Company's current employees are subject to a collective bargaining agreement. ITEM 2. PROPERTIES. The Company occupies approximately 45,000 square feet of office space located in a modern facility in an industrial park complex in Bloomington, Minnesota, a suburb of Minneapolis. The building is occupied under a 99 month lease which expires in November 2005. To meet its future space requirements, the Company acquired a facility in Eagan, a suburb of Minneapolis. The Company will initially occupy 160,000 square feet in this facility and will lease the remainder of the space to SGI pursuant to a short-term lease. The Company expects that all Minnesota headquartered employees will be relocated to this facility during the summer of 1999. The Company will also be relocating its Minneapolis NOC in this facility. The Company has also acquired, through the acquisition of 4-Sight, a 9,000 square foot office space in Bournemouth, Dorset, England. SGI leases certain of the space in the Eagan, Minnesota office facility from the Company. The term of the lease with SGI shall commence on March 4, 1999 and end on May 31, 2004. Effective as of June 1, 2001 and on each June 1 thereafter until June 1, 2003, SGI shall have the option to terminate the lease by delivering to the Company at least six (6) months' prior written notice of termination (which notice shall be delivered not sooner than June 1, 2001, providing a termination date of not sooner than six (6) months thereafter). From June 1, 1999 through May 31, 2001, SGI will occupy 326,000 square feet (67.8% of the square footage of the interior common area) and will pay a base rent in the amount of $12.00 per square foot of rentable area per year. With respect to the portion of the premises which SGI continues to occupy under the lease from and after June 1, 2001, the base rent shall be in the amount of $12.60 per square foot of rentable area per year. SGI shall pay as additional rent its proportionate share of all taxes and operating expenses. The proportionate share will be determined by dividing the then existing SGI rentable area of the premises by the total rentable area. The Company's leased properties also include: (i) an approximately 18,000 square foot manufacturing and warehousing facility located in Minneapolis, (ii) an approximately 1,540 square foot office facility located in Minneapolis, where one of the Company's NOCs is located, (iii) an approximately 7,970 square foot facility located in Las Vegas, Nevada where the Company's other NOC is located and which serves as a backup customer service center, (iv) the Company occupies 20,000 square feet of office space in Brussels, Belgium; this facility contains the Company's European NOC and customer service operations, (v) an approximately 1,500 square foot office facility located in Missoula, Montana where the headquarters of FreeMail, Inc., a wholly-owned subsidiary of the Company, is located, (vi) small offices in Toronto, New York, Chicago, and Washington, D.C. for use by the Company's business development managers and account executives stationed in those cities, (vii) an approximately 18,800 square foot office facility located in Minneapolis, which previously served as the Company's headquarters and which the Company intends to sub-lease, (viii) a 16,000 square foot office space located in Bournemouth, Dorset, England under a 100 month lease which expires in September of 2006, and (ix) small offices in Hamburg, Germany, Woburn, Massachusetts, West Des Moines, Iowa, Hague, Holland, Gothenburg, Sweden, Copenhagen, Denmark and Paris, France for WAM!NET U.K.'s sales and marketing personnel stationed in those cities. ITEM 3. LEGAL PROCEEDINGS. 24 The Company is aware that certain holders of warrants issued in connection with bridge loans in 1995 and 1996 have commenced litigation seeking a reduction in the exercise price of these warrants and seeking attorney's fees. Although the warrants provide for downward adjustments under certain circumstances, the Company believes no adjustment is required. Should the warrant holders initiate litigation and should that litigation be successful, the gross proceeds receivable by the Company from exercise of those warrants would be reduced from approximately $8.4 million to $4.9 million. The Company will vigorously defend such litigation. The Company is engaged in certain legal proceedings and claims arising in the ordinary course of its business. The ultimate liabilities, if any, which may result from these or other pending or threatened legal actions against the Company cannot be determined at this time. However, it is the opinion of management that facts known at the present time do not indicate that there is a probability that such litigation will have a material effect on the financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) There is no established public trading market for the Company's outstanding common stock. (b) As of March 15, 1999, there were 74 holders of record of the outstanding common stock of the Company. (c) The Company has paid no cash dividends on its common stock. (d) Not applicable. (e) RECENT SALES OF UNREGISTERED SECURITIES: On March 5, 1998, the Company consummated an offering (the "1998 Offering"), pursuant to which the Company sold 208,530 units (the "1998 Units") consisting of $208,530,000 aggregate principal amount at maturity of the 1998 Notes and 625,590 warrants (the "1998 Warrants") to purchase an aggregate of 1,257,436 shares of Common Stock. Each 1998 Unit consists of $1,000 principal amount at maturity of the 1998 Notes and three 1998 Warrants, each 1998 Warrant entitling the holder thereof to purchase 2.01 shares of Common Stock. The 1998 Units were initially sold to the lead underwriters; Merrill Lynch & Co., Credit Suisse First Boston and First Chicago Capital Markets, Inc., under an exemption from registration requirements of Section 5 of the Securities Act of 1933, as amended (the "Securities Act") pursuant to the provisions of Section 4(2) of the Securities Act. Subsequently, 208,030 of the 1998 Units were sold pursuant to Rule 144A under the Securities Act, and 500 Units were sold pursuant to Regulation S under the Securities Act. On January 13, 1999, the Company issued the 13.25% Subordinated Unsecured Convertible Note due August 28, 2005 (the "1999 MCI WorldCom Convertible Note") pursuant to the Subordinated Unsecured Convertible Note and Warrant Purchase Agreement by and between MCI 25 WorldCom and the Company (the "1999 MCI WorldCom Convertible Note Purchase Agreement") and on January 13 and March 4, 1999, respectively, the Company borrowed $10.0 million and $15.0 million thereunder. The 1999 MCI WorldCom Convertible Note automatically converted into 2,196,317 shares of the Company's Class D Convertible Preferred Stock, par value $.01 per share (the "Class D Preferred Stock"), immediately prior to the closing of the SGI Investment. The Class D Preferred Stock is immediately convertible in the aggregate into approximately 2.9% of the Common Stock (calculated on a fully diluted basis). In connection with the issuance of the 1999 MCI WorldCom Convertible Note, the Company also (i) issued warrants to purchase 150,000 shares of Common Stock at an exercise price of $.01 per share after April 30, 1999 and until April 30, 2004 and (ii) expects to issue warrants to purchase 200,000 shares of Common Stock at an exercise price of $.01 per share from April 30, 1999 until April 30, 2004, (together the "1999 MCI WorldCom Warrants"). The Class D Preferred Stock and the 1999 MCI WorldCom Warrants are subject to certain registration rights. On March 4, 1999, the Company consummated the SGI Investment pursuant to which SGI purchased 5,710,425 shares of the Company's Class B Convertible Preferred Stock, par value $.01 per share (the "Class B Preferred Stock"), and 878,527 shares of the Company's Class C Convertible Preferred Stock, par value $.01 per share (the "Class C Preferred Stock" and together with the Class B Preferred Stock, the "SGI Preferred Stock"). The SGI Preferred Stock is subject to certain registration rights. The holders of the Class B Preferred Stock, voting separately as a class, have the right to designate one member of the Company's Board of Directors. The SGI Preferred Stock is convertible in the aggregate into approximately 8.7% of the Common Stock (calculated on a fully diluted basis); provided that the Class C Preferred Stock may not be converted until the earlier of September 4, 2000 or a public offering of the Common Stock at a minimum specified price. The aggregate consideration received by the Company in the SGI Investment was $75.0 million, of which $35.0 million was paid in cash and $40.0 million was paid by transfer to the Company of a corporate campus office facility located in Eagan, Minnesota. The sale and purchase of the 1999 MCI WorldCom Note and the conversion thereof into the Class D Preferred Stock and the sale and purchase of the Class B Preferred Stock, the Class C Preferred Stock and the 1999 MCI WorldCom Warrants were exempt from the registration requirements of Section 5 of the Securities Act pursuant to the provisions of Section 4(2) of the Securities Act. ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected historical consolidated financial data for the Company and its subsidiaries for each of the years in the four year period ended December 31, 1998. The 4-Sight Acquisition occurred on March 13, 1998 and the operating results of WAM!NET U.K. are included in the Company's operating results from that date through December 31, 1998. The Company's development and expansion activities during the periods presented below significantly affect the period-to-period comparability of the historical data presented for the Company. The financial data should be read in conjunction with the financial statements and related notes thereto of the Company included elsewhere in this Annual Report on Form 10-K. 26
WAM!NET INC. --------------------------------------------- Year Ended December 31, (1) --------------------------------------------- 1995 1996 1997 1998 --------- --------- ---------- --------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues................................. $ 180 $ 279 $ 1,555 $ 17,629 Operating expenses....................... 1,437 7,036 31,037 119,981 Operating income (loss).................. (1,257) (6,757) (29,482) (102,352) Interest income (expense), net........... (20) (839) (4,154) (20,878) Income (loss) before income taxes........ (1,277) (7,596) (33,636) (123,230) Net income (loss)........................ (1,277) (7,596) (33,636) (121,878) OTHER DATA: EBITDA(2)................................ $(1,226) $(6,310) $(26,814) $ (84,684) Depreciation and amortization............ 31 447 2,668 17,668 Capital expenditures..................... 657 4,244 16,599 54,584 Net cash used in operating activities.... (747) (6,218) (23,917) (57,892) Net cash used in investing activities.... (657) (5,244) (15,599) (71,304) Net cash provided by financing activities............................. (2,372) 24,578 25,346 135,194 Ratio of earnings to fixed charges(3).... -- -- -- -- BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents................ $(1,328) $15,444 $ 274 $ 6,272 Total assets............................. 2,075 20,070 29,134 125,459 Total debt(4)............................ 1,900 20,473 54,826 210,238 Shareholders' deficit(5)................. (371) (2,683) (30,671) (109,854)
(1) The Company was organized in September 1994 and commenced operations in March 1995. (2) EBITDA represents earnings (loss) from operations before taking into consideration net interest expense, income tax expense, depreciation expense and amortization expense. The Company has included information concerning EBITDA as it is used by certain investors as a measure of a company's ability to service its debt. EBITDA should not be considered as an alternative to net income or any other measure of performance or liquidity as determined in accordance with generally accepted accounting principles or as an indicator of the Company's overall financial performance. In addition, the measure of EBITDA presented herein by the Company may not be comparable to other similarly titled measures of other companies. (3) The ratio of earnings to fixed charges is calculated by dividing (i) net income (loss) before taxes plus fixed charges by (ii) fixed charges. Fixed charges consist of interest incurred and the portion of rent expense which is deemed representative of interest. Earnings were insufficient to cover fixed charges by $1,242, $6,653, $29,180 and $99,027 for the Company for the years ended December 31, 1995, 1996, 1997 and 1998. (4) Total debt includes long-term debt, redeemable preferred stock, current portion of long-term debt and obligations under capitalized leases. (5) The estimated value of warrants issued to debtholders and of options issued to consultants is reflected as both an asset and an element of paid in capital. 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Revenue. The Company's revenue is derived primarily from WAM!NET Service contracts which usually are annual, automatically renewable service contracts with a minimum monthly fee and additional charges for usage exceeding the monthly minimum. The Company offers the WAM!NET Service at scaled minimum usage fees, ranging from $250 per month to $3,000 per month. The Company begins to earn gross revenue following installation of service at a customer's premises; however, the Company incurs cost of service rebates which offset such gross revenue. Furthermore, free trial periods under the Company's various promotional programs have ranged from 60 days to six months and have been extended to 60% of the Company's customer base. As a result, the Company's generation of net revenue from any customer may lag contract signing by a period of three to nine months, a practice that is not customary in the digital data delivery industry but is a key component in the Company's market penetration strategy. The Company's experience with promotional programs has been favorable to date, with approximately 93% of customers continuing to subscribe to the WAM!NET Service following expiration of the promotional period extended to them. The Company expects the use of promotional programs in the Graphic Arts sector of the media industry to decline with increasing penetration of the market, but the Company will likely use similar promotional programs to introduce the WAM!NET Service to the entertainment and medical imaging industries. The Company also plans to continue to develop new Industry Smart applications to increase the volume of files transferred over the WAM!NET Network. In connection with the SGI Investment, SGI and the Company entered into the Preferred Provider Agreement pursuant to which both parties have developed a list of existing SGI customers in the entertainment industry which the Company believes represents a significant sales revenue opportunity for it over the next three years. The Company and SGI have agreed to jointly develop a marketing, sales and implementation plan to address these accounts, including field resource commitments, compensation to SGI for field activities and professional services, and such other matters applicable to the sale of the WAM!NET Service to such potential customers. In addition, SGI and the Company intend to explore a broader strategic relationship that is intended to enable the Company to obtain the benefit of SGI's presence in the entertainment industry, other selected commercial accounts and the U.S. federal government sector. Revenue is primarily driven by the number of installed customer locations (network access device's), the length of time a customer has been using the service, the number of work flow (trading) partners with whom a customer exchanges data and the size of the files exchanged. Network Communications Fees. Network communications fees include both the costs of the high bandwidth carrier services interconnecting the Company's national infrastructure of NOCs and Distribution Hubs and the costs of local telephone circuits connecting network access devices to the nearest Distribution Hub. Local telephone circuit connections account for approximately 80% of these charges, with significant differences between urban and rural connection costs. National carrier service, provided primarily by MCI WorldCom, accounts for most of the balance of these charges. Network communication fees are generally a fixed monthly cost per circuit. The excess of these fees over revenue represents excess capacity costs which the Company expects will decline with the increasing utilization of the WAM!NET Network. The Company actively seeks to obtain and deploy technologies that will reduce the costs of local telephone circuit connections, such as wireless technologies and remote dial-up capabilities. The Company also intends to use its network management tools to optimize the use of existing and planned network capacity as volume increases and traffic 28 patterns begin to emerge. The Company has implemented new pricing strategies for its services which take into account the significant cost differential between urban and rural local telephone circuit connections. The Company also believes that growing competition among telephony and communications providers may reduce the cost of local telephone circuit connections. Network Operations Expense. Network operations expense represents costs directly associated with developing, maintaining, managing and servicing the global WAM!NET Network. Such costs include direct labor, vendor service fees, point-of-presence charges and research and development charges, which are often incurred in advance of receiving revenue. The Company's currently installed NOCs, which account for the substantial majority of direct labor and network operating costs, are capable of providing for and managing the Company's current and planned North American, European and Asian operations. Costs associated with the development of the WAM!BASE, WAM!PROOF and other network applications related to medical media transport and storage are also contained in network operations expense and are incurred in advance of revenue receipt. The Company expects that network operations costs will increase as the WAM!NET Network expands; however, the cost of network operations as a percentage of revenue is expected to decline. Pursuant to the Preferred Provider Agreement, the Company has agreed to purchase hardware, software and services from SGI over a four year period with a firm commitment to purchase $35 million during the period commencing December 1, 1998 and ending December 31, 2000. The Company has the ability to purchase such products at prices based on SGI's most favored pricing models. The Company believes that the discounted prices, reduced commissions and lower servicing fees for such products will result in lower network operations expenses in the future. Sales and Marketing Expense. The Company's sales and marketing efforts are intended to create global awareness of the WAM!NET Service, communicate its potential for work flow enhancement, demonstrate its reliability and establish strong brand recognition. As a result, the Company aggressively markets the WAM!NET Service through a combination of trade journal advertising, trade show attendance, promotional programs, direct field sales, tele-sales, cooperative sales presentations and active participation in industry-sponsored seminars and publications. The Company expects to continue to incur significant sales and marketing expenses to obtain increased penetration of the global media industry, to generate increased traffic among its existing customers and to market the WAM!NET media transport service to other targeted industries. General and Administrative Expense. The Company's general and administrative expense includes administrative salaries, related overhead and professional service fees. These costs reflect expenditures related to the rapid growth and expansion of the Company's administrative infrastructure necessary to manage its expanding operations, and professional service fees for financing activities, contract negotiations and acquisitions. The Company expects to continue to incur substantial general and administrative expense as the Company deploys the WAM!NET Service internationally; however, the cost of general and administrative expense as a percentage of revenue is expected to decline. Depreciation and Amortization. To facilitate entry into its target markets, the Company furnishes its global customers with all the hardware and software necessary for them to use the WAM!NET Service on a turn-key, pay-by-use basis. As a result, the Company retains ownership of the network access devices it furnishes to customers for their use of the WAM!NET Service. Depreciation and amortization expense includes depreciation of network access devices, Distribution Hubs and equipment located in the NOCs. The Company's network infrastructure is generally organized to use the most expensive equipment in the NOCs, less expensive equipment for Distribution 29 Hubs and the least expensive equipment in the network access devices. The Company anticipates substantial capital investments for additional North American and international Distribution Hubs, WAM!BASE storage facilities to be located in the existing NOCs and network access devices to be located at customer premises. As a result, the Company anticipates that depreciation and amortization expense will continue to increase in future periods as the Company continues to purchase equipment. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997 - - ----------------------------------------------------------------------- Revenue. Revenue for the year ended December 31, 1998 was $8,776,512 compared to $1,627,590 for the year ended December 31, 1997, an increase of $7,148,922, or 439.2%. This increase in revenue was primarily due to increased market penetration of the North American graphic-arts segment by the Company's high end media transport service. Installed network access device media transport services increased from 474 sites for the year ended December 31, 1997 to 1,477 sites for the year ended December 31,1998; an increase of 1,003 sites or 212%. For the years ending December 31, 1997 and December 31, 1998, average monthly gross of the Company's media transport revenue per customer increased from $526 to $761, respectively, an increase of $235 or %44.6. Service rebates for the years ended December 31, 1997 and December 31, 1998 were $150,400, 9.2% of gross revenue, and $1,976,904, 22.5% of gross revenue, respectively; an increase of $1,826,504 or 1,214%. Service rebates are primarily the result of marketing programs that allow customers who sign up for the Company's high end media transport services to participate in a trial period that under certain circumstances can rebate the associated monthly minimum charges for a period of two to six months. During 1998, approximately 60% of newly installed customers participated in a trial period and approximately 93% of those customers have remained on the network after the lapse of their initial trial period. Revenue for software and hardware sales for the year ended December 31, 1997 was $0, compared to $10,829,671 for the year ended December 31, 1998. Software and hardware sales revenue for the year ended December 31, 1998 were primarily derived from continuing media-transport software sales of WAM!NET U.K. following its integration with 4-sight on March 13, 1998. Operating Expenses. Network communications fees for the year ended December 31, 1998 were $18,259,389, compared to $7,363,667 for the year ended December 31, 1997, an increase of $10,895,722, or 148.0%. This increase was due primarily to an increase of 201% in customers purchasing the Company's media transport services. Network communications fees represent the largest direct cost associated with providing the Company's media transport service to customers. Although network communications fees increased 148% from the year ending December 31, 1997 to the year ending December 31, 1998, the average monthly communications fees incurred by the Company to provide media transport services to a single customer declined from $2,421 for the period ending December 31, 1997 to $1,336 for the period ending December 31, 1998; a decline of $1,085 or 44.8%. Network operations expense for the year ended December 31, 1998 was $29,704,742, compared to $7,477,753 for the year ended December 31, 1997, an increase of $22,226,989, or 297.2%. This increase was due to several significant factors relating to the design and implementation of the Company's global media transport infrastructure and the shift from a primary North American operational focus to a global operational focus. The Company expects to incur significant expenses from global network operations; however, as a percentage of global revenue these expenses are expected to decline in future periods. 30 Sales and marketing expense for the year ended December 31, 1998 was $21,997,438, compared to $9,207,486 for the year ended December 31, 1997, an increase of $12,789,952, or 138.9%. This increase is primarily due (i) to the expansion of the North American sales and marketing force and the creation of a European sales and marketing force to increase market penetration, (ii) enhancing product recognition within the existing North American market and (iii) implementing global sales and marketing strategies throughout Europe and Asia. The Company expects to incur significant expenses from its global sales and marketing efforts; however, as a percentage of global revenue these expenses are expected to decline in future periods. General and administrative expense for the year ended December 31, 1998 was $28,815,594, compared to $4,320,128 for the year ended December 31, 1997, an increase of $24,495,466, or 567.0%. The increase in general and administrative expenses during 1998 was primarily the result of large non-cash compensation expenses relating to the vesting of certain option and warrant contracts held by various officers of the Company which totaled $12,528,726. The balance of the increase in general and administrative expenses was due to the increased global support requirements of the Company's expanding operations. The Company expects to continue to incur significant general and administrative expenses; however, as a percentage of global revenue these expenses are expected to decline in future periods. Depreciation and amortization for the year ended December 31, 1998 was $17,667,765, compared to $2,668,177 for the year ended December 31, 1997, an increase of $14,999,588, or 562.2%. This increase is primarily due to the purchasing of network equipment and other support equipment in the amount of $54,584,000 and the increase of $32,557,000 in goodwill that resulted from the acquisition of WAM!NET U.K. Interest expense for the year ended December 31, 1998 was $22,626,008, compared to $4,355,676 for the year ended December 31, 1997, an increase of $18,270,332, or 419.5%. The increase was primarily due to the increase in long- term unsecured debt the Company incurred during 1998 to fund its operations and acquisition, consisting primarily of the Company's 13.25% Senior Discounted Notes due 2005 (the "1998 Notes") in the amount of $138,975,000 and the equipment financing increase of $7,102,000. Interest income for the year ended December 31, 1998 was $1,748,340, compared to $202,035 for the year ended December 31, 1997, an increase of $1,546,305, or 765.4%. The increase in interest income was primarily due to the increase in the Company's average monthly balance of cash and cash equivalents, which was $34,815,203 for the year ended December 31, 1998 over the average monthly balance of $3,105,890 for the year ended December 31, 1997. During 1998 the Company invested a large portion of the cash proceeds from its offering of the 1998 Notes into highly liquid investments with staggered maturities ranging from 30 to 180 days, corresponding with the Company's operational cash requirements. These investments consisted of high-grade (A1/P1) rated commercial paper, certificates of deposits and securities backed by the United States government. The cost of hardware and software sales for the year ended December 31, 1998 was $3,537,413, compared to $0 for the year ended December 31, 1997. These costs are directly related to the software and hardware sales revenue associated with the acquisition of 4-sight and its subsequent integration into WAM!NET U.K. Income Taxes. For the year ended December 31, 1998, the Company experienced net losses of $121,878,317 and paid no income taxes. These losses are available to offset future taxable income 31 through the year 2013 and are subject to the limitations of Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). These limitations may result in expiration of net operating loss carry-forwards before they can be utilized. An income tax benefit of $1,352,000 related to U.K. income tax and V.A.T. benefits was realized by the Company in the year ended December 31, 1998. YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996 - - ----------------------------------------------------------------------- Revenue. Revenue for the year ended December 31, 1997 was $1,627,590 compared to $110,424 for the year ended December 31, 1996, an increase of $1,517,166, or 1,373.9%. This was primarily due to a 1,375.8% increase in the number of subscribers to the WAM!NET Service from approximately 33 installed customer sites on December 31, 1996 to approximately 487 installed customer sites on December 31, 1997. At December 31, 1997, the Company had contracts to install network access devices at 578 customer sites awaiting installation of telephone service. Service rebates for the year ended December 31, 1997 were $150,400, or 9.2% of revenue. Service rebates for the year ended December 31, 1996 were $0. Other service fees revenue for the year ended December 31, 1997 was $77,748, compared to $168,290 for the year ended December 31, 1996, a decrease of $90,542, or 53.8%. Other service fees revenue is primarily derived from minor transactions with currently existing WAM!NET Service customers which includes consulting services and hardware sales. The decrease was primarily due to the expiration of a contractual consulting relationship that the Company had in place with a customer during 1996. OPERATING EXPENSES Network communications fees for the year ended December 31, 1997 were $7,363,667, compared to $816,403 for the year ended December 31, 1996, an increase of $6,547,264, or 802.0%. Network operations expense for the year ended December 31, 1997 was $7,477,753, compared to $1,108,807 for the year ended December 31, 1996, an increase of $6,368,946, or 574.4%. These increases were primarily due to the 1,375.8% increase in customers that subscribed to the WAM!NET Service during 1997. Sales and marketing expense for the year ended December 31, 1997 was $9,207,486, compared to $2,052,860 for the year ended December 31, 1996, an increase of $7,154,626, or 348.5%. This increase was primarily due to costs associated with building the Company's direct sales force and marketing department as well as higher outside advertising agency and trade show expenditures. General and administrative expense for the year ended December 31, 1997 was $4,320,128, compared to $2,609,879 for the year ended December 31, 1996, an increase of $1,710,249, or 65.5%. General and administrative expense increased during 1997 as operational support requirements intensified due to the rapid expansion of the Company's services and corporate facilities. Depreciation and amortization for the year ended December 31, 1997 was $2,668,177, compared to $447,233 for the year ended December 31, 1996, an increase of $2,220,944, or 496.6%. As a percentage of total revenue, depreciation and amortization was 171.6% in 1997 compared to 160.5% in 1996. This increase is primarily due to an increase in the installed communications backbone equipment and equipment installed on customers' premises as a result of the increase in the number of customers. 32 Interest expense for the year ended December 31, 1997 was $4,355,676, compared to $903,443 for the year ended December 31, 1996, an increase of $3,452,233, or 382.1%. The increase was primarily due to the Company's financing of its 1997 operations through the issuance of various debt instruments, including $24 million of long term subordinated notes to MCI WorldCom and $18.8 million in borrowings from the Company's revolving credit facility (the "Revolving Credit Facility") and $9.6 million of equipment financing. Income Taxes. For the year ended December 31, 1997, the Company experienced net losses of $33,636,000 and paid no income taxes. These losses are available to offset future taxable income through the year 2012 and are subject to the limitations of Section 382 of the Code. These limitations may result in expiration of net operating loss carryforwards before they can be utilized. LIQUIDITY AND CAPITAL RESOURCES The Company continues to incur substantial operating losses as a direct result of its continuing efforts to expand its media network throughout North America, Europe and Asia. Net losses since the Company's inception have resulted in an accumulated deficit balance of approximately $164.4 million. Though these losses are not unexpected, the Company's ability to continue to fund these operating losses and its ability to continue to purchase and install the required WAM!NET Network hardware to provide the WAM!NET Service to its increasing global customer base depends on its ability to obtain additional sources of funds for working capital during 1999. Sources of such funds which the Company will continue to seek include but are not limited to long- and short-term secured equipment financing from vendors, financial institutions and banks, long-term unsecured senior debt, long-term property mortgages on its existing facilities and the issuance of the Company's equity securities. Though the Company believes it can secure additional funding by one or more of the above sources, there can be no assurances that such funding can be obtained. From inception through December 31, 1998, the Company has derived substantially all of its operating capital from the issuance of short- and long-term debt and equity instruments. At December 31, 1998, the Company had a total of approximately $209.2 million in long-term debt, of which approximately $5.3 million becomes payable during 1999. The Company's available operating capital as of March 10, 1999, as evidenced by cash, cash equivalent investments and commitments from financial institutions for additional equipment financing, totaled approximately $50 million. If additional sources of funding cannot be obtained during the course of the Company's fiscal year ending December 31, 1999, due to a constraint of available operating capital, the Company will be required to significantly slow its global market penetration, network growth and product development. In addition, should the Company be unable to generate cash to fund its operations and network growth during 1999, management expects that it would implement plans to reduce cash expenditures. The reduction of cash expenditures would have a material adverse effect on the Company's global revenue and network expansion plans. The Company believes that the most evident and clearly measurable impact resulting from these reductions would be a significant decrease of installed network customers for the year ending December 31, 1999. A material reduction in the base of installed customers would slow the growth of the Company's recurring revenue stream, which is dependent upon customer utilization of the Company's excess network capacity. Reductions in network utilization would directly impact the Company's network revenue and could ultimately defer overall profitability of the Company's service and products. Another possible impact of the above outlined expenditure reductions, would be potentially material delays in software product development, the impact of which could further erode customer retention and network utilization. 33 The Company's source of liquidity since inception has primarily come from the issuance of debt and equity instruments and from credit facilities and other borrowings. The Company has received approximately $171.7 million net cash proceeds from the issuance of long- and short-term debt and collateralized equipment financing. An additional $61.9 million of net cash proceeds has been received from the sale of equity securities. The Company has utilized these proceeds by investing $71.9 million into its globally expanding WAM!NET Network and investing $20.3 million to acquire WAM!NET U.K.. Since inception, the Company has also expended $112.8 million to fund its globally expanding operating activities. To date, the Company has not generated cash from operating activities and remains dependent upon its ability to generate operating capital for its global expansion from credit facilities or other borrowings, or the issuance of additional short- and long-term debt and equity instruments. During September of 1997, the Company established the Revolving Credit Facility, the proceeds of which were used by the Company to fund its operations and purchase WAM!NET Network equipment. The maximum amount that can be borrowed under the Revolving Credit Facility is $25.0 million. The Revolving Credit Facility was established under an agreement with The First National Bank of Chicago. In addition, MCI WorldCom guaranteed the Company's obligations under the Revolving Credit Facility. At December 31, 1998, the Company had $24.0 million borrowed under the Revolving Credit Facility. Interest and principal on the Revolving Credit Facility become payable in September 1999. Borrowings by the Company under the Revolving Credit Facility require the prior consent of MCI WorldCom. The Company expects to repay all amounts outstanding under the Revolving Credit Facility prior to September 1999. In December 1997, the Company acquired the outstanding common stock of FreeMail, Inc. ("FreeMail"). In connection with the acquisition, the Company issued to FreeMail 125,000 shares of Common Stock, with a fair value of approximately $488,000, as consideration. The Company is also obligated to pay the former shareholders of FreeMail as additional contingent consideration, on a quarterly basis, amounts equal to five percent of the gross collected revenue derived by the Company from certain identified FreeMail products; however, the total amounts of the quarterly payments shall not exceed $3,012,500. As of December 31, 1998, the Company did not record a liability relating to the FreeMail revenue because no revenue had been collected. On March 5, 1998, the Company consummated the offering of the 1998 Units, each consisting of $1,000 principal amount of 1998 Notes and three 1998 Warrants resulting in net proceeds to the Company of approximately $120.6 million. Cash interest does not accrue nor is payable on the 1998 Notes prior to March 1, 2002. Thereafter, cash interest on the 1998 Notes will accrue at a rate of 13.25% per annum (calculated on a semi-annual bond equivalent basis) and will be payable semi-annually in arrears on March 1 and September 1 of each year, commencing September 1, 2002. The Company used the proceeds of the 1998 Offering as follows: (i) $20.0 million to pay the cash portion of the 4-Sight Acquisition, (ii) approximately $25.0 million to repay borrowings under the Revolving Credit Facility and (iii) the balance to further the Company's business development and expansion strategy, to enhance the WAM!NET Service infrastructure and develop additional value-added features and services, to optimize marketing, sales and customer support and service capabilities and for working capital and other general corporate purposes. On January 13, 1999, the Company issued the 1999 MCI WorldCom Convertible Note to MCI WorldCom in a principal amount up to $25.0 million due August 28, 1999. On January 13 and March 4, 1999, respectively, the Company borrowed $10.0 million and $15.0 million thereunder. The 1999 MCI WorldCom Convertible Note automatically converted into 2,196,317 shares of the Company's 34 Class D Preferred Stock immediately prior to the closing of the SGI Investment. The Class D Preferred Stock is immediately convertible in the aggregate into approximately 2.9% of the Common Stock (calculated on a fully diluted basis). In connection with the issuance of the 1999 MCI WorldCom Convertible Note, the Company also issued the 1999 MCI WorldCom Warrants to MCI WorldCom. The Class D Preferred Stock and the 1999 MCI WorldCom Warrants are subject to certain registration rights. On March 4, 1999, the Company consummated the SGI Investment pursuant to which SGI purchased (a) 5,710,425 shares of the Class B Preferred Stock and (b) 878,527 shares of the Class C Preferred Stock, which Class B Preferred Stock and Class C Preferred Stock are convertible in the aggregate into approximately 8.7% of the Common Stock (calculated on a fully diluted basis); provided that the Class C Preferred Stock may not be converted until the earlier of September 4, 2000 or a public offering of the Common Stock at a minimum specified price. The Class B Preferred Stock and the Class C Preferred Stock are subject to certain registration rights. In consideration for the SGI Preferred Stock, the Company has received $75.0 million, of which $35.0 million was paid in cash and $40.0 million was paid by way of transfer to the Company of SGI's corporate campus office facility located in Eagan, Minnesota. See "Properties." In connection with the SGI Investment, SGI and the Company entered into the Preferred Provider Agreement pursuant to which both parties have developed a list of existing SGI customers in the entertainment industry which the Company believes represents a significant sales revenue opportunity for it over the next three years. The Company and SGI have agreed to jointly develop a marketing, sales and implementation plan to address these accounts, including field resource commitments, compensation to SGI for field activities and professional services, and such other matters applicable to the sale of the WAM!NET Service to such potential customers. In addition, SGI and the Company intend to explore a broader strategic relationship that the Company believes will enable it to obtain the benefit of SGI's presence in the entertainment industry and other selected commercial accounts. Pursuant to the Preferred Provider Agreement, the Company has agreed to purchase hardware, software and services from SGI over a four year period with a firm commitment to purchase $35 million during the period commencing January 1, 1999 and ending December 31, 2000. The Company has the ability to purchase such products at prices based on SGI's most favored pricing models. The Company believes that the discounted prices, reduced commissions and lower servicing fees for such products will result in lower network operations expenses in the future. Pursuant to an agreement with MCI WorldCom, if the Company is not publicly held by 2001, under certain circumstances and subject to certain conditions, the Company may be required to buy and MCI WorldCom may be required to sell, the 1996 MCI WorldCom Securities (as defined herein) pursuant to a tender offer and pricing methodology described herein under "Certain Relationships and Related Transactions." If the Company fails to timely pay the purchase price for the 1996 MCI WorldCom Securities, MCI WorldCom will be relieved of all obligations to sell such securities to the Company, the Company will have no right to cause MCI WorldCom to sell such securities and the Company will not be obligated to pay the purchase price for such securities. See "Certain Relationships and Related Transactions." During the year ended December 31, 1998, the Company received less than 5% of its total revenue from sales and operations in Asian countries. As a result, the Company had limited exposure 35 to the particular risks attendant to doing business in Asia and did not experience any material adverse effects from the Asian economic crisis; however, the Company presently intends to expand its operations in that region. The Company is currently unable to determine the effect, if any, that recent economic downturns in Asia, particularly Japan, will have on the Company's future business, operating results or liquidity, although the Company intends to exercise prudence and sound business judgment prior to making any future investments in Asia. During the year ended December 31, 1998, the Company's revenue originating outside the U.S. was 53% of total revenues. Currently, the Company does not employ currency hedging strategies to reduce the risks associated with the fluctuation of foreign currency exchange rates. Currently, all of the Company's contracts are denominated in U.S. dollars except for those contracts entered into by WAM!NET U.K. which denominates all of its contracts in pounds sterling other than its German sales contracts which are denominated in Euro, the single European currency. The Company is unable to determine what effect, if any, the adoption and use of the Euro will have in the future on the Company's business, operating results, liquidity and financial condition. See "Quantitative and Qualitative Disclosures About Market Risk." YEAR 2000 COMPLIANCE Many computer systems and applications experience problems handling dates beyond the year 1999 and will need to be modified before the year 2000 in order to remain functional. As for many other companies, the year 2000 computer issue poses a potential risk for the Company as a user of information systems in the operation of its business, as a provider of managed, high speed, digital data delivery network service and the related computer technology and software to customers, and as a customer of other organizations whose operations may be affected by year 2000 compliance issues. The Company has completed an assessment of its core business information systems, many of which are provided by outside suppliers, for year 2000 readiness and is extending that review to include a wide variety of other information systems and related business processes used in its operations. The Company plans to have changes to critical systems implemented by the third quarter of 1999 to allow time for testing. Most of the Company's mission- critical applications are believed to be year 2000 compliant. Although its assessment is ongoing, the Company currently believes that resolving these matters will not have a material adverse effect on its financial condition or results of operations. The Company is also assessing the possible effect on its operations of the year 2000 readiness of critical suppliers of products and services. These include not just suppliers of components but also the Company's outsourcing partners in manufacturing as well as suppliers of basic utilities. The Company's reliance on its key suppliers, and therefore on the proper functioning of their information systems and software, is increasing, and there can be no assurance that another company's failure to address year 2000 issues could not have a material adverse effect on the Company. Telecommunication and data traffic between customers who are connected to the WAM!NET Network are routed over high-bandwidth leased telephone circuits. In addition, most customers are connected to the WAM!NET Network through facilities of the incumbent local telephone company. Consequently, customers may not be able to complete telephone calls or data transmissions if the computer, telecommunications or other systems of the service provider over which the call or transmission is routed is not year 2000 compliant. To the extent that any disruption caused by the 36 failure of a service provider to make its systems year 2000 compliant is substantial, it could have a material adverse effect on the Company's results of operations. The Company has not incurred material historical costs for year 2000 awareness, inventory assessment, analysis, conversion, testing or contingency planning. Certain of the costs associated with the Company's internal Year 2000 compliance effort (exclusive of any potential costs related to any customer or other claim) cannot effectively be isolated from other operating expenses, because investing in new systems is both an ordinary cost of doing business and a means to year 2000 compliance. The Company's current estimates indicate the total costs to insure year 2000 compliance will not be material. The Company believes that it is unlikely to experience a material adverse impact on its financial condition or results of operations due to year 2000 compliance issues. However, since the assessment process is ongoing, year 2000 complications are not fully known, and potential liability issues are not clear, the full potential impact of the year 2000 on the Company is not known at this time. The information regarding year 2000 issues provided in this Form 10-K is based on the Company's current assessment of ongoing activities and is subject to change as the Company continuously monitors these activities. The Company is currently evaluating the need for contingency plans associated with potential year 2000 problems. The Year 2000 disclosure set forth above is a "year 2000 statement" as defined in the Year 2000 Information and Readiness Disclosure Act of 1998 (the "Year 2000 Act") and, to the extent the disclosure related to year 2000 processing of the Company or to products or services offered by the Company, is also a "year 2000 readiness disclosure" as defined in the Year 2000 Act. In a recent Securities and Exchange Commission release regarding Year 2000 disclosure, the Securities and Exchange Commission stated that public companies must disclose the most reasonably likely worst case Year 2000 scenario. Although it is not possible to assess the likelihood of any of the following events, each must be included in a consideration of worst case scenarios: widespread failure of electrical, gas, and similar supplies serving the Company; widespread disruption of the services provided by common communications carriers; similar disruption to the means and modes of transportation for the Company and its employees, contractors, suppliers, and customers; significant disruption to the Company's ability to gain access to, and remain working in, office buildings and other facilities; the failure of substantial numbers of the Company's critical computer hardware and software systems, including both internal business systems and systems controlling operational facilities such as electrical generation, transmission, and distribution systems; and the failure of outside entities' systems, including systems related to banking and finance. Among other things, the Company could face substantial claims by customers or loss of revenue due to service interruptions, inability to fulfill contractual obligations or to bill customers accurately and on a timely basis, and increased expenses associated with litigation, stabilization of operations following critical system failures and the execution of contingency plans. The Company could also experience an inability by customers and others to pay, on a timely basis or at all, obligations owed to the Company. Under these circumstances, the adverse effects on the Company would be material, although not quantifiable at this time. Further, the cumulative effect of these failures could have a substantial adverse effect on the economy, domestically and internationally. The adverse effect on the Company from a domestic or global recession or depression also could be material, although not quantifiable at this time. The Company will continue to monitor business conditions to assess and quantify material adverse effects, if any, that may result from the Year 2000 problem. 37 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Foreign Currency Exchange Rates. The Company's revenue originating outside the U.S. for the year ending December 31, 1998 was 53% of total revenues. As the Company expands its operations into countries outside of the U.S., its results of operations and the value of its assets will be affected by the currency exchange rates between the U.S. dollar and the functional currency of countries in which the Company has assets. The Company may also sell products and services in certain countries in the local functional currency or in a currency other than the U.S. dollar. In addition, the Company may acquire interests in companies that operate in countries where the removal or conversion of currency is restricted. The Company cannot be certain that countries that do not have such restrictions regarding removal or conversion of currency at the time it establishes operations in those countries will not subsequently impose them, especially in situations where there is a deterioration in a country's balance of payments or where the local currency is being heavily converted into other currencies. The Company does not currently hedge against such fluctuations. Gains and losses from such fluctuations have not been material to the Company's consolidated results of operations. A 10% shift in such local currencies against the U.S. dollar as of December 31, 1998 would not have had a material effect on the Company's pretax earnings over the next fiscal year ending December 1, 1999. Currently, all of the Company's contracts are denominated in U.S. dollars except for those contracts entered into by WAM!NET U.K. which denominates all of its contracts in pounds sterling other than its German sales contracts which are denominated in Euro, the single European currency. The Company's international business is subject to risks typical of an international business, including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, the Company's future results could be materially and adversely impacted by changes in these or other factors. Interest Rates. The Company invests its cash in a variety of financial instruments, including bank time deposits and fixed rate obligations of governmental entities and agencies. These investments are denominated in U.S. dollars. Cash balances in foreign currencies overseas are operating balances and are invested in short-term time deposits of the local operating bank. Investments in fixed rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates. Due in part to these factors, the future investment income of the Company may fall short of expectations due to changes in interest rates, or the Company may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates. The Company's investment securities are held for purposes other than trading. The Company is exposed to market risk from changes in the interest rates on certain of its outstanding debt. The outstanding loan balance under the Revolving Credit Facility bears interest at a variable rate based on prevailing short-term interest rates in the U.S. and Europe. Based on the average outstanding bank debt for the year ended December 31, 1998, a 100 basis point change in interest rates would not change interest expense by a material amount. For fixed rate debt such as the Company's 1998 Notes, interest rate changes effect the fair market value thereof, but do not impact earnings or cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. An index to the financial statements and the required financial statement schedules is set forth in Item 14. 38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 39 PART II ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Company's executive officers and directors are:
NAME Age Position with the Company - - ------------------------------ --- ------------------------------------------------------------------------ Edward J. Driscoll III........ 38 Chairman of the Board, Chief Executive Officer, President and Treasurer Allen L. Witters.............. 40 Chief Technology Officer Bradley E. Sparks............. 52 Executive Vice President and Chief Financial Officer James R. Clancy............... 37 Senior Vice President of Corporate Development David T. Ottinger............. 50 Senior Vice President of Operations and Engineering John R. Kauffman.............. 41 Vice President of Global Marketing David A. Townend.............. 40 Managing Director, WAM!NET U.K. Raymond E. Kang............... 39 Vice President of Product Marketing and Development Gary C. Jader................. 47 Vice President and General Manager of Medical Services Carrie J. Maurer.............. 32 Vice President, Global Operations Mark Marlow................... 34 Director of Finance Curtis G. Gray................ 50 Director K. William Grothe, Jr......... 43 Director Robert L. Hoffman............. 70 Director Susan Mayer................... 49 Director
The Board of Directors of the Company consists of five directors, two of whom (currently Messrs. Driscoll, Hoffman are elected by the holders of the Common Stock, three of whom (currently Ms. Mayer and Messrs. Grothe and Gray) are elected by the holders of the Company's Class A Preferred Stock. Edward J. Driscoll III is a founder and principal shareholder of the Company and has served as its Chairman of the Board, Chief Executive Officer, President and Treasurer since inception. Previously, Mr. Driscoll was the principal shareholder, Chief Executive Officer, and a director of Cybernet Systems, Inc. ("Cybernet"). Mr. Driscoll founded Cybernet in 1991 to provide network integration services to the pre-press industry. Prior to founding Cybernet, he held various marketing and management positions, most recently as general manager of Roland Marketing, Inc., a regional wholesale produce marketing and packaging company. He holds a Bachelor of Arts degree in economics from St. John's University, Minnesota and a Master of Business Administration degree from the University of St. Thomas. 40 Allen L. Witters is a founder and principal shareholder of the Company and has served as its Chief Technology Officer since inception. He is principally responsible for designing and implementing the WAM!NET Service architecture. Mr. Witters has been engaged in technical consulting to the computer industry since 1975, including serving as a technical consultant from 1992 to 1996 for Cybernet, and has broad experience in the invention, design, engineering and implementation of software, networks, and network management systems. From 1987 to 1992, Mr. Witters was the Chief Executive Officer and a principal shareholder of Datamap, Inc., a company that was engaged in the development and sale of GIS (geographic information systems) software. In 1994, Mr. Witters filed a petition for bankruptcy under Chapter 7 of the United States Bankruptcy Code. Bradley E. Sparks joined the Company in September 1998 and currently serves as Executive Vice President and Chief Financial Officer. Mr. Sparks has more than 20 years of experience in corporate planning, management and finance. For the past three and a half years, Mr. Sparks served as Chief Financial Officer for the wireless telecommunications firm, Omnipoint Corporation, and was instrumental in its 1996 initial public offering. At Omnipoint, Mr. Sparks focused on arranging more than $3 billion of financing with a variety of financial instruments including public equity, high yield debt, private placements and bank financing. Prior to that time, Mr. Sparks was employed by MCI Communications Corporation (now MCI WorldCom), where, from 1993 to 1995 he held the position of Vice President and Controller and was responsible for internal controls and, from 1988 to 1993, he served as Vice President and Treasurer, responsible for the company's financing and capital structure. Prior to that, Mr. Sparks served twelve years in corporate planning and finance for Ryder System, Inc. James R. Clancy joined the Company in April 1996 first serving as Chief Marketing and Sales Officer until February 1999 and currently serves as Senior Vice President of Corporate Development. From 1994 to 1996, Mr. Clancy was employed by the Ceridian Corporation as Director of Marketing and Strategic Planning. From 1988 to 1994, Mr. Clancy was employed by General Mills, Inc., in various marketing and marketing management capacities. Prior to General Mills, Mr. Clancy was a founder/President and General Manager of two Macintosh supply manufacturing companies, respectively. Mr. Clancy holds a Bachelor of Arts degree in economics from Moorhead State University and a Master of Business Administration degree from the Wharton School of Business. David T. Ottinger joined the Company in November 1997 as Senior Vice President of Operations and Engineering. From April 1997 to November 1997, he served as President and Chief Executive Officer of NetAccess, Inc., a network security company. From April 1996 to April 1997, he served as Vice President, Professional Services of Parallel Technologies, Inc. From October 1993 to April 1996, he served as Vice President, Network Services of COMDISCO Network Services. John R. Kauffman joined the Company in January 1998 first serving as Vice President of Strategic Marketing and Communications until February 1999 and currently serves as Vice President of Global Marketing. From 1991 to December 1997, Mr. Kauffman was President of Kauffman Marketing Group, Inc., where from November 1995 to November 1997, he provided strategic positioning and outside marketing services to the Company. Prior to 1991, Mr. Kauffman was President of Kauffman Stewart Advertising. David A. Townend joined the Company in March 1998 upon the consummation of the 4-Sight Acquisition, and currently serves as Managing Director of WAM!NET U.K. Mr. Townend founded 4-Sight and has been its Managing Director for more than the past five years. 41 Raymond E. Kang joined the Company in March 1998 and currently serves as Vice President of Product Marketing and Development. Prior to joining the Company, Mr. Kang was employed by MCI Telecommunications for fourteen years in various management and sales positions, most recently as Director of Broadband and Multimedia Marketing. Carrie J. Maurer joined the Company in November 1996 as the Director, Installation & Customer Service and is currently the Vice President, Global Operations. Prior to joining the Company, Ms. Maurer was employed from 1994 to 1996 by COMDISCO Network Services as the Director of Implementation Services. From 1984 to 1994, she was employed in various customer service management positions with Minnesota Mutual. Gary C. Jader joined the Company in February 1998 and currently serves as Vice President and General Manager of Medical Services. Prior to joining the Company, Mr. Jader was employed from 1996 to February 1998 by NeuroMotion Inc., a medical device company, as Vice President, Marketing and Sales. From 1991 to 1996, Mr. Jader was employed by 3M Corporation as Marketing Supervisor. Mark Marlow joined the Company in May 1995 and currently serves as its Director of Finance. From 1994 until May 1995, he was employed as an accounting senior by the public accounting firm of Brunberg, Thorsen and Associates, Minneapolis, Minnesota. From 1991 to 1994, he was employed as an assistant controller at Miller, Johnson and Kuehn, Incorporated, a licensed securities brokerage firm. Mr. Marlow is a certified public accountant, holds a Bachelor of Science degree in accounting from the University of Minnesota and also holds a general securities license. Curtis G. Gray has served as a Director of the Company since 1996 and since November 1991 has served as MCI WorldCom's Vice President of Enhanced Data Networks. Mr. Gray has more than 20 years of experience in the data communication arena, including through his own consulting firm and engineering and management positions with GTE Laboratories and Blue Cross and Blue Shield Association. Mr. Gray received his Masters and Bachelors degrees in Engineering from the University of Wisconsin. K. William Grothe, Jr. has served as a Director of the Company since 1996 and has served as Vice President of Corporate Development of MCI WorldCom since January 1996. From July 1990 to January 1996, Mr. Grothe was Senior Vice President and Chief Financial Officer of MobileCom, a national paging company headquartered in Jackson Mississippi. Mr. Grothe is a Certified Public Accountant and received a Bachelor of Science degree in Accounting from the University of Illinois. Robert L. Hoffman has served as a Director of the Company since October 1995. Mr. Hoffman is a founder and shareholder of the law firm of Larkin, Hoffman, Daly & Lindgren, Ltd, where he has practiced for more than the past five years, and has served as its Chairman of the Board and President. He has been extensively involved in land use and development for the past 35 years as both an attorney and in various elective and appointive offices, including 14 years as a member of the Bloomington City Council, seven years as a member of the Metropolitan Council, a land use law instructor at Hamline University School of Law, a member of the Urban Land Institute Development Policies and Regulations Council and a member of the Land Use Advisory Group for the Public Technologies Institute of Washington, D.C. Susan Mayer has served as a Director of the Company since October 1998 and currently serves as an MCI WorldCom Senior Vice President. Ms. Mayer is also President, MCI WorldCom Fund, a 42 venture fund created to invest in technologies, products and services that complement MCI WorldCom's strategic direction. Previously, she was Senior Vice President, ventures and alliances of MCI Communications Corporation, responsible for strategy development, and mergers and acquisitions, and President and Chief Operating Officer of SkyMCI, an MCI company that marketed a full range of data, information and training services. Ms. Mayer joined MCI WorldCom in July 1993. Previously, Ms. Mayer was with NHP, Inc., where she was responsible for the development and implementation of acquisition and financing strategies. She also previously served as general manager of COMSAT Video Enterprises, and vice president of corporate development for COMSAT Corp., and was manager of strategy consulting for The Boston Consulting Group. ITEM 11. EXECUTIVE COMPENSATION. The following table summarizes all compensation paid to the Company's Chief Executive Officer and to each of the Company's executive officers other than the Chief Executive Officer (collectively, the "Named Executive Officers") whose salaries and bonus exceed $100,000 for services rendered in all capacities to the Company for each of the years ended December 31, 1997 and 1998. SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS ------------------------ ----------------------------------- NAME AND PRINCIPAL POSITION YEAR SALARY BONUS RESTRICTED SECURITIES ALL OTHER --------------------------- ---- ------ ----- ---------- ---------- --------- STOCK UNDERLYING COMPEN- ----- ---------- ------- AWARD(S) OPTIONS (#) SATION -------- ----------- ------ Edward J. Driscoll III.......................... 1998 $ 195,000 $ -- (1) $-- 750,000 -- Chairman of the Board, Chief Executive 1997 150,000 75,000 -- -- -- Officer, President and Treasurer 1996 101,250 67,500 -- 2,000,000 -- Allen L. Witters................................ 1998 195,000 -- (1) -- 750,000 -- Chief Technology Officer 1997 150,000 75,000 -- -- -- 1996 101,250 67,500 -- 2,000,000 -- James R. Clancy................................. 1998 170,000 -- (1) -- -- -- Senior Vice President of Corporate 1997 135,000 67,500 -- 500,000 -- Development 1996 55,580 40,000 -- 375,000 -- David T. Ottinger............................... 1998 120,000 10,000 (1) -- -- --
43 1997 16,000 (2) 5,000 Senior Vice President of Operations and 1997 -- -- -- 150,000 -- Engineering 1996 -- -- -- -- -- John R. Kauffman................................. 1998 150,000 100,000 (1) -- 350,000 -- Vice President of Global Marketing 1997 -- -- -- 225,000 -- 1996 -- -- -- -- --
_____________________ (1) The total bonuses for the year ended December 31, 1998 for Messrs. Driscoll, Witters, Clancy, Ottinger and Kauffman have yet to be determined by the Board of Directors. (2) David T. Ottinger's employment with the Company began in November of 1997. The following table sets forth certain information for the fiscal year ended December 31, 1998 with respect to stock options granted to the Named Executive Officers. For the fiscal year ended December 31, 1998, no stock appreciation rights were granted to the Named Executive Officers and no stock options were granted to the Named Executive Officers at an option price below market value on the date of the grant, as determined by the Board of Directors of the Company. The potential realized dollar value of an option grant is the product of (a) the difference between (1) the product of the per-share market price at the time of the grant (which the Company determined was $3.90 on January 1, 1998 and $8.00 on July 1, 1998, which was the price per share attributable to the Company's common stock in the immediately preceding arm's length transaction with an independent third party) and the sum of 1 plus the adjusted stock price appreciation rate and (2) the per-share exercise price of the option, and (b) the number of securities underlying the grant at fiscal year-end. STOCK OPTION GRANTS IN 1998
POTENTIAL REALIZED VALUE AT ASSUMED ANNUAL RATES OF STOCK APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM --------------------------------------------------- ----------- % OF TOTAL ---------- NUMBER OF OPTIONS EXERCISE --------- ------- -------- SECURITIES GRANTED TO OR BASE ---------- ---------- ------- NAME UNDERLYING OPTIONS EMPLOYEES PRICE EXPIRATION - - ----- ------------------ --------- ----- ---------- GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% 10% ----------- -------------- ------ ---- ---------- ---------- Edward J. Driscoll III....... 750,000 16% $8.00 7/01/08 $1,657,689 $3,663,060 Allen L. Witters............. 750,000 16% 8.00 7/01/08 1,657,689 3,663,060 James R. Clancy.............. -- -- -- -- -- -- David T. Ottinger............ -- -- -- -- -- -- John R. Kauffman............. 350,000 8% 3.90 1/01/06 377,124 833,346
The following table sets forth certain information with respect to the value of unexercised stock options held by the Named Executive Officers as of December 31, 1998. 44 FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY UNEXERCISED OPTIONS AT FY-END (#) OPTIONS AT FY-END --------------------------------- --------------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - - ----------------------------- ----------- ------------- ----------- ------------- Edward J. Driscoll III....... 2,750,000 -- $14,080,000 $ -- Allen L. Witters............. 2,750,000 -- 14,080,000 -- James R. Clancy.............. 583,333 291,667 4,106,664 2,053,336 David T. Ottinger............ 50,000 100,000 205,000 410,000 John R. Kauffman............. 410,000 165,000 2,342,500 676,500
DIRECTORS' COMPENSATION The Company does not grant compensation to its directors other than as set forth below. Each director is reimbursed for reasonable out-of-pocket expenses incurred in connection with attendance at meetings of the Board of Directors. In January 1996 Mr. Robert L. Hoffman was granted 75,000 stock options at an exercise price of $0.96 per share, which options expire November 30, 2005, all of which were vested and exercisable of December 31, 1998. Other than Mr. Hoffman, no director received compensation in any form for services rendered as a director from the Company during fiscal year 1998. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of the Company's Compensation Committee is or has been an officer or employee of the Company or any of its subsidiaries. During 1998, no executive officer of the Company served on the Compensation Committee or as a director of another entity in which any such entity's executive officers served on the Company's Compensation Committee or Board of Directors. K. William Grothe, Jr. a member of the Compensation Committee, is an officer of MCI WorldCom, a significant shareholder of the Company. See "Certain Relationships and Related Transactions." EMPLOYMENT AGREEMENTS Effective October 1, 1996, the Company entered into an employment agreement with Edward J. Driscoll III which provides for: (i) an initial term of 27 months and subsequent one-year renewals, (ii) an initial annual salary of $150,000, subject to periodic review and adjustment, (iii) an additional bonus or other compensation as may be established from time to time by the Board of Directors based upon achievement of performance goals derived from the Company's annual business plan, which sets forth revenue and profit measures of the Company, (iv) use of a company automobile, (v) non-competition by Mr. Driscoll with the business of the Company during the term of the agreement and for a period of two years after its termination of employment and non-solicitation of the employees or customers of the Company during such period, (vi) confidentiality with respect to all information and trade secrets of the Company during the term of employment and for a period of two years after the termination of employment and (vii) automatic assignment to the Company of all ideas, inventions, discoveries and improvements of Mr. Driscoll relating to the business of the Company. In the event that the agreement is terminated by the Company without cause, Mr. Driscoll is entitled to receive 45 severance, payable in cash, in an amount equal to the sum of (a) the greater of (x) his then base salary for two years or (y) the amounts reasonably estimated to be due under the agreement for the two year period following termination and (b) one half of the bonus to which he would have been entitled to in the year of termination. In connection with this employment agreement, the Company and Mr. Driscoll also entered into a stock option agreement which provides for the grant of an option, expiring December 31, 2007, to purchase up to 2,000,000 shares of Common Stock at a price of $0.96 per share. These options vested on January 2, 1998. Effective October 1, 1996, the Company entered into an employment agreement and a stock option agreement with Allen L. Witters on terms substantially the same as those of the employment agreements with Mr. Driscoll. The stock options issued to Mr. Witters also vested on January 2, 1998. Effective April 16, 1996, the Company entered into an employment agreement with James R. Clancy which provides for: (i) an annual salary of $85,000, (ii) a bonus of up to $40,000, conditioned on achievement of certain operational objectives, such operational objectives to include (a) the proposal of a written plan and timeline for the development and implementation of a comprehensive marketing plan for the Company's products during 1996 and 1997 and (b) such other additional objectives that Mr. Clancy was to determine and achieve during the first twelve month period following the effective date of his employment agreement, (iii) confidentiality with respect to all information and trade secrets of the Company during the term of employment and for a period of one year after the termination of employment and (iv) non-competition by Mr. Clancy with the business of the Company for a period of 18 months after the termination of employment, and non-solicitation of the customers of the Company during such period. The employment agreement is for an unspecified term on an "at will" basis. In connection with this employment agreement, the Company and Mr. Clancy have entered into incentive stock option agreements with respect to the grant of options to purchase 875,000 shares of Common Stock at a purchase price of $0.96 per share. 750,000 options vest in annual increments ending May 1, 2000 and the remaining 125,000 vested on January 2, 1998. Effective September 8, 1998, the Company entered into an employment agreement with Bradley E. Sparks which provides for (i) an initial monthly base salary of $16,667; (ii) an annual bonus of up to 30% of his base salary conditioned upon achievement of specific performance objectives; (iii) an automobile allowance; (iv) non-competition with the Company during the term of the agreement and for a period of one year after his termination of employment and non-solicitation of Company employees during such period; (vi) confidentiality with respect to all Company confidential information and trade secrets of the Company during the terms of his employment and for a period of one year after the termination of employment; and (vii) automatic assignment to the Company of all ideas, inventions, discoveries and improvements of Mr. Sparks relating to the business of the Company. In the event that the agreement is terminated by the Company without cause, Mr. Sparks is entitled to receive as severance pay an amount equal to six months of his base pay as of the date of his termination, less customary payroll deductions, to be paid in monthly installments. In connection with the agreement, the Company and Mr. Sparks also entered into stock option agreements which provides for the grant of options to purchase 400,000 shares of Common Stock at a price of $8.00 per share and 200,000 shares of Common Stock at a price of $12.00 per share. Effective January 1, 1998, the Company entered into an employment agreement with John R. Kauffman which provides for (i) an initial monthly base salary of $12,500; (ii) non-competition with the Company during the term of the agreement and for a period of one year after his termination of employment and non- solicitation of Company employees during such period; (iii) confidentiality with respect to all Company confidential information and trade secrets of the Company during the terms of his employment and for a period of one year after the termination of employment; and (iv) automatic assignment to the company 46 of all ideas, inventions, discoveries and improvements of Mr. Kauffman relating to the business of the Company. In connection with the agreement, the Company and Mr. Kauffman also entered into a stock option agreement which provided for the grant of options to purchase 350,000 shares of Common Stock at a price of $3.90 per share. Mr. Kauffman's employment agreement was subsequently amended to provide Mr. Kauffman with quarterly bonuses of $25,000 per calendar quarter. Prior to joining the Company as an employee, Mr. Kauffman served the Company as a consultant and in connection therewith was granted options to purchase 225,000 shares of Common Stock at a purchase price of $.96 per share. Effective November 3, 1997, the Company entered into an employment agreement with David T. Ottinger which provides for (i) an initial monthly base salary of $8,333; (ii) a initial bonus of up to $20,000 based upon achievement of specific operational objectives; (iii) non-competition with the Company during the term of the agreement and for a period of one year after his termination of employment and non-solicitation of Company employees during such period; (iii) confidentiality with respect to all Company confidential information and trade secrets of the Company during the terms of his employment and for a period of one year after the termination of employment; and (iv) automatic assignment to the company of all ideas, inventions, discoveries and improvements of Mr. Ottinger relating to the business of the Company. In connection with the agreement, the Company and Mr. Ottinger also entered into a stock option agreement which provided him with options to purchase 150,000 shares of Common Stock at a price of $3.90 per share. The Company has implemented a quarterly bonus compensation program pursuant to which directors and key managers can receive up to 30%, and other employees up to 20%, of their annual salary in cash bonuses based upon individual achievement and the achievement of corporate goals and objectives. The Company's other officers and significant technical employees are employed pursuant to annually renewing employment agreements which continue until terminated by either the Company or the employee. Each such agreement contains confidentiality and assignment of invention provisions in favor of the Company. The Company currently has no retirement, pension, or insurance plans for its officers. The Company may in the future adopt such plans and may also adopt a compensation plan substantially increasing officers' salaries and other compensation based upon the performance of the Company. STOCK OPTION PLANS The Company's Stock Option Plan (the "1994 Plan") was adopted in September 1994 by the Company's Board of Directors and was approved by the shareholders of the Company in October 1994. The 1994 Plan has been subsequently amended, most recently on April 24, 1998 (as so amended and restated, the "Amended 1994 Plan") in conjunction with the adoption of the Company's 1998 Combined Stock Option Plan (the "1998 Plan" and, collectively, the "Plans"), to reflect the Company's name change to WAM!NET Inc., to incorporate prior amendments to the 1994 Plan, to provide that no new options be granted under the Amended 1994 Plan and to limit the number of shares of Common Stock available for issuance under the Amended 1994 Plan to 7,000,000. Each Plan is currently administered by the Company's Board of Directors. The 1998 Plan and the amendments to the 1994 Plan adopted by the Board of Directors on April 24, 1998 received shareholder approval on May 30, 1998. The Amended 1994 Plan and the 1998 Plan provide for the granting of Common Stock options which qualify as "incentive stock options" under Section 422 of the Code, as well as the granting of 47 "nonqualified options." Under each Plan, the Board or, if the Board appoints one, a "Stock Option Committee" has complete discretion to select the optionees and to establish the terms and conditions of each option, subject in all cases to the applicable provisions of the Plan and the Code. Options granted under a Plan are not transferable and are subject to various other conditions and restrictions. Participation in the Amended 1994 Plan is limited to officers and regular full-time executive, administrative, professional, production and technical employees of the Company or a subsidiary of the Company, who are salaried employees of the Company or such subsidiary, and consultants or the Company or a subsidiary. Non-employee directors of the Company may be granted nonqualified options. Participation in the 1998 Plan is limited to employees of the Company or a subsidiary of the Company and to non-employee directors and non-employee consultants. The 1998 Plan provides that without amending the 1998 Plan, the Stock Option Committee may grant options to eligible employees who are foreign nationals on such terms and conditions different from those specified in the 1998 Plan as may in the judgment of the committee be necessary or desirable to foster and promote achievement of the purposes of the 1998 Plan, and, in furtherance of such purposes, the Committee may make such addenda, modifications, amendments, procedures and subplans as may be necessary or advisable to comply with provisions of laws in other countries in which the Company operates or has employees. An addendum to the 1998 Plan extends the benefits of stock options granted under the 1998 Plan to employees of the Company and its subsidiaries who are residents of the United Kingdom. A total of 7,000,000 shares of Common Stock have been reserved for issuance under the Amended 1994 Plan and a total of 25,000,000 shares of Common Stock have been reserved for issuance under the 1998 Plan, subject to adjustment for stock splits or recapitalizations. Shares subject to canceled, unexercised, lapsed or terminated options are available for subsequently granted options under a Plan. The exercise price of all incentive stock options granted under a Plan must be at least equal to the fair market value of the shares on the date of grant, and the maximum term of each option is ten years. Under the terms of each Plan, the aggregate fair market value of the Common Stock (determined at the date of the option grant) for which any employee may first exercise incentive stock options in any calendar year may not exceed $100,000. Upon exercise of an option, payment of the exercise price in cash is required, or, at the discretion of the Company, by the delivery of Common Stock of the Company already owned by the optionee or a promissory note for all or a portion of the exercise price of the shares so purchased or a combination of the foregoing. There is no express limitation on the duration of a Plan; provided, however, that incentive stock options may not be granted after the date that is ten years from the date of shareholder approval of a Plan. The Board may terminate either Plan and, subject to certain limitations, may amend either Plan at any time. As of the date hereof, there were 6,913,251 options issued and outstanding under the Amended 1994 Plan, consisting of incentive stock options to employees to purchase a total of 5,847,417 shares of Common Stock at exercise prices ranging from $0.45 to $8.00 per share, and non-qualified stock options to purchase a total of 1,065,834 shares of Common Stock at exercise prices ranging from $0.96 to 12.00 per share. As of the date hereof, there were 2,191,250 options issued and outstanding under the 1998 Plan, consisting of incentive options to employees and consultants to purchase a total of 552,000 shares of Common Stock at an exercise price of $8.00 per share and non-qualified options to purchase a total of 1,639,250 shares of Common Stock at exercise prices ranging from $8.00 to $12.00 per share. In addition to options granted under the Plans, the Company has also granted certain officers and consultants options to purchase a total of 5,125,000 shares of Common Stock at exercise prices ranging from $0.45 to $3.90 per share. 48 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth the beneficial ownership of the Company's Common Stock as of March 15, 1999 for (i) each of the Company's executive officers and directors, (ii) all executive officers and directors as a group and (iii) each person known by the Company to own beneficially 5% or more of the Company's outstanding shares of Common Stock. All persons indicated have sole voting and dispositive power over such shares unless otherwise indicated. Except as indicated below, none of the persons in the table have beneficial ownership in any class of equity securities of any parent or subsidiary of the Company.
NAME OF BENEFICIAL OWNER Number of Shares Percentage of Total ------------------------ Beneficially Owned (1) SHARES OUTSTANDING (1) ---------------------- ---------------------- Edward J. Driscoll III/(2)/......................................... 4,750,000 (3) 39.4% Allen L. Witters/(2)/............................................... 4,750,000 (3) 39.4 James R. Clancy/(2)/................................................ 645,833 (4) 6.5 Mark Marlow/(2)/.................................................... 81,666 (5) 0.9 John R. Kauffman/(2)/............................................... 485,000 (6) 5.0 David T. Ottinger/(2)/.............................................. 50,000 (7) 0.5 Gary C. Jader/(2)/.................................................. 50,000 (7) 0.5 Raymond E. Kang/(2)/................................................ 83,333 (8) 0.9 Carrie J. Maurer/(2)/............................................... 65,000 (9) 0.7 Bradley E. Sparks/(2)/.............................................. -- -- David A. Townend/(10)/.............................................. 1,317,300 14.2 Robert L. Hoffman................................................... 75,000 (11) 0.8 K. William Grothe, Jr./(12)/........................................ -- (13) -- Susan Mayer/(12)/................................................... -- (14) -- Curtis G. Gray/(12)/................................................ -- (15) -- MCI WorldCom, Inc./(12)/............................................ 36,794,680 (16) 79.8 Silicon Graphics, Inc............................................... 5,710,425 (17) 38.0 George L. Frisch.................................................... 625,000 (18) 6.5 James L. Ecker...................................................... 922,520 (19) 9.0 All executive officers and directors as a group (15 persons)........ 12.403,132 (3)(4)(5)(6)((7) 75.7 (8)(9)(10)(11)
________________________ (1) Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission, and includes general voting power and/or investment power with respect to securities. Shares of Common Stock subject to options or warrants currently exercisable or exercisable within 60 days are deemed outstanding for purposes of computing the beneficial ownership percentage of the person holding such options but are not deemed outstanding for purposes of computing the percentage of any other person. 49 (2) Address: 6100 W. 110th Street, Minneapolis, Minnesota 55438. (3) Includes 2,750,000 shares issuable upon exercise of stock options currently exercisable. (4) Includes 583,333 shares issuable upon exercise of stock options currently exercisable and 62,500 shares issuable upon exercise of stock options exercisable within 60 days. (5) Includes 81,666 shares issuable upon exercise of stock options currently exercisable. (6) Includes 455,000 shares issuable upon exercise of stock options currently exercisable and 30,000 shares issuable upon exercise of stock options exercisable within 60 days. (7) Includes 50,000 shares issuable upon exercise of stock options currently exercisable. (8) Includes 83,333 shares issuable upon exercise of stock options currently exercisable. (9) Includes 65,000 shares issuable upon exercise of stock options currently exercisable. (10) Address: 2 Poole Road, Bournemouth, Dorset, BH25QY England. (11) Issuable upon exercise of stock options currently exercisable. Address: Larkin, Hoffman, Daly & Lindgren, Ltd., 1500 Northwest Financial Center, 7900 Xerxes Avenue South, Bloomington, MN 55431. (12) Address: 515 East Amite, Suite 400, Jackson, MS 39201. (13) Mr. Grothe is the beneficial owner of 53,333 shares of Common Stock of MCI WorldCom, representing fewer than 1% of the total shares outstanding, which total includes 43,833 shares issuable upon exercise of stock options exercisable within 60 days. (14) Ms. Mayer is the beneficial owner of 25,122 shares of Common Stock of MCI WorldCom, representing fewer than 1% of the total shares outstanding, which total includes 4,970 shares issuable upon exercise of stock options exercisable within 60 days. (15) Mr. Gray is the beneficial owner of 98,000 shares of Common Stock of MCI WorldCom, representing fewer than 1% of the total shares outstanding, which total includes 58,000 shares issuable upon exercise of stock options exercisable within 60 days. (16) Includes 29,333,670 shares issuable upon exercise of warrants currently exercisable and 200,000 shares issuable upon the exercise of warrants exercisable within 60 days, 5,064,868 shares issuable upon conversion of a convertible subordinated note in the principal amount of $5 million and 2,196,317 shares of Class D Convertible Preferred Stock. MCI WorldCom also owns 115,206 shares of Class A Preferred Stock. (17) Includes 5,710,425 shares of Class B Convertible Preferred Stock which are immediately convertible. Silicon Graphics, Inc. also owns 878,527 shares of Class C Convertible Preferred Stock. Address: 2011 N. Shoreline Blvd., Mountain View, CA 94043-1389. (18) Includes 150,000 shares issuable upon exercise of warrants currently exercisable, 200,000 shares issuable upon exercise of stock options currently exercisable and 25,000 shares issuable upon exercise of stock options exercisable within 60 days. Address: 5030 Woodlawn Blvd., Minneapolis, MN 55417. (19) Includes 131,580 shares issuable upon exercise of a convertible subordinated debenture, 416,665 shares issuable upon exercise of currently exercisable warrants and 50,000 shares owned by the Ecker Family Limited Partnership, of which he is a partner. Address: 5061 Interlachen Bluff, Edina, MN 55436. 50 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. MCI WorldCom is a principal shareholder of the Company. As a result of the consummation of the SGI Investment, MCI WorldCom will have the right to elect the largest whole number that is less than the majority of all of the members of the Board of Directors of the Company. In September 1996, the Company issued to MCI WorldCom the 1996 MCI WorldCom Convertible Note. Interest on the 1996 MCI WorldCom Convertible Note accrues at an annual rate of 10%, payable semi- annually, commencing with the first payment on March 30, 1997. At any time prior to September 30, 1999, MCI WorldCom may convert the principal amount of the 1996 MCI WorldCom Convertible Note into shares of Common Stock at a conversion price of $1.00 per share, subject to adjustment in the event of stock splits, reorganizations or recapitalizations. Payment of principal and interest on the 1996 MCI WorldCom Convertible Note is subordinated to existing and future obligations of the Company for money borrowed from bank, trust, insurance or other financial institutions. The shares of Common Stock underlying the 1996 MCI WorldCom Convertible Note are subject to certain registration rights. In November 1996, the Company and MCI WorldCom entered into a Preferred Stock, Subordinated Note and Warrant Purchase Agreement (the "1996 MCI WorldCom Agreement"). Pursuant to the 1996 MCI WorldCom Agreement, the Company issued 100,000 shares of its Class A Preferred Stock, par value $10.00 per share, to MCI WorldCom for an aggregate purchase price of $1.0 million. In connection with the SGI Investment, MCI WorldCom exchanged its shares of Class A Preferred Stock for 115,206 shares of a new Series of Class A Preferred Stock, par value $10.00 per share (the "Class A Preferred Stock") with terms substantially the same as the original Class A Preferred Stock except with respect to matters related to the Tender Valuation (as discussed below) and the right to elect directors. Except for voting with respect to the election of directors, holders of shares of Class A Preferred Stock are entitled to one vote for each share held of record, voting together with the holders of Common Stock as a single class, on all matters submitted to a vote of shareholders. Following the SGI Investment, holders of Class A Preferred Stock, voting separately as a class, will be entitled to elect one member less than a majority of all directors. Pursuant to the 1996 MCI WorldCom Agreement, the Company also issued to MCI WorldCom a $28.5 million Subordinated Note due December 31, 2003 (the "1996 MCI WorldCom Subordinated Note"), of which $20.4 million aggregate principal amount was outstanding as of December 31, 1998. The MCI WorldCom Subordinated Note accrues interest at an annual rate of 7%, payable semi-annually, commencing March 31, 1997. Payment of principal and interest on the 1996 MCI WorldCom Subordinated Note is subordinated to existing and future obligations of the Company for money borrowed from bank, trust, insurance or other financial institutions. In February 1998 MCI WorldCom agreed to defer all cash payments of principal (or premium on) or interest on, or dividend, distribution, redemption or other payment in respect of the 1996 MCI WorldCom Convertible Note, the Class A Preferred Stock owned by MCI WorldCom and the 1996 MCI WorldCom Subordinated Note until a date that is 180 days following the Stated Maturity of the 1998 Notes (the "Deferral Date"). The agreement also provides that the payment of the principal of and interest on the 1996 MCI WorldCom Convertible Note and the 1996 MCI WorldCom Subordinated Note may be accelerated only in the event of the acceleration of the payment of the principal amount of the 1998 Notes following an Event of Default with respect to the 1998 Notes. The agreement grants MCI WorldCom an option to convert (a) interest otherwise due on the 1996 MCI WorldCom Convertible Note and deferred pursuant to MCI WorldCom's agreement, and (b) the interest accrued on the outstanding principal amount of the 1996 MCI WorldCom Subordinated Note 51 from December 31, 2003 through the date such amount is paid pursuant to MCI WorldCom's agreement into shares of Common Stock at the per share price on the date of such conversion. Pursuant to the 1996 MCI WorldCom Agreement, the Company also issued to MCI WorldCom warrants to purchase, on or before December 31, 2000, up to 20,787,500 shares of the Company's Common Stock at an initial exercise price of $0.96 per share, subject to adjustment in the event of stock splits, reorganizations or recapitalizations (the "1996 MCI WorldCom Warrants"). The exercise price increased to $0.98 per share on March 31, 1997, and thereafter will automatically increase by the amount of $0.02 per share on the last day of each calendar quarter, subject to certain abatement provisions. The exercise price is currently $1.09 per share. The 1996 MCI WorldCom Warrants are subject to certain registration rights. The 1996 MCI WorldCom Agreement (as amended) provides that if the Company is not publicly held by the year 2001 its managers and Board of Directors will obtain an independent valuation by a nationally recognized investment bank of the fair market value per share of the Company's Common Stock, without any premium allocated for any controlling interest (the "Tender Valuation"). Upon receipt of the Tender Valuation, MCI WorldCom may, but is not required to, tender (the "First Tender") to purchase all outstanding shares of Common Stock and all outstanding options, warrants, convertible securities and other rights to purchase shares of Common Stock (collectively, "Company Common Securities") for at least the per share amount of the Tender Valuation. If the owners of a majority of the then outstanding shares of the Company's Common Stock (excluding shares held by MCI WorldCom or its affiliates) reject the First Tender, MCI WorldCom will have 60 days following such rejection to again tender (the "Second Tender") to purchase the same securities. During such 60-day period, the Company will use its good faith efforts to determine what offer price would be acceptable to the owners of such shares and will communicate such information to MCI WorldCom. Subject to certain conditions, MCI WorldCom will sell and the Company will purchase the 1996 MCI WorldCom Warrants, any shares acquired upon exercise of the 1996 MCI WorldCom Warrants and any shares acquired upon the conversion of the 1996 MCI WorldCom Convertible Note (collectively, the "1996 MCI WorldCom Securities") if (i) MCI WorldCom fails to make the First Tender within 90 days after receipt of the Tender Valuation; (ii) owners of a majority of the then outstanding shares of Common Stock (excluding shares held by MCI WorldCom or its affiliates) reject the First Tender and 1996 MCI WorldCom makes no Second Tender; or (iii) owners of a majority of the then outstanding shares of Common Stock (excluding shares held by MCI WorldCom or its affiliates) reject the Second Tender. The Company's purchase price for the 1996 MCI WorldCom Securities will be as follows: (a) If MCI WorldCom fails to make the First Tender, an amount equal to the Tender Valuation (or the spread between the Tender Valuation and the exercise price in the case of warrants). (b) If the First Tender is rejected by the Company's shareholders and MCI WorldCom does not make the Second Tender, an amount equal to the purchase price offered by MCI WorldCom in the First Tender (or the spread between the offer price and the exercise price in the case of warrants). (c) If the Second Tender is rejected by the Company's shareholders, an amount equal to the purchase price offered by MCI WorldCom in the Second Tender (or the spread between the offer price and the exercise price in the case of warrants). 52 The Company will have nine months in which to pay the purchase price for the 1996 MCI WorldCom Securities. From the time the obligation of the Company to purchase the 1996 MCI WorldCom Securities arises until the expiration of such nine-month period, Edward J. Driscoll III and Allen L. Witters will jointly hold a limited proxy with regard to all of the 1996 MCI WorldCom Securities. If the Company fails to timely pay the purchase price for the 1996 MCI WorldCom Securities, MCI WorldCom will be relieved of all obligations to sell such securities to the Company, the Company will have no right to cause MCI WorldCom to sell such securities and the Company will not be obligated to pay the purchase price for such securities. The parties have agreed to waive their respective obligations thereunder if the Company determines to become, and thereafter becomes, a publicly-held company. In December 1996, MCI WorldCom, Edward J. Driscoll III and Allen L. Witters executed a Right of Refusal Agreement which provides: (i) for a restriction on transfer by Mr. Driscoll and Mr. Witters of the shares of Common Stock of the Company held by them as of the date thereof (the "Subject Shares") and (ii) that in the event Mr. Driscoll or Mr. Witters desires to sell his Subject Shares, then he shall offer to the other a right of first refusal and, in the event the other does not elect to purchase such Subject Shares, he shall offer to MCI WorldCom a right of second refusal. In September 1997, the Company entered into the Revolving Credit Facility. The maximum amount that can be borrowed under the Revolving Credit Facility is $25.0 million. MCI WorldCom has guaranteed the payment of all amounts owed under the Revolving Credit Facility, and, accordingly, the Company must obtain MCI WorldCom's consent prior to obtaining any advances under the Revolving Credit Facility. At December 31, 1998, the amount outstanding under the Revolving Credit Agreement was $24,000,000. In consideration of MCI WorldCom's guaranty, the Company granted to MCI WorldCom 8,396,170 Class A warrants and 14,204,835 Class B warrants to purchase shares of Common Stock at an initial exercise price of $3.90 per share, subject to adjustment in the event of stock splits, reorganizations or recapitalizations. The Class A warrants may be exercised at any time on or before December 31, 2000. The Class B warrants begin to vest after September 1999 depending upon the outstanding balance under the Revolving Credit Facility at certain times and whether certain qualified repayments are made thereunder. If the Company repays all obligations under the Revolving Credit Facility prior to September 1999 with certain qualified repayments, no Class B warrants will vest. The Company intends to repay all obligations thereunder prior to the September 1999 vesting date of the Class B warrants. The Class A warrants and Class B warrants are subject to certain registration rights. MCI WorldCom has also guaranteed the performance of the Company's obligations under a Service Provision Agreement, dated July 18, 1997, between the Company and Time. The Company has entered into service arrangements with MCI WorldCom, including an Application for Data Services pursuant to which MCI WorldCom provides the Company with interexchange telecommunications service, frame relay service and ATM service, and co-location agreements pursuant to which the Company leases space for its Distribution Hubs. The Company believes that these arrangements are on terms that are similar to those that could be obtained from an independent third party on an arm's-length basis. Pursuant to the Company's agreements with MCI WorldCom, the Company has guaranteed monthly usage levels of data communications with MCI WorldCom totaling in aggregate approximately $4.1 million, $2.8 million and $1.1 53 million for the years ended December 31, 1999, 2000 and 2001, respectively. In the event these agreements are terminated prior to their expiration date, the Company will be liable to MCI WorldCom for termination contingencies totaling in aggregate approximately $4.4 million, $2.6 million and $1.1 million for the years ended December 31, 1998, 1999 and 2000, respectively. The Company's data communications expense under telecommunication contracts with MCI WorldCom was approximately $342,573, $5.5 million and $11.8 million for the years ended December 31, 1996, 1997 and 1998, respectively. In addition, in connection with the issuance of the 1999 MCI WorldCom Convertible Note, the Company has agreed to make available to MCI WorldCom certain technology developed by the Company to be integrated with MCI WorldCom's infrastructure and product/service suites on terms mutually acceptable to each of the Company and MCI WorldCom, provided that such technology is provided on such terms and conditions that are at least as favorable, when viewed in their entirety, as the Company provides (or may in the future have provided) to any other person or entity not affiliated with MCI WorldCom. On January 13, 1999, the Company issued the 1999 MCI WorldCom Convertible Note to MCI WorldCom in a principal amount up to $25.0 million due August 28, 1999. On January 13 and March 4, 1999, respectively, the Company borrowed $10.0 million and $15.0 million thereunder. The 1999 MCI WorldCom Convertible Note automatically converted into 2,196,317 shares of the Company's Class D Preferred Stock immediately prior to the closing of the SGI Investment. The Class D Preferred Stock is immediately convertible in the aggregate into approximately 2.9% of the Common Stock (calculated on a fully diluted basis). In connection with the issuance of the 1999 MCI WorldCom Convertible Note, the Company also issued the 1999 MCI WorldCom Warrants to MCI WorldCom. The Class D Preferred Stock and the 1999 MCI WorldCom Warrants are subject to certain registration rights. On March 4, 1999, the Company consummated the SGI Investment pursuant to which SGI purchased (a) 5,710,425 shares of the Class B Preferred Stock and (b) 878,527 shares of the Class C Preferred Stock, which Class B Preferred Stock and Class C Preferred Stock are convertible in the aggregate into approximately 8.7% of the Common Stock (calculated on a fully diluted basis); provided that the Class C Preferred Stock may not be converted until the earlier of September 4, 2000 or a public offering of the Common Stock at a minimum specified price. The Class B Preferred Stock and the Class C Preferred Stock are subject to certain registration rights. SGI, as the holder of Class B Preferred Stock has the exclusive right, voting separately as a class, to elect one member to the Company's Board of Directors. In consideration for the SGI Preferred Stock, the Company has received $75.0 million, of which $35.0 million was paid in cash and $40.0 million was paid by way of transfer to the Company of SGI's corporate campus office facility located in Eagan, Minnesota. See "Properties." In connection with the SGI Investment, SGI and the Company entered into the Preferred Provider Agreement, pursuant to which the Company has developed a list of existing SGI customers in the entertainment industry which the Company believes represents a significant sales revenue opportunity for it over the next three years. The Company and SGI have agreed to jointly develop a marketing, sales and implementation plan to address these accounts, including field resource commitments, compensation to SGI for field activities and professional services, and such other matters applicable to the sale of the WAM!NET Service to such potential customers. In addition, SGI and the Company intend to explore a broader strategic relationship that the Company believes will enable it to obtain the benefit of SGI's presence in the entertainment industry and other selected commercial accounts. 54 Pursuant to the Preferred Provider Agreement, the Company has agreed to purchase hardware, software and services from SGI over a four year period with a firm commitment to purchase $35 million during the period commencing December 1, 1998 and ending December 31, 2000. The Company has the ability to purchase such products at prices based on SGI's most favored pricing models. The Company believes that the discounted prices, reduced commissions and lower servicing fees for such products will result in lower network operations expenses in the future. Immediately prior to the issuance of the SGI Preferred Stock, MCI WorldCom (a) converted the 1999 MCI WorldCom Convertible Note into 2,196,317 shares of Class D Preferred Stock which are immediately convertible into approximately 2.9% of the Common Stock calculated on a fully diluted basis, and (b) exchanged 100,000 shares (100%) of the Company's Class A Preferred Stock, par value $10.00 per share (which had entitled MCI WorldCom to elect a majority of the members of the Company's Board of Directors), into 115,206 shares (100%) of 1999 Class A Preferred Stock, par value $10.00 per share (the "1999 Class A Preferred Stock") (which now entitles MCI WorldCom to elect the largest whole number that is less than a majority of all of the members of the Company's Board of Directors). Concurrently with the closing of the SGI Investment, SGI, MCI WorldCom and the Company entered into a Stockholder's Agreement, dated as of March 4, 1999 (the "1999 Stockholders Agreement") pursuant to which SGI and MCI WorldCom have each agreed to provide the other party with certain tag-along rights with respect to the transfer of any shares of the SGI Stock or the Class D Preferred Stock. In addition, the parties agreed that the terms of future material agreements between the Company and MCI WorldCom must be approved by a majority of the disinterested directors of the Company. Edward J. Driscoll, Jr., purchased 250,000 shares of Common Stock at the Company's inception in 1994. As consideration for such shares, Mr. Driscoll paid the Company $500 and agreed to provide certain consulting services to the Company. In January 1998, Mr. Driscoll was granted an option to purchase up to 200,000 shares of the Company's Common Stock at a price of $3.90 per share as partial consideration for his agreement to provide certain services to the Company. Mr. Driscoll is a shareholder of Larkin, Hoffmann, Daly & Lindgren, Ltd., which provides certain legal services to the Company. Mr. Driscoll is the father of Edward J. Driscoll III, the Company's Chairman of the Board, President and Chief Executive Officer. George H. Frisch, who provides certain legal services to the Company, purchased 250,000 shares of Common Stock at the Company's inception in 1994. As consideration for such shares, Mr. Frisch paid the Company $500 and agreed to provide certain legal services to the Company. In November 1995, Mr. Frisch was granted warrants to purchase an additional 150,000 shares of the Company's Common Stock at the price of $0.60 per share as partial consideration for his agreement to provide additional legal services to the Company. In addition, Mr. Frisch was granted, in July 1997, an option to purchase up to 100,000 shares of the Company's Common Stock at a price of $0.96 per share and Mr. Frisch was granted, in January 1998, an option to purchase up to 200,000 shares of the Company's Common Stock at a price of $3.90 per share, in each case as partial consideration for his agreement to provide additional legal services to the Company. The Company's marketing services were performed by Kauffman Marketing Group, Inc. from November 1995 to December 1997. The former President of Kauffman Marketing Group, Inc., John Kauffman, joined the Company as Vice President of Strategic Marketing and Communications in December 1997. During the years ended December 31, 1995, 1996 and 1997, the Company incurred 55 marketing expenses of approximately $0.0, $0.3 million and $1.6 million, respectively, to such firm for marketing services. In addition, Mr. Kauffman was granted, in July 1997, an option to purchase up to 225,000 shares of Common Stock at a price of $0.96 per share and Mr. Kauffman was granted, in January 1998, an option to purchase up to 350,000 shares of Common Stock at a price of $3.90 per share. In consideration for David Townend's sale of 31,680,000 ordinary shares of 4-Sight Limited to the Company and its subsidiaries in connection with the 4- Sight Acquisition, Mr. Townend received $7,991,094 and 1,317,300 shares of Common Stock. In addition, Mr. Townend is entitled to receive 48.95% of the 750,000 shares of Common Stock which comprises the deferred consideration for the purchase of 4-Sight Limited, which shares are conditioned upon the achievement of certain revenue goals by the Company following the 4-Sight Acquisition. 56 PART III ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K-. (a) Financial Statements. See index immediately following signature page. (b) Reports on Form 8-K No Current Reports on Form 8-K were filed during the quarter ended December 31, 1998. (c) Exhibits 2.1 (1) Agreement for the Sale and Purchase of the entire issued share capital of WAM!NET U.K. Limited dated February 11, 1998, among the Company, WAM!NET (UK) Limited and the Selling Shareholders listed therein. 2.2 (1) Agreement and Plan of Reorganization dated December 17, 1997 by and among NetCo Communications Corporation, NetCo Acquiring Corporation, FreeMail, Inc. and the shareholders listed therein. 3.1 (1) Amended and Restated Articles of Incorporation of the Company. 3.2 (1) By-Laws of the Company. 4.1 (1) Indenture dated as of March 5, 1998, between the Company, as Issuer, and First Trust National Association, as Trustee. 4.2a (1) Certificate for the Rule 144A Original Notes ($200,000,000). 4.2b (1) Certificate for the Rule 144A Original Notes ($8,030,000). 4.3 (1) Certificate for the Regulation S Original Notes. 4.4 (1) Certificate for the Rule 144A Warrants. 4.5 (1) Certificate for the Regulation S Warrants. 4.6a (1) Rule 144A Unit Certificate. (200,000 Units) 4.6b (1) Rule 144A Unit Certificate. (8,030 Units) 57 4.7 (1) Certificate for the Regulation S Units. 4.8 (1) Form of Certificate for the Exchange Notes (incorporated herein by reference and included in Exhibit 4.1 to the Company's Registration Statement on Form S-4 filed with Securities and Exchange Commission on May 28, 1998). 4.9 (1) Common Stock Certificate. 4.10 (1) Registration Rights Agreement, dated March 5, 1998, among the Company and Merrill Lynch Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. 4.11 (1) Common Stock Registration Rights Agreement, dated as of March 5, 1998, among the Company, WorldCom Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. 4.12 (1) Warrant Agreement, dated as of March 5, 1998, by and between the Company and First Trust National Association, as Warrant Agent, to purchase common stock of the Company. 4.13 Certificate Representing 100,000 Shares of Class A Preferred Stock of the Company issued to WorldCom Inc. on December 16, 1996 (Incorporated herein by reference to exhibit 10.5 of the Company's Registration Statement on Form S-4 (File No. 333-53841) filed with the Securities and Exchange Commission on May 28, 1998). 4.14 Warrants to purchase 4,157,500 Shares of Common Stock of the Company exercisable on or before December 31, 2000, issued to WorldCom Inc. on December 16, 1996 (Incorporated herein by reference to exhibit 10.6 of the Company's Registration Statement on Form S-4 (File No. 333-53841) filed with the Securities and Exchange Commission on May 28, 1998). 4.15 Certificate for 13.25% Subordinated Unsecured Convertible Note due August 28, 2005 ($25,000,000 Note) issued to MCI WorldCom, Inc. on January 13, 1999. 4.16 Certificate for 1,679,234 Class A Warrants and 2,840,967 Class B Warrants to purchase Common Stock of the Company, issued to WorldCom Inc. on September 26, 1997 (Incorporated herein by reference to exhibit 10.9 of the Company's Registration Statement on Form S-4 (File No. 333-53841) filed with the Securities and Exchange Commission on May 28, 1998). 4.17 Subordinate Unsecured Convertible Note and Warrant Purchase Agreement between the Company and MCI WorldCom, Inc. dated January 13, 1999. 58 4.18 Preferred Stock Purchase Agreement by and between the Company and Silicon Graphics, Inc. dated as of March 3, 1999. 4.19 Certificate for 150,000 Warrants to purchase shares of Common Stock for the purchase price of $.01 per share dated January 13, 1999. 4.20 Certificate of Designation of Rights and Preferences of Class A Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999, as corrected and filed with the Secretary of State of this State of Minnesota on March 5, 1999. 4.21 Certificate of Designation of Rights and Preferences of Class B Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999. 4.22 Certificate of Designation of Rights and Preferences of Class C Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999. 4.23 Certificate of Designation of Rights and Preferences of Class D Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999. 4.24 Certificate representing 115,206 shares of Class A Preferred Stock of the Company issued to MCI WorldCom. Inc. on March 4, 1999. 4.25 Certificate representing 5,710,425 shares of Class B Convertible Preferred Stock of the Company issued to Silicon Graphics, Inc. on March 4, 1999. 4.26 Certificate representing 878,527 shares of Class C Convertible Preferred Stock of the Company issued to Silicon Graphics, Inc. on March 4, 1999. 4.27 Certificate representing 2,196,317 shares of Class D Convertible Preferred Stock of the Company issued to MCI WorldCom. Inc. on March 4, 1999. 4.28 Stockholders Agreement by and among the Company, Silicon Graphics, Inc. and MCI WorldCom, Inc. dated as of March 4, 1999. 4.29 Class A Preferred Stock Exchange Agreement by and between the Company and MCI WorldCom, Inc. dated as of March 4, 1999. 4.30 Class D Preferred Stock Conversion Agreement by and between the Company and MCI WorldCom, Inc. dated as of March 4, 1999. 10.1 (1) Credit Agreement among the Company, the Lending Institutions party thereto, as Lenders, The First National Bank of Chicago, as Agent, dated as of September 26, 1997. 59 10.2 (1) Ten Percent Convertible Note Purchase Agreement between the Company and WorldCom Inc. dated September 12, 1996 ($5,000,000 Note). 10.3 (1) Preferred Stock, Subordinated Note and Warrant Purchase Agreement between the Company and WorldCom Inc. dated November 14, 1996. 10.4 (1) $28,500,000 Seven Percent Subordinated Note due December 31, 2003, payable to WorldCom Inc. 10.5 Intentionally omitted. 10.6 Intentionally omitted. 10.7 (1) Right of Refusal Agreement Among WorldCom Inc., Edward Driscoll III and Alan L. Witters dated December 16, 1996. 10.8 (1) Guaranty Agreement dated September 26, 1997, by and between the Company and WorldCom Inc. 10.9 Intentionally omitted. 10.10 (1) Sublease dated September 24, 1997 between the Company and 1250895 Ontario Limited, relating to the property located at 6100 110th Street West, Bloomington, Minnesota. 10.11 (1) Service Provision Agreement dated as of July 18, 1997, by and between the Company and Time Inc. 10.12 (1) Standby Agreement dated as of July 19, 1997 by and between WorldCom Inc. and Time Inc. 10.13 (1) Employment Agreement dated as of November 14, 1996, by and between the Company and Edward J. Driscoll III. 10.14 (1) Employment Agreement dated as of November 14, 1996, by and between the Company and Allen Witters. 10.15 (1) Employment Agreement dated as of April 16, 1996, by and between the Company and James R. Clancy. 10.16 (1) Employment Agreement dated as of May 10, 1995, as amended, by and between the Company and Mark Marlow. 10.17 (1) Agreement dated February 11, 1998 between the Company and WorldCom, Inc. modifying certain terms of the (i) 10% Convertible Subordinated Note, due September 30, 1999, (ii) 7% Subordinated Note, due December 31, 2003, and (iii) 100,000 shares of Series A Preferred Stock, all of which are held by MCI 60 WorldCom, Inc. (incorporated herein by reference to exhibit No. 4.17 to the Company's Registration Statement on Form S-4 (File No. 333- 53841) filed with the Securities and Exchange Commission on May 28, 1998) 10.18 (1) 1994 Stock Option Plan 10.19 (1) Amended and Restated 1994 Stock Option Plan 10.20 (1) 1998 Combined Stock Option Plan. 10.21 (1) Agreement dated June 5, 1997 between the Company and WorldCom, Inc. regarding data services provided by WorldCom, Inc. to the Company. 10.22 Intentionally omitted 10.23 Sale and Purchase Agreement by and between Silicon Graphics, Inc., on behalf of itself and its wholly-owned subsidiary, Cray Research, L.L.C., and the Company dated as of March 4, 1999. 10.24 Lease by and between the Company and Silicon Graphics, Inc. on behalf of itself and its wholly-owned subsidiary, Cray Research, L.L.C., with respect to the Company's corporate campus facility located in Eagan, Minnesota dated as of March 4, 1999. 10.25 Employment Agreement dated January 1, 1998 by and between John R. Kauffman and the Company. 10.26 Employment Agreement dated November 3, 1997 by and between David T. Ottinger and the Company. 10.27 Employment Agreement dated September 8, 1998 by and between the Bradley E. Sparks and the Company. 12.1 Statement re: Computation of Ratios. 21.1 List of Subsidiaries of the Company. 23.1 Consent of Ernst & Young LLP 27.1 Financial Data Schedule. ________________ (1) Incorporated herein by reference to the Company's Registration Statement on Form S-4 (File No. 333-53841), filed with the SEC on May 28, 1998. 61 IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. In connection with certain forward-looking statements contained in this Form 10-K and those that may be made in the future by or on behalf of the Company, the Company notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements. The forward- looking statements contained in this Form 10-K were prepared by management and are qualified by, and subject to, significant business, economic, competitive, regulatory and other uncertainties and contingencies, all of which are difficult or impossible to predict and many of which are beyond the control of the Company. Factors which could cause or contribute to such differences include, but are not limited to: (1) the ability of the Company to consummate acquisitions, integrate such acquisitions into existing operations, manage expansion, achieve operating efficiencies and control costs in its operations; (2) the Company's success in retaining key employees, including its Chief Executive Officer and Chief Financial Officer and the senior management teams of its primary operating units; (3) pressures from competitors with greater resources than those of the Company, as well as competitive pressures arising from changes in technology and customer requirements; (4) the availability of raw intellectual property information from alternative sources for little or no cost; (5) disruptions to operations resulting from Year 2000 issues that might originate with third parties; and (6) the concentration of ownership among the certain stockholders such as MCI WorldCom and SGI who have the ability to control the Company, including the election of directors and the direction of the affairs and operations of the business. Accordingly, there can be no assurance that the forward-looking statements contained in this Form 10-K will be realized or that actual results will not be significantly higher or lower. The statements have not been audited by, examined by, compiled by or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements. Readers of this Form 10-K should consider these facts in evaluating the information contained herein. In addition, the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements contained in this Form 10-K. The inclusion of the forward-looking statements contained in this Form 10-K should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Form 10-K will be achieved. In light of the foregoing, readers of this Form 10-K are cautioned not to place undue reliance on the forward-looking statements contained herein. These risks and others that are detailed in this Form 10-K and other documents that the Company files from time to time with the Securities and Exchange Commission, including quarterly reports on Form 10-Q and any current reports on Form 8-K must be considered by any investor or potential investor in the Company. 62 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 31st day of March, 1998. WAM!NET INC. By: /s/ Bradley E. Sparks ___________________________ Name: Bradley E. Sparks Title: Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on its behalf by the registrant and in the capacities and on the dates indicated:
Signature Title Date /s/ Edward J. Driscoll III Chairman of the Board, March 31, 1999 _________________________________ Chief Executive Officer, Edward J. Driscoll III President and Treasurer /s/ Robert L. Hoffman Director March 31, 1999 _________________________________ Robert L. Hoffman /s/ Curtis G. Gray Director March 31, 1999 _________________________________ Curtis G. Gray /s/ K. William Grothe, Jr. Director March 31, 1999 _________________________________ K. William Grothe, Jr. /s/ Susan Mayer Director March 31, 1999 _________________________________ Susan Mayer
63 WAM!NET INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors........................................... F-1 Consolidated Financial Statements Consolidated Balance Sheets.............................................. F-2 Consolidated Statements of Operations.................................... F-4 Consolidated Statements of Shareholders' Deficit......................... F-5 Consolidated Statements of Cash Flows.................................... F-6 Notes to Consolidated Financial Statements............................... F-8
F-1 Report of Independent Auditors Board of Directors WAM!NET Inc. We have audited the accompanying consolidated balance sheets of WAM!NET Inc. as of December 31, 1997 and 1998, and the related consolidated statements of operations, shareholders' deficit and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of WAM!NET Inc. at December 31, 1997 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota March 19, 1999 F-1 WAM!NET Inc. Consolidated Balance Sheets (Dollars in thousands, except share data)
DECEMBER 31 1997 1998 -------------------------------- ASSETS Current assets: Cash and cash equivalents $ 274 $ 6,272 Accounts receivable, net of allowance of $40 and $430, respectively 459 3,466 Inventory - 1,534 Prepaid expenses and other current assets 554 3,187 ------------------------------- Total current assets 1,287 14,459 Property and equipment: Network equipment 15,618 51,512 Other support equipment 5,242 18,046 Furniture and fixtures 1,078 2,802 Leasehold improvements 259 6,506 ------------------------------- 22,197 78,866 Accumulated depreciation 2,877 16,399 ------------------------------- 19,320 62,467 Goodwill, net of accumulated amortization of $6 and $5,308, respectively 479 27,734 Deferred financing charges, net of accumulated amortization of $1,624 and $5,959, respectively 8,048 20,183 Other assets - 616 -------------------------------- Total assets $29,134 $125,459 ================================
F-2
DECEMBER 31 1997 1998 ----------------------------------- LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable $ 2,460 $ 17,098 Accrued salaries and wages 360 4,801 Accrued expenses 2,159 3,176 Current portion of equipment financing and obligations under capitalized leases 3,129 5,324 ----------------------------------- Total current liabilities 8,108 30,399 Long-term debt: 13.25% Senior Discounted Notes - 138,975 Line of credit 18,800 24,000 Equipment financing 6,434 13,536 Subordinated notes payable 25,463 27,403 Redeemable Preferred Stock, Class A, $10.00 par value: Authorized, issued and outstanding shares - 100,000 1,000 1,000 SHAREHOLDERS' DEFICIT Undesignated shares, $.01 par value - 49,500,000 Common Stock, $.01 par value: Authorized shares - 450,000,000 Issued and outstanding shares - 6,699,740 and 9,288,194 at December 31, 1997 and 1998 67 93 Additional paid-in capital 11,771 54,302 Accumulated deficit (42,509) (164,387) Other accumulated comprehensive income - 138 ----------------------------------- Total shareholders' deficit (30,671) (109,854) ----------------------------------- Total liabilities and shareholders' deficit $ 29,134 $ 125,459 ===================================
See accompanying notes. F-3 WAM!NET Inc. Consolidated Statements of Operations (Dollars in thousands, except share and per share data)
YEAR ENDED DECEMBER 31 1996 1997 1998 ----------------------------------------------------- Revenues: WAM!NET revenues $ 110 $ 1,628 $ 8,776 Less rebates - (150) (1,977) ----------------------------------------------------- Net WAM!NET user fees 110 1,478 6,799 Software and hardware sales - - 10,830 Other services fees 169 77 - ----------------------------------------------------- Total revenues 279 1,555 17,629 Operating expenses: Network communication fees 816 7,364 18,259 Cost of software and hardware - - 3,537 Network operations 1,109 7,478 29,705 Sales and marketing 2,054 9,207 21,996 General and administrative 2,610 4,320 28,816 Depreciation and amortization 447 2,668 17,668 ----------------------------------------------------- 7,036 31,037 119,981 ----------------------------------------------------- Loss from operations (6,757) (29,482) (102,352) Other income (expense): Interest income 64 202 1,748 Interest (expense) (903) (4,356) (22,626) ----------------------------------------------------- Net loss before income tax benefit (7,596) (33,636) (123,230) Income tax benefit - - 1,352 ----------------------------------------------------- Net loss (7,596) (33,636) (121,878) Less preferred dividends - (70) (70) ----------------------------------------------------- Net loss applicable to common stock $ (7,596) $ (33,706) $ (121,948) ===================================================== Net loss applicable per common share - basic and diluted $(1.18) $(5.19) $(13.87) ===================================================== Weighted average number of common shares outstanding 6,445,785 6,496,345 8,793,961 =====================================================
See accompanying notes. F-4 WAM!NET Inc. Consolidated Statements of Shareholders' Deficit (In thousands)
ADDITIONAL COMMON STOCK PAID-IN ACCUMULATED ------------------ DESCRIPTION ISSUED AMOUNT CAPITAL DEFICIT - - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 6,415 $64 $ 863 $ (1,277) Payments received on stock subscriptions - - - - Value of warrants issued in connection with bridge financing in July - - 121 - Value of warrants issued in connection with subordinated notes in March, June and December - 5,040 Value of warrants issued for services rendered - - 15 - Value of warrants issued in connection with equipment lease - - 14 - Issuance of Common Stock upon debt conversion in July, conversion price of $1.90 per share 65 1 24 - Payments received on sale of stock warrants - - 48 - Net loss - - - (7,596) ---------------------------------------------- Balance at December 31, 1996 6,480 65 6,125 (8,873) Accumulated and unpaid dividends in connection with Preferred Stock - - (70) - Amortization of stock options - - 426 - Value of warrants issued in connection with line of credit in September - - 4,766 - Issuance of Common Stock upon merger with FreeMail 125 1 487 - Issuance of Common Stock upon debt conversion in December, conversion price of $1.90 per share 65 1 24 - Exercise of stock options 30 - 13 - Net loss - - - (33,636) ------------------------------------------------ Balance at December 31, 1997 6,700 67 11,771 (42,509) Accumulated and unpaid dividends in connection with Preferred Stock - - (70) - Amortization of stock options - - 12,538 - Value of warrants issued in connection with Senior Discounted Notes - - 10,047 - Issuance of Common Stock upon merger with 4-Sight 2,500 25 19,975 - Issuance of Common Stock upon debt conversion in December 65 1 24 - Exercise of stock options 23 - 17 - Comprehensive loss: Net loss - - - (121,878) Foreign currency translation adjustment - - - - Total comprehensive loss ---------------------------------------------- Balance at December 31, 1998 9,288 $93 $54,302 $(164,387) ============================================== ACCUMULATED COMMON OTHER STOCK COMPREHENSIVE DESCRIPTION SUBSCRIPTION INCOME TOTAL - - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 $(20) $ - $ (370) Payments received on stock subscriptions 20 - 20 Value of warrants issued in connection with bridge financing in July - - 121 Value of warrants issued in connection with subordinated notes in March, June and December - - 5,040 Value of warrants issued for services rendered - - 15 Value of warrants issued in connection with equipment lease - - 14 Issuance of Common Stock upon debt conversion in July, conversion price of $1.90 per share - - 25 Payments received on sale of stock warrants - - 48 Net loss - - (7,596) ----------------------------------------- Balance at December 31, 1996 - - (2,683) Accumulated and unpaid dividends in connection with Preferred Stock - - (70) Amortization of stock options - - 426 Value of warrants issued in connection with line of credit in September - - 4,766 Issuance of Common Stock upon merger with FreeMail - - 488 Issuance of Common Stock upon debt conversion in December, conversion price of $1.90 per share - - 25 Exercise of stock options - - 13 Net loss - - (33,636) ------------------------------------------ Balance at December 31, 1997 - - (30,671) Accumulated and unpaid dividends in connection with Preferred Stock - - (70) Amortization of stock options - - 12,538 Value of warrants issued in connection with Senior Discounted Notes - - 10,047 Issuance of Common Stock upon merger with 4-Sight - - 20,000 Issuance of Common Stock upon debt conversion in December - - 25 Exercise of stock options - - 17 Comprehensive loss: Net loss - - (121,878) Foreign currency translation adjustment - 138 138 --------- Total comprehensive loss 121,740 ----------------------------------------- Balance at December 31, 1998 - $138 $(109,854) =========================================
See accompanying notes. F-5 WAM!NET Inc. Consolidated Statements of Cash Flows (Dollars in thousands)
YEAR ENDED DECEMBER 31 1996 1997 1998 ---------------------------------------- OPERATING ACTIVITIES Net loss $(7,596) $(33,636) $(121,878) Adjustments to reconcile net loss to net cash used in operating activities: Noncash interest expense, including related warrant values 306 1,624 18,295 Value of stock options issued to employees and consultants 15 426 12,522 Depreciation and amortization 447 2,668 17,814 Loss on disposal of property and equipment - 797 69 Changes in operating assets and liabilities: Accounts receivable (14) (386) 647 Inventory (467) Prepaid expenses and other assets (111) (415) (7,957) Accounts payable 338 1,832 14,795 Accrued expenses 397 3,173 10,282 ---------------------------------------- Net cash used in operating activities (6,218) (23,917) (55,878) INVESTING ACTIVITIES Purchases of property and equipment (4,244) (16,599) (54,584) Patent expenditures - - (370) Purchase of investments (1,000) - - Purchase of 4-Sight (net of cash acquired) (16,350) Proceeds from sale of investments - 1,000 - ---------------------------------------- Net cash used in investing activities (5,244) (15,599) (71,304) FINANCING ACTIVITIES Proceeds from sale of common stock 20 - - Proceeds from sale of common stock warrants 48 - - Proceeds from sale of preferred stock 1,000 - - Proceeds from subordinated notes payable 24,000 - - Payment of subordinated notes payable (250) - - Proceeds from exercise of stock options - - 15 Proceeds from 13.25% Senior Discounted Notes - - 120,626 Proceeds from line of credit - 18,800 29,203 Payment on line of credit - - (24,003) Proceeds from bridge financing 4,100 10,000 - Payments on bridge financing (4,525) (11,075) - Proceeds from equipment financing 245 8,158 14,348 Payments on equipment financing (60) (537) (4,995) Capitalized financing costs - - (2,377) ---------------------------------------- Net cash provided by financing activities 24,578 25,346 132,817 Effect of foreign currencies on cash - - 363 ---------------------------------------- Increase (decrease) in cash and cash equivalents 13,116 (14,170) 5,998 Cash and cash equivalents at beginning of year 1,328 14,444 274 ---------------------------------------- Cash and cash equivalents at end of year $14,444 $ 274 $ 6,272 ========================================
See accompanying notes. F-6 WAM!NET Inc. Consolidated Statements of Cash Flows (continued) (Dollars in thousands)
YEAR ENDED DECEMBER 31 1996 1997 1998 ---------------------------------------- SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES Value of interest cost assigned to warrants $5,176 $4,766 $10,047 Equipment financed through equipment financing - 1,764 - Conversion of accrued interest to subordinated debt - 1,363 1,965 Issuance of common stock relating to acquisition - 488 20,000 Cashless exercise of stock options - 13 - Conversion of convertible subordinated debenture for common stock 25 25 25 Equipment financed through capital leases 239 - - SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid for interest 358 1,208 2,276
See accompanying notes. F-7 WAM!NET Inc. Notes to Consolidated Financial Statements December 31, 1998 1. SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS WAM!NET Inc. (the "Company") provides a managed, high speed digital data delivery network service that integrates the Company's industry-specific work flow applications with high speed storage and telephony technologies. The Company offers digital data delivery service designed to provide its subscribers with the rapid, secure, accurate and reliable transportation and management of information. CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries from their respective dates of acquisition: FreeMail, Inc., NetCo Communications of Canada, Inc. and WAM!NET U.K. Limited (formerly 4-Sight Limited). All intercompany transactions have been eliminated. REVENUE RECOGNITION The Company records revenue from its digital data delivery network services on a monthly basis based upon service contracts signed with customers. The service contracts call for monthly usage amounts by the customer. The Company records the minimum monthly billing amount as revenue on a monthly basis over the life of the service contract. If a customer's usage exceeds the maximum usage specified in the service contract, the Company will record additional revenue in the month that the overage occurs. The Company does not receive initial up-front amounts or pre-payments from customers. The Company also incurs service rebates that offset the gross revenue generated by the Company. Revenue from hardware and software sales is recognized upon delivery of the hardware and software. Upon delivery of the hardware and software, the Company has no remaining obligations to the customer. Other service fees are recognized as revenue in the period the service is provided to the customer. F-8 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Investments classified as cash equivalents consist of high grade commercial paper (A1/P1), certificates of deposit and United States Treasury Bills. Cash equivalents are considered available for sale and are stated at cost which approximates fair market value. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful life of three to seven years. GOODWILL The excess of the cost over the fair value of the net assets acquired is amortized on a straight-line basis over a period of three to five years. The Company periodically reviews the recoverability of goodwill based on estimated future cash flows from the related operations. IMPAIRMENT OF LONG-LIVED ASSETS The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The amount of impairment loss recorded will be measured as the amount by which the carrying value of the assets exceeds the fair value of the assets. F-9 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between the financial reporting and tax bases of assets and liabilities. PRODUCT DEVELOPMENT Costs associated with the development of new products and services are charged to operations in the year incurred. These costs for 1996, 1997 and 1998 were $1,109,000, $3,364,000 and $13,447,000, respectively. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS The Company translates the assets and liabilities of its foreign subsidiaries stated in local functional currencies to U.S. dollars at the rates of exchange in effect at the end of the period. Revenues and expenses are translated using rates of exchange in effect during the period. The cumulative effect of foreign currency translations is the only component of other comprehensive income. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to credit risk consist primarily of accounts receivable. The Company grants credit to customers in the ordinary course of business. No single customer or region represents a significant concentration of credit risk. STOCK SPLIT In February 1998, the Board of Directors declared a five-for-one Common Stock split effected in the form of a stock dividend. All references to number of shares, options and warrants and conversion price and exercise price per share have been adjusted to reflect this stock split on a retroactive basis. F-10 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET LOSS PER COMMON SHARE Under Statement No. 128, Earnings per Share (Statement 128), basic earnings per share is based on the weighted average shares of common stock outstanding during the period. Diluted earnings per share includes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share as presented is the same as basic earnings per share as the effect of outstanding options, warrants and convertible securities is antidilutive. RECLASSIFICATION Certain prior year amounts have been reclassified to conform with the current year presentation. 2. CASH REQUIREMENTS The Company continues to incur substantial operating losses as a direct result of its continuing efforts to expand its WAM!NET media network throughout North America, Europe and Asia. Net losses since the Company's inception have resulted in an accumulated deficit balance of $164.4 million. Though these losses are not unexpected, the Company's ability to continue to fund these operating losses and its ability to continue to purchase and install the required WAM!NET network hardware to provide WAM!NET services to its increasing global customer base depends on its ability to obtain additional sources of funds for working capital during 1999. Sources of such funds include but are not limited to long- and short-term secured equipment financing from vendors financial institutions and banks, long-term unsecured senior debt, long-term property mortgages on its existing facilities and the issuance of the Company's equity securities. Though the Company is optimistic regarding its ability to secure additional funding by one or more of the above sources, there can be no assurances that such funding can be obtained. From inception through December 31, 1998, the Company has derived substantially all of its operating capital from the issuance of short- and long-term debt and equity instruments. At December 31, 1998, the Company had approximately $204.9 million in long-term debt, of which approximately $5.3 million becomes payable during 1999. F-11 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 2. CASH REQUIREMENTS (CONTINUED) The Company's available operating capital as of March 10, 1999 as evidenced by cash, cash equivalent investments and commitments from financial institutions for additional equipment financing totaled approximately $50 million dollars. If additional sources of funding cannot be obtained, the Company would be required to significantly slow its global market penetration, network growth and product development due to a constraint of available operating capital. If the Company encounters a constraint in the availability of operating capital to fund its operations and network growth during 1999, management would implement plans to reduce cash expenditures. Management believes such reductions would leave the Company with adequate cash to continue operations through the end of 1999. The reduction of cash expenditures would have a material adverse effect on the Company's global revenue and network expansion plans. The most evident and clearly measurable impact resulting from these reductions is a significant decrease of installed network customers for the year ending December 31,1999. Material reductions to the base of installed customers slow the growth of the Company's recurring revenue stream, which is dependent upon customer utilization of the Company's excess network capacity. Reductions in network utilization directly impact network revenue and may ultimately defer attainment of overall profitability from the Company's WAM!NET transport products. Another definable impact of the above outlined expenditure reductions, would be material delays in software product development, the impact of which may further erode customer retention and network utilization. F-12 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 3. LONG-TERM DEBT EQUIPMENT FINANCING NOTES PAYABLE Equipment financing notes payable consist of the following:
DECEMBER 31 1997 1998 ---------------------------------- FINOVA Technology Finance; installment note; monthly payments of $43,000 and an additional final installment of $242,000 including interest imputed at 13.44%; secured by equipment; due April 2001 $1,518,000 $1,152,000 FINOVA Technology Finance; installment note; monthly payments of $91,000 and an additional final installment of $509,000 including interest imputed at 13.35%; secured by equipment; due May 2001 3,248,000 2,486,000 FINOVA Technology Finance; installment note; monthly payments of $120,000 and an additional final installment of $627,000 including interest imputed at 11.75%; secured by equipment; due October 2002 - 4,675,000 Transamerica Business Credit; installment note; monthly payments of $46,000 and an additional final installment of $207,000 including interest imputed at 13.53%; secured by equipment; due May 2001 1,606,000 1,250,000 Transamerica Business Credit; installment note; monthly payments of $42,000 and an additional final installment of $187,000 including interest imputed at 13.43%; secured by equipment; due May 2001 1,457,000 1,133,000 Transamerica Business Credit; installment note; monthly payments of $41,000 and an additional final installment of $184,000 including interest imputed at 13.11%; secured by equipment; due May 2001 - 1,138,000 Transamerica Business Credit; installment note; monthly payments of $11,000 and an additional final installment of $48,000 including interest imputed at 12.88%; secured by equipment; due July 2001 - 302,000 Transamerica Business Credit; installment note; monthly payments of $75,000 and an additional final installment of $352,000 including interest imputed at 11.66%; secured by equipment; due October 2001 - 2,348,000 Transamerica Business Credit; installment note; monthly payments of $40,000 and an additional final installment of $187,000 including interest imputed at 11.66%; secured by equipment; due October 2001 - 1,245,000
F-13 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 3. LONG-TERM DEBT (CONTINUED)
DECEMBER 31 1997 1998 ----------------------------------- Transamerica Business Credit; installment note; monthly payments of $19,000 and an additional final installment of $88,000 including interest imputed at 11.65%; secured by equipment; due December 2001 $ - $ 609,000 Leasetec Corporation; installment note; monthly payments of $47,000 including interest imputed at 13.50%; unsecured; due December 1998 521,000 - Leasetec Corporation; installment note; monthly payments of $83,000 including interest imputed at 13.50%; unsecured; due April 1999 1,123,000 243,000 Icon Funding Corp.; installment note; monthly payments of $39,000 including interest imputed at 12.57%; secured by equipment; due July 2002 - 1,319,000 Icon Funding Corp.; installment note; monthly payments of $28,000 including interest imputed at 12.57%; secured by equipment; due July 2002 - 960,000 ----------------------------------- 9,473,000 18,860,000 Less current portion 3,039,000 5,324,000 ----------------------------------- $6,434,000 $13,536,000 ===================================
Maturities of equipment notes payable as of December 31, 1998 are as follows: 1999 $ 5,324,000 2000 5,759,000 2001 5,896,000 2002 1,881,000 $18,860,000 =================
F-14 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 3. LONG-TERM DEBT (CONTINUED) SENIOR DISCOUNT NOTES On March 5, 1998, the Company sold 208,530 Units consisting of $1,000 principal amount at maturity 13 1/4% Senior Discount Notes due 2005 ("Notes") and three warrants. The aggregate principal amount of the Notes payable at maturity is $208.6 million. The sale of the Units resulted in net proceeds to the Company of $120.6 million. Cash interest does not accrue nor is it payable on the Notes prior to March 1, 2002. Thereafter, cash interest on the Notes will accrue on the Notes at a rate of 13 1/4% per annum (calculated on a semiannual bond equivalent basis) and will be payable semiannually in arrears on March 1 and September 1 of each year, commencing September 1, 2002. In connection with the Notes, the Company issued 625,590 warrants to purchase a total of 1,257,436 shares of Common Stock. Each warrant entitles the holder to purchase 2.01 shares of Common Stock at an exercise price of $.01 per share. The warrants were deemed to have a value of $10 million, which is being amortized as interest expense over the life of the Notes. LINE OF CREDIT AGREEMENT In September 1997, the Company entered into a three year $25 million line of credit agreement with a bank. The line of credit is guaranteed by MCI WorldCom and the Company must obtain MCI WorldCom's consent prior to each borrowing under the line. At December 31, 1998, the amount outstanding on the line of credit was $24 million. The line of credit has both Eurodollar and Floating Rate advances. The Eurodollar and Floating Rate accrue interest at 55 basis points above LIBOR (5.12% at December 31, 1998) and prime (8.5% at December 31, 1998), respectively. Interest on the LIBOR borrowings is payable upon maturity and on the prime borrowings is payable quarterly. F-15 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 3. LONG-TERM DEBT (CONTINUED) In connection with MCI WorldCom's guarantee of the line of credit agreement, the Company issued Class A warrants to purchase 8,396,170 common shares and Class B Warrants to purchase 14,204,835 common shares at an initial exercise price of $3.90 per share. The Class A warrants were immediately exercisable and expire on December 31, 2000. The Class A warrants were deemed to have a value of $4.77 million which is being amortized as interest expense over the life of the agreement. Amortization of the warrants for the year ended December 31, 1998 was $1,589,000. The Class B warrants are exercisable based on a calculation that factors the outstanding balance and repayments made on the line of credit during the final 12 months of the agreement. The Class B warrants expire on December 31, 2000. It is management's intention to fully repay the credit facility before the final 12 months of the agreement by the end of the second quarter 1999. The Class B warrants were deemed to have no value based on management's intentions and the unpredictability of the factors used to calculate the number of warrants exercisable. 4. BRIDGE FINANCING On December 29, 1995, the Company entered into a bridge financing agreement (Bridge Loan) which provided funding up to $1.6 million. The Bridge Loan accrued interest at 10% per annum and was payable on the earlier of December 31, 1996 or the date of closing of a qualifying preferred stock financing. In connection with the financing, the Company granted warrants to purchase 1,600,000 shares of common stock at $1.00 per share. The warrants were deemed to have a value of $109,000 which was recorded as interest expense over the life of the Bridge Loan. Additionally, the Company granted the placement agent warrants to purchase 160,000 shares of common stock at $1.00 per share exercisable over five years. F-16 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 4. BRIDGE FINANCING (CONTINUED) On March 19, 1996, the Company issued a total of $1.0 million of subordinated notes. The subordinated notes accrued interest at 10% per annum and were payable on the earlier of December 31, 1996 or the date of closing of a qualifying financing transaction. In connection with the issuance of the notes, the Company granted warrants to purchase 1,000,000 shares of Common Stock at $1.50 per share. The warrants were deemed to have a value of $57,000 which was recorded as interest expense over the life of the subordinated notes. Additionally, the Company granted the placement agent warrants to purchase 100,000 shares of Common Stock at $1.50 per share. On June 24, 1996, the Company issued $3.0 million of subordinated notes. The subordinated notes accrued interest at 10% per annum and were payable on the earlier of December 31, 1996 or the date of closing of a qualifying financing transaction. In connection with the subordinated notes, the Company sold for a price of $.01 each Common Stock warrants to purchase 600,000 shares of Common Stock at $1.50 per share. The warrants to purchase 3,000,000 shares of Common Stock were deemed to have a value of $120,000 which was recorded as interest expense over the life of the subordinated notes. Additionally, the Company granted the placement agent warrants to purchase 300,000 shares of Common Stock at $1.50 per share. On June 30, 1997, the Company entered into a promissory note agreement with WorldCom which provided funding up to $10 million. The Company was advanced $10 million on the promissory note. The promissory note accrued interest at 12% per annum and was paid in full as of December 31, 1997. The valuation of the Common Stock in each transaction was negotiated between the parties at arm's-length. 5. SUBORDINATED NOTES PAYABLE In March through May of 1995, the Company issued a total of $250,000 of convertible subordinated notes which are due December 31, 1999. Interest on the notes accrues at an annual rate of 8%, payable semi-annually. The Company may redeem the notes at any time commencing January 1, 1997, upon notice to the holders at 110% of the face amount of the notes plus interest. The holder has the right to convert the unpaid principal amount of the notes into shares of Common Stock at a conversion price of $.38 per share. F-17 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 5. SUBORDINATED NOTES PAYABLE On May 24, 1995, $100,000 of the notes were converted into 263,160 shares of Common Stock at the conversion price of $.38 per share. On July 3, 1996, $25,000 of the notes were converted into 65,790 shares of Common Stock at the conversion price of $.38 per share. On December 31, 1997, $25,000 of the notes were converted into 65,790 shares of Common Stock at the conversion price of $.38 per share. On February 28, 1998, 25,000 of the notes were converted into 65,790 shares of Common Stock at the conversion price of $.38 per share. In September 1996, the Company issued to MCI WorldCom a $5.0 million convertible subordinated note due 2005. Interest on the note accrues at an annual rate of 10%. The Company may redeem the note at any time commencing January 1, 1998, upon notice to the holder, at the outstanding principal amount of the note plus interest. The holder has the right to convert the principal amount of the note into shares of Common Stock at a conversion price of $1.00 per share. During 1998, $635,000 of accrued interest was converted into additional subordinated notes. In November 1996, the Company entered into a Redeemable Preferred Stock, Subordinated Note and Common Stock Warrant Purchase Agreement ("Investment Agreement") with MCI WorldCom. Pursuant to the agreement, the Company sold 100,000 shares of Class A Preferred Stock, $10.00 par value. The preferred shares are required to be redeemed in 2005 at a price of $10.00 per share plus an amount equal to all accumulated and unpaid dividends. Dividends are payable at the rate of 7% ($.175 per quarter per share) and shall start to cumulate on January 1, 1997, whether or not earned. Cumulated dividends on the preferred stock were $140,000 at December 31, 1998. The Class A Preferred Shares also carry voting rights equal to common shares and possess special voting rights that entitle the holder to elect a majority of the Directors. Under the Subordinated Note Agreement, the Company has available an aggregate amount of $28.5 million. The Company has the option to issue additional notes not more frequently than once each quarter, commencing with the calendar quarter ending March 31, 1997. The note accrues interest at 7% per annum due 2005. During 1998, $1,333,000 of accrued interest was converted into additional subordinated notes. The amount outstanding on the subordinated note agreement was $20.4 million and $21.7 million at December 31, 1997 and December 31, 1998, respectively. F-18 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 5. SUBORDINATED NOTES PAYABLE (CONTINUED) In connection with the Investment Agreement, the Company sold, for a price of $0.01 each, Common Stock Warrants entitling MCI WorldCom to purchase 20,787,500 shares of common stock at an initial exercise price of $.96 share. The warrants were immediately exercisable and expire on December 31, 2000. The warrants were deemed to have a value of $4.9 million which will be amortized as interest expense over the life of the warrant agreement. Amortization of the warrants for the years ended December 31, 1997 and 1998 was $1.2 million and $2.5 million, respectively. The initial exercise price of $.96 per share increased to $.98 per share on March 31, 1997, and shall thereafter increase by an amount of $0.16 per share on the last day of each calendar quarter during the term of the warrant, commencing with the calendar quarter ending June 30, 1997. The exercise price was $1.09 per share on December 31, 1998. On February 11, 1998, the Company and MCI WorldCom agreed to modify the 10% Convertible Subordinated Note, due September 30, 1999, the 7% Subordinated Note, due December 31, 2003 and the 100,000 shares of Series A Preferred Stock. All principal and interest payment obligations of the Company in respect of the above securities shall be subordinate to the prior payment in full of the Notes. MCI WorldCom shall have the option to convert (a) the interest due on the 10% Subordinated Note and (b) the interest accrued on the outstanding principal amount of the 7% Subordinated Note from December 31, 2003 through the date such amount is paid into shares of common stock, par value $.01, of the Company, at the price per share then existing on the date of such conversion. The carrying amounts of the Company's debt instruments in the balance sheets at December 31, 1997 and 1998 approximate fair value. F-19 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 6. COMMITMENTS AND CONTINGENCIES The Company enters into various term contracts with suppliers of telecommunications services for the purpose of receiving discounts off the standard service offerings. Some of these contracts will result in termination liabilities if the contract is terminated prior to the expiration date of the contract. The termination liabilities are generally based upon the minimum monthly dollar amount committed to the vendor multiplied by a termination liability percentage, multiplied by the number of months remaining in the contract. Total data communications expense under telecommunication contracts was $816,000, $7,364,000 and $16,535,000 for the years ended December 31, 1996, 1997 and 1998, respectively. The Company's data communications expense under telecommunication contracts with MCI WorldCom was $342,573, $5,538,000 and $11,840,000 for the years ended December 31, 1996, 1997 and 1998, respectively. Guaranteed monthly usage levels of data communications with certain of the Company's telecommunication vendors and MCI WorldCom at December 31, 1998 aggregate to the following annual amounts:
GUARANTEED GUARANTEED USAGE USAGE (ALL VENDORS) (WORLDCOM) ----------------------------------- 1999 $ 8,074,000 $4,140,000 2000 6,490,000 2,784,000 2001 3,039,000 1,140,000 2002 1,354,000 - 2003 665,000 - ----------------------------------- $19,622,000 $8,064,000 ===================================
F-20 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) The termination contingency of data communications with certain of the Company's telecommunication vendors and MCI WorldCom at December 31, 1998 aggregates to the following annual amounts:
TERMINATION TERMINATION CONTINGENCY CONTINGENCY (ALL VENDORS) (WORLDCOM) ----------------------------------- December 31: 1998 $ 9,805,000 $4,351,000 1999 5,822,000 2,633,000 2000 2,303,000 1,140,000 2001 509,000 - 2002 531,000 - ----------------------------------- $18,970,000 $8,124,000 ===================================
The Company also has operating leases for its office space. Operating expenses including maintenance, utilities, real estate taxes and insurance are paid by the Company. Total rent expense under operating leases was $208,000, $592,000 and $2,189,000 for the years ended December 31, 1996, 1997 and 1998, respectively. Future minimum lease obligations in excess of one year as of December 31, 1997 are as follows: 1999 $ 2,666,000 2000 2,373,000 2001 2,221,000 2002 2,185,000 2003 2,038,000 Thereafter 4,888,000 ----------- $16,371,000 ===========
F-21 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) During 1996, the Company entered into a sale-leaseback agreement for equipment. The total lease obligation is $239,000 which is to be paid over a 30 month period. In connection with this lease financing, the leasing company was granted warrants to purchase 45,000 shares of Common Stock at $1.50 per share. The warrants were deemed to have a value of $14,000 which will be recorded as interest expense over the life of the agreement. The Company determined the fair value of the warrants by considering the difference in interest charged on the lease with and without the warrants in place. The minimum future obligation on the capital lease is $0. The balance is paid in full. 7. INCOME TAXES At December 31, 1998, the Company had net operating loss carryforwards of approximately $134 million. These carryforwards are available to offset future taxable income through 2013 and are subject to the limitations of Internal Revenue Code Section 382 resulting from changes in ownership. The effective tax rate differs from the statutory rate primarily as a result of the following:
1996 1997 1998 ----------------------------------------- Tax at statutory rate 34.0% 34.0% 34.0% State income taxes 6.0 6.0 6.0 Foreign tax benefit - - (1.1) Impact of net operating loss carryforward (40.0) (40.0) (40.0) ----------------------------------------- - % - % (1.1)% =========================================
F-22 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 7. INCOME TAXES (CONTINUED) Income tax benefit consists of:
1996 1997 1998 ----------------------------------------- Current: Federal $ - $ - $ - State - - - Foreign - - (1,352,000) Deferred: Federal - - - State - - - Foreign - - - ----------------------------------------- $ - $ - $(1,352,000) =========================================
Components of deferred tax assets are as follows:
DECEMBER 31 1997 1998 ----------------------------------------- Deferred assets: Net operating loss $ 15,691,000 $ 50,905,000 Warrant amortization 619,000 2,020,000 Stock option amortization 127,000 4,892,000 Other 84,000 199,000 ----------------------------------------- 16,521,000 58,016,000 Deferred liability: Depreciation and amortization (562,000) (1,602,000) ----------------------------------------- Net deferred income tax assets 15,959,000 56,414,000 Valuation allowance (15,959,000) (56,414,000) ----------------------------------------- Net deferred income taxes $ - $ - =========================================
F-23 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 8. CAPITAL STOCK In February 1998, the Company amended the Articles of Incorporation to increase its authorized capital from 20,000,000 shares to 100,000,000 shares, 90,000,000 of which are classified as common shares, 100,000 of which are Class A preferred shares and 9,900,000 of which are undesignated shares. In May 1998, the Company amended the Articles of Incorporation to increase its authorized capital from 100,000,000 shares to 500,000,000 shares, 450,000,000 of which are classified as common shares, 500,000 of which are Class A preferred shares and 49,500,000 of which are undesignated shares. 9. STOCK OPTIONS AND WARRANTS In September 1994, the Company adopted an Incentive Stock Option Plan (1994 Stock Option Plan) that includes incentive stock options to be granted to certain eligible employees and non-employee directors of the Company. In September 1998, the Company adopted a new incentive stock option plan. The 1998 Combined Stock Option Plan (the "Plan") includes incentive stock options to be granted to certain eligible employees (including foreign nationals) and non- employee consultants of the Company and any subsidiary corporation of the Company. The Company has authorized the grant of options for up to 25,000,000 shares of the Company's Common Stock. The Company also amended the 1994 Stock Option Plan. The number of shares reserved for option grants was reduced from 22,071,400 to 7,000,000, including those for which options have previously been granted. The Company has authorized the grant of options to management personnel for up to 5,125,000 shares of the Company's Common Stock outside the plan. A majority of the options granted have ten year terms and vest and become fully exercisable at the end of three years of continued employment. In November 1996, the Chief Executive Officer and Chief Technology Officer were each granted options to purchase 2,000,000 shares of Common Stock at an exercise price of $.96. These options vested in incremental amounts based on the number of installed customer sites and remain exercisable until December 31, 2007. In 1998, the Board of Directors agreed to amend the stock option agreements whereas the shares became fully vested. The amendment constituted a repricing and, accordingly, the Company recorded $11,405,000 as compensation expense in January 1998. F-24 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 9. STOCK OPTIONS AND WARRANTS (CONTINUED) During 1997, the Company granted non-plan options to various consultants to purchase 347,500 shares of the Company's Common Stock at an exercise price of $.96 per share. The options were deemed to have a value of $92,000 which was recognized as compensation expense. During 1998, the Company granted options to purchase a total of 400,000 shares at an exercise price of $3.90 per share to two consultants. The options were deemed to have a value of $431,000, which was recognized as legal expense. Option activity is summarized as follows:
WEIGHTED SHARES AVERAGE AVAILABLE EXERCISE FOR GRANT OPTIONS OUTSTANDING PRICE -------------------------------- UNDER PLAN PLAN NON-PLAN PER SHARE ---------------------------------------------------------------------- Establishment of 1994 stock Option Plan 500,000 - - $ - Additional shares reserved for issuance 2,500,000 - - - Granted (532,500) 532,500 377,500 .45 --------------------------------------------------- Balance at December 31, 1995 2,467,500 532,500 377,500 .45 Additional shares reserved for issuance 4,071,400 - - Granted (2,992,800) 2,992,800 4,000,000 1.09 Canceled 1,646,400 (1,646,400) - 1.48 --------------------------------------------------- Balance at December 31, 1996 5,192,500 1,878,900 4,377,500 .90 Additional shares reserved for issuance 15,000,000 - - Granted (3,131,250) 3,131,250 347,500 1.38 Canceled 257,750 (257,750) - .86 Exercised - (30,000) - .45 --------------------------------------------------- Balance at December 31, 1997 17,319,000 4,722,400 4,725,000 1.09 Additional shares reserved for issuance 9,928,600 Granted (4,601,000) 4,601,000 400,000 7.31 Canceled 196,235 (196,235) - 4.60 Exercised - (22,664) - .77 --------------------------------------------------- Balance at December 31, 1998 22,842,835 9,104,501 5,125,000 $2.23 ===================================================
F-25 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 9. STOCK OPTIONS AND WARRANTS (CONTINUED) The following table summarizes information about the stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------- ------------------------------------ WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE - - ------------------------------------------------------------------------------------------------------------------- $ .45 721,500 3.8 years $ .45 711,500 $ .45 .96 8,377,251 6.4 years .96 8,443,201 .96 3.90 1,246,750 6.7 years 3.90 460,831 3.90 8.00 3,684,000 9.4 years 8.00 1,503,000 8.00 12.00 200,000 9.7 years 12.00 - - -------------- ------------- $ .45 - $12.00 14,229,501 7.1 years $ 3.17 9,118,532 $2.23
The Company has shares exercisable within the plans of 1,167,795 and 4,213,532 at December 31, 1997 and 1998, respectively, at a weighted average exercise price of $.81 and $3.61 per share, respectively. The Company also has shares exercisable outside the plan of 914,000 and 4,905,000 at December 31, 1997 and 1998, respectively, at a weighted average exercise price of $.76 and $1.04 per share, respectively. The fair value of options granted within the plan in 1996, 1997 and 1998 was $.27, $.34 and $.90 per share, respectively. The fair value of options granted outside the plan in 1996, 1997 and 1998 was $.27, $.27 and $.25 per share. The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, Accounting for Stock-Based Compensation (Statement 123), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. F-26 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 9. STOCK OPTIONS AND WARRANTS (CONTINUED) Pro forma information regarding net loss and loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a minimum value option pricing model with the following weighted-average assumptions for 1996, 1997 and 1998: risk-free interest rate of 6.5%; 6.5% and 4.78%, respectively; dividend yield of 0%; and a weighted-average expected life of the option of five years. The minimum value option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1996 1997 1998 -------------------------------------------------------------- Net loss as reported $(7,596,000) $(33,636,000) $(121,878,000) Pro forma net loss (7,763,000) (34,168,000) (127,272,000) Net loss per common share as reported $ (1.18) $ (5.18) $ (13.87) Pro forma net loss per common share (1.20) (5.26) (14.47)
During the initial phase-in period, the effects of applying Statement 123 for recognizing compensation cost may not be representative of the effects on reported net loss or income for future years because the options in the Incentive Stock Option Plans vest over several years and additional awards will be made in the future. During 1995, the Company granted a consultant warrants to purchase 150,000 shares of common stock at an exercise price of $.60 per share for services provided. The warrants were immediately exercisable and expire November 17, 2002. The warrants were valued at $15,000 and were charged to expense. The Company determined the fair value of the warrants by considering the difference in fees charged by the consultant with and without the warrants in place. F-27 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 9. STOCK OPTIONS AND WARRANTS (CONTINUED) The following is a table of the warrants to purchase shares of the Company's Common Stock:
WARRANTS EXERCISE PRICE EXPIRATION OUTSTANDING EXERCISABLE PER SHARE DATE ---------------------------------------------------------------- Balance at December 31, 1994 Granted: Note payable 416,665 416,665 $ .60 2000 Consulting Service 150,000 150,000 .60 2002 Bridge Loan #1 1,760,000 1,760,000 1.00 2000 ---------------------------------------------------- Balance at December 31, 1995 2,326,665 2,326,665 .60 - 1.00 Granted: Bridge Loan #2 1,100,000 1,100,000 1.50 2003 Bridge Loan #3 3,300,000 3,300,000 1.50 2003 Lease financing 45,000 45,000 1.50 2003 7% subordinated notes 20,787,500 20,787,500 1.50 2000 ---------------------------------------------------- Balance at December 31, 1996 27,559,165 27,559,165 .60 - 1.50 Granted: Line of credit 22,601,005 8,396,170 3.90 2000 ---------------------------------------------------- Balance at December 31, 1997 50,160,170 35,955,335 $.60 - $3.90 Granted: 13 1/4% Senior Discount Note 1,257,436 1,257,436 .01 2005 ---------------------------------------------------- Balance at December 31, 1998 51,417,606 37,212,771 $.01 - $3.90 ====================================================
10. EMPLOYMENT AGREEMENTS In November 1996, the Company entered into Employment Agreements with its President and Chief Executive Officer and its Chief Technology Officer. The agreements provide for an annual base salary and a bonus and other compensation as may be established from time to time by the Board of Directors. As part of the agreements, the employees were each granted options to purchase 2,000,000 shares of Common Stock at an exercise price of $.96. The agreements contain provisions providing for the maintenance of confidentiality of proprietary information of the Company and a two-year non-competition clause in the event of termination of employment. The agreements may be terminated by either party for any reason at any time. If, however, the employees are terminated by the Company without cause, the Company must pay salary to the employees equal to the employees' then base salary for two years. F-28 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 11. SAVINGS AND RETIREMENT PLAN The Company has a savings and retirement plan covering all eligible employees. The plan was adopted pursuant to 401(k) of the Internal Revenue Code. Contributions to the plan are discretionary for the employees. The Company does not make contributions to the plan. 12. ACQUISITIONS In December 1997, the Company acquired the outstanding common stock of FreeMail, Inc. (FreeMail). The results of operations of the acquired business are included in the accompanying financial statements since the date of acquisition. The Company issued 125,000 shares of Common Stock, with a fair value of $488,000, as consideration in connection with the acquisition. The Company will pay a quarterly payment to the former shareholders of FreeMail as additional contingent consideration equal to 5% of the gross collected revenue derived by the Company from certain identified FreeMail products. The total amounts of the quarterly payments shall not exceed $3.0 million. As of December 31, 1998, the Company did not record a liability relating to the FreeMail revenue since no revenue from FreeMail products was collected. The acquisition was accounted for as a purchase. The inclusion of the FreeMail operating results for periods prior to the date of acquisition would not have materially affected results of operations. On March 13, 1998, the Company purchased all of the outstanding capital stock of 4-Sight Limited, a private limited company organized under the laws of the United Kingdom ("4-Sight"), for $20 million in cash plus related acquisition expenses of $500,000 and 2,500,000 shares of the Company's Common Stock valued at $20.0 million. In addition, the former shareholders of 4-Sight will be entitled to receive up to an additional 750,000 shares of the Company's Common Stock in the event certain sales objectives are met over the next three years. Specifically, 4-Sight's former shareholders shall be entitled to receive an additional 625,000 shares of Common Stock if the cumulative Non-U.S./Canada Revenues (defined below) for the period from March 13, 1998 to March 13, 2000 equal or exceed $50.0 million; and they shall be entitled to receive a further 125,000 shares of Common Stock if the cumulative Non-U.S./Canada Revenues during the same three year period equal or exceed $70.0 million. F-29 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 12. ACQUISITIONS (CONTINUED) For the purpose of the foregoing, "Non-U.S./Canada Revenues" shall mean the revenues attributable to customer sites located outside the United States and Canada and receivable by the Company or any of its subsidiaries. The shares to be issued as contingent consideration will result in the Company recording additional goodwill, which will be amortized over its estimated useful life. The acquisition was accounted for under the purchase method of accounting and, accordingly, the operating results of 4-Sight have been included in the consolidated operating results since the date of acquisition. On acquisition, approximately $32.1 million of goodwill was recorded, which is being amortized on a straight-line basis over five years. The following table shows the pro forma consolidated results of operations as if 4-Sight had been acquired as of the beginning of the periods presented:
YEAR ENDED DECEMBER 31 1997 1998 ------------------------------------- (Unaudited) Revenues $ 20,833,000 $ 21,109,000 Net loss (37,942,000) (121,922,000) Net loss per share $ (4.22) $ (13.87)
The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the entire periods presented. in addition, they are not intended to be a projection of future results and do not reflect any synergies that might be achieved from combined operations. 13. RELATED PARTY TRANSACTIONS On September 1, 1998, the Company entered into a $305,000 Secured Recourse Promissory Note and Pledge Agreement (the "Note") with its Chief Technology Officer (the "Maker"). The Note accrues interest at 7% per annum and is due on December 15, 1999. As security for the repayment of the principal of and interest on this Note, the Maker grants to the Company, 60,000 shares of the Company's common stock, par value $.01 per share. F-30 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 13. RELATED PARTY TRANSACTIONS (CONTINUED) The Company's corporate counsel owns 250,000 shares, and has been granted warrants and options to purchase 450,000 shares of Company Common Stock. During the years ended December 31, 1996, 1997 and 1998, the Company incurred legal fees and expenses of approximately $102,000, $128,000 and $152,000, respectively, to such counsel for services rendered in connection with litigation and for general legal services. The Company's corporate counsel is Larkin, Hoffman, Daly & Lingren, Ltd. One of the partners of this firm is the father of the Company's President and Chief Executive Officer and owns 250,000 shares of Common Stock of the Company and has been granted an option to purchase 200,000 shares of the Company's Common Stock. Additionally, Mr. Hoffman, a partner of this firm, is a director of the Company and has been granted an option to purchase 75,000 shares of the Company's Common Stock. During the years ended December 31, 1996, 1997 and 1998, the Company incurred legal fees and expenses of approximately $75,000, $157,000 and $1,111,000, respectively, to such counsel for services rendered in connection with litigation and for general legal services. The Company's marketing services were performed by Kauffman Marketing Group, Inc. from November 1995 to December 1997. The former President of Kauffman Marketing Group, Inc. joined the Company as the Vice President of Strategic Marketing & Communications in December 1997. During the years ended December 31, 1996, 1997 and 1998, the Company incurred marketing expenses of approximately $318,000, $1.6 million and $0, respectively, to such firm for strategic positioning and outside marketing services. Management believes the fees paid for all the above services rendered to the Company were on terms at least as favorable to the Company as could have been obtained from an unrelated party. 14. MAJOR CUSTOMERS In 1997 three customers accounted for 24%, in aggregate, of net sales. In 1998, no single customer accounted for more than 10% of net sales. F-31 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 15. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION The Company, operating in a single industry segment, provides a managed, high speed digital data delivery network service. Information regarding operations in different geographic areas is as follows:
YEARS ENDED DECEMBER -------------------------------------------------------------- 1996 1997 1998 -------------------------------------------------------------- Net sales to unaffiliated customers: United States $ 279,000 $ 1,555,000 $ 8,255,000 Europe - - 9,005,000 Rest of World - - 369,000 -------------------------------------------------------------- Total net sales $ 279,000 $ 1,555,000 $ 17,629,000 ============================================================== Operating (loss) income: United States $(7,596,000) $(33,636,000) $(113,272,000) Europe - - (8,606,000) Rest of World - - - -------------------------------------------------------------- Net loss $(7,596,000) (33,636,000) $(121,878,000) ============================================================== Identifiable assets: United States $20,070,000 $ 21,086,000 $ 89,698,000 Europe - - 18,358,000 Rest of World - - - -------------------------------------------------------------- Total assets $20,070,000 $ 21,086,000 $ 108,056,000 ==============================================================
"United States" includes United States and Canada. "Rest of World" includes principally Japan and the Asia-Pacific region. Net revenue from sales to unaffiliated customers is based on the location of the customer. Operating income and identifiable assets are classified based on the location of the Company's facilities. F-32 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 16. CONTINGENCY The Company is aware that certain holders of warrants issued in connection with the bridge loans in 1995 and 1996 believe that the exercise price of those warrants should be adjusted downward. Although the warrants provide for downward adjustments under certain circumstances, the Company believes no adjustment is required. Should the warrant holders initiate litigation and should that litigation be successful, the gross proceeds receivable by the Company from exercise of those warrants would be reduced from approximately $8.4 million to $4.9 million. The Company would vigorously defend any such litigation if initiated in the future. The Company is engaged in certain legal proceedings and claims arising in the ordinary course of its business. The ultimate liabilities, if any, which may result from these or other pending or threatened legal actions against the Company cannot be determined at this time. However, it is the opinion of management that facts known at the present time do not indicate that there is a probability that such litigation will have a material effect on the financial position of the Company. 17. SUBSEQUENT EVENTS In January 1999, the Company issued the 1999 MCI WorldCom Convertible Note and in January 1999 and March 1999, the Company borrowed $10.0 million and $15.0 million, respectively, thereunder. The 1999 MCI WorldCom Convertible Note was converted into 2,196,317 shares of the Company's Class D Convertible Preferred Stock, par value $.01 per share (the "Class D Preferred Stock"), immediately prior to the closing of the Silicon Graphics, Inc. Investment ("SGI Investment"). In connection with the MCI WorldCom Convertible Note, the Company issued warrants to purchase a total of 350,000 shares of Common Stock. The warrants have an exercise price of $.01 and are exercisable from April 30, 1999 until April 30, 2004. F-33 WAM!NET Inc. Notes to Consolidated Financial Statements (continued) 17. SUBSEQUENT EVENTS (CONTINUED) In March 1999, the Company entered into the SGI Investment, providing for the purchase by SGI of 5,710,425 shares of the Company's Class B Preferred Stock and 878,527 shares of the Company's Class C Preferred Stock. The holders of a majority of the Class B Preferred Stock will have the right to designate one member of the Company's Board of Directors. The aggregate consideration received by the Company for the Class B Preferred Stock and the Class C Preferred Stock was $75 million, of which $35 million was paid in cash and $40 million was paid by transfer to the Company of a campus facility. The Class B Preferred Stock and the Class C Preferred Stock will be convertible on a one-to one basis into Common Stock and will have the right to vote such percentage with the Common Stock as a single class. The Class B Preferred Stock and Class C Preferred Stock are convertible immediately following the issuance date and 18 months following the issuance date, respectively. The shares of Common Stock into which the Class B Preferred Stock and the Class C Preferred Stock are subject to certain registration rights. F-34 EXHIBIT INDEX Item No. Description - - -------- ----------- 2.1 (1) Agreement for the Sale and Purchase of the entire issued share capital of WAM!NET U.K. Limited dated February 11, 1998, among the Company, WAM!NET (UK) Limited and the Selling Shareholders listed therein. 2.2 (1) Agreement and Plan of Reorganization dated December 17, 1997 by and among NetCo Communications Corporation, NetCo Acquiring Corporation, FreeMail, Inc. and the shareholders listed therein. 3.1 (1) Amended and Restated Articles of Incorporation of the Company. 3.2 (1) By-Laws of the Company. 4.1 (1) Indenture dated as of March 5, 1998, between the Company, as Issuer, and First Trust National Association, as Trustee. 4.2a (1) Certificate for the Rule 144A Original Notes ($200,000,000). 4.2b (1) Certificate for the Rule 144A Original Notes ($8,030,000). 4.3 (1) Certificate for the Regulation S Original Notes. 4.4 (1) Certificate for the Rule 144A Warrants. 4.5 (1) Certificate for the Regulation S Warrants. 4.6a (1) Rule 144A Unit Certificate. (200,000 Units) 4.6b (1) Rule 144A Unit Certificate. (8,030 Units) 4.7 (1) Certificate for the Regulation S Units. 4.8 (1) Form of Certificate for the Exchange Notes (incorporated herein by reference and included in Exhibit 4.1 to the Company's Registration Statement on Form S-4 filed with Securities and Exchange Commission on May 28, 1998). 4.9 (1) Common Stock Certificate. 4.10 (1) Registration Rights Agreement, dated March 5, 1998, among the Company and Merrill Lynch Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. 4.11 (1) Common Stock Registration Rights Agreement, dated as of March 5, 1998, among the Company, WorldCom Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. 4.12 (1) Warrant Agreement, dated as of March 5, 1998, by and between the Company and First Trust National Association, as Warrant Agent, to purchase common stock of the Company. 4.13 Certificate Representing 100,000 Shares of Class A Preferred Stock of the Company issued to WorldCom Inc. on December 16, 1996 (Incorporated herein by reference to exhibit 10.5 of the Company's Registration Statement on Form S-4 (File No. 333-53841) filed with the Securities and Exchange Commission on May 28, 1998). 4.14 Warrants to purchase 4,157,500 Shares of Common Stock of the Company exercisable on or before December 31, 2000, issued to WorldCom Inc. on December 16, 1996 (Incorporated herein by reference to exhibit 10.6 of the Company's Registration Statement on Form S-4 (File No. 333-53841) filed with the Securities and Exchange Commission on May 28, 1998). 4.15 Certificate for 13.25% Subordinated Unsecured Convertible Note due August 28, 2005 ($25,000,000 Note) issued to MCI WorldCom, Inc. on January 13, 1999. 4.16 Certificate for 1,679,234 Class A Warrants and 2,840,967 Class B Warrants to purchase Common Stock of the Company, issued to WorldCom Inc. on September 26, 1997 (Incorporated herein by reference to exhibit 10.9 of the Company's Registration Statement on Form S-4 (File No. 333-53841) filed with the Securities and Exchange Commission on May 28, 1998). 4.17 Subordinate Unsecured Convertible Note and Warrant Purchase Agreement between the Company and MCI WorldCom, Inc. dated January 13, 1999. 4.18 Preferred Stock Purchase Agreement by and between the Company and Silicon Graphics, Inc. dated as of March 3, 1999. 4.19 Certificate for 150,000 Warrants to purchase shares of Common Stock for the purchase price of $.01 per share dated January 13, 1999. 4.20 Certificate of Designation of Rights and Preferences of Class A Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999, as corrected and filed with the Secretary of State of this State of Minnesota on March 5, 1999. 4.21 Certificate of Designation of Rights and Preferences of Class B Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999. 4.22 Certificate of Designation of Rights and Preferences of Class C Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999. 4.23 Certificate of Designation of Rights and Preferences of Class D Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999. 4.24 Certificate representing 115,206 shares of Class A Preferred Stock of the Company issued to MCI WorldCom. Inc. on March 4, 1999. 4.25 Certificate representing 5,710,425 shares of Class B Convertible Preferred Stock of the Company issued to Silicon Graphics, Inc. on March 4, 1999. 4.26 Certificate representing 878,527 shares of Class C Convertible Preferred Stock of the Company issued to Silicon Graphics, Inc. on March 4, 1999. 4.27 Certificate representing 2,196,317 shares of Class D Convertible Preferred Stock of the Company issued to MCI WorldCom. Inc. on March 4, 1999. 4.28 Stockholders Agreement by and among the Company, Silicon Graphics, Inc. and MCI WorldCom, Inc. dated as of March 4, 1999. 4.29 Class A Preferred Stock Exchange Agreement by and between the Company and MCI WorldCom, Inc. dated as of March 4, 1999. 4.30 Class D Preferred Stock Conversion Agreement by and between the Company and MCI WorldCom, Inc. dated as of March 4, 1999. 10.1 (1) Credit Agreement among the Company, the Lending Institutions party thereto, as Lenders, The First National Bank of Chicago, as Agent, dated as of September 26, 1997. 10.2 (1) Ten Percent Convertible Note Purchase Agreement between the Company and WorldCom Inc. dated September 12, 1996 ($5,000,000 Note). 10.3 (1) Preferred Stock, Subordinated Note and Warrant Purchase Agreement between the Company and WorldCom Inc. dated November 14, 1996. 10.4 (1) $28,500,000 Seven Percent Subordinated Note due December 31, 2003, payable to WorldCom Inc. 10.5 Intentionally omitted. 10.6 Intentionally omitted. 10.7 (1) Right of Refusal Agreement Among WorldCom Inc., Edward Driscoll III and Alan L. Witters dated December 16, 1996. 10.8 (1) Guaranty Agreement dated September 26, 1997, by and between the Company and WorldCom Inc. 10.9 Intentionally omitted. 10.10 (1) Sublease dated September 24, 1997 between the Company and 1250895 Ontario Limited, relating to the property located at 6100 110th Street West, Bloomington, Minnesota. 10.11 (1) Service Provision Agreement dated as of July 18, 1997, by and between the Company and Time Inc. 10.12 (1) Standby Agreement dated as of July 19, 1997 by and between WorldCom Inc. and Time Inc. 10.13 (1) Employment Agreement dated as of November 14, 1996, by and between the Company and Edward J. Driscoll III. 10.14 (1) Employment Agreement dated as of November 14, 1996, by and between the Company and Allen Witters. 10.15 (1) Employment Agreement dated as of April 16, 1996, by and between the Company and James R. Clancy. 10.16 (1) Employment Agreement dated as of May 10, 1995, as amended, by and between the Company and Mark Marlow. 10.17 (1) Agreement dated February 11, 1998 between the Company and WorldCom, Inc. modifying certain terms of the (i) 10% Convertible Subordinated Note, due September 30, 1999, (ii) 7% Subordinated Note, due December 31, 2003, and (iii) 100,000 shares of Series A Preferred Stock, all of which are held by MCI WorldCom, Inc. (incorporated herein by reference to exhibit No. 4.17 to the Company's Registration Statement on Form S-4 (File No. 333- 53841) filed with the Securities and Exchange Commission on May 28, 1998) 10.18 (1) 1994 Stock Option Plan 10.19 (1) Amended and Restated 1994 Stock Option Plan 10.20 (1) 1998 Combined Stock Option Plan. 10.21 (1) Agreement dated June 5, 1997 between the Company and WorldCom, Inc. regarding data services provided by WorldCom, Inc. to the Company. 10.22 Intentionally omitted. 10.23 Sale and Purchase Agreement by and between Silicon Graphics, Inc., on behalf of itself and its wholly-owned subsidiary, Cray Research, L.L.C., and the Company dated as of March 4, 1999. 10.24 Lease by and between the Company and Silicon Graphics, Inc. on behalf of itself and its wholly-owned subsidiary, Cray Research, L.L.C., with respect to the Company's corporate campus facility located in Eagan, Minnesota dated as of March 4, 1999. 10.25 Employment Agreement dated January 1, 1998 by and between John R. Kauffman and the Company. 10.26 Employment Agreement dated November 3, 1997 by and between David T. Ottinger and the Company. 10.27 Employment Agreement dated September 8, 1998 by and between the Bradley E. Sparks and the Company. 12.1 Statement re: Computation of Ratios. 21.1 List of Subsidiaries of the Company. 23.1 Consent of Ernst & Young LLP 27.1 Financial Data Schedule. ________________ (1) Incorporated herein by reference to the Company's Registration Statement on Form S-4 (File No. 333-53841), filed with the SEC on May 28, 1998. EX-4.15 2 CERTIFICATE FOR 13.25% SUB. UNSECURED NOTES EXHIBIT 4.15 Registered Holder: MCI WORLDCOM, Inc. $25,000,000 WAM!NET, Inc. 6100 WEST 110th STREET MINNEAPOLIS, MINNESOTA 55438 13.25% Subordinated Unsecured Convertible Note Due August 28, 2005 For Value Received, WAM!NET, Inc., a Minnesota corporation (hereinafter called the "Issuer"), hereby promises to pay to the order of MCI WORLDCOM, Inc., or the registered holder (hereinafter referred to as the "Holder") the principal amount of Twenty Five Million Dollars ($25,000,000) or such lesser amount as has been actually advanced to the Issuer by the Holder pursuant to that certain Subordinated Unsecured Convertible Note and Warrant Purchase Agreement of even date herewith, upon presentation of this certificate, in legal tender of the United States of America at the time of payment hereof, to the account of holder according to Holder's written instructions, on August 28, 2005, being one hundred eighty (180) days after the maturity of the Senior Notes, as hereinafter defined. The indebtedness evidenced by this Subordinated Unsecured Convertible Note (this or the "Note") constitutes "Deeply Subordinated Indebtedness" for purposes of the Indenture (the "Indenture") relating to the Senior Notes as defined below. The Issuer further agrees to pay interest on the principal amount remaining unpaid from time to time thereon from the date hereof at the rate of thirteen and one-quarter percent (13.25%) per annum. Interest shall accrue on a monthly basis from the date of purchase of the Note, and be payable upon the due date of this Note. The Issuer shall, upon the due date and with or without demand or other request by the registered Holder, mail a check or draft representing such interest and the unpaid principal balance to the registered holder at the address designated by the registered holder and appearing on the books of registration maintained by the Issuer. The following terms, covenants, statements of Holders' rights and conditions shall apply to this Note. ARTICLE 1. SUBORDINATION 1.1. The Issuer and the Holder of this Note, by acceptance hereof, agree that the payment of the principal and interest on this Note is, to the extent stated herein expressly subordinated to the prior payment in full of all existing obligations of the Issuer for money borrowed from a bank, trust, insurance, or other financial institution engaged in the business of lending money, and with respect to the Issuer's Senior Discount Notes due 2005 issued March 5, 1998 ("Senior Notes"), which collectively are hereinafter referred to as "Senior Indebtedness." In no event shall the Issuer make any payments in respect of this Note prior to the date that is 180 days following the stated maturity of the principal of any Senior Indebtedness, except: (a) that this Note may be redeemed or retired by the Issuer or converted in accordance with the terms hereof into capital stock of the Issuer; and (b) the payment principal of and interest on this Note may be accelerated in accordance with the terms hereof only in the event of the acceleration of the payment of the principal amount of the Senior Notes following an event of default in respect of such Senior Notes, provided that any payment in respect of this Note following the acceleration thereof shall be subordinated to the prior payment in full of all amounts due in respect of the Senior Notes and under the Indenture, and provided further, that in the event of the recession of any such acceleration of the Senior Notes, the acceleration of this Note shall be deemed rescinded upon notice to such effect to the Holder from the Indenture trustee with respect to the Senior Notes. ARTICLE 2. EVENT OF DEFAULT 2.1. Each of the following shall constitute an Event of Default: (a) Failure to pay principal and interest when due; (b) An assignment for the benefit of creditors of the Issuer, adjudication of Issuer as a bankrupt, or petition for the reorganization of the Issuer pursuant to Chapter X or XI of the United States Bankruptcy Act, as the same may be amended. 2.2. Upon the occurrence of any Event of Default specified in (b) above, the entire unpaid principal balance hereof, together with all accrued and unpaid interest thereon and all other sums owing hereunder, shall become immediately due and payable, without presentation, demand or further action of any kind. Upon the occurrence of any Event of Default specified in (a) above, the holder of this Note shall have the sole option of declaring the unpaid principal balance hereof together with all other sums owing hereunder immediately due and payable, without presentation, demand or further action of any kind. 2.3. Upon the occurrence of any Event of Default and before and after acceleration of the entire unpaid principal balance of this Note, interest shall continue to accrue thereafter on the unpaid principal amount of this Note at a rate equal to two percent (2%) per annum in excess of the then -2- applicable rate of interest under this Note until this Note is paid in full, including the period following entry of any judgment. Both before and after any default, interest shall be calculated on the basis of a 360-day year but charged on the basis of actual number of days elapsed in any calendar year or part thereof. 2.4. Holder may waive any default before or after the same has been declared without impairing the Holder's right to declare a subsequent default hereunder, this right being a continuing right. 2.5. Upon an Event of Default, Holder shall not be deemed, by any act of omission or commission to have waived any of its rights or remedies unless such waiver is in writing and signed by Holder, and then only to the extent specifically set forth in the writing. A waiver as to one event shall not be construed as continuing or as a bar to or waiver of any right or remedy as to a subsequent event. ARTICLE 3. PREPAYMENT BY ISSUER 3.1. This Note may be prepaid at any time after April 30, 1999, in whole or in part, prior to maturity at the option of the Issuer, on at least twenty (20) days' written notice by registered mail by the Issuer to the Holder, upon payment of all, or such lesser portion of the principal amount as specified in the notice, together with interest accrued to the date fixed for prepayment. If the Holder hereof fails or neglects to present this Note for payment at the time and place specified in such notice, this Note shall continue to bear interest regardless of whether or not payment hereof is refused upon the presentation of the same at or after the time specified in such notice. ARTICLE 4. CONVERSION OF NOTE TO COMMON STOCK AT THE OPTION OF HOLDER 4.1. The Holder of this Note shall have the right, at its option in accordance with the terms of this Article 4, to convert the then outstanding principal amount of this Note, or any portion thereof, and any accrued interest thereon, into shares of the Capital Stock of the Issuer ("Stock") at a price per share determined as hereinafter described (such price hereinafter referred to as the "Conversion Price") upon surrender of this Note at the principal office of the Issuer, together with written notice (hereinafter referred to as the "Conversion Notice"), in form appended hereto, of the election executed by the Holder and specifying the name or names in which the shares of Stock deliverable upon such conversion shall be registered, -3- along with the addresses of the persons so named and, if required by the Issuer, accompanied by a written instrument of transfer in form satisfactory to the Issuer duly executed by the Holder; provided, however, that if this Note has been called for prepayment according to the terms of Article 3 prior to the receipt by Issuer of the Conversion Notice, the right of the Holder to convert this Note shall terminate on the date fixed for prepayment. 4.2. If the Equity Offering as defined in Section 4A.1 is not consummated by April 30, 1999, the Holder shall have the right, at its option, to convert at any time after April 30, 1999 and prior to the due date of this Note, the then outstanding principal amount of this Note, or any portions thereof plus accrued interest thereon into Common Stock of the Issuer, par value $.01 ("Common Stock"), at a Conversion Price equal to the per share fair market value of the Common Stock as of the date of the receipt by Issuer of the Conversion Notice from Holder with respect to its election to convert as determined in accordance with Section 4.3. 4.3. In the event the Holder elects to convert part or all of the outstanding principal and accrued interest thereon of this Note to Common Stock under Section 4.2 above, the Issuer (acting through its directors who are not affiliated with the Holder) and the Holder shall, within twenty (20) days of the receipt of the Conversion Notice, utilize their reasonable efforts to reach an agreement as to the per share fair market value of the Common Stock. In the event the parties are unable to do so, WAM!NET's management and Board of Directors shall promptly obtain from a nationally recognized investment banking firm a valuation of the fair market value per share of WAM!NET's Common Stock. In such case, the fees and expenses of the investment banking firm shall be borne one-half by the Issuer and one-half by the Holder. 4.4. Stock issued on conversion of this Note pursuant to Section 4.1 shall be delivered as follows: (a) Within fifteen (15) days after the surrender of this Note for conversion and the receipt of the Conversion Notice, the Issuer shall deliver to the Holder, or to such person or persons so designated by the Holder in the Conversion Notice, a certificate or certificates representing the number of fully paid and non-assessable shares of Stock into which this Note or portion thereof is to be converted in such name or names as are specified in the Conversion Notice, together with any cash payable in lieu of any fractional share as provided in Section 4.6. Such conversion shall be deemed to have been effected at the close of business on the date when this Note shall have been surrendered for conversion together with the Conversion Notice, so that the person entitled to receive the shares of Stock upon conversion shall be treated for all purposes as having become the record holder of such shares of Stock at such time and the -4- conversion shall be at the Conversion Price in effect at the time. (b) In the event less than the entire outstanding principal balance of this Note shall be converted hereunder, this Note shall not be surrendered for cancellation but shall have the fact and amount of conversion recorded on the face of this Note by writing acknowledged by the Holder and the Issuer. 4.5. In the case of any consolidation or merger of the Issuer with another corporation, or the sale of all or substantially all of its assets to another person, or any reorganization or reclassification of the capital stock of the Issuer: (a) as a condition of such consolidation, merger, sale, reorganization or reclassification, lawful and adequate provision shall be made whereby the Holder shall thereafter have the right to receive upon the basis and upon the terms and conditions specified herein and in lieu of the shares of the Stock immediately theretofore subject to acquisition hereunder, such securities or assets as may (by virtue of such consolidation, merger, sale, reorganization or reclassification) be issued or payable with respect to or in exchange for a number of outstanding shares of such Stock equal to the number of shares of such Common Stock immediately theretofore so subject to acquisition hereunder had such consolidation, merger, sale, reorganization or reclassification not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder to the end that the provisions hereof shall thereafter be applicable as nearly as may be, in relation to any securities or assets thereafter deliverable upon the exercise of the conversion option. The Issuer shall not effect any such consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof, the successor person or persons purchasing such assets or succeeding or resulting from such consolidation, merger, reorganization or reclassification shall assume by written instrument executed and mailed or delivered to the Holder, the obligation to deliver to such Holder such securities or assets as, in accordance with the foregoing provisions, the Holder may be entitled to receive. (b) In the event that the Issuer shall make any distribution of its assets upon or with respect to its Common Stock, as a liquidating or partial liquidation dividend, or other than as a dividend payable out of earnings or any surplus legally available for dividends under the laws of the State of Minnesota, the Holder shall, upon conversion of the Note in accordance with the terms of the Note after the record date for such distribution or, in the absence of a record date, after the date of such distribution, receive in addition to the shares subscribed for, the amount of such assets (or, at the option of the Issuer, a sum equal to the value thereof at the time of distribution as -5- determined in good faith by the Board of Directors in its sole discretion) which would have been distributed to the Holder if this Note had been converted immediately prior to the record date for such distribution or, in the absence of a record date, immediately prior to the date of such distribution. 4.6. Fractional shares shall not be issued upon conversion of this Note but in any case where the Holder would, except for the provisions of this Article, be entitled under the terms hereof to receive a fractional share, the Issuer shall, upon any conversion for the largest number of whole shares then called for, pay a sum in cash equal to the sum of the proportional part of the per share Conversion Price represented by such fractional share. ARTICLE 4A. AUTOMATIC CONVERSION 4A.1. If on or before April 30, 1999, the Issuer consummates an equity offering resulting in gross proceeds in cash and non-cash consideration as provided in the Loan Agreement having an aggregate value of a minimum of Seventy-Five Million Dollars ($75,000,000.00) (an "Equity Offering"), the then outstanding principal amount of this Note and any accrued interest thereon shall, upon such consummation automatically and without any action on the part of the Holder or Issuer convert into the same class of shares sold in the Equity Offering and at a Conversion Price equal to the offering price per share in the Equity Offering. ARTICLE 5. REGISTRATION RIGHT 5.1. (a) If, commencing one (1) year after the date hereof, the Issuer proposes to claim an exemption under Section 3(b) for a public offering of any of its securities or to register under the Securities Act of 1933 (except by a claim of exemption or registration statement on a form that does not permit the inclusion of shares by its security holders) any of its securities, it will give written notice to the registered Holder of this Note, and all registered Holders of shares of common stock acquired upon the conversion of this Note, of its intention to do so and, on the written request of any such registered holders given within twenty (20) days after receipt of any such notice (which request must be made within five (5) years from the date of this Note and which notice shall specify the shares of common stock intended to be sold or disposed of by such registered holder and describe the nature of any proposed sale or other disposition thereof), the Issuer will use its best efforts to cause all such shares, the registered holders of which shall have requested the registration or qualification thereof, to be included in such notification of registration statement proposed -6- to be filed by the Issuer; provided, however, that nothing herein shall prevent the Issuer from, at any time, abandoning or delaying any such registration initiated by it. If any such registration shall be underwritten in whole or in part, the Issuer may require that the shares requested for inclusion pursuant to this section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment, as expressed in writing delivered to the registered holder(s), of the managing underwriter of such public offering the inclusion of all of the shares originally covered by a request for registration would reduce the number of shares to be offered by the Issuer or interfere with the successful marketing of the shares of stock offered by the Issuer, the number of shares otherwise to be included pursuant to this Section in the underwritten public offering may be reduced; provided, however, that any such required reduction shall be pro rata among all persons (other than the Issuer) who are participating in such offering. Those shares which are thus excluded from the underwritten public offering shall be withheld from the market for a period, not to exceed 90 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. All expenses of such offering, except the fees of special counsel to such holders and brokers' commissions or underwriting discounts payable by such holders, shall be borne by the Issuer. (b) Further, on one occasion only, commencing one (1) year after the date hereof, upon request by the holder of the Note and/or the holders of shares issued upon the conversion of the Note who collectively have the right to purchase at least 500,000 shares or hold directly at least 500,000 shares purchased hereunder or have the right to purchase and hold directly an aggregate of at least 500,000 shares purchasable or purchased hereunder, the Issuer will promptly use its reasonable best efforts to register or qualify the Note or such shares under Section 3(b) or Section 5 of the Securities Act of 1933 (and, upon the request of such holders, under Rule 415 thereunder) and such state laws as such holders may reasonably request; provided that (i) such request must be made within five (5) years from the date of this Note; and (ii) the Issuer may delay the filing of any registration statement requested pursuant to this section to a date not more than ninety (90) days following the date of such request if in the opinion of the Issuer's principal investment banker at the time of such request such a delay is necessary in order not to adversely affect financing efforts then underway at the Issuer, or if in the opinion of the Issuer such a delay is necessary or advisable to avoid disclosure of material nonpublic information. The costs and expenses directly related to any registration requested pursuant to this section, including but not limited to legal fees of the Issuer's counsel, audit fees, printing expense, filing fees and fees and expenses relating to qualifications under state securities or blue sky laws incurred by the Issuer shall be borne entirely by the Issuer; provided, -7- however, that the persons for whose account the securities covered by such registration are sold shall bear the expenses of underwriting commissions applicable to their shares and fees of their legal counsel. If the holder of the Note and the holders of shares of Common Stock underlying the Note are the only persons whose shares are included in the registration pursuant to this section, such holders shall bear the expense of inclusion of audited financial statements in the registration statement which are not dated as of the Issuer's normal fiscal year or are not otherwise prepared by the Issuer for its own business purposes. The Issuer shall keep effective and maintain any registration, qualification, notification or approval specified in this paragraph for such period as may be necessary for the holders of the Note and such common stock to dispose thereof, and from time to time shall amend or supplement, at the holder's expense, the prospectus or offering circular used in connection therewith to the extent necessary in order to comply with applicable law; provided, that the Issuer shall not be obligated to maintain any registration for a period of more than nine (9) months. If, at the time any written request for registration is received by the Issuer pursuant to this Section 5.1(b) the Issuer has determined to proceed with the actual preparation and filing of a registration statement under the Securities Act in connection with the proposed offer and sale for cash of any of its securities by it or any of its security holders, such written request shall be deemed to have been given pursuant to Section 5.1(a) rather than to this Section 5.1(b), and the rights of the holders of the Note and/or shares issued upon the conversion of the Note covered by such written request shall be governed by Section 5.1(a) hereof. (c) If and whenever the Issuer is required by the provisions of Sections 5.1(a) or 5.1(b) hereof to effect the registration of shares issued upon the exercise of the Note under the Securities Act, the Issuer will: (i) Prepare and file with the Commission a registration statement with respect to such securities, and use its best efforts to cause such registration statement to become and remain effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed nine (9) months; (ii) prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed nine (9) months; (iii) furnish to the security holders participating in such registration and to the underwriters of the securities being registered such reasonable number of -8- copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities; (iv) use its best efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as such participating holders may reasonably request in writing within 30 days following the original filing of such registration statement, except that the Issuer shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (v) notify the security holders participating in such registration, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (vi) notify such holders promptly of any request by the Commission for the amending or supplementing of such registration statement or prospectus or for additional information; (vii) prepare and file with the Commission, promptly upon the request of any such holders, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for such holders (and concurred in by counsel for the Issuer), is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Note or shares by such holder; (viii) prepare and promptly file with the Commission and promptly notify such holders of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; (ix) advise such holders, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose -9- and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (x) not file any amendment or supplement to such registration statement or prospectus to which a majority in interest of such holders shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for the Issuer the filing of such amendment or supplement is reasonably necessary to protect the Issuer from any liabilities under any applicable federal or state law and such filing will not violate applicable law; and (xi) at the request of any such holder, furnish on the effective date of the registration statement and, if such registration includes an underwritten public offering, at the closing provided for in the underwriting agreement: (i) opinions, dated such respective dates, of the counsel representing the Issuer for the purposes of such registration, addressed to the underwriters, if any, and to the holder or holders making such request, covering such matters as such underwriters and holder or holders may reasonably request; and (ii) letters, dated such respective dates, from the independent certified public accountants of the Issuer, addressed to the underwriters, if any, and to the holder or holders making such request, covering such matters as such underwriters and holder or holders may reasonably request, in which letter such accountants shall state (without limiting the generality of the foregoing) that they are independent certified public accountants within the meaning of the Securities Act and that in the opinion of such accountants the financial statements and other financial data of the Issuer included in the registration statement or the prospectus or any amendment or supplement thereto comply in all material respects with the applicable accounting requirements of the Securities Act. (d) The Issuer hereby indemnifies the holder of this Note and of any common or other stock issued or issuable hereunder, its officers, directors, employees and agents, and any person who controls such Note holder or such holder of common or other stock within the meaning of Section 15 of the Securities Act of 1933, against all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in any registration statement, prospectus, notification or offering circular (and as amended or supplemented if the Issuer shall have furnished any amendments or supplements thereto) or any preliminary prospectus or caused by any omission to state therein a material fact required to be stated therein or necessary to -10- make the statements therein not misleading except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission contained in information furnished in writing to the Issuer by such Note holder or such holder of common or other stock expressly for use therein, and each such holder by its acceptance hereof severally agrees that it will indemnify and hold harmless the Issuer and each of its officers who signs such registration statement and each of its directors and each person, if any, who controls the Issuer within the meaning of Section 15 of the Securities Act of 1933 with respect to losses, claims, damages or liabilities which are caused by any untrue statement or omission contained in information furnished in writing to the Issuer by such holder expressly for use therein. (e) If the indemnification provided for in Article 5 is unavailable to an indemnified party as provided herein in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the Issuer, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the Issuer on the one hand and the holder of this Note on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of the Issuer on the one hand and of the holder of this Note on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statements of a material fact of the omission or alleged omission to state a material fact relates to information supplied by the Issuer or by the holder of this Note is and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent, such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, without limitation, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Issuer and the holder of this Note agree that it would not be just and equitable if contribution pursuant to this Section 5.1(e) were determined by a pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5.1(c), the holder of this Note shall not be required to contribute any amount in excess of the amount by which the total price which such holder's registerable securities were sold to the public. No person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. -11- ARTICLE 6. REGISTRY 6.1. Books for the registry hereof are kept at the office of the Issuer. No transfer hereof shall be valid unless made on the Issuer's books at the office of the Issuer, by the Holder, in person, or by an attorney duly authorized in writing, similarly noted hereon. ARTICLE 7. PAYMENT 7.1. Payment to the Holder of principal and interest shall be a complete discharge of the Issuer's liability with respect to such payment, but the Issuer may, at any time, require the presentation hereof as a condition precedent to such payment. 7.2. No recourse shall be had for the payment of the principal, or interest, or for any claim based thereof, or otherwise, against any incorporator, shareholder, officer, director, or agent, past, present, or future, of the Issuer, whether by virtue of any constitution, statute, rule of law, enforcement of any assessment, or penalty, or by reason of any matter prior to delivery of this Note, or otherwise. All such liability, by the acceptance hereof, is a part of the consideration to the Issuer hereof, and is expressly waived. ARTICLE 8. DIVIDENDS 8.1. Until payment in full or conversion of this Note, the Issuer may not declare any dividend payable in cash or property on its Common Stock, with the sole exception of any stock split in the form of a dividend payable in shares of common stock to which the provisions of Article IV hereof apply. ARTICLE 9. OWNERSHIP 9.1. The Issuer may treat the person(s) in whose name this Note is issued as the absolute owner(s) hereof for all purposes, whether or not this Note is overdue and the Issuer shall not be affected by any notice to the contrary. ARTICLE 10. NOTICE 10.1. All notices, requests, demands and other communications under this Note shall be in writing and shall be -12- deemed to have been given on the date of service if served personally on the party to whom notice is to be given, or on the third day after mailing if mailed to the party to whom notice is to be given by first class mail, registered or certified, postage prepaid to the Issuer at its address stated on the front page of this Note and to the Holder at its address as listed in the register of the Issuer. Either party may change its address for purposes of this Article 10.1 by giving the other party written notice of the new address in the manner set forth above. ARTICLE 11. MISCELLANEOUS 11.1. All parties liable for the payment of this Note agree to pay on demand, all costs of collection and to cure any default under this Note including, but not limited to, reasonable attorneys' fees actually incurred. 11.2. The undersigned and all endorsers, sureties and guarantors of this Note jointly and severally waive notice of and consent to any and all extensions of this Note or any part hereof without notice, and each hereby waives presentment, demand for payment, protest and notice of dishonor, demand, protest and nonpayment. 11.3. The remedies of Holder as provided herein shall be cumulative and concurrent, and may be pursued singularly, successively or together against Issuer at the sole discretion of Holder, and the failure to exercise any such right or remedy shall in no event be construed as a waiver or release of the same. 11.4. Issuer's obligations hereunder shall extend to and bind Issuer's successors and assigns. This Note may be amended only by an instrument in writing signed by both Issuer and Holder. IN WITNESS WHEREOF, the Issuer has caused this Note to be signed by its Chief Financial Officer. Dated: January ____, 1999 WAM!NET, Inc. By: /s/Brad Sparks ------------------------- Brad Sparks Its: Chief Financial Officer -13- CONVERSION NOTICE To WAM!NET, Inc. The undersigned holder of this Note hereby irrevocably exercises the option to convert this Note as indicated below: __________ The undersigned elects to convert $_________ in principal of this Note and accrued interest thereon into Common Stock of WAM!NET, Inc. in accordance with the terms of Section 4 of this Note. The undersigned holder of this Note directs that the shares issuable and deliverable upon the conversion be issued and delivered to the undersigned unless a different name has been indicated below. Additionally, as a condition to such conversion privilege, the undersigned holder of this Note agrees to execute a letter stating its investment intent is to hold the shares issuable upon conversion for investment and not for resale, except in accordance with the requirements is of Rule 144 of the General Rules and Regulations under the Securities Act of 1933, or any successor Rule together with applicable state securities law, and agrees that the certificates representing the shares issuable and deliverable upon conversion may be imprinted with a legend in customary form reciting the restrictions on transfer mandated by such laws. Dated:___________ NOTE HOLDER: ------------------------------- Name (Please Print) ------------------------------- Address ------------------------------- City, State and Zip ------------------------------- Signature If shares are to be issued otherwise than to owner please provide name and address of person or persons to whom shares are to be issued: ------------------------------- Name (Please Print) ------------------------------- Address ------------------------------- City, State and Zip -14- EX-4.17 3 SUBORDINATED UNSECURED CONVERTIBLE NOTES & WARRANT EXHIBIT 4.17 SUBORDINATED UNSECURED CONVERTIBLE NOTE AND WARRANT PURCHASE AGREEMENT Agreement made this 13th day of January 1999, by and between WAM!NET, Inc., a Minnesota corporation, having its principal place of business at 6100 West 110/th/ Street, Minneapolis, Minnesota 55438 ("WAM!NET") and MCI WORLDCOM, INC., a Georgia corporation, having its principal place of business at 515 East Amite Street, Jackson, Mississippi 39201 ("MCI WCOM"). WITNESSETH: Whereas, WAM!NET's objective is to become the leading provider of enhanced, managed digital data delivery and archiving services to industries comprised of interdependent participants requiring industry specific, high speed digital connectivity; Whereas, in order to pursue this objective, WAM!NET intends to designate a senior level operations manager to serve as a Chief Operating Officer and perform the functions and duties typically performed by a Chief Operating Officer; Whereas, WAM!NET currently requires financing to continue its development and deployment activities, to maintain existing and recruit additional key employees, and to engage a Chief Operating Officer pending the receipt of additional permanent financing; and Whereas, MCI WCOM is agreeable to lending WAM!NET the sum of up to Twenty Five Million Dollars ($25,000,000.00) in consideration of WAM!NET's issuance to MCI WCOM of WAM!NET's Subordinated Unsecured Convertible Note upon the terms and conditions, and for the additional consideration, provided herein; Whereas, MCI WCOM and WAM!NET each desire to provide for the issuance of the Warrants (as hereinafter defined) and the conversion of the Subordinated Unsecured Convertible Note of WAM!NET held by MCI WCOM as set forth in this Agreement. NOW THEREFORE, in consideration of the foregoing premises, and of the consideration provided herein, the parties agree as follows: I. LOAN AGREEMENT 1.1. The Loan. Subject to the terms and conditions set forth in this -------- Agreement, MCI WCOM will loan to WAM!NET an amount not exceeding Twenty-Five Million Dollars ($25,000,000) (the "Loan"). The Loan will be made in an initial disbursement ("Initial Disbursement") of Ten Million Dollars ($10,000,000.00) at Closing (as defined herein) and, upon request of WAM!NET, in subsequent disbursements ("Future Disbursements") not exceeding Fifteen Million Dollars ($15,000,000.00). WAM!NET hereby agrees that it will promptly designate a senior level operations manager to serve as a Chief Operating Officer and perform the functions and duties typically performed by a Chief Operating Officer, whose selection, qualifications and authority are satisfactory to MCI WCOM. Future Disbursements of the Loan shall be made in one or more disbursements on or after January 31, 1999, conditioned upon the Initial Disbursement being funded and of WAM!NET's obtaining a commitment for an equity investment resulting in gross proceeds of cash and non-cash consideration having an aggregate value of a minimum of $75,000,000.00, from an investor or investors and on such terms as are acceptable to MCI WCOM in its sole discretion. All requests for Future Disbursements must be signed by an officer of WAM!NET authorized by its board, requesting the Future Disbursement. The amount of each such Future Disbursement shall be delivered by MCI WCOM to WAM!NET in immediately available funds by wire transfer to an account designated by WAM!NET in the Funding Notice. Each Funding Notice shall be in form of the Funding Notice attached to this Agreement as Exhibit 1. 1.2. 13.25% Subordinated Note. The Loan shall be evidenced by a 13.25% ------------------------ Subordinated Convertible Unsecured Note ("Subordinated Note") in the form attached to this Agreement as Exhibit 2. The Loan shall be governed by the terms of the Subordinated Note, and shall bear interest and be repayable in accordance therewith in the principal amount of the sum of the Initial Disbursement and all Future Disbursements (if any) made by MCI WCOM to WAM!NET. The Loan shall constitute "Deeply Subordinated Indebtedness" for purposes of the Indenture (the "Indenture") relating to WAM!NET's 13.25% Senior Discount Notes due 2005. II. WARRANTS 2.1. Consideration. In consideration of the Loan, WAM!NET agrees to issue ------------- to MCI WCOM warrants to purchase shares of the Common Stock of WAM!NET in the form and subject to the terms and conditions set forth herein. 2.2. Terms. ----- (a) Upon the Initial Disbursement, WAM!NET shall issue to MCI WCOM Common Stock Purchase Warrants (the "Initial Warrants") entitling MCI WCOM to purchase in whole or in part One Hundred Fifty Thousand (150,000) shares of WAM!NET's authorized and unissued Common Stock, par value $.01 per share ("Common Stock") for an exercise price of One Cent ($.01) after April 30, 1999 and until April 30, 2004 subject to the additional terms and conditions as set forth in the Warrants. (b) WAM!NET shall issue to MCI WCOM Common Stock Purchase Warrants (the "Future Warrants" and, together with the Initial Warrants, the "Warrants") entitling MCI WCOM to purchase Common Stock in addition to that referenced in Section 2.02 (a) and not to exceed an additional Two Hundred Thousand (200,000) shares of Common Stock according to the formula set forth below for an exercise price of One Cent ($.01), after April 30, 1999 and until April 30, 2004 subject to the additional terms and conditions as set forth in the Warrants. Prior to requesting any Future Disbursement, WAM!NET shall use its reasonable efforts to obtain a written opinion from an Independent Financial Advisor (as such term is defined in the Indenture 2 pursuant to Section 10.14 thereof) stating that the terms of the issuance of the Warrants (as defined herein) including the Section 2.02 and 2.03 transactions, together with the other transactions contemplated under this Agreement, are fair to WAM!NET from a financial point of view ("Fairness Opinion"). If, notwithstanding its reasonable efforts to do so, WAM!NET is unable to obtain a response to its request for a Fairness Opinion within the time set forth for the Future Disbursement, MCI WCOM shall fund the Future Disbursement based upon WAM!NET's covenant that it will diligently pursue in good faith the issuance of the Fairness Opinion. Upon receipt of a Fairness Opinion and if supported by the Fairness Opinion, WAM!NET will issue Warrants to MCI WCOM for an aggregate number of shares of Common Stock equal to the product of (x) 200,000 and (y) a fraction, the numerator of which is the amount of such Future Disbursement and the denominator of which is $15,000,000. (c) In the event the Independent Financial Advisor cannot issue a Fairness Opinion on the transaction set forth in Section 2.02 (a), then the Warrants shall be promptly returned by MCI WCOM to WAM!NET and replaced with Warrants in such number as are supported by the Fairness Opinion rendered by the Independent Financial Advisor. In the event the Independent Financial Advisor cannot issue a Fairness Opinion on the proposed transaction set forth in Section 2.02(b), then the Warrants contemplated thereby shall not be issued but WAM!NET shall instead issue Warrants in such number as are supported by the Fairness Opinion rendered by the Independent Financial Advisor. 2.3. Form of the Warrants. The Initial Warrants for the Initial -------------------- Disbursement will be issued in the form attached to this Agreement as Exhibit 3. The Future Warrants for the Future Disbursements will be issued in a form substantially similar to the form attached to this Agreement as Exhibit 3, modified to reflect the correct number of warrants according to the formula set forth in Section 2.02 (b). III. REPRESENTATIONS, WARRANTIES AND COVENANTS OF WAM!NET 3.1. WAM!NET hereby represents, warrants and covenants to MCI WCOM that, as of the date hereof and as of the Closing as provided herein: (a) Corporate Organization and Power; Qualification. WAM!NET is duly organized, validly existing and in good standing as a corporation under the laws of its state of incorporation, has all corporate power and authority to own its properties and to carry on its businesses as now being and hereafter proposed to be conducted and is duly qualified and in good standing as a foreign corporation, and is authorized to do business, in all jurisdictions in which the character of its properties or the nature of its businesses requires such qualification or authorization, except for qualifications and authorizations the lack of which, singly or in the aggregate, has not had and will not have a materially adverse effect on WAM!NET. (b) Subsidiaries. Except as set forth on Schedule 1 hereto, WAM!NET does not own, directly or indirectly, any capital stock or other equity securities of any corporation nor does WAM!NET have any direct or indirect ownership interest, including interests in partnerships and joint ventures, in any other entity or business. 3 (c) Authorization; Enforceability. WAM!NET has the power, and has taken, or will take prior to closing, all necessary action (including any necessary stockholder action) to authorize it, to execute, deliver and perform in accordance with their respective terms this Agreement, the Subordinated Note in the form appended to this Agreement as Exhibit 2, and the Warrants in the form appended to this Agreement as Exhibit 3. This Agreement has been, and the Subordinated Note and Warrant contemplated hereby to which WAM!NET is a party, when delivered to MCI WCOM will have been duly executed and delivered by WAM!NET, and are, or when so delivered will be, legal, valid and binding obligations of WAM!NET, enforceable against WAM!NET in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. (d) No Violations; Consent. The execution, delivery and performance in accordance with their respective terms by WAM!NET of this Agreement and of the Note and Warrants, do not and will not as of closing or thereafter (i) require any governmental approval or any other consent or approval, including any consent or approval of the stockholders of WAM!NET, other than governmental approvals and other consents and approvals that have been obtained, are final and not subject to review on appeal or to collateral attack, are in full force and effect, or (ii) violate, conflict with, result in a breach of, constitute a default under, or result in or require the creation of any lien upon any assets of WAM!NET under, any material contract to which WAM!NET is a party or by which WAM!NET or any of its properties may be bound. (e) Litigation. There are not, in any court or before any arbitrator of any kind or before or by any governmental or non-governmental body, any actions, suits or proceedings pending or, to the knowledge of WAM!NET, threatened against or in any other way relating to or affecting (i) WAM!NET, or (ii) any of its businesses or properties, except for such actions, suits or proceedings which, singularly or in the aggregate, have not had and will not have a material adverse affect upon WAM!NET. (f) Taxes. WAM!NET has filed (or obtained extensions of the time by which it is required to file) all United States federal, state and local income tax returns and all other material tax returns required to be filed by it and has paid all taxes shown due on the returns so filed as well as the other taxes, assessments and governmental charges which have become due, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. WAM!NET will continue to make all such filings in a timely manner and pay all such taxes, assessments and other governmental charges required of it. (g) Capitalization. (i) As of the date hereof, the authorized capital stock of WAM!NET consists of 500,000,000 shares, the designations and classes of which are shown on Schedule 2 to this Agreement. WAM!NET does not hold any of its shares in treasury. (ii) As of the date hereof, 9,288,194 Common Shares are issued and outstanding and have been validly issued and are fully paid and nonassessable and are not subject to preemptive rights. 4 (iii) Except as contemplated by this Agreement and as disclosed on Schedule 2 to this Agreement, there are no outstanding subscriptions, options, warrants or other rights of any kind to acquire any additional shares of capital stock of WAM!NET, or other instruments or securities convertible into or exchangeable for, or which otherwise confer on the holder thereof any right to acquire, any such additional shares, nor is WAM!NET committed to issue any such option, warrant, right, or security, or any other instrument convertible into a security. (iv) Except as expressly provided for in this Agreement or depicted on Schedule 2 to this Agreement, there are no agreements relating to voting, purchase or sale of capital stock between WAM!NET and any of its stockholders or affiliates, and to the best of WAM!NET's knowledge, among any of its stockholders. (h) Financial Statements; Information. (i) WAM!NET has delivered to MCI WCOM copies of its financial statements (including balance sheets, income statements, changes in stockholders equity and statements of cash flow) for the period from inception, September, 1994, through year end December, 1997, and for the ten month period ended October 31, 1998. Such financial statements (x) fairly present the financial condition, assets and liabilities of WAM!NET at their respective dates and the results of its operations and changes in its cash flows for the periods covered thereby, (y) were prepared in accordance with generally accepted accounting principles except as may be noted therein, and (z) were prepared from the books and records of WAM!NET, which books and records are complete and correct and fairly reflect all material transactions of WAM!NET's business. (ii) Within 30 days following the end of each of its first three fiscal quarters and within 75 days following the end of its fourth fiscal quarter during the term of the Subordinated Note, WAM!NET will furnish MCI WCOM with a copy of its financial statements, (including balance sheets, income statements, changes in stockholders equity and statements of cash flow) for each of such quarters and fiscal year, respectively. In addition, WAM!NET will furnish MCI WCOM with such additional financial and business information, including monthly or other periodic financial statements as WAM!NET may prepare from time to time, upon the reasonable request of MCI WCOM. (i) Access. WAM!NET has provided MCI WCOM access to full and complete information regarding WAM!NET and shall continue to provide such information as MCI WCOM may reasonably request throughout the term of the Subordinated Note. IV. REPRESENTATIONS, WARRANTIES AND COVENANTS OF MCI WCOM 4.1. MCI WCOM hereby represents, warrants and covenants to WAM!NET that: (a) MCI WCOM has been given access to full and complete information regarding WAM!NET and has utilized such access to its satisfaction for the purpose of obtaining information MCI WCOM desires or deems relevant to the decision to purchase the Subordinated Note and obtain the Warrants; and particularly, MCI WCOM has had the opportunity to ask questions of, and receive answers from, representatives of the Company concerning the terms and 5 conditions of the Note and to obtain any additional information MCI WCOM desires or deems relevant; and (b) MCI WCOM is aware that the Company is a development stage company; that the success of the Company is dependent upon the Company's ability to secure appropriate employees, switching equipment, telephone carriage, integrating software; also upon the Company's ability to provide adequate installation and maintenance services; and upon the Company's ability to successfully market its data transportation technology and services to appropriate customers; and upon the Company's ability to obtain adequate financing, to finance its development and operations; and that the Company can give no assurances that it will be able to successfully obtain, provide or accomplish any such matters. (c) MCI WCOM has obtained, to the extent it has deemed necessary, professional advice with respect to the risks inherent in the investment in the Subordinated Note and the Warrant. (d) MCI WCOM, being a corporation with total assets in excess of $5,000,000 that was not formed for the purpose of acquiring the Subordinated Note and the Warrants, is an "accredited investor" within the meaning of Rule 501(a) of the General Rules and Regulations under the Securities Act of 1933. (e) MCI WCOM will not use its representation on WAM!NET's board of directors to cause WAM!NET to amend, waive or fail to enforce any provision of this Agreement; provided however, that this covenant shall not be deemed to ---------------- require any current or future director of WAM!NET to take or refrain from taking any action which such director reasonably believes, in the exercise of reasonable business judgment, to be in the best interests of WAM!NET or its shareholders in light of the circumstances then prevailing; and provided further -------------------- that this covenant is intended to be for the express benefit of the members, from time to time, of WAM!NET's board of directors who are not affiliated with MCI WCOM or its affiliates. V. LICENSES AND ACCESS TO TECHNOLOGY 5.1 Access to Technology. WAM!NET desires MCI WCOM to use certain of its -------------------- technology, products and services, both for MCI WCOM's own use and as part of suites of solutions MCI WCOM sells to its customers. As such, MCI WCOM would have to integrate certain of WAM!NET's technologies, products and services into MCI WCOM's infrastructure and product/service suites. During the term of the Subordinated Note and thereafter until such time as an initial public offering ("IPO") of the WAM!NET stock is prepared at the request of WAM!NET, WAM!NET hereby agrees that it will make available for such purposes to MCI WCOM technology developed by WAM!NET on terms mutually acceptable to MCI WCOM and WAM!NET subject to the provisions of Section 5.02. WAM!NET can condition such access upon the execution of an appropriate license or other agreement so long as the terms and conditions of the agreement are at least as favorable as any WAM!NET provides or may provide to any other customer or partner as set forth below. Upon the payment of the Subordinated Note or its conversion to Stock as provided herein, WAM!NET shall continue to make available to MCI WCOM technology previously made available to MCI WCOM in accordance with the terms 6 of any then existing applicable license or other agreement, but shall have no obligation to make available new technology developed after an IPO. 5.2. Most Favored Customer and/or Partner Terms. WAM!NET agrees that ------------------------------------------ during the term set forth in Section 5.01, any technology it provides or makes available to MCI WCOM pursuant to Section 5.01 shall be furnished on the terms and conditions (including, without limitation, pricing, access, and all other material terms and conditions) that are at least as favorable, when viewed in their entirety with respect to any particular agreement, as WAM!NET provides or may in the future have provided to any other person or entity not affiliated with WAM!NET or MCI WCOM. 5.3. Participation in Investor Partnering Discussions. During the term of ------------------------------------------------ the Subordinated Note and thereafter until paid or converted to Stock as provided herein, WAM!NET hereby agrees that MCI WCOM shall be given the opportunity to participate in any negotiation with any person or entity concerning an equity investment in WAM!NET by such person or entity. 5.4. No Violations. Notwithstanding anything to the contrary contained ------------- herein, (a) in no event shall WAM!NET be obligated to enter into any agreement, arrangement or understanding contemplated by this Section 5 on terms that would violate or cause a default under the Indenture and (b) in the event that this Section 5 would require WAM!NET to enter into any agreement, arrangement or understanding on terms that would violate or cause a default under any of its other material obligations existing as of the date hereof, MCI WCOM and WAM!NET agree to each use their respective good faith efforts in order to provide MCI WCOM with the benefits of this Section 5 without violating or causing a default under any such other material obligation. WAM!NET represents that as of the date hereof it has not identified any such material obligation that will be violated or as to which a default would occur by virtue of the rights granted to MCI WCOM in Section 5 of this agreement. VI. CLOSING 6.1. Closing. Closing of the transactions contemplated by this Agreement ------- ("the Closing") shall occur at the offices of WAM!NET, at 9:00 A.M., local Minneapolis time, on or before January 12, 1999, or at such other time and place as may be agreed by WAM!NET and MCI WCOM. 6.2. Conditions to Closing. The Closing shall be conditioned upon --------------------- satisfaction of all of the following requirements; (a) The approval of this Agreement by WAM!NET's Board of Directors and by MCI WCOM; (b) The due authorization and approval by WAM!NET's Board of Directors of the Subordinated Note and the Warrants; (c) Any necessary corporate filings by WAM!NET to validly authorize the Subordinated Note and the Warrants; 7 (d) Such certificates, dated as of the Closing, from officers of WAM!NET as MCI WCOM may reasonably request relating to the representations, warranties and covenants given by WAM!NET herein or to the satisfaction of these conditions of closing; (e) The opinion of WAM!NET counsel addressed to MCI WCOM in form and substance attached as Exhibit 4 to this Agreement. 6.3. Payment and Delivery. At Closing, WAM!NET shall deliver the -------------------- Subordinated Note and the Initial Warrants to purchase 150,000 shares of Common Stock to MCI WCOM against MCI WCOM's payment of the Initial Disbursement by wire transfer of immediately available funds to a depositary account specified by WAM!NET. VII. TERMINATION 7.1. Termination. Either party may terminate this Agreement prior to ----------- Closing upon any failure, including its own failure, to satisfy any of the Conditions to Closing set forth in Section 6.02 hereof. 7.2. Consequences of Termination. Neither party shall be liable to the --------------------------- other upon any termination in accordance with Section 7.01 hereof. VIII. MISCELLANEOUS ------------- 8.1. Amendments, Waivers and Consents. No provision in this Agreement -------------------------------- may be altered or amended, and compliance with any covenant or provision set forth herein may not be omitted or waived, except by an instrument in writing duly executed by MCI WCOM and WAM!NET. Any waiver or consent may be given subject to satisfaction of conditions stated therein and any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 8.2. Notices. All notices required or permitted by this Agreement shall ------- be in writing, and shall be hand delivered, sent by facsimile or sent by nationally recognized overnight delivery service or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to MCI WCOM: MCI WORLDCOM, Inc. 515 E. Amite Jackson, Mississippi 39201 Attention: Susan Mayer Senior Vice President Telephone: (202) 887-2202 Telecopy: (202) 887-3226 8 with a copy to: MCI WORLDCOM, Inc. 515 E. Amite Jackson, Mississippi 39201 Attention: Michael Salsbury General Counsel Telephone: (601) 360-8977 Telecopy: (601) 360-8282 (b) If to the WAM!NET: WAM!NET, Inc. 6100 West 110/th/ Street Minneapolis, Minnesota 55438 Attention: Edward J. Driscoll, III President and CEO Telephone: (612) 886-5146 Telecopy: (612) 887-2165 with a copy to: Lisa A. Gray General Counsel WAM!NET, Inc. 6100 West 110/th/ Street Minneapolis, Minnesota 55438 Telephone: (612) 886-5091 Telecopy: (612) 886-5176 or to such other person or address as any party hereto shall specify by notice in writing to the other parties. All such notices and other communications shall be effective when received. 8.3. Binding Effect; Assignment. This Agreement shall be binding upon -------------------------- and inure to the benefit of the WAM!NET and MCI WCOM. No assignment of rights or delegation of duties arising under this Agreement may be made by any party hereto without the prior written consent of the other parties. 8.4. Third-Party Beneficiaries. Except as set forth in Section 4.01(e), ------------------------- this Agreement is for the sole benefit of the parties hereto and their permitted assigns and, except as expressly set forth in Section 3.02(b) herein relating to the right to petition for a valuation, nothing herein expressed or implied shall give or be construed to give to any person, other than the parties hereto and such assigns, any legal or equitable rights hereunder. 9 8.5. Entire Agreement; Sayings. This Agreement, the Subordinated Note ------------------------- and the Warrants constitute the entire agreement between the parties hereto with respect to the subject matter contained herein and therein and supersedes all other prior understandings or agreements, both written and oral, between the parties with respect to the matters contained herein and therein. 8.6. Severability. The provisions of this Agreement are severable and, ------------ in the event that any court of competent jurisdiction shall determine that any one or more of the provisions or part of a provision contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement; but this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of a provision, had never been contained herein, and such provisions or part reformed so that it would be valid, legal and enforceable to the maximum extent possible. 8.7. Governing Law. This Agreement shall be governed by, and construed ------------- in accordance with, the law of the State of Minnesota without regard to its principles of conflicts of laws. 8.8. Headings. Article, section and subsection headings in this -------- Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 8.9. Counterparts. This Agreement may be executed in two or more ------------ counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart by original or facsimile signature. 8.10. Expenses. Each of the parties hereto shall pay the fees and -------- expenses of its respective counsel, accountants and other experts (including any broker, finder, advisor or intermediary) and shall pay all other expenses incurred by it in connection with the negotiation, preparation and execution of this Agreement and the consummation of the transactions contemplated hereby. 10 IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. "WAM!NET" WAM!NET, Inc. By: /s/ Bradley E. Sparks ---------------------------------- Bradley E. Sparks Its: Chief Financial Officer "MCI WCOM" MCI W0RLDCOM, Inc. By: /s/ Susan Mayer ---------------------------------- Susan Mayer Its: Senior Vice President 11 EX-4.18 4 PREFERRED STOCK PURCHASE AGREEMENT EXHIBIT 4.18 ================================================================================ PREFERRED STOCK PURCHASE AGREEMENT BY AND BETWEEN WAM!NET INC. AND SILICON GRAPHICS, INC. ______________________________ Dated as of March 3, 1999 ______________________________ ================================================================================ PREFERRED STOCK PURCHASE AGREEMENT Preferred Stock Purchase Agreement, dated as of March 3, 1999 (this "Agreement"), by and between WAM!NET INC., a Minnesota corporation (the "Company"), and SILICON GRAPHICS, INC., a Delaware corporation ("Buyer"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company has designated two additional series of its preferred stock, consisting of 5,710,425 shares, par value $0.01 per share, designated as its "Class B Convertible Preferred Stock" (the "Class B Preferred Shares"), and 878,527 shares, par value $0.01 per share, designated as its "Class C Convertible Preferred Stock" (the "Class C Preferred Shares" and together with the Class B Preferred Shares, the "Preferred Shares"); WHEREAS, the Preferred Shares are convertible into shares (the "Conversion Shares") of the Company's common stock, par value $0.01 per share (the "Common Stock") in accordance with the terms of the Class B Certificate of Designation and the Class C Certificate of Designation (each as defined herein); WHEREAS, the terms, limitations and relative rights and preferences of the Class B Preferred Shares are set forth in the "Statement of Rights and Preferences of Class B Convertible Preferred Shares" (the "Class B Certificate of Designation"), a copy of which is attached hereto as Exhibit I, and the terms, limitations and relative rights and preferences of the Class C Preferred Shares are set forth in the "Statement of Rights and Preferences of Class C Convertible Preferred Shares" (the "Class C Certificate of Designation"), a copy of which is attached hereto as Exhibit II; and WHEREAS, Buyer desires to subscribe for and purchase from the Company, and the Company desires to issue and sell to Buyer, the Class B Preferred Shares and the Class C Preferred Shares, all in accordance with the terms and subject to conditions of this Agreement. NOW THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements contained herein, the parties hereby agree as follows: I. PURCHASE AND SALE OF PREFERRED STOCK 1.01 Purchase and Sale of the Preferred Stock. On the terms and subject to ---------------------------------------- the conditions set forth in this Agreement, on the Closing Date (as defined herein), Buyer shall subscribe for and purchase from the Company, and the Company shall issue and sell to Buyer: (a) The Class B Preferred Shares for an aggregate purchase price of $65,000,000, of which (i) $25,000,000 shall be payable in cash and (ii) $40,000,000 shall be payable by transfer and conveyance of title to Buyer's campus facility located at 655 Lone Oak Parkway, Eagan, Minnesota, as described in greater detail in the Real Property Documents (as defined herein) (the "Real Property" and, together with the amount set forth in (i), the "Class B Purchase Price"); and 2 (b) The Class C Preferred Shares for an aggregate purchase price of $10,000,000 payable in cash (the "Class C Purchase Price"). 1.02 Duration, Rights and Preferences of the Preferred Stock. The Class B ------------------------------------------------------- Preferred Shares shall have and enjoy the rights and preferences as are set forth in the Class B Certificate of Designation and the Class C Preferred Shares shall have and enjoy the rights and preferences as are set forth in the Class C Certificate of Designation. 1.03 Closing. (a) Unless this Agreement shall have been terminated and the ------- transactions herein contemplated shall have been abandoned pursuant to Section 5 hereof, the closing of the purchase and sale of the Preferred Shares and the other transactions contemplated hereby (the "Closing") shall be held at 10:00 a.m. (Central Standard Time) on the third business day following the satisfaction or waiver of the conditions set forth herein, at the offices of the Company, 6100 West 110th Street, Minneapolis, Minnesota (or at such other time, date and place as the parties may mutually agree). The date on which the Closing actually occurs is hereinafter referred to as the "Closing Date." (b) At the Closing, the Company shall deliver to Buyer stock certificates registered in the name of Buyer representing the Preferred Shares being purchased by Buyer, against payment and delivery by Buyer to the Company of the Class B Purchase Price and the Class C Purchase Price. Buyer shall effect such payment and delivery of the Class B Purchase Price and the Class 3 C Purchase Price as follows: (i) with respect to cash, by wire transfer of immediately available funds to such bank account or bank accounts designated by the Company and (ii) with respect to the Real Property, by execution and delivery of the agreements, instruments and documents set forth on Schedule 1.03(b) hereto necessary to convey good and marketable title to the Real Property to the Company (the "Real Property Documents"). II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY 2.01 The Company hereby represents, warrants and covenants to Buyer that, as of the date hereof and as of the Closing Date: (a) Corporate Organization and Power; Qualification. The Company (i) is ----------------------------------------------- duly organized, validly existing and in good standing as a corporation under the laws of the state of Minnesota, (ii) has all corporate power and authority to own its properties and to carry on its businesses as now being conducted and (iii) is duly qualified and in good standing as a foreign corporation, and is authorized to do business, in all jurisdictions in which the character of its properties or the nature of its businesses requires such qualification or authorization, except for qualifications and authorizations the lack of which, individually or in the aggregate, would not reasonably be expected to result in a material adverse effect on the business, financial condition, results of operations, assets or liabilities of the Company and its subsidiaries taken as a whole (a "Material Adverse Effect"). 4 (b) Subsidiaries. Set forth on Schedule 2.01(b) hereto is a complete list ------------ of all of the subsidiaries of the Company. Except as set forth on Schedule 2.01(b) hereto, the Company does not own, directly or indirectly, any capital stock or other equity securities of any corporation, nor does the Company have any direct or indirect ownership interest, including interests in partnerships and joint ventures, in any other entity or business. Each of the subsidiaries has been duly incorporated, is validly existing and in good standing under the laws of its respective jurisdiction of incorporation and is duly qualified and in good standing as a foreign corporation, and is authorized to do business, in all jurisdictions in which the character of its properties or the nature of its businesses requires such qualification or authorization, except for qualifications and authorizations the lack of which, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect. Each of the subsidiaries has the requisite power and authority to own and hold its properties and to carry on its business as now being conducted. Except as disclosed in the registration statements, reports and proxy statements filed by the Company with the Securities and Exchange Commission (the "SEC Reports"), disclosed in the Financial Statements (as defined herein) or set forth on Schedule 2.01(b) hereto: (i) all of the outstanding shares (other than director's qualifying shares, if any) of capital stock of each of the subsidiaries are owned beneficially and of record by the Company, one of its subsidiaries or any combination thereof, in each case 5 free and clear of any liens, charges, restrictions, claims or encumbrances created or suffered by the Company or any of its subsidiaries, other than restrictions on transfer imposed by the Securities Act of 1933, as amended (the "Securities Act"), or any other provision of applicable law; and (ii) there are no outstanding subscriptions, warrants, options, convertible securities or other rights (contingent or other) pursuant to which any of the subsidiaries is or may become obligated to issue any shares of its capital stock to any person other than the Company or a subsidiary. (c) Power and Authority; Authorization; Enforceability. The Company has -------------------------------------------------- all requisite corporate power and authority necessary to execute and deliver (i) this Agreement, (ii) the Real Property Documents to which it is a party, (iii) the Stockholders' Agreement, by and among the Company, Buyer and MCI WORLDCOM, Inc., the form of which is attached hereto as Exhibit III (the "Stockholders' Agreement"), (iv) the Preferred Provider Agreement, by and between the Company and Buyer, the form of which is attached hereto as Exhibit IV (the "Preferred Provider Agreement" and, collectively with the Real Property Documents to which the Company or Buyer, as the case may be, is a party and the Stockholders' Agreement, the "Other Transaction Documents") and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Other Transaction Documents and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part 6 of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement and the Other Transaction Documents and to consummate the transactions contemplated hereby and thereby. This Agreement has been (and the Other Transaction Documents, when executed and delivered in accordance with their respective terms, will be) duly executed and delivered by the Company and constitutes (and, in the case of the Other Transaction Documents, will constitute) the valid and binding obligation of the Company, enforceable against it in accordance with its terms, except as enforceability against the Company may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to the rights of creditors generally and other general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) and except as any rights to indemnity and contribution contemplated by Section 6.02 may be limited by applicable federal and state securities laws and public policy considerations. (d) No Violations; Consents and Approvals. The execution and delivery by ------------------------------------- the Company of this Agreement and the Other Transaction Documents, the performance by the Company of its obligations hereunder and thereunder and the consummation by the Company of the transactions contemplated hereby and thereby will not (i) violate, conflict with, result in a breach of, constitute a default under, or result in or require the creation of any lien upon any assets of the Company under its Articles of Incorporation, as amended (the "Charter"), By-laws or any 7 material contract to which the Company is a party or by which the Company or any of its properties may be bound or (ii) require any consent or approval other than such consents and approvals to be obtained before the Closing and those that have been obtained which are final and not subject to review on appeal or to collateral attack and are in full force and effect, except for such violations, conflicts, breaches, defaults or liens which, or consents or approvals which, if not obtained, would not reasonably be expected to, individually or in the aggregate, result in a Material Adverse Effect. (e) Litigation; Compliance with Laws. Except as disclosed in the SEC -------------------------------- Reports, disclosed in the Financial Statements or set forth on Schedule 2.01(e), there are no (i) actions, suits, claims, proceedings or investigations instituted and pending or, to the knowledge of the Company, threatened, against or affecting the Company or any of its subsidiaries, at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) arbitration proceedings relating to the Company instituted and pending under collective bargaining agreements or otherwise or (iii) governmental inquiries instituted and pending or, to the knowledge of the Company, threatened, against or affecting the Company, any of which would reasonably be expected to result in a Material Adverse Effect. Except for any defaults which would not reasonably be expected to result in a Material Adverse Effect, neither the Company nor any of its subsidiaries is in default with respect to any order, 8 writ, injunction or decree known to or served upon the Company of any court or of any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. Except where the failure to do so would not reasonably be expected to result in a Material Adverse Effect, neither the Company nor any of its subsidiaries has failed to comply with any laws, rules, regulations and orders applicable to its respective business, operations, properties, assets, products and services, the Company and each of its subsidiaries has all necessary permits, licenses and other authorizations required to conduct its business as presently conducted and the Company and each of its subsidiaries has operated its respective business pursuant to and in compliance with the terms of all such permits, licenses and other authorizations. (f) Taxes. The Company has filed (or obtained extensions of the time by ----- which it is required to file) all United States federal, state and local income tax returns and all other material tax returns required to be filed by it, and has paid all taxes shown due on the returns so filed as well as the other taxes, assessments and governmental charges which have become due, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. The Company will continue to make all such filings in a timely manner and pay all such taxes, assessments and other governmental charges required of it. 9 (g) Capitalization. (i) As of the date hereof, the authorized capital -------------- stock of the Company consists of 500,000,000 shares, the designations and classes of which are set forth on Schedule 2.01(g) hereto. The Company does not hold any of its shares in treasury. (ii) As of the date hereof, 9,291,027 shares of Common Stock and 100,000 shares of the Company's Class A Preferred Stock, par value $10.00 per share (the "Class A Preferred Stock"), are issued and outstanding and have been validly issued and are fully paid and nonassessable and are not subject to preemptive rights. (iii) Except as contemplated by this Agreement, disclosed in the SEC Reports, disclosed in the Financial Statements or set forth on Schedule 2.01(g) hereto, as of the date hereof there are no outstanding subscriptions, options, warrants or other rights of any kind to acquire any additional shares of capital stock of the Company or other instruments or securities convertible into or exchangeable for, or which otherwise confer on the holder thereof any right to acquire, any such additional shares of capital stock, nor is the Company committed to issue any such option, warrant, right or security. Except as provided for in the Charter, disclosed in the SEC Reports or set forth on Schedule 2.01(g) hereto, the Company has no obligation (contingent or other) to purchase, redeem or otherwise acquire any of its equity securities or any interest therein or to pay any dividend or make any other distribution in respect thereof. 10 All of the outstanding securities of the Company were issued in compliance with the registration requirements under applicable federal and state securities laws (or pursuant to applicable exemptions therefrom). (iv) Except as contemplated by this Agreement, disclosed in the SEC Reports or disclosed in the Financial Statements, as of the date hereof, there are no agreements relating to voting, purchase or sale of capital stock between the Company and any of its stockholders or affiliates, and to the best of the Company's knowledge, there are no such agreements among any of its stockholders. (v) The Preferred Shares are duly authorized and, when issued and paid for pursuant to the terms of this Agreement, will be validly issued, fully paid and nonassessable, will have the rights, preferences and privileges specified in the Class B Certificate of Designation and the Class C Certificate of Designation, as the case may be. The Conversion Shares are duly authorized and have been reserved for issuance and, when issued upon conversion in accordance with the terms of the Class B Certificate of Designation and the Class C Certificate of Designation, as the case may be, will be validly issued, fully paid and nonassessable, and will be free and clear of all liens, encumbrances and restrictions (other than those contemplated hereby and by the Other Transaction Documents, created or suffered by Buyer (or the current holder thereof) and restrictions on transfer imposed by the Securities Act or any 11 other applicable federal or state securities laws, and the rules and regulations promulgated thereunder). Neither the issuance, sale or delivery of the Preferred Shares nor the contemplated issuance or delivery of the Conversion Shares is subject to any currently existing preemptive right of stockholders of the Company, any right of first refusal or other right in favor of any person, in each case except for rights that have been waived. (h) Financial Statements. The Company has delivered to Buyer copies of its -------------------- financial statements (including balance sheets, income statements, changes in stockholders equity, statements of cash flow and any related notes) for the year ended December 31, 1998 (the "Financial Statements") and will deliver to Buyer (as soon as practicable but in no event later than March 31, 1999) audited copies of the Financial Statements. The Financial Statements (i) fairly present, in all material respects, the financial condition, assets and liabilities of the Company as of the date thereof and the results of its operations and changes in its cash flows for the periods covered thereby, (ii) were prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved, except as may be noted therein, and (iii) were prepared from the books and records of the Company, which books and records are complete and correct and fairly reflect all material transactions of the Company's business. (i) Absence of Certain Changes. Except as contemplated by this Agreement, -------------------------- disclosed in the SEC Reports or set forth on 12 Schedule 2.01(i) hereto, since December 31, 1998, (i) there has been no change in the assets, liabilities or financial condition of the Company and its subsidiaries (on a consolidated basis) from that reflected in the balance sheet of the Company and its subsidiaries as of December 31, 1998, except for changes (A) in the ordinary course of business or (B) which in the aggregate have not resulted in and would not reasonably be expected to result in a Material Adverse Effect and (ii) there has not been any event or change that would reasonably be expected to result in a Material Adverse Effect, individually or in the aggregate, whether or not insured against (excluding general economic or industry changes). (j) No Brokers. No broker, finder or investment banker is entitled to any ---------- brokerage, finder's or other fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of the Company. (k) Proprietary Information of Third Parties. Except for such claims that ---------------------------------------- would not reasonably be expected to result in a Material Adverse Effect, to the knowledge of the Company, no third party has claimed or has reason to claim that the Company or any of its subsidiaries has (a) violated or may be violating any of the terms or conditions of any non-competition or non-disclosure agreement with such third party, (b) disclosed or may be disclosing or utilized or may be utilizing any trade secret or proprietary information or documentation of such third party or (c) interfered or may be interfering in the employment 13 relationship between such third party and any of its present or former employees. Neither the Company nor any of its subsidiaries has utilized and does not propose to utilize any trade secret or any information or documentation proprietary to any other person in violation of existing arrangements with such person, and to the knowledge of the Company, neither the Company nor any of its subsidiaries has violated any confidential relationship which any such person may have had with any third party, in connection with the development, manufacture or sale of any product or the development or sale of any service of the Company. (l) Patents, Trademarks, Etc. Set forth on Schedule 2.01(l) hereto is a ------------------------- list of all domestic and foreign trademarks, trademark applications, patents, registered copyrights (except copyrighted software licensed to the Company in its ordinary course of business) and patent applications owned by, registered in the name of or licensed to or from the Company and its subsidiaries as of the date hereof. Except where the failure to do so would not reasonably be expected to result in a Material Adverse Effect, the Company and its subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (including those necessary for the use and protection of the names and/or marks "WAM!NET", "WAM!BASE" and "WAM!PROOF") or other intellectual 14 property (collectively, "Intellectual Property") necessary to carry on its business as presently conducted. Except as set forth on Schedule 2.01(l) hereto, neither the Company nor any subsidiary has received any notice of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect. (m) The Year 2000. Except where the failure to do so would not reasonably -------------- be expected to result in a Material Adverse Effect, the Company has used (or is in the process of using) reasonable procedures to verify that any of its software licensed or otherwise provided to its customers and any software used in its business will recognize and process date fields after the turn of the century, and perform date-dependent calculations and operations (including sorting, comparing and reporting) after the turn of the century correctly, and has used (or is in the process of using) reasonable efforts to ensure that any such software will not produce invalid and incorrect results as a result of the change of century (all without human intervention, other than original data entry of valid dates), provided that such software receives correct and properly formatted date inputs from all 15 software and hardware that exchanges data with or provides data to the software. (n) Title to Properties. Except as disclosed in the SEC Reports, the ------------------- Company and its subsidiaries have good and valid title to all real and personal property which they own and which are reflected on the Financial Statements (except for assets and properties sold, consumed or otherwise disposed of by them in the ordinary course of business since December 31, 1998), and such assets and properties are owned free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind, except (i) those securing indebtedness reflected on the Financial Statements or indebtedness incurred in the ordinary course of business and consistent with past practice after the date thereof, (ii) mechanics', materialmens' and other liens which have arisen in the ordinary course of business or (iii) mortgages, pledges, liens, security interests, claims, restrictions or encumbrances which, individually or in the aggregate, would not be reasonably likely to impair, in any material respect, the continued use of such asset or property. (o) Agreements. Except as set forth in Schedule 2.01(o) hereto or ---------- disclosed in the Financial Statements, all material agreements, contracts or instruments required to be filed as exhibits to the SEC Reports have been so filed. Neither the Company nor any of its subsidiaries is in breach or default of any agreement, contract, instrument or other commitment, except for such breaches and defaults which would not reasonably be expected to result in a Material Adverse Effect. To the 16 knowledge of Company, no other party to any of such agreements, contracts, instruments or other commitments is, as of the date of this Agreement, in breach or default (and no event has occurred which with notice or the lapse of time or both would constitute a default or violation) thereunder, except for such breaches and defaults which would not reasonably be expected to result in a Material Adverse Effect. The Company is in full compliance with all of the terms and provisions of its Charter and By-laws, except where the failure to so comply would not reasonably be expected to result in a Material Adverse Effect. (p) Offering of the Preferred Shares. The Company has not, directly or -------------------------------- indirectly, solicited any other offer to buy or offered to sell, and will not, directly or indirectly, solicit any other offer to buy or offer to sell, any security which is or would be integrated with the sale of the Preferred Shares in a manner that would require the Preferred Shares to be registered under the Securities Act. (q) Transactions With Affiliates. Except as disclosed in the SEC Reports ---------------------------- or disclosed in the Financial Statements, neither the Company nor any subsidiary is a party to any transaction of the type required to be disclosed pursuant to Item 404 of Regulation S-K under the Securities Act. (r) Disclosure. Neither this Agreement (including the Schedules hereto) ---------- nor the SEC Reports (as of the date filed with the Securities and Exchange Commission) contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or 17 therein, in light of the circumstances under which they were made, not misleading. None of the statements, documents, certificates or other items prepared by the Company and supplied to Buyer or its counsel in connection with the transactions contemplated hereby (other than those relating to (i) projected financial information, (ii) plans and objectives regarding the Company's future operations, (iii) future economic performance and (iv) assumptions underlying any of the matters described in (i) through (iii), each as to which no representation or warranty is given) contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading. III. REPRESENTATIONS AND WARRANTIES OF BUYER 3.01 Buyer hereby represents, warrants and covenants to the Company that: (a) Corporate Organization and Power; Qualification. Buyer (i) is duly ----------------------------------------------- organized, validly existing and in good standing as a corporation under the laws of the state of Delaware and (ii) has all corporate power and authority to own its properties and to carry on its businesses as now being conducted. (b) Power and Authority; Authorization; Enforceability. Buyer has all -------------------------------------------------- requisite corporate power and authority necessary to execute and deliver this Agreement and the Other Transaction Documents and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and 18 the Other Transaction Documents and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of Buyer and no other corporate proceedings on the part of Buyer are necessary to authorize this Agreement and the Other Transaction Documents and to consummate the transactions contemplated hereby and thereby. This Agreement has been (and the Other Transaction Documents, when executed and delivered in accordance with their respective terms, will be) duly executed and delivered by Buyer and constitutes (and, in the case of the Other Transaction Documents, will constitute) the valid and binding obligation of Buyer, enforceable against it in accordance with its terms, except as enforceability against Buyer may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to the rights of creditors generally and other general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) and except as any rights to indemnity and contribution contemplated by Section 6.02 may be limited by applicable federal and state securities laws and public policy considerations. (c) No Violations; Consents and Approvals. The execution and delivery by ------------------------------------- Buyer of this Agreement and the Other Transaction Documents, the performance by Buyer of its obligations hereunder and thereunder and the consummation by Buyer of the transactions contemplated hereby and thereby will not (i) violate, conflict with, result in a breach of, constitute a default under, or 19 result in or require the creation of any lien upon any assets of Buyer under its certificate of incorporation, by-laws (or other comparable charter documents) or any material contract to which Buyer is a party or by which Buyer or any of its properties may be bound or (ii) require any consent or approval other than such consents and approvals to be made and obtained before the Closing and those that have been obtained which are final and not subject to review on appeal or to collateral attack and are in full force and effect, except for such violations, conflicts, breaches, defaults or liens which, or consents or approvals which, if not obtained would not reasonably be expected to, individually or in the aggregate, result in a material adverse effect on the business, financial condition, results of operations, assets or liabilities of Buyer. (d) Due Diligence. Buyer has sufficient knowledge and experience in ------------- investing in companies similar to the Company in terms of the Company's stage of development and is capable of evaluating the merits and risks of its investment in the Company as contemplated by this Agreement and is able to bear the economic risk of such investment for an indefinite period of time. Buyer has been given access to full and complete information regarding the Company and has utilized such access to its satisfaction for the purpose of obtaining information Buyer desires or deems relevant to its decision to purchase the Preferred Shares. Buyer has had the opportunity to ask questions of and receive answers from representatives of the Company concerning the terms and conditions of this Agreement, to discuss 20 the Company's business, management and financial affairs with the Company's management and to obtain any additional information Buyer desires or deems relevant. Buyer has obtained, to the extent it has deemed necessary, professional advice with respect to the risks inherent in the investment in the Preferred Shares and the Company, including, without limitation, the matters relating to the Company's business and financial condition set forth in the SEC Reports. (e) Investment Intent. Buyer is acquiring the Preferred Shares for its own ----------------- account for investment and not with a view towards the resale, transfer or distribution thereof, nor with any present intention of distributing the Preferred Shares in violation of the Securities Act or any other applicable federal or state securities laws, and the rules and regulations promulgated thereunder. Buyer understands that no public market currently exists for the Preferred Shares or the Common Stock, and that no such public market may ever exist. Buyer further understands and agrees that the Preferred Shares have not been (and the Conversion Shares, upon issuance, will not be) registered under the Securities Act by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act, that the Preferred Shares and the Conversion Shares will bear a legend (and the Company will make a notation on its transfer books) to such effect and the Preferred Shares (and, upon issuance, the Conversion Shares) must be held indefinitely unless subsequently disposed of pursuant to an effective registration statement under the Securities Act or in a 21 transaction exempt from, or not subject to, the registration requirements thereof. Buyer agrees that if it sells any Conversion Shares pursuant to Rule 144A under the Securities Act, it will take all necessary steps in order to perfect the exemption from registration provided thereby, including, without limitation, obtaining on behalf of the Company information to enable the Company to establish a reasonable belief that the purchaser is a "qualified institutional buyer" (within the meaning of Rule 144A) and advising such purchaser that Rule 144A is being relied upon with respect to such resale. Buyer was not organized for the specific purpose of acquiring the Preferred Shares and is an "accredited investor" within the meaning of Rule 501(a) of the Securities Act. (f) No Brokers. No broker, finder or investment banker is entitled to ---------- any brokerage, finder's or other fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of Buyer. IV. CONDITIONS 4.01 Conditions of Each Party. The respective obligations of each of the ------------------------ Company and Buyer to consummate the transactions contemplated hereby are subject to the fulfillment, at or prior to the Closing, of each of the following conditions, any or all of which may be waived in whole or in part to the extent permitted by applicable law: 22 (a) All filings required to be made, and all consents, approvals, permits and authorizations required to be obtained, prior to the Closing from any governmental or regulatory authorities in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby shall have been made or obtained; (b) No court or governmental or regulatory authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) or taken any action that prohibits the consummation of the transactions contemplated by this Agreement; provided, --------- however, that any party invoking this condition shall use its reasonable best - - ------- efforts to have any such judgment, decree, injunction or order vacated; (c) Any waiting period applicable to the consummation of the transactions contemplated hereby under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, shall have expired or been terminated; and (d) All proceedings to be taken by a party in connection with this Agreement and the transactions contemplated hereby and all documents incident hereto and thereto shall be reasonably satisfactory in form and substance to such party and its counsel, and each party and its counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. 23 4.02 Conditions of the Company. The obligations of the Company to ------------------------- consummate the transactions contemplated hereby are subject to the fulfillment, at or prior to the Closing, of each of the following conditions, any or all of which may be waived in whole or in part by the Company to the extent permitted by applicable law: (a) Buyer shall have performed and complied with, in all material respects, all of its respective obligations hereunder required to be performed by it at or prior to the Closing; (b) Each of the representations and warranties of the Buyer contained in this Agreement and in any certificate or other writing delivered by Buyer pursuant hereto qualified as to materiality shall be true and correct, and those not so qualified shall be true and correct, in all material respects in each case at and as of the Closing Date as if made at and as of such time (except to the extent it relates to a particular date); (c) The Company shall have received a certificate from Buyer, signed by an executive officer of Buyer, to the effect set forth in clauses (a) and (b) of this Section 4.02; (d) Buyer shall have executed and delivered the Stockholders' Agreement; (e) Buyer shall have executed and delivered the Preferred Provider Agreement; and 24 (f) Buyer shall have executed and delivered each of the Real Property Documents to which it is a party and has caused the delivery of all other Real Property Documents to be delivered by any party other than the Company. 4.03 Conditions of Buyer. The obligation of Buyer to consummate the ------------------- transactions contemplated by this Agreement is subject to the fulfillment, at or prior to the Closing, of each of the following conditions, any or all of which may be waived in whole or in part by Buyer to the extent permitted by applicable law: (a) The Company shall have performed and complied with, in all material respects, all of its obligations hereunder required to be performed by it at or prior to the Closing; (b) Each of the representations and warranties of the Company contained in this Agreement and in any certificate or other writing delivered by the Company pursuant hereto qualified as to materiality shall be true and correct, and those not so qualified shall be true and correct, in all material respects at and as of the Closing Date as if made at and as of such time (except to the extent it relates to a particular date); (c) Buyer shall have received a certificate from the Company, signed by an executive officer of the Company, to the effect set forth in clauses (a) and (b) of this Section 4.03; (d) The Company shall have executed and delivered the Shareholders' Agreement; 25 (e) The Company shall have executed and delivered the Preferred Provider Agreement; and (f) The Company shall have delivered copies of the following documents: (i) (A) The Charter, certified as of a recent date by the Secretary of State of the State of Minnesota and (B) a certificate of said Secretary dated as of a recent date as to the due incorporation and good standing of the Company; and (ii) a certificate of the Secretary or an Assistant Secretary of the Company dated the Closing Date and certifying: (A) that attached thereto is a true and complete copy of the By-laws of the Company as in effect on the date of such certification; (B) that attached thereto is a true and complete copy of all resolutions adopted by the Board of Directors or the stockholders of the Company authorizing the execution, delivery and performance of this Agreement and the Other Transaction Documents, the issuance, sale and delivery of the Preferred Shares and the reservation, issuance and delivery of the Conversion Shares, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated by this Agreement and the Other Transaction Documents; and (C) that the Charter has not been amended since the date of the last amendment referred to in the certificate delivered pursuant to Section 4.03(g)(i)(B). (g) Buyer shall have received from Willkie Farr & Gallagher, an opinion, dated the Closing Date, covering the matters set forth in Exhibit V hereto, subject to customary 26 qualifications, limitations and assumptions for opinions given in transactions of the kind contemplated hereby. 4.04 Materiality of Conditions. Notwithstanding anything contained ------------------------- herein, no condition involving the performance of obligations by the Company or the truth and accuracy of representations and warranties made by the Company as of the Closing Date shall be deemed not fulfilled, and Buyer shall not be entitled to fail to consummate the transactions contemplated hereby or terminate this Agreement on such basis, if the respects in which such conditions have not been performed or such representations and warranties are untrue (assuming for this purpose that the representations and warranties are not qualified by materiality), in the aggregate, would not reasonably be expected to result in a Material Adverse Effect. V. TERMINATION 5.01 Termination. This Agreement may be terminated and the transactions ----------- contemplated hereby may be abandoned at any time prior to the Closing: (a) by joint written agreement of the Company and Buyer; (b) by the Company, if Buyer has breached any representation, warranty, covenant or agreement contained in this Agreement and has not cured such breach within ten (10) business days after written notice to Buyer (provided that the ------------- Company is not then in material breach of the terms of this Agreement; and --- provided further that no cure period shall be required for a - - --------------------- 27 breach which by its nature cannot be cured) such that the conditions set forth in Section 4.01 or 4.02 hereof, as the case may be, will not be satisfied; (c) by Buyer, if the Company has breached any representation, warranty, covenant or agreement contained in this Agreement and has not cured such breach within ten (10) business days after written notice to the Company (provided that ------------- Buyer is not then in material breach of the terms of this Agreement; and --- provided further that no cure period shall be required for a breach which by its - - --------------------- nature cannot be cured) such that the conditions set forth in Section 4.01 or 4.03 hereof, as the case may be, will not be satisfied; or (d) by any party if the Closing has not occurred on or before April 30, 1999; provided, however, that a party may not terminate this Agreement pursuant ----------------- to this Section 5.01(d) if the failure of such party to fulfill any of its obligations hereunder shall have been the reason that the Closing shall not have occurred on or before said date. 5.02 Effect of Termination. In the event of termination of this Agreement --------------------- pursuant to this Article V, this Agreement shall forthwith terminate and (except in the event of the willful breach of this Agreement by any party) there shall be no liability on the part of any party; provided, however, that Sections ----------------- 2.01(j), 3.01(f), 5.02, 6.03, 7.01, 7.02, 7.04, 7.07 and 7.10 shall survive the termination of this Agreement. VI. OTHER AGREEMENTS 28 6.01 Consents And Approvals. Each of the parties agrees to use all ---------------------- commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated hereby, including, without limitation, using all commercially reasonable efforts to obtain all necessary waivers, consents and approvals, to effect all necessary registrations and filings (including, but not limited to, filings with all applicable governmental agencies) and to lift any injunction or other legal bar to the transactions contemplated hereby (and, in such case, to proceed with such transactions as expeditiously as possible). 6.02 Registration Rights. ------------------- (a) Piggy-back Registration. If, commencing one (1) year after the date ----------------------- hereof, the Company proposes to claim an exemption under Section 3(b) of the Securities Act for a public offering of any of its securities or to register under the Securities Act (except pursuant to a registration statement on Form S- 4 or S-8 (or any substitute form adopted by the Commission) or any other form that does not permit the inclusion of shares by its security holders) its Common Stock, it will give written notice to Buyer of its intention to do so and, upon the written request of Buyer given within twenty (20) days after receipt of any such notice (which request shall specify the number of Conversion Shares intended to be sold or disposed of by Buyer and the nature of any 29 proposed sale or other disposition thereof), the Company will use its best efforts to cause all Conversion Shares that Buyer shall have requested the registration of to be included in such notification or the registration statement proposed to be filed by the Company; provided, however, that nothing ----------------- herein shall prevent the Company from, at any time, abandoning or delaying any such registration initiated by it. If any such registration shall be underwritten in whole or in part, the Company may require that the Conversion Shares requested for inclusion pursuant to this Section 6.02 be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the managing underwriter, as expressed in writing delivered to Buyer, the inclusion of all of the Conversion Shares of Common Stock originally covered by a request for registration would reduce the number of Common Stock to be offered by the Company or interfere with the successful marketing of the Common Stock offered by the Company, the number of Conversion Shares otherwise to be included pursuant to this Section 6.02 in the underwritten public offering may be reduced; provided, however, that any such required reduction shall be pro ----------------- rata among all persons (other than the Company and any other persons demanding registration pursuant to existing rights who are entitled to be protected against any such reduction) who are participating in such offering. Conversion Shares which are thus excluded from the underwritten public offering shall be withheld from the market for a period, not to exceed 90 days, which the managing 30 underwriter reasonably determines is necessary in order to effect the underwritten public offering. All expenses of such offering, except the fees of special counsel to Buyer and brokers' commissions or underwriting discounts payable by Buyer, shall be borne by the Company. (b) Demand Registration. In addition, on one occasion only, commencing ------------------- upon the later of one (1) year after the date hereof and the date that is six months after an IPO, upon request by Buyer to register the Conversion Shares, the Company will promptly use its reasonable best efforts to register such shares under the Securities Act; provided that (i) such request must be made ------------- within five (5) years from the date hereof and (ii) the Company may delay the filing of any registration statement requested pursuant to this Section 6.02(b) to a date not more than ninety (90) days following the date of such request if in the opinion of the Company's principal investment banker at the time of such request such a delay is necessary in order not to adversely affect the Company's financing efforts then underway or if in the opinion of the Company such a delay is necessary or advisable to avoid disclosure of material nonpublic information. The costs and expenses directly related to any registration requested pursuant to this Section 6.02(b), including, but not limited to, legal fees of the Company's counsel, audit fees, printing expenses, filing fees of the Commission and the National Association of Securities Dealers, Inc. and fees and expenses relating to qualifications under state securities or blue sky laws incurred by the Company shall be borne entirely by the 31 Company; provided, however, that the persons for whose account the securities -------- ------- covered by such registration are sold shall bear the expenses of brokers' commissions or underwriting discounts applicable to their shares and fees of their legal counsel. If Buyer is the only person whose shares are included in the registration pursuant to this Section 6.02(b), Buyer shall bear the expense of inclusion of any audited financial statements contained in the registration statement which are not dated as of the Company's fiscal year-end or are not otherwise prepared by the Company for its own business purposes. The Company shall keep effective and maintain any registration statement specified in this Section 6.02(b) for such period as may be necessary for Buyer to dispose of the Conversion Shares so registered, and from time to time shall amend or supplement, at Buyer's expense, the prospectus used in connection therewith to the extent necessary in order to comply with applicable law; provided that the ------------- Company shall not be obligated to maintain any registration statement for a period of more than nine (9) months. If, at the time any written request for registration is received by the Company pursuant to this Section 6.02(b), the Company had previously determined to proceed with the preparation and filing of a registration statement under the Securities Act in connection with the proposed offer and sale of Common Stock, such written request shall be deemed to have been given pursuant to Section 6.02(a) rather than this Section 6.02(b), and the rights of Buyer shall be governed by Section 6.02(a) hereof. 32 (c) Registration Procedures. If and whenever the Company is required by ----------------------- the provisions of Sections 6.02(a) or 6.02(b) hereof to effect the registration of Conversion Shares under the Securities Act, the Company will: (i) prepare and file with the Commission a registration statement with respect to such securities, and use its reasonable best efforts to cause such registration statement to become and remain effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed nine (9) months; (ii) prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed nine (9) months; (iii) furnish to the security holders participating in such registration and to the underwriters of the securities being registered, such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such participating security holders and underwriters may reasonably request in order to facilitate the public offering of such securities; (iv) use its reasonable best efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as such participating security holders and 33 underwriters may reasonably request in writing within 30 days following the original filing of such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (v) notify the participating security holders, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (vi) notify such participating security holders promptly of any request by the Commission for the amending or supplementing of such registration statement or prospectus or for additional information; (vii) prepare and file with the Commission, promptly upon the request of any such participating security holders, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for such holders (and concurred with by counsel for the Company), is required under the Securities Act or the rules and regulations promulgated thereunder in connection with the distribution of such Conversion Shares by such holder; (viii) prepare and promptly file with the Commission and promptly notify such participating security holders of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or 34 omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; (ix) advise such participating security holders, promptly after it shall receive notice of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose, and promptly use its reasonable best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; and (x) furnish on the effective date of the registration statement and, if such registration includes an underwritten public offering, at the closing provided for in the underwriting agreement: (A) opinions, dated such respective dates, of counsel representing the Company for the purposes of such registration, addressed to the underwriters, covering such matters as such persons may reasonably request in customary form as would be given to underwriters in connection with underwritten offerings and (B) letters, dated such respective dates, from the independent certified public accountants of the Company addressed to the underwriters, in customary form and concerning matters of the type customarily covered in "comfort" letters in connection 35 with underwritten offerings, and such other matters as permitted by the Statement on Accounting Standards No. 72. (d) Indemnification. In connection with such registration, the Company --------------- shall indemnify Buyer, its officers, directors, employees and agents, and any person who controls Buyer within the meaning of Section 15 of the Securities Act, against all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in any registration statement or prospectus, (and as amended or supplemented, if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission contained in information furnished in writing to the Company by Buyer expressly for use therein, and Buyer agrees that it will indemnify and hold harmless the Company and each of its officers who signs such registration statement and each of its directors and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act with respect to losses, claims, damages or liabilities which are caused by any untrue statement or omission contained in information furnished in writing to the Company by Buyer expressly for use therein. (e) Contribution. In addition, in connection with any such registration, ------------ the Company and Buyer agree that if the indemnification to be provided for pursuant to Section 6.02(d) is 36 unavailable to an indemnified party as provided herein in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the Company or Buyer (as the case may be), in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and Buyer, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand, and of Buyer, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statements of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by Buyer, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, without limitation, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Company and Buyer agree that it would not be just and equitable if contribution pursuant to this Section 6.02(e) were determined by a pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to 37 in this Section 6.02(e). Notwithstanding the provisions of this Section 6.02(e), Buyer shall not be required to contribute any amount in excess of the amount by which the total price which Buyer's securities were sold to the public. The parties agree that in connection with any such registration, no person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (f) Termination. The registration rights provided in this Section 6.02 ----------- shall terminate on the earliest to occur of: (i) the date that is five (5) years from the date hereof and (ii) the date on which all of the Conversion Shares then held by Buyer could be sold pursuant to Rule 144(k) under the Securities Act (or any comparable or successor provision). 6.03 Confidentiality. (a) Without the consent of the other party, --------------- neither Buyer nor the Company shall make any public comment, statement or communication with respect to, or otherwise disclose or permit the disclosure of the terms of this Agreement and the transactions contemplated hereby, and each party shall cause its authorized officers, directors, partners, employees, counsel, accountants, agents and other representatives (collectively, "Representatives") to strictly comply with the foregoing. (b) Each of the parties hereby covenants and agrees to use due care to prevent the disclosure of the information and other material furnished under or in connection with this Agreement to 38 persons other than its Representatives who have a need to know such information or to have access to such material in connection with Buyer's investment in the Company and who have agreed to keep such information and material confidential. For purposes of this Section 6.03(b), "due care" means at least the same level of care that a person would use to protect the confidentiality of its own sensitive or proprietary information, and this obligation shall survive termination of this Agreement. (c) Notwithstanding Sections 6.03(a) and (b), either party may disclose or deliver any information or other material disclosed to or received by it (i) should such party be advised by its counsel that such disclosure or delivery is required by law, regulation, legal process or administrative order, if the disclosing party has first provided the other party with prompt notice of the request to disclose or deliver such information or other material a reasonable period of time in advance of making such disclosure or delivery so as to enable such other party to seek a protective order or other appropriate remedy or (ii) in connection with a public or private financing effected by the Company, to the extent required in any Registration Statement, prospectus or other offering document, or to the extent necessary to make any statements contained in any of the foregoing not misleading. (d) In the event of any termination of this Agreement prior to the Closing Date, Buyer shall return to the Company all 39 material previously furnished to it or its Representatives in connection with this transaction. 6.04 Information Rights. From and after the Closing Date until the ------------------ earlier to occur of (i) the issuance of shares of Common Stock to the public in an underwritten offering pursuant to a registration statement filed under the Securities Act covering the offer and sale of Common Stock (an "IPO") and (ii) the date on which Buyer no longer owns any Preferred Shares, within 45 days following the end of each of its first three fiscal quarters and within 90 days following the end of its fourth fiscal quarter, the Company shall furnish Buyer with a copy of its financial statements, (including balance sheets, income statements, changes in stockholders equity and statements of cash flow) for each of such quarters and fiscal year, respectively. In addition, during such period, the Company will furnish Buyer with such additional financial and business information, including monthly or other periodic financial statements as the Company may prepare from time to time, upon the reasonable request of Buyer. 6.05 Subscription Right. (a) From and after the Closing Date until the ------------------ earlier of (i) an IPO and (ii) the date on which Buyer no longer owns any Preferred Shares, if the Company proposes to issue equity securities of any kind (the term "equity securities" shall include for the purposes of this Section 6.05, any equity securities and all warrants, options or other rights to acquire equity securities, and debt securities convertible 40 into or exchangeable for equity securities) of the Company (other than the issuance of securities (i) upon conversion of or exercise securities of the Company outstanding as of the date hereof, (ii) in an IPO, (iii) pursuant to the acquisition of another entity by the Company by merger, purchase of substantially all of the assets or other form of reorganization, (iv) pursuant to an employee stock option plan, stock bonus plan, stock purchase plan or other management equity program, (v) to vendors, customers and consultants of the Company for purposes primarily other than the raising of capital or (vi) in connection with a public or private debt financing effected by the Company (other than with an affiliate of the Company) or upon the conversion or exercise of any securities so issued), then the Company shall: (A) give written notice to Buyer setting forth in reasonable detail: (1) the designation and all of the terms and provisions of the securities proposed to be issued (the "Proposed Securities"), including, where applicable, the voting powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereof; (2) the price and other terms of the proposed sale of Proposed Securities; (3) the amount of Proposed Securities proposed to be issued; and (4) such other information as Buyer may reasonably request in order to evaluate the proposed issuance; and (B) offer to issue to Buyer a portion of the Proposed Securities equal to a percentage determined by dividing (1) the number of shares of Common Stock held by Buyer and issuable to Buyer (including for purposes of this calculation, 41 conversion and exercise in full of all securities then held by Buyer that are then convertible into or exchangeable for Common Stock) by (2) the total number of shares of Common Stock then outstanding (including for purposes of this calculation, conversion and exercise in full of all securities then outstanding that are then convertible into or exchangeable for Common Stock). (b) Buyer must exercise its purchase right hereunder within fifteen (15) days after receipt of such notice from the Company. To the extent that the Company offers two or more securities in units, Buyer must purchase such units as a whole and will not be given the opportunity to purchase only one of the securities making up such unit. Upon the expiration of such fifteen-day period, the Company will be free to sell Proposed Securities that Buyer has not elected to purchase during the ninety (90) days following such expiration on terms and conditions no more favorable to the purchasers thereof than those offered to Buyer. Any Proposed Securities offered or sold by the Company after such 90-day period must be reoffered to Buyer pursuant to this Section 6.05. (c) The election by Buyer not to exercise its subscription rights under this Section 6.05 in any one instance shall not affect its right (other than in respect of a reduction in its percentage holdings) as to any subsequent proposed issuance of equity securities by the Company. Any sale of equity securities by the Company without first giving Buyer the rights described in this Section 6.05 shall be void and of no force and effect. 42 6.06 By-laws. The Company shall at all times cause its By-laws to provide ------- that the number of directors fixed in accordance therewith shall in no event conflict with any of the terms or provisions of the Preferred Shares as set forth in the Charter. The Company shall at all times maintain provisions in its By-laws or Charter indemnifying all directors to the maximum extent permitted under the Minnesota Business Corporation Act. VII. MISCELLANEOUS 7.01 Amendments, Waivers and Consents. No provision in this Agreement may -------------------------------- be altered or amended, and compliance with any covenant or provision set forth herein may not be omitted or waived, except by an instrument in writing duly executed by Buyer and the Company. Any waiver or consent may be given subject to satisfaction of conditions stated therein and any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 7.02 Notices. All notices required or permitted by this Agreement shall be ------- in writing, and shall be hand delivered, sent by facsimile or nationally recognized overnight delivery service, addressed as follows: (a) If to Buyer: Silicon Graphics, Inc. 2011 N. Shoreline Blvd. Mountain View, CA 94043-1389 Attention: William M. Kelly, Senior Vice President, Corporate Operations Telephone: 650-933-1440 Facsimile: 650-932-0908 43 with a copy to: Testa, Hurwitz & Thibeault, LLP High Street Tower, 125 High Street Boston, MA 02110 Attention: William B. Asher, Jr. Telephone: 617-248-7518 Facsimile: 617-248-7100 (b) If to the Company: WAM!NET INC. 6100 West 110th Street Minneapolis, MN 55438 Attention: Edward J. Driscoll, III, President Telephone: 612-886-5100 Facsimile: 612-887-2165 with a copy to: Willkie Farr & Gallagher 787 Seventh Avenue New York, NY 10019-6099 Attention: Daniel D. Rubino Telephone: 212-728-8000 Facsimile: 212-728-8111 or to such other person or address as a party shall specify by notice in writing to the other party. All such notices and other communications shall be effective when received. 7.03 Binding Effect; Assignment. This Agreement shall be binding upon and -------------------------- inure to the benefit of the Company and Buyer. No assignment of rights or delegation of duties arising under this Agreement may be made by any party hereto without the prior written consent of the other party. 7.04 Third-Party Beneficiaries. This Agreement is for the sole benefit of ------------------------- the parties hereto and their permitted assigns and nothing herein expressed or implied shall give or be 44 construed to give to any person, other than the parties hereto and such permitted assigns, any legal or equitable rights hereunder. 7.05 Entire Agreement. This Agreement (including all Schedules and ---------------- Exhibits hereto) constitutes the entire agreement between the parties hereto with respect to the subject matter contained herein and supersedes all other prior understandings or agreements, both written and oral, between the parties with respect to the matters contained herein. 7.06 Severability. The provisions of this Agreement are severable and, in ------------ the event that any court of competent jurisdiction shall determine that any one or more of the provisions or part of a provision contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement; but this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of a provision, had never been contained herein, and such provisions or part reformed so that it would be valid, legal and enforceable to the maximum extent possible. 7.07 Governing Law. This Agreement shall be governed by, and construed in ------------- accordance with, the law of the State of Minnesota without regard to its principles of conflicts of laws. 45 7.08 Headings. Article, Section and sub-Section headings in this Agreement -------- are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 7.09 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart by original or facsimile signature. 7.10 Expenses. Each party shall pay the fees and expenses of its -------- respective counsel, accountants and other experts (including any broker, finder, advisor or intermediary), and shall pay all other expenses incurred by it in connection with the negotiation, preparation and execution of this Agreement and the consummation of the transactions contemplated hereby. 46 IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. WAM!NET INC. /s/ Allen L. Witters ____________________________________ By: Allen L. Witters Its: Chief Technology Officer SILICON GRAPHICS, INC. /s/ William M. Kelly ____________________________________ By: William M. Kelly Its: Senior Vice President 47 EX-4.19 5 WARRANTS TO PURCHASE COMMON STOCK OF WAM!NET EXHIBIT 4.19 EXERCISABLE ON OR BEFORE, AND VOID AFTER 5:00 P.M. MINNEAPOLIS TIME APRIL 30, 2004 Certificate for 150,000 Warrants WARRANTS TO PURCHASE COMMON STOCK OF WAM!NET, Inc. INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA THIS CERTIFIES that MCI WORLDCOM, Inc., ("Holder") or assigns, is the owner of the number of Warrants set forth above, each of which represents the right to purchase from WAM!NET, Inc., Minnesota corporation (the "Company"), at any time after April 30, 1999 and on or before 5:00 Minneapolis time, April 30, 2004, upon compliance with and subject to the conditions set forth herein, one share (subject to adjustments referred to below) of the Common Stock of the Company, par value $.01 per share (such shares or other securities or property purchasable upon exercise of the Warrants being herein called the "Shares"). Upon any exercise of less than all the Warrants evidenced by this Warrant Certificate, there shall be issued to the Holder a new Warrant Certificate in respect of the Warrants as to which this Warrant Certificate was not exercised. This Warrant is subject to the following provisions, terms and conditions: 1. Exercise; Transferability. The rights represented by this Warrant may be ------------------------- exercised by the Holder hereof, in whole or in part (but not as to a fractional share of Common Stock), by written notice of exercise delivered to the Company ten (10) days prior to the intended date of exercise and by the surrender of this Warrant (properly endorsed if required) at the principal office of the Company and by paying in full, as provided herein, the purchase price of $.01 per share (the "Exercise Price"). Payment upon exercise of the rights represented by this Warrant may be made at the option of the Holder (a) in cash or by certified or official bank check payable to the order of the Company, (b) by surrendering to the Company for cancellation and retirement any number shares of Class A Preferred Shares, par value $10.00 per share, which shares shall each be valued for purposes hereof at their par value of $10.00 plus the sum of any then accumulated and unpaid dividends thereon, (c) by cancellation and discharge of the Company from all or any portion of any debt in the amount then owed by the Company to the Holder on a dollar for dollar basis, including principal whether or not then due and payable together with any interest accrued and unpaid thereon, or (d) by any combination of any or all of the foregoing. This Warrant may not be transferred or divided into two or more Warrants of smaller denominations, nor may any Common Stock issued pursuant to exercise of this Warrant be transferred unless this Warrant or shares have been registered under the Securities Act of 1933, as amended ("Securities Act") and applicable state laws, or unless the Holder of the certificate obtains an opinion of counsel satisfactory to the Company and its counsel that the proposed transfer may be effected without registration pursuant to exemptions under the Securities Act and applicable state laws. 2. Issuance of Shares. The Company agrees that the shares purchased hereby ------------------ shall be deemed to be issued to the record Holder hereof as of the close of business on the date on which this Warrant shall have been surrendered and the payment made for such shares as aforesaid. Subject to the provisions of the next succeeding paragraph, certificates for the shares of stock so purchased shall be delivered to the Holder hereof within a reasonable time, not exceeding ten (10) days after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the number of shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the Holder hereof within such time. Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for shares of stock upon exercise of this Warrant, except in accordance with the provisions, and subject to the limitations, of paragraph 7 hereof. 3. Covenants of Company. The Company covenants and agrees that all shares -------------------- which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized and issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and without limiting the generality of the foregoing, the Company covenants and agrees that it will from time to time take all such action as may be required to assure that the par value per share of the Common Stock is at all times equal to or less than the then effective purchase price per share of the Common Stock issuable pursuant to this Warrant. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of issue -2- or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. 4. Adjustments. The above provisions are, however, subject to the following ----------- provisions: (a) No fractional shares of Common Stock are to be issued upon the exercise of the Warrant, but the Company shall pay a cash adjustment in respect of any fraction of a share which would otherwise be issuable in an amount equal to the same fraction of the market price per share of Common Stock on the date of exercise as determined in good faith by the Company. (b) If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the Holder hereof shall hereafter have the right to purchase and receive upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the shares of the Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities or assets as may be issued and payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder of this Warrant to the end that the provisions hereof (including without limitation provisions for adjustments of the Warrant purchase price and of the number of shares purchasable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation, merger, or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered Holder hereof at the last address of such holder appearing on the books of the Company, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. -3- (c) If the Company shall at any time or from time to time (i) distribute (otherwise than as a dividend in cash or in Common Stock or securities convertible into or exchangeable for Common Stock) to the holders of Common Stock any property or other securities, or (ii) declare a dividend upon the Common Stock (to the extent payable otherwise than out of earnings or earned surplus, as indicated by the accounting treatment of such dividend in the books of the Company, and otherwise than in Common Stock or securities convertible into or exchangeable for Common Stock), the Company shall reserve and the Holder of this Warrant shall thereafter upon exercise hereof be entitled to receive, with respect to each share of Common Stock purchased hereunder, without any change in, or payment in addition to, the exercise price, the amount of any property or other securities which would have been distributable to such holder had such holder been a holder of one share of Common Stock on the record date of such distribution or dividend (or if no record date was established by the Company, the date such distribution or dividend was paid). 5. Common Stock. As used herein, the term "Common Stock" means the ------------ Company's presently authorized shares of Common Stock and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company. 6. No Voting Rights. This Warrant shall not entitle the Holder hereof to ---------------- any voting rights or other rights as a stockholder of the Company. 7. Notice of Transfer of Warrant or Resale of Shares. The Holder of this ------------------------------------------------- Warrant, by acceptance hereof, agrees to give written notice to the Company before transferring this Warrant, or transferring any Common Stock issued upon the exercise hereof, of such holder's intention to do so, describing briefly the manner of any proposed transfer. Promptly upon receiving such written notice the Company shall present copies thereof to the Company counsel and if in the opinion of such counsel the proposed transfer complies with federal and state securities laws and may be effected without registration or qualification (under any Federal or State law), the Company, as promptly as practicable, shall notify such holder of such opinion, whereupon such holder shall be entitled to transfer this Warrant or to dispose of shares of Common Stock received upon the previous exercise of this Warrant, provided that an appropriate legend may be endorsed on this Warrant or the certificates for such shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel to the Company to prevent further transfers which would be in violation of Section 5 of the Securities Act of 1933. -4- If in the opinion of Company's counsel referred to in this paragraph 7 hereof, the proposed transfer or disposition of shares described in the written notice given pursuant to this paragraph 7 may not be effected without registration or qualification of this Warrant or the shares of Common Stock issued on the exercise hereof, the Company shall promptly give written notice thereof to the Holder hereof, and the Holder will limit its activities in respect to such as, in the opinion of such counsel, are permitted by law. 8. Registration Rights. If the Company, at any time after the later of ------------------- three (3) years from the date hereof until two (2) years after the complete exercise of this Warrant, but in no event later than April 30, 2004, proposes to claim an exemption under Section 3(b) for a public offering of any of its securities or to register under the Securities Act of 1933 (except by a Form S-8 or other inappropriate Form for registration) any of its securities, it will give written notice to all registered holders of Warrants, and all registered holders of shares of Common Stock acquired upon the exercise of Warrants, of its intention to do so and, on the written request of any registered holders given within twenty (20) days after receipt of any such notice (which request shall specify the Warrants or shares of Common Stock intended to be sold or disposed of by such registered holder and describe the nature of any proposed sale or other disposition thereof), the Company will use its best efforts to cause all such Warrants and/or shares, the registered holders of which shall have requested the registration or qualification thereof, to be included in such notification or registration statement proposed to be filed by the Company; provided, however, that no such inclusion shall be required (i) if the Shares may then be sold by the holder thereof without limitation under Rule 144(k), or comparable successor rule of the Securities and Exchange Commission, or (ii) if the managing underwriter of such offering reasonably determines that including such Shares would unreasonably interfere with such offering. The Company will pay all expenses of registration. The Warrant holders shall pay all commissions or discounts applicable to the sale of the included Shares, together with any expenses of counsel retained by them in connection with their sale of the Shares. -5- IN WITNESS WHEREOF, WAM!NET, Inc. has caused this Warrant to be signed by its duly authorized officer and this Warrant to be dated January 13, 1999. WAM!NET, Inc. By: /s/ Bradley E. Sparks ------------------------ Bradley E. Sparks Chief Financial Officer -6- EX-4.20 6 CERT. OF DESIGNATION OF RIGHTS/PREFERENCES CLASS A EXHIBIT 4.20 CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES OF CLASS A CONVERTIBLE PREFERRED STOCK OF WAM!NET INC. The undersigned, Edward J. Driscoll, Jr., hereby certifies that: A. He is the duly elected and acting Secretary of WAM!NET Inc. (the "Company"), a Minnesota corporation. B. The Articles of Incorporation of this Company provide for a class of up to 49,500,000 shares known as Undesignated Stock, which shares may be issued from time to time in one or more classes or series. C. The Board of Directors of the Company is authorized, pursuant to Article 6 of the Company's Articles of Incorporation and Minnesota Statutes, Section 302A.401, to fix or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Undesignated Stock, to fix the number of shares constituting the series, and to determine the designation thereof. D. It is the desire of the Board of Directors of the Company, pursuant to its authority, to fix the rights, preferences, restrictions and other matters relating to the Undesignated Stock and the number of shares of Undesignated Stock. E. Pursuant to authority given by Article 6 of the Company's Articles of Incorporation, the Company's Board of Directors has adopted the following resolutions as of the 4th day of March, 1999; RESOLVED, that, pursuant to Article 6 of the Articles of Incorporation of WAM!NET Inc. (the "Company"), the Board of Directors of the Company hereby creates and designates a series of Preferred Stock, Ten Dollars ($10.00) par value per share, and authorizes the issuance of up to One Hundred Fourteen Thousand Two Hundred and Six (115,206) of such shares, and hereby fixes the designation and the preferences and relative, participating, optional and other special rights of such shares, and the qualifications, limitations or restrictions as follows: Section 1. Designation and Amount. The shares of the Preferred Stock shall be ---------------------- designated as "1999 Class A Preferred Stock." The number of shares constituting the 1999 Class A Preferred Stock shall be One Hundred Fifteen Thousand Two Hundred and Six (115,206). Each share of 1999 Class A Preferred Stock shall have a par value of Ten Dollars ($10.00) per share. The number of shares of 1999 Class A Preferred Stock may be increased or decreased by resolution of the Board of Directors; provided, that, no decrease shall reduce the number of shares of 1999 Class A Preferred Stock to a number less than the number of shares then outstanding, plus the number of shares of 1999 Class A Preferred Stock, if any, reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Company convertible into 1999 Class A Preferred Stock. Section 2. Dividends and Distributions. --------------------------- (A) The holders of shares of 1999 Class A Preferred Stock, in preference to the holders of Common Stock of the Company, shall be entitled to receive, when, as and if declared by the Board of Directors of the Company (the "Directors"), a dividend (the "Quarterly Dividend") in the amount of Seventeen and One-half Cents ($.175) per share payable out of the net earnings of the Company constituting funds legally available for the purpose. The Quarterly Dividend shall begin to accrue on January 1, 1999, and shall be payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of 1999 Class A Preferred Stock. If the net earnings in any year are not sufficient to pay the Quarterly Dividend, either in whole or in part, then any unpaid portion of such dividend will become a charge against the net earnings of the Company, and will be paid in full out of the net earnings of the Company in subsequent years before any dividends are paid on the Common Stock of the Company in those years. No dividends will be paid or set apart for payment on the Common Stock, no distribution will be made on the Common Stock, and no shares of Common Stock will be redeemed, retired or otherwise acquired for valuable consideration unless all theretofore unpaid Quarterly Dividends have been declared, and the Company has paid those dividends or has set aside a sum sufficient to pay them. (B) Dividends shall begin to accrue and accumulate on outstanding shares of 1999 Class A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or (i) from such Quarterly Dividend Date if additional consideration, prorated for the number of elapsed days since such Quarterly Dividend Date, is paid upon issuance, (ii) unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of 1999 Class A Preferred Stock entitled to receive Quarterly Dividends and before such Quarterly Dividend Payment Date, in either of which events such Quarterly Dividends shall begin to accrue and accumulate from such Quarterly Dividend Payment Date. Accrued but unpaid Quarterly Dividends shall not bear interest. Dividends paid on the shares of 1999 Class A Preferred Stock in an amount less than the total amount of Quarterly Dividends then accrued and payable shall be allocated pro rata on a share-by-share basis among all such shares of 1999 Class A Preferred Stock then outstanding. The Directors may fix a record date for the determination of holders of shares of 1999 Class A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than sixty (60) days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of 1999 Class A Preferred ------------- Stock shall have the following voting rights: 2 (A) Each share of 1999 Class A Preferred Stock shall entitle the holder thereof to one (1) vote for each share of 1999 Class A Preferred Stock standing in the name of the holder on the books of the Company. The holders of 1999 Class A Preferred Stock, voting separately as a class, shall be entitled to elect that number of Directors as is equal to the largest whole number less than a majority of all Directors. The right to elect Directors may be exercised at any annual meeting of the stockholders of the Company, at any special meeting held in place of an annual meeting, or at a special meeting called to elect directors. The right to elect directors shall continue until December 31, 2000, and then expire. The directors elected by the 1999 Class A Preferred Stock shall serve until the next annual or special meeting of the stockholders of the Company and until their respective successors have been elected by the holders of 1999 Class A Preferred Stock and have been qualified. The term of office of any person elected as a director by the holders of 1999 Class A Preferred Stock shall terminate on December 31, 2000. The vacancies created thereby may be filled by resolution of the remaining Directors who shall have been elected by a vote of the holders of the Common Stock of the Company. If the office of a director elected by the holders of 1999 Class A Preferred Stock is vacant prior to December 31, 2000, due to resignation, removal or death, the vacancy shall be filled by the majority vote of the directors then in office, even if less than a quorum, upon the recommendation of the remaining director or directors who were elected by the holders of the 1999 Class A Preferred Stock. If the office of a director who was elected by the holders of Common Stock is vacant prior to December 31, 2000, due to resignation, removal or death, the vacancy shall be filled by the majority vote of the directors then in office, even if less than a quorum, upon the recommendation of the remaining director or directors who were elected by the holders of the Common Stock. If the vacancy is not so filled within forty (40) days after the creation of the vacancy, a special meeting of the holders of Preferred Stock and/or Common Stock shall be called and the vacancy or vacancies shall be filled at that meeting. (B) In addition to the right to elect Directors as provided in Section 3(A), the holder of each share of 1999 Class A Preferred Stock shall be entitled to one (1) vote, voting together with the holders of Common Stock as a single class, on all matters, excluding the election of Directors, submitted to the vote of shareholders of the Company. (C) Except as otherwise provided in Section 3(A) or in Section 10, or in any Certificate of Designation creating another class or series of preferred stock, or in any similar stock of the Company hereafter created, or by law, the holders of shares of 1999 Class A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Company having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Company. (D) Except as expressly set forth herein, or as otherwise provided by law, holders of 1999 Class A Preferred Stock shall have no special voting rights and their consent, as a separate class, shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. -------------------- 3 A. Whenever Quarterly Dividends or distributions payable on 1999 Class A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid Quarterly Dividends and distributions, whether or not declared, on shares of 1999 Class A Preferred Stock outstanding shall have been paid in full, the Company shall not, without the express affirmative unanimous approval of the Directors elected by holders of the 1999 Class A Preferred Stock: (1) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the 1999 Class A Preferred Stock; (2) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the 1999 Class A Preferred Stock, except dividends paid ratably on the 1999 Class A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (3) redeem or purchase or otherwise acquire for consideration shares of any stock of the Company ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the 1999 Class A Preferred Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Company ranking junior (as to dividends and upon dissolution, liquidation and winding up) to the 1999 Class A Preferred Stock; or (4) redeem or purchase or otherwise acquire for consideration any shares of 1999 Class A Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the 1999 Class A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. B. The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under Paragraph A of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Liquidation, Dissolution or Winding Up. Upon any voluntary -------------------------------------- or involuntary liquidation, dissolution or winding up of the affairs of the Company, no distribution shall be made (a) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the 1999 Class A Preferred Stock, or (b) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the 1999 Class A Preferred Stock unless each holder of 1999 Class A Preferred 4 Stock has received in cash out of the assets of the Company, whether from capital or earnings, available for distribution to the shareholders of the Company, before any amount is paid to the holders of Common Stock, the sum of Ten Dollars ($10.00) per share for each share of 1999 Class A Preferred Stock held by the holder, plus an amount equal to the sum of all accumulated and unpaid dividends to the date affixed for the payment of the distribution on the shares of 1999 Class A Preferred Stock held by the holder. The sale or transfer by the Company of all or substantially all of its assets shall not, for the purposes of determining preferences and liquidation, be deemed to be a liquidation, dissolution or winding up of the Company. Section 6. Preemptive Rights. No holder of any shares of 1999 Class A ----------------- Preferred Stock shall be entitled as such, as a matter of right, to subscribe for, purchase or receive any part of any class whatsoever, or of securities convertible into or exchangeable for any stock or any class whatsoever, whether now or hereafter authorized or whether issued for cash or other consideration or by way of a dividend. Section 7. Mandatory Redemption. Unless earlier redeemed or acquired in -------------------- whole or in part by the Company with the consent of the holder, the shares of 1999 Class A Preferred Stock that remain issued and outstanding shall expire and shall be automatically redeemed on December 31, 2000, at par value, plus an amount equal to all accumulated and unpaid dividends, if any, due with respect to the 1999 Class A Preferred Stock (collectively, the "Redemption Price"). Redemption shall be in cash out of any funds legally available for the redemption of the 1999 Class A Preferred Stock. Section 8. Rank. The 1999 Class A Preferred Stock shall rank, with ---- respect to payment of dividends and distribution of assets (except with respect to events that do not give rise to a right of the holders of the 1999 Class A Preferred Stock to receive distributions) (a) junior to any other class or series of the Company's preferred stock which shall specifically provide that such class or series shall rank senior to the 1999 Class A Preferred Stock ("Senior Stock"); (b) on parity with (i) the Company's Class B Convertible Preferred Stock, par value $0.01 per share, (ii) the Company's Class C Convertible Preferred Stock, par value $0.01 per share, (iii) the Company's Class D Convertible Preferred Stock, par value $0.01 per share, and (iv) any other class or series of the Company's preferred stock which shall specifically provide that such class or series shall rank on parity with the Class B Preferred Stock ((i) through (iv) collectively, the "Parity Stock"); and (c) prior to (i) the Company's Common Stock and (ii) any other class or series of the Company's preferred stock except for any class or series which are Senior Stock or Parity Stock ((i) and (ii) together, the "Junior Stock"). Section 9. Reacquired Shares. Any shares of 1999 Class A Preferred ----------------- Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of undesignated stock and may be reissued subject to the conditions and restrictions on issuance in the Articles of Incorporation, or in any other Certificate of Designations creating another class or series of stock or as otherwise required by law. Section 10. Amendment. If any proposed amendment to these Articles of --------- Incorporation would alter or change the preferences, special rights or powers given to the 1999 5 Class A Preferred Stock so as to affect the 1999 Class A Preferred Stock adversely, or would authorize the issuance of a class or classes of stock having preferences or rights with respect to dividends or dissolution or the distribution of assets that would be superior to the preferences or rights of the 1999 Class A Preferred Stock, then the holders of the 1999 Class A Preferred Stock shall be entitled to vote as a series upon such amendment, and the affirmative vote of two-thirds of the outstanding shares of 1999 Class A Preferred Stock shall be necessary to the adoption thereof, in addition to such other vote as may be required by law. RESOLVED FURTHER, that the officers of this Company be, and each of them acting alone is, hereby authorized and instructed to take all steps necessary to execute, deliver and file, for and on behalf of this Company and in its name, any and all documents required in connection with the establishment and authorization of the Company's Class A Preferred Stock, including but not limited to filing the Statement of Rights and Preferences with the Minnesota Secretary of State in accordance with Minnesota Statutes, Section 302A.401. F. The undersigned further declares under penalty of perjury that the matters set out in the foregoing Certificate are true and correct of his own knowledge. IN WITNESS WHEREOF, the undersigned has executed this certificate as of the 4th day of March 1999. /s/ Edward J. Driscoll, Jr. ---------------------------------------- Edward J. Driscoll, Jr. Secretary 6 ARTICLES OF CORRECTION OF CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES OF CLASS A CONVERTIBLE PREFERRED STOCK OF WAM!NET INC. The undersigned, Edward J. Driscoll, Jr., Secretary of WAM!NET INC., a Minnesota Corporation (the "Corporation"), acting pursuant to the provisions of Minnesota Statutes, Section 5.16, does hereby correct and amend the Certificate of Designation of Rights and Preferences of Class A Convertible Preferred Stock as follows effective as of the 4th day of March, 1999: 1.) The undersigned, Edward J. Driscoll, Jr., executed and filed a Certificate of Designation of Rights and Preferences of Class A Convertible Preferred Stock which was filed with the Minnesota Secretary of State on March 4, 1999. 2.) The Certificate of Designation of Rights and Preferences of Class A Convertible Preferred Stock inadvertently referenced "Convertible" ----------- Stock in its title, the Certificate of Designation of Rights and Preferences of Class A Convertible Preferred Stock title should read "Certificate of Designation of Rights and Preferences of Class A Preferred Stock." 3.) In Section 1, the number of shares constituting the 1999 Class A Preferred Stock incorrectly states "One Hundred Fourteen Thousand Two -------- Hundred and Six (115,206)." The number of shares constituting the 1999 ------- Class A Preferred Stock should read "One Hundred Fifteen Thousand Two Hundred and Six (115,206). IN WITNESS WHEREOF, I have hereunder subscribed my name effective the 4th day of March, 1999. /s/ Edward J. Driscoll, Jr. ------------------------------------- Edward J. Driscoll, Jr., Secretary CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES OF CLASS A PREFERRED STOCK OF WAM!NET INC. The undersigned, Edward J. Driscoll, Jr., hereby certifies that: A. He is the duly elected and acting Secretary of WAM!NET Inc. (the "Company"), a Minnesota corporation. B. The Articles of Incorporation of this Company provide for a class of up to 49,500,000 shares known as Undesignated Stock, which shares may be issued from time to time in one or more classes or series. C. The Board of Directors of the Company is authorized, pursuant to Article 6 of the Company's Articles of Incorporation and Minnesota Statutes, Section 302A.401, to fix or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Undesignated Stock, to fix the number of shares constituting the series, and to determine the designation thereof. D. It is the desire of the Board of Directors of the Company, pursuant to its authority, to fix the rights, preferences, restrictions and other matters relating to the Undesignated Stock and the number of shares of Undesignated Stock. E. Pursuant to authority given by Article 6 of the Company's Articles of Incorporation, the Company's Board of Directors has adopted the following resolutions as of the 4th day of March, 1999; RESOLVED, that, pursuant to Article 6 of the Articles of Incorporation of WAM!NET Inc. (the "Company"), the Board of Directors of the Company hereby creates and designates a series of Preferred Stock, Ten Dollars ($10.00) par value per share, and authorizes the issuance of up to One Hundred Fifteen Thousand Two Hundred and Six (115,206) of such shares, and hereby fixes the designation and the preferences and relative, participating, optional and other special rights of such shares, and the qualifications, limitations or restrictions as follows: Section 1. Designation and Amount. The shares of the Preferred Stock shall be ---------------------- designated as "1999 Class A Preferred Stock." The number of shares constituting the 1999 Class A Preferred Stock shall be One Hundred Fifteen Thousand Two Hundred and Six (115,206). Each share of 1999 Class A Preferred Stock shall have a par value of Ten Dollars ($10.00) per share. The number of shares of 1999 Class A Preferred Stock may be increased or decreased by resolution of the Board of Directors; provided, that, no decrease shall reduce the number of shares of 1999 Class A Preferred Stock to a number less than the number of shares then outstanding, plus the number of shares of 1999 Class A Preferred Stock, if any, reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Company convertible into 1999 Class A Preferred Stock. Section 2. Dividends and Distributions. --------------------------- (A) The holders of shares of 1999 Class A Preferred Stock, in preference to the holders of Common Stock of the Company, shall be entitled to receive, when, as and if declared by the Board of Directors of the Company (the "Directors"), a dividend (the "Quarterly Dividend") in the amount of Seventeen and One-half Cents ($.175) per share payable out of the net earnings of the Company constituting funds legally available for the purpose. The Quarterly Dividend shall begin to accrue on January 1, 1999, and shall be payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of 1999 Class A Preferred Stock. If the net earnings in any year are not sufficient to pay the Quarterly Dividend, either in whole or in part, then any unpaid portion of such dividend will become a charge against the net earnings of the Company, and will be paid in full out of the net earnings of the Company in subsequent years before any dividends are paid on the Common Stock of the Company in those years. No dividends will be paid or set apart for payment on the Common Stock, no distribution will be made on the Common Stock, and no shares of Common Stock will be redeemed, retired or otherwise acquired for valuable consideration unless all theretofore unpaid Quarterly Dividends have been declared, and the Company has paid those dividends or has set aside a sum sufficient to pay them. (B) Dividends shall begin to accrue and accumulate on outstanding shares of 1999 Class A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or (i) from such Quarterly Dividend Date if additional consideration, prorated for the number of elapsed days since such Quarterly Dividend Date, is paid upon issuance, (ii) unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of 1999 Class A Preferred Stock entitled to receive Quarterly Dividends and before such Quarterly Dividend Payment Date, in either of which events such Quarterly Dividends shall begin to accrue and accumulate from such Quarterly Dividend Payment Date. Accrued but unpaid Quarterly Dividends shall not bear interest. Dividends paid on the shares of 1999 Class A Preferred Stock in an amount less than the total amount of Quarterly Dividends then accrued and payable shall be allocated pro rata on a share-by-share basis among all such shares of 1999 Class A Preferred Stock then outstanding. The Directors may fix a record date for the determination of holders of shares of 1999 Class A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than sixty (60) days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of 1999 Class A Preferred ------------- Stock shall have the following voting rights: 2 (A) Each share of 1999 Class A Preferred Stock shall entitle the holder thereof to one (1) vote for each share of 1999 Class A Preferred Stock standing in the name of the holder on the books of the Company. The holders of 1999 Class A Preferred Stock, voting separately as a class, shall be entitled to elect that number of Directors as is equal to the largest whole number less than a majority of all Directors. The right to elect Directors may be exercised at any annual meeting of the stockholders of the Company, at any special meeting held in place of an annual meeting, or at a special meeting called to elect directors. The right to elect directors shall continue until December 31, 2000, and then expire. The directors elected by the 1999 Class A Preferred Stock shall serve until the next annual or special meeting of the stockholders of the Company and until their respective successors have been elected by the holders of 1999 Class A Preferred Stock and have been qualified. The term of office of any person elected as a director by the holders of 1999 Class A Preferred Stock shall terminate on December 31, 2000. The vacancies created thereby may be filled by resolution of the remaining Directors who shall have been elected by a vote of the holders of the Common Stock of the Company. If the office of a director elected by the holders of 1999 Class A Preferred Stock is vacant prior to December 31, 2000, due to resignation, removal or death, the vacancy shall be filled by the majority vote of the directors then in office, even if less than a quorum, upon the recommendation of the remaining director or directors who were elected by the holders of the 1999 Class A Preferred Stock. If the office of a director who was elected by the holders of Common Stock is vacant prior to December 31, 2000, due to resignation, removal or death, the vacancy shall be filled by the majority vote of the directors then in office, even if less than a quorum, upon the recommendation of the remaining director or directors who were elected by the holders of the Common Stock. If the vacancy is not so filled within forty (40) days after the creation of the vacancy, a special meeting of the holders of Preferred Stock and/or Common Stock shall be called and the vacancy or vacancies shall be filled at that meeting. (B) In addition to the right to elect Directors as provided in Section 3(A), the holder of each share of 1999 Class A Preferred Stock shall be entitled to one (1) vote, voting together with the holders of Common Stock as a single class, on all matters, excluding the election of Directors, submitted to the vote of shareholders of the Company. (C) Except as otherwise provided in Section 3(A) or in Section 10, or in any Certificate of Designation creating another class or series of preferred stock, or in any similar stock of the Company hereafter created, or by law, the holders of shares of 1999 Class A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Company having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Company. (D) Except as expressly set forth herein, or as otherwise provided by law, holders of 1999 Class A Preferred Stock shall have no special voting rights and their consent, as a separate class, shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. -------------------- 3 A. Whenever Quarterly Dividends or distributions payable on 1999 Class A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid Quarterly Dividends and distributions, whether or not declared, on shares of 1999 Class A Preferred Stock outstanding shall have been paid in full, the Company shall not, without the express affirmative unanimous approval of the Directors elected by holders of the 1999 Class A Preferred Stock: (1) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the 1999 Class A Preferred Stock; (2) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the 1999 Class A Preferred Stock, except dividends paid ratably on the 1999 Class A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (3) redeem or purchase or otherwise acquire for consideration shares of any stock of the Company ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the 1999 Class A Preferred Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Company ranking junior (as to dividends and upon dissolution, liquidation and winding up) to the 1999 Class A Preferred Stock; or (4) redeem or purchase or otherwise acquire for consideration any shares of 1999 Class A Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the 1999 Class A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. B. The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under Paragraph A of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Liquidation, Dissolution or Winding Up. Upon any voluntary or -------------------------------------- involuntary liquidation, dissolution or winding up of the affairs of the Company, no distribution shall be made (a) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the 1999 Class A Preferred Stock, or (b) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the 1999 Class A Preferred Stock unless each holder of 1999 Class A Preferred 4 Stock has received in cash out of the assets of the Company, whether from capital or earnings, available for distribution to the shareholders of the Company, before any amount is paid to the holders of Common Stock, the sum of Ten Dollars ($10.00) per share for each share of 1999 Class A Preferred Stock held by the holder, plus an amount equal to the sum of all accumulated and unpaid dividends to the date affixed for the payment of the distribution on the shares of 1999 Class A Preferred Stock held by the holder. The sale or transfer by the Company of all or substantially all of its assets shall not, for the purposes of determining preferences and liquidation, be deemed to be a liquidation, dissolution or winding up of the Company. Section 6. Preemptive Rights. No holder of any shares of 1999 Class A ------------------ Preferred Stock shall be entitled as such, as a matter of right, to subscribe for, purchase or receive any part of any class whatsoever, or of securities convertible into or exchangeable for any stock or any class whatsoever, whether now or hereafter authorized or whether issued for cash or other consideration or by way of a dividend. Section 7. Mandatory Redemption. Unless earlier redeemed or acquired in -------------------- whole or in part by the Company with the consent of the holder, the shares of 1999 Class A Preferred Stock that remain issued and outstanding shall expire and shall be automatically redeemed on December 31, 2000, at par value, plus an amount equal to all accumulated and unpaid dividends, if any, due with respect to the 1999 Class A Preferred Stock (collectively, the "Redemption Price"). Redemption shall be in cash out of any funds legally available for the redemption of the 1999 Class A Preferred Stock. Section 8. Rank. The 1999 Class A Preferred Stock shall rank, with ---- respect to payment of dividends and distribution of assets (except with respect to events that do not give rise to a right of the holders of the 1999 Class A Preferred Stock to receive distributions) (a) junior to any other class or series of the Company's preferred stock which shall specifically provide that such class or series shall rank senior to the 1999 Class A Preferred Stock ("Senior Stock"); (b) on parity with (i) the Company's Class B Convertible Preferred Stock, par value $0.01 per share, (ii) the Company's Class C Convertible Preferred Stock, par value $0.01 per share, (iii) the Company's Class D Convertible Preferred Stock, par value $0.01 per share, and (iv) any other class or series of the Company's preferred stock which shall specifically provide that such class or series shall rank on parity with the Class B Preferred Stock ((i) through (iv) collectively, the "Parity Stock"); and (c) prior to (i) the Company's Common Stock and (ii) any other class or series of the Company's preferred stock except for any class or series which are Senior Stock or Parity Stock ((i) and (ii) together, the "Junior Stock"). Section 9. Reacquired Shares. Any shares of 1999 Class A Preferred ----------------- Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of undesignated stock and may be reissued subject to the conditions and restrictions on issuance in the Articles of Incorporation, or in any other Certificate of Designations creating another class or series of stock or as otherwise required by law. Section 10. Amendment. If any proposed amendment to these Articles of --------- Incorporation would alter or change the preferences, special rights or powers given to the 1999 5 Class A Preferred Stock so as to affect the 1999 Class A Preferred Stock adversely, or would authorize the issuance of a class or classes of stock having preferences or rights with respect to dividends or dissolution or the distribution of assets that would be superior to the preferences or rights of the 1999 Class A Preferred Stock, then the holders of the 1999 Class A Preferred Stock shall be entitled to vote as a series upon such amendment, and the affirmative vote of two-thirds of the outstanding shares of 1999 Class A Preferred Stock shall be necessary to the adoption thereof, in addition to such other vote as may be required by law. RESOLVED FURTHER, that the officers of this Company be, and each of them acting alone is, hereby authorized and instructed to take all steps necessary to execute, deliver and file, for and on behalf of this Company and in its name, any and all documents required in connection with the establishment and authorization of the Company's Class A Preferred Stock, including but not limited to filing the Statement of Rights and Preferences with the Minnesota Secretary of State in accordance with Minnesota Statutes, Section 302A.401. F. The undersigned further declares under penalty of perjury that the matters set out in the foregoing Certificate are true and correct of his own knowledge. IN WITNESS WHEREOF, the undersigned has executed this certificate as of the 4th day of March 1999. /s/ Edward J. Driscoll, Jr. --------------------------------------------- Edward J. Driscoll, Jr. Secretary 6 EX-4.21 7 CERT. OF RIGHTS/PREFERENCES OF CLASS B EXHIBIT 4.21 CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES OF CLASS B CONVERTIBLE PREFERRED STOCK OF WAM!NET INC. The undersigned, Edward J. Driscoll, Jr., hereby certifies that: A. He is the duly elected and acting Secretary of WAM!NET Inc. (the "Company"), a Minnesota corporation. B. The Articles of Incorporation of this Company provide for a class of up to 49,500,000 shares known as Undesignated Stock, which shares may be issued from time to time in one or more classes or series. C. The Board of Directors of the Company is authorized, pursuant to Article 6 of the Company's Articles of Incorporation and Minnesota Statutes, Section 302A.401, to fix or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Undesignated Stock, to fix the number of shares constituting the series, and to determine the designation thereof. D. It is the desire of the Board of Directors of the Company, pursuant to its authority, to fix the rights, preferences, restrictions and other matters relating to the Undesignated Stock and the number of shares of Undesignated Stock. E. Pursuant to authority given by Article 6 of the Company's Articles of Incorporation, the Company's Board of Directors has adopted the following resolutions as of the 4th day of March, 1999: RESOLVED, that, pursuant to Article 6 of the Articles of Incorporation of WAM!NET Inc. (the "Company"), the Board of Directors of the Company (the "Board") hereby creates and designates a series of Convertible Preferred Stock, par value $0.01 per share, and authorizes the issuance of up to 5,710,425 of such shares, and hereby fixes the designations, powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions, of such shares, as follows: 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated ---------------------- "Class B Convertible Preferred Stock" (the "Class B Preferred Stock") and the number of shares constituting such series shall be 5,710,425. 2. RANK. The Class B Preferred Stock shall rank, with respect to dividend ---- rights and distribution of assets on any Liquidation of the Company (as defined herein) (a) junior to any other class or series of the Company's preferred stock which shall specifically provide that such class or series shall rank senior to the Class B Preferred Stock (the "Senior Stock"); (b) on parity with (i) the Company's Class A Preferred Stock, par value $10.00 per share (the "Class A Preferred Stock") (except with respect to a Liquidation of the Company resulting from the merger or consolidation of the Company into or with another corporation, the merger or consolidation of any other corporation into or with the Company or the sale of all or substantially all the assets of -2- the Company, which events do not give rise to a right of the holders of the Class A Preferred Stock to receive distributions), (ii) the Company's Class C Convertible Preferred Stock, par value $0.01 per share (the "Class C Preferred Stock"), (iii) the Company's Class D Convertible Preferred Stock, par value $0.01 per share (the "Class D Preferred Stock"), and (iv) any other class or series of the Company's preferred stock which shall specifically provide that such class or series shall rank on parity with the Class B Preferred Stock ((i) through (iv) collectively, the "Parity Stock"); and (c) prior to (i) the Company's common stock, par value $0.01 per share (the "Common Stock") and (ii) any other class or series of the Company's preferred stock except for any class or series which are Senior Stock or Parity Stock ((i) and (ii) together, the "Junior Stock"). 3. DIVIDENDS. (a) Payment. The holders of Class B Preferred Stock shall be --------- ------- entitled to receive dividends as set forth herein, payable only (i) if, as and when declared by the Board, out of any funds legally available therefor or (ii) to the extent declared by the Board, upon the Liquidation of the Company, subject to and as set forth in Section 4 hereof. All such dividends (X) shall be cumulative and shall accrue on each share of Class B Preferred Stock from the date of issuance thereof at the rate of SEVEN PERCENT (7%) per annum of the Original Purchase Price Per Share (as defined herein) thereof solely in the form of additional shares of Class B Preferred Stock (Y) shall be payable before any dividends shall be set apart for or paid upon Junior -3- Stock in any year and (Z) shall be payable in accordance with Section 2 when any dividends shall be set apart for or paid upon Parity Stock in any year. All such dividends declared upon Class B Preferred Stock shall be declared pro rata per share. (b) Limit on Junior Dividends and Redemption. For so long as the Class B ---------------------------------------- Preferred Stock remains outstanding, the Company shall not pay any dividend upon the Junior Stock, whether in cash or other property (other than shares of Junior Stock), or purchase, redeem or otherwise acquire any such Junior Stock; provided, however, that nothing in this Section 3(b) shall prohibit or otherwise - - ----------------- limit the ability of the Company to (i) purchase unvested shares of Common Stock from former employees of the Company at their original purchase price or (ii) make any purchase, redemption or other acquisition pursuant to arrangements existing as of the date of the initial issuance of the Class B Preferred Stock (the "Initial Issuance Date"). 4. LIQUIDATION, DISSOLUTION OR WINDING-UP. -------------------------------------- (a) Liquidation Preference. In the event of any Liquidation of the ---------------------- Company, the holders of shares of Class B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of Senior Stock upon such Liquidation of the Company and before any payment shall be made to the holders of Junior Stock, the Liquidation Amount (as defined herein) per share of Class B Preferred Stock. If upon any such Liquidation of the Company, the remaining assets of -4- the Company available for the distribution to its stockholders after payment in full of amounts required to be paid or distributed to holders of Senior Stock shall be insufficient to pay the holders of shares of Parity Stock the full amount to which they shall be entitled, the holders of the Class B Preferred Stock shall share ratably with the holders of Parity Stock in any distribution of the remaining assets and funds of the Company in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to said shares were paid in full. After the payment of all preferential amounts required to be paid to the holders of Senior Stock and Parity Stock and any other series of the Company's preferred stock upon any Liquidation of the Company, the holders of shares of Junior Stock then outstanding shall be entitled to receive the remaining assets and funds of the Company available for distribution to its stockholders in accordance with the terms thereof. (b) Certain Definitions. (i) The term "Liquidation of the Company" shall ------------------- mean any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Company, and the merger or consolidation of the Company into or with another corporation, the merger or consolidation of any other corporation into or with the Company or the sale of all or substantially all the assets of the Company. (ii) The term "Liquidation Amount" shall mean an amount per share of Class B Preferred Stock equal to the greater of: (A) (1) -5- if the Company has effected a Real Property Financing (as defined herein) within 18 months of the Initial Issuance Date, (Y) the sum of the Financed Value (as defined herein), plus $25,000,000, plus any dividends accrued on the Class B Preferred Stock but not paid (provided that, under no circumstances shall the ------------- amount calculated under this Section 4(b)(ii)(A)(1)(Y) exceed $65,000,000 (the "Original Purchase Price") plus any dividends accrued on the Class B Preferred Stock but not paid) divided by (Z) 5,710,425 or (2) if the Company has not effected a Real Property Financing within such 18 months, the Original Purchase Price Per Share plus any dividends per share accrued on the Class B Preferred Stock but not paid; and (B) the per share amount that holders of the Class B Preferred Stock would have received had they exercised their right to convert the Class B Preferred Stock to Common Stock immediately prior to a Liquidation of the Company; and provided further, that for purposes of the antidilution ---------------- provisions of Section 7 hereof and the mandatory conversion provisions of Section 8 hereof, the term "Liquidation Amount" shall exclude any dividends accrued on the Class B Preferred Stock but not paid. (iii) The term "Real Property Financing" shall mean a sale-leaseback or similar financing arrangement with an independent third party for the purposes of financing not less than 100% of the financeable value of the Real Property. (iv) The term "Real Property" shall have the meaning ascribed thereto in the Preferred Stock Purchase Agreement, dated as of March 3, 1999, by and between the Company and Silicon -6- Graphics, Inc., relating to the sale of the Class B Preferred Stock and the Class C Preferred Stock (the "Purchase Agreement"). (v) The term "Financed Value" shall mean (A) in connection with a sale- leaseback arrangement, the sum of the total amount that a third-party is willing to fund (without deduction for loan fees and costs), providing for rent payable to the Company under the lease in an amount not less than fair market rental for the Real Property or (B) in connection with a mortgage or other financing arrangement involving a loan to value ratio of less than 100%, the total appraised value of the Real Property being relied upon by such lender; provided, --------- however, that the Financed Value shall under no circumstances be greater than - - ------- $40,000,000 or less than $30,000,000. (vi) The values ascribed to the terms "financeable value," "fair market rental" and "total appraised value" as used in this Section 4(b) shall be determined in good faith by the Company after consultation with a majority-in- interest of the holders of the Class B Preferred Stock; provided that, if a ------------- majority-in-interest of the holders of the Class B Preferred Stock reasonably object to the values ascribed to such terms, such holders may proceed to arbitration as set forth in herein: (A) In such event, the dispute shall be solely and finally settled in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA") as in force and effect at such time. The AAA shall administer the arbitration. The arbitration shall be conducted by a panel of three arbitrators selected in the following manner: The Company and a majority-in-interest of -7- the holders of the Class B Preferred Stock shall each select one arbitrator within five (5) days from the date on which the notice of arbitration has been received by the Company. Within five (5) days after such appointment, the selected arbitrators shall choose a third arbitrator, who must be experienced in the area of real estate valuation in the Minneapolis, Minnesota metropolitan area, to serve as the chairman of the panel. The arbitration shall take place in Minneapolis, Minnesota. The determination of the arbitrators shall set forth findings of fact, conclusions and the reasons therefor and shall be the final disposition on the merits. The Company and the holders of the Class B Preferred Stock waive any right they may enjoy under the law of any state to apply to the courts of such state for relief from the provisions hereof or from any decision of the arbitrators. All costs of arbitration hereunder shall be borne equally by the Company, on the one hand, and the holders of the Class B Preferred Stock, on the other hand. 5. VOTING. (a) Number of Votes. Each issued and outstanding share of Class B ------ --------------- Preferred Stock shall be entitled to the number of votes equal to (i) the number of shares of Common Stock into which each such share of Class B Preferred Stock is then convertible (as adjusted from time to time) divided by the Number of Common Shares Deemed Outstanding (as defined herein) at such time, multiplied by (ii) the aggregate number of shares of Common Stock then outstanding and entitled to vote (giving effect to the voting power of all of the securities of the Company convertible into or exchangeable for Common Stock that are entitled to vote -8- with the Common Stock, but without giving effect to the voting power of the Class B Preferred Stock), at each meeting of stockholders of the Company (or any written consent without a meeting in accordance with the Minnesota Business Corporation Act) with respect to any and all matters presented to the stockholders of the Company for their action or consideration other than the election of directors (as to which the Class B Preferred Stock shall have rights voting separately as a class as set out in Section 5(b)). Except as provided by law, by the provisions of this Section 5 or by the provisions establishing any other series of the Company's preferred stock, holders of Class B Preferred Stock and of any other outstanding preferred stock shall vote together with the holders of Common Stock as a single class. (b) The Class B Director. The holders of Class B Preferred Stock shall have -------------------- the exclusive right, voting separately as a class, to elect one director (the "Class B Director"). The Class B Director shall be elected by the affirmative vote of the holders of record of a majority of the outstanding shares of Class B Preferred Stock either at meetings of stockholders at which directors are elected, a special meeting of the holders of record of the Class B Preferred Stock or by written consent of a majority of such holders of record without a meeting in accordance with the Minnesota Business Corporation Act. Each Class B Director so elected shall serve for a term of one year and until his or her successor is elected and qualified. Any vacancy in the position of a Class B Director may be filled only -9- by the holders of the Class B Preferred Stock. Each Class B Director may, during his or her term of office, be removed at any time, with or without cause, by and only by the affirmative vote, at a special meeting of holders of Class B Preferred Stock called for such purpose, or the written consent, of the holders of record of a majority of the outstanding shares of Class B Preferred Stock. Any vacancy created by such removal may also be filled at such meeting or by such consent. (c) Protective Provisions. In addition to any other rights provided by --------------------- law, the Company shall not (i) without first obtaining the affirmative vote or written consent of a majority of the holders of the Class B Preferred Stock, voting separately as a class, amend, alter or repeal any provision of the Company's Articles of Incorporation or By-Laws in a manner that is adverse to the holders of the Class B Preferred Stock and (ii) without first obtaining the affirmative vote or written consent of a majority of the holders the Company's voting stock other than MCI WORLDCOM, Inc. (together with its majority-owned subsidiaries and other controlled affiliates, "MCI WCOM"), enter into any merger or consolidation into or with MCI WCOM or enter into any other contract or arrangement involving the sale or license of the Company's material assets with MCI WCOM (excluding contractual arrangements with MCI WCOM existing as of the Initial Issuance Date). 6. OPTIONAL CONVERSION. Each share of Class B Preferred Stock may be converted ------------------- at any time, at the option of the holder thereof, into the number of fully paid and nonassessable shares -10- of Common Stock obtained by dividing the Original Purchase Price Per Share by the Conversion Price then in effect (the "Conversion Rate"); provided, however, ----------------- that upon any Liquidation of the Company, the right of conversion shall terminate at the close of business on the full business day next preceding the date fixed for the payment of any amounts distributable on liquidation to the holders of Class B Preferred Stock. (a) Initial. The initial Conversion Rate for the Class B Preferred Stock ------- shall be one share of Common Stock for each one share of Class B Preferred Stock surrendered for conversion representing an initial Conversion Price of $11.3826902 per share of Common Stock (the "Original Purchase Price Per Share"). The applicable Conversion Rate and Conversion Price from time to time in effect is subject to adjustment as hereinafter provided. (b) No Fractional Shares. The Company shall not issue fractions of shares -------------------- of Common Stock upon conversion of Class B Preferred Stock or scrip in lieu thereof. If any fraction of a share of Common Stock would, except for the provisions of this Section 6(b), be issuable upon conversion of any Class B Preferred Stock, the Company shall in lieu thereof pay to the person entitled thereto an amount in cash equal to the current value of such fraction, calculated to the nearest one hundredth (1/100) of a share, to be computed (i) if the Common Stock is listed on any national securities exchange on the basis of the last sales price of the Common Stock on such exchange (or the quoted closing bid price if there shall have been no sales) on the date of conversion or (ii) if the Common Stock shall not be -11- listed, on the basis of the mean between the closing bid and asked prices for the Common Stock on the date of conversion as reported by Nasdaq, or its successor, and if there are not such closing bid and asked prices, on the basis of the fair market value per share as determined by the Board of Directors of the Company. (c) Adjustment. Whenever the Conversion Rate and Conversion Price shall ---------- be adjusted as provided herein, the Company shall forthwith file at each office designated for the conversion of Class B Preferred Stock, a statement, signed by the President, any Vice President or Treasurer of the Company, showing in reasonable detail the facts requiring such adjustment and the Conversion Rate that will be effective after such adjustment. The Company shall also cause a notice setting forth any such adjustments to be sent by mail, first class, postage prepaid, to each record holder of Class B Preferred Stock at his or its address appearing on the stock register. If such notice relates to an adjustment resulting from an event referred to in Section 7(g), such notice shall be included as part of the notice required to be mailed and published under the provisions of such Section 7(g). (d) Exercise. In order to exercise the conversion privilege, the holder -------- of any Class B Preferred Stock to be converted shall surrender his or its certificate or certificates therefore to the principal office of the transfer agent for the Class B Preferred Stock (or if no transfer agent be at the time appointed, then the Company at its principal office), and shall -12- give written notice to the Company at such office that the holder elects to convert the Class B Preferred Stock represented by such certificates, or any number thereof. Such notice shall also state the name or names (with address) in which the certificate or certificates for shares of Common Stock which shall be issuable on such conversion shall be issued, subject to any restrictions on transfer relating to shares of the Class B Preferred Stock or shares of Common Stock upon conversion thereof. If so required by the Company, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Company, duly authorized in writing. The date of receipt by the transfer agent (or by the Company if the Company serves as its own transfer agent) of the certificates and notice shall be the conversion date. As soon as practicable after receipt of such notice and the surrender of the certificate or certificates for Class B Preferred Stock as set forth herein, the Company shall cause to be issued and delivered at such office to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Section 6(b) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. (e) Reservation of Shares of Common Stock. The Company shall at all times ------------------------------------- while any shares of Class B Preferred Stock shall be outstanding, reserve and keep available out of its -13- authorized but unissued stock, for the purposes of effecting the conversion of the Class B Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Class B Preferred Stock. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Class B Preferred Stock, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Conversion Price. (f) No Adjustment for Dividends. Upon any such conversion, no adjustment --------------------------- to the Conversion Rate shall be made for accrued and unpaid dividends on the Class B Preferred Stock surrendered for conversion or on the Common Stock delivered. (g) Surrender. All shares of Class B Preferred Stock which shall have --------- been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall forthwith cease and terminate except only the right of the holder thereof to receive shares of Common Stock in exchange therefor and payment of any accrued and unpaid dividends on such shares of Common Stock. Any shares of Class B Preferred Stock so converted shall be retired and canceled and shall not be reissued, and the Company may from time to time take -14- such appropriate action as may be necessary to reduce the authorized Class B Preferred Stock accordingly. 7. ANTI-DILUTION PROVISIONS. (a) General. In order to prevent dilution of ------------------------ ------- the rights granted hereunder, the Conversion Price shall be subject to adjustment from time to time in accordance with this Section 7. Upon each adjustment of the Conversion Price pursuant to this Section 7, the registered holder of shares of Class B Preferred Stock shall thereafter be entitled to acquire upon conversion, at the Conversion Price resulting from such adjustment, the number of shares of Common Stock obtainable by multiplying the Conversion Price in effect immediately prior to such adjustment by the number of shares of Common Stock acquirable immediately prior to such adjustment and dividing the product thereof by the Conversion Price resulting from such adjustment. (b) Adjustment of Conversion Price. Except as provided in Sections 7(c) ------------------------------ or 7(f) below, if and whenever on or after the Initial Issuance Date, the Company shall issue or sell, or shall pursuant to Section 7(b)(1) through (10) inclusive, be deemed to have issued or sold any shares of its Common Stock for a consideration per share less than the Liquidation Amount (excluding, for all purposes of this Section 7, any dividends accrued on the Class B Preferred Stock) in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale (the "Triggering Transaction"), the Conversion Price shall, subject to Section 7(b)(1) through (10) inclusive, be reduced to: (i) if a Triggering Transaction shall occur within -15- nine months following the Initial Issuance Date, the consideration per share that such Common Stock shall have been issued or sold (or deemed issued or sold) for in such Triggering Transaction or (ii) if a Triggering Transaction shall occur at any time thereafter, the Conversion Price (calculated to the nearest one-hundredth of a cent) determined by dividing: (A) an amount equal to the sum of the product derived by multiplying the Number of Common Shares Deemed Outstanding immediately prior to such Triggering Transaction by the Conversion Price then in effect, plus the consideration, if any, received by the Company upon consummation of such Triggering Transaction by (B) an amount equal to the sum of the Number of Common Shares Deemed Outstanding immediately prior to such Triggering Transaction plus the number of shares of Common Stock issued (or deemed to be issued in accordance with Section 7(b)(1) through (10) inclusive) in connection with the Triggering Transaction. The term "Number of Common Shares Deemed Outstanding" at any given time shall mean the sum of (i) the number of shares of Common Stock outstanding at such time, (ii) the number of shares of Common Stock issuable upon conversion or exchange at such time of all of the Company's outstanding securities that are then convertible into, or exchangeable for, Common Stock and (iii) the number of shares of the Company's Common Stock deemed to be outstanding under Section 7(b)(1) through (10) inclusive, at such time. For purposes of determining the adjusted Conversion Price under this Section 7(b), the following provisions shall be applicable: -16- (1) In case the Company at any time shall in any manner grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities"), whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable and the price per share for which the Common Stock is issuable upon exercise, conversion or exchange (determined by dividing (Y) the total amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of all such Options, plus, in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (Z) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities) shall be less than the Liquidation Amount in effect immediately prior to the time of the granting of such Option, then the total maximum amount of Common Stock issuable upon the exercise of such Options or in the case of Options for Convertible Securities, upon the conversion or exchange of such Convertible Securities shall (as -17- of the date of granting of such Options) be deemed to be outstanding and to have been issued and sold by the Company for such price per share. No further adjustment of the Conversion Price shall be made upon the actual issue of such shares of Common Stock or such Convertible Securities upon the exercise of such Options, except as otherwise provided in Section 7(b)(3). (2) In case the Company at any time shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (Y) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (Z) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Liquidation Amount in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued and sold by the Company for such price per share. No further adjustment of the Conversion Price shall be made upon the actual issue of such Common Stock upon exercise of the rights to -18- exchange or convert under such Convertible Securities, except as otherwise provided in Section (7)(b)(3). (3) If the purchase price provided for in any Options referred to in Section 7(b)(1), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in Sections 7(b)(1) or (2), or the rate at which any Convertible Securities referred to in Sections 7(b)(1) or (2) are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution of the type set forth in Sections 7(b) or 7(d)), the Conversion Price in effect at the time of such change shall forthwith be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. If the purchase price provided for in any Option referred to in Section 7(b)(1) or the rate at which any Convertible Securities referred to in Sections 7(b)(1) or (2) are convertible into or exchangeable for Common Stock, shall be reduced at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such Option or upon conversion or exchange of any such Convertible Security, the Conversion Price then in effect hereunder shall forthwith be adjusted to such respective amount as would have been obtained had such Option or Convertible Security never been issued as to -19- such Common Stock and had adjustments been made upon the issuance of the shares of Common Stock delivered as set forth herein, but only if as a result of such adjustment the Conversion Price then in effect hereunder is hereby reduced. (4) On the expiration of any Option or the termination of any right to convert or exchange any Convertible Securities, the Conversion Price then in effect hereunder shall forthwith be increased to the Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination, never been issued. (5) In case any Options shall be issued in connection with the issue or sale of other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued without consideration. (6) In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be the fair value of such consideration as determined in good faith by the Board. In case any shares of Common Stock, Options or Convertible -20- Securities shall be issued in connection with any merger in which the Company is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value of such portion of the net assets and business of the non- surviving corporation as shall be attributable to such Common Stock, Options or Convertible Securities, as the case may be. (7) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock for the purpose of this Section 7(b). (8) In case the Company shall declare a dividend or make any other distribution upon the stock of the Company payable in Options or Convertible Securities, then in such case any Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (9) For purposes of this Section 7(b), in case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of -21- the granting of such right or subscription or purchase, as the case may be. (10) For purposes of this Section 7(b), notwithstanding Section 7(f), in the event that the "Class B Warrants" issued to MCI WCOM on September 26, 1997 vest and become exercisable for shares of Common Stock, whether or not MCI WCOM shall exercise such Class B Warrants, the following shall apply: the consideration per share that the Common Stock shall be deemed to have been issued or sold at shall be equal to the Original Purchase Price Per Share that would have been payable by the holder of the Class B Preferred Stock on the Initial Issuance Date if the vested Class B Warrants had vested and been exercised (and the exercise price thereon had been paid to the Company) prior to the Initial Issuance Date. (c) Liquidating Dividends. In the event the Company shall declare a --------------------- dividend upon the Common Stock (other than a dividend payable in Common Stock) payable otherwise than out of earnings or earned surplus, determined in accordance with generally accepted accounting principles, including the making of appropriate deductions for minority interests, if any, in subsidiaries (herein referred to as "Liquidating Dividends"), then, as soon as possible after the conversion of any Class B Preferred Stock, the Company shall pay to the person converting such Class B Preferred Stock an amount equal to the aggregate value at the time of such exercise of all Liquidating Dividends (including but not limited to the Common Stock which would have been issued at the time of such earlier exercise and all other -22- securities which would have been issued with respect to such Common Stock by reason of stock splits, stock dividends, mergers or reorganizations, or for any other reason). For the purposes of this Section 7(c), a dividend other than in cash shall be considered payable out of earnings or earned surplus only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend as determined in good faith by the Board. (d) Subdivisions and Dividends; Combinations. In case the Company shall ---------------------------------------- at any time (i) subdivide the outstanding Common Stock or (ii) issue a stock dividend on its outstanding Common Stock, the number of shares of Common Stock issuable upon conversion of the Class B Preferred Stock shall be proportionately increased by the same ratio as the subdivision or dividend (with appropriate adjustments to the Conversion Price in effect immediately prior to such subdivision or dividend). In case the Company shall at any time combine its outstanding Common Stock, the number of shares issuable upon conversion of the Class B Preferred Stock immediately prior to such combination shall be proportionately decreased by the same ratio as the combination (with appropriate adjustments to the Conversion Price in effect immediately prior to such combination). (e) Reorganizations, etc. If any capital reorganization or -------------------- reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of -23- Common Stock shall be entitled to receive stock, securities, cash or other property with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of the Class B Preferred Stock shall have the right to acquire and receive upon conversion of the Class B Preferred Stock, which right shall be prior to the rights of the holders of Junior Stock, equal to the rights of the holders of Parity Stock and after and subject to the rights of holders of Senior Stock, such shares of stock, securities, cash or other property issuable or payable (as part of the reorganization, reclassification, consolidation, merger or sale) with respect to or in exchange for such number of outstanding shares of Common Stock as would have been received upon conversion of the Class B Preferred Stock at the Conversion Price then in effect. (f) Exceptions to Antidilution. The provisions of this Section 7 shall -------------------------- not apply to any Common Stock issued, issuable or deemed outstanding under Section 7(b)(1) through (10) inclusive (and no such transaction shall constitute a Triggering Transaction): (i) in connection with a public or private debt financing effected by the Company (other than with an affiliate of the Company, including MCI WCOM) within nine months after the Initial Issuance Date, (ii) after the issuance of shares of Common Stock to the public in an underwritten offering pursuant to a registration statement filed under the Securities Act of 1933, as amended (the "Securities Act") covering the offer and -24- sale of Common Stock in which the proceeds to the Company are not less than $20 million, (iii) to any person pursuant to any stock option, stock purchase or similar plan or arrangement for the benefit of employees, consultants or other representatives of the Company or its subsidiaries in effect on the Initial Issuance Date or thereafter adopted by the Board, (iv) pursuant to options, warrants and conversion rights in existence on the Initial Issuance Date (other than as provided for in Section 7(b)(10)) or (v) on conversion of the Class B Preferred Stock, the Class C Preferred Stock or the Class D Preferred Stock or the sale of any additional shares of any of the foregoing at a price not less than the applicable conversion price thereof. (g) Procedures. In the event that (i) the Company shall declare any cash ---------- dividend upon its Common Stock, (ii) the Company shall declare any dividend upon its Common Stock payable in stock or make any special dividend or other distribution to the holders of its Common Stock, (iii) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights, (iv) there shall be any capital reorganization or reclassification of the capital stock of the Company, including any subdivision or combination of its outstanding shares of Common Stock, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation, (v) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, in connection with any such event, the Company shall give to the holders of the -25- Class B Preferred Stock (A) at least twenty (20) days prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up; and (B) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, at least twenty (20) days prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (A) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (B) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification consolidation, merger, sale, dissolution, liquidation or winding-up, as the case may be. Each such written notice shall be given by first class mail, postage prepaid, addressed to the holders of the Class B Preferred Stock at the address of each such holder as shown on the books of the Company. (h) Intended Effect. If any event occurs as to which, in the opinion of --------------- the Board, the provisions of this Section 7 are not strictly applicable or if strictly applicable would not fairly protect the rights of the holders of the Class B Preferred -26- Stock in accordance with the essential intent and principles of such provisions, then the Board shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights as set forth herein, but in no event shall any adjustment have the effect of increasing the Conversion Price as otherwise determined pursuant to any of the provisions of this Section 7 except in the case of a combination of shares of a type contemplated in Section 7(d) and then in no event to an amount greater than the Conversion Price as adjusted pursuant to Section 7(d). 8. MANDATORY CONVERSION. -------------------- (a) Mandatory Conversion. Each share of Class B Preferred Stock shall -------------------- automatically be converted into shares of Common Stock at the then effective Conversion Price at any time upon the closing of an underwritten offering pursuant to an effective registration statement under the Securities Act, covering the offer and sale of Common Stock to the public at a price per share of Common Stock that is not less than (i) 110% of the Liquidation Amount (excluding, for all purposes of this Section 8, any dividends accrued on the Class B Preferred Stock), if such offering is consummated within two years following the Initial Issuance Date or (ii) 200% of the Liquidation Amount, if such offering is consummated at any time thereafter. In addition, each share of Class B Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Price for such shares (A) upon the vote to so convert of the holders of at least a majority of the shares of Class B -27- Preferred Stock then outstanding or (B) at any time after the conversion into Common Stock of at least a majority of the shares of Class B Preferred Stock issued on the Initial Issuance Date. (b) Procedures. All holders of record of shares of Class B Preferred ---------- Stock will be given at least twenty (20) days' prior written notice of the date fixed and the place designated for mandatory conversion of all of such shares of Class B Preferred Stock pursuant to this Section 8. Such notice will be sent by mail, first class, postage prepaid, to each record holder of shares of Class B Preferred Stock at such holder's address appearing on the stock register. On or before the date fixed for conversion each holder of shares of Class B Preferred Stock shall surrender his or its certificates or certificates for all such shares to the Company at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 8. On the date fixed for conversion, all rights with respect to the Class B Preferred Stock so converted will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefore, to receive certificates for the number of shares of Common Stock into which such Class B Preferred Stock has been converted and payment of any accrued and unpaid dividends thereon. If so required by the Company, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Company, duly executed by the registered holder or by his attorneys duly -28- authorized in writing. All certificates evidencing shares of Class B Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the date such certificates are so required to be surrendered, be deemed to have been retired and canceled and the shares of Class B Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. As soon as practicable after the date of such mandatory conversion and the surrender of the certificate or certificates for Class B Preferred Stock as set forth herein, the Company shall cause to be issued and delivered to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Section 6(b) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. 9. CONVERTED AND REACQUIRED SHARES. Any shares of Series B referred Stock ------------------------------- converted into Common Stock, purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of undesignated stock of the Company and may be reissued subject to the conditions and restrictions on issuance in the Articles of Incorporation, in any other -29- Certificate of Designation creating a series of preferred stock or any similar stock or as otherwise required by law. 10. SUSPENSION OF VOTING RIGHTS PENDING HSR APPROVAL. Notwithstanding anything ------------------------------------------------ to the contrary contained herein, unless and until all filings required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations of the Federal Trade Commission promulgated thereunder, in connection with the acquisition of the Class B Preferred Stock shall have been made and the applicable waiting period thereunder shall have expired or been terminated, no holder of Class B Preferred Stock shall have any voting rights as a stockholder of the Company or any other right to elect, nominate, designate or vote for any member of the Company's Board of Directors. RESOLVED FURTHER, that the officers of this Company be, and each of them acting alone is, hereby authorized and instructed to take all steps necessary to execute, deliver and file, for and on behalf of this Company and in its name, any and all documents required in connection with the establishment and authorization of the Company's Class B Preferred Stock, including but not limited to filing the Statement of Rights and Preferences with the Minnesota Secretary of State in accordance with Minnesota Statutes, Section 302A.401. -30- F. The undersigned further declares under penalty of perjury that the matters set out in the foregoing Certificate are true and correct of his own knowledge. -31- IN WITNESS WHEREOF, the undersigned has executed this certificate as of the 4th day of March, 1999. /s/ Edward J. Driscoll, Jr. _________________________________ Edward J. Driscoll, Jr. Secretary -32- EX-4.22 8 CERT. OF DESIGNATION OF RIGHTS/PREFERENCES CLASS C EXHIBIT 4.22 CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES OF CLASS C CONVERTIBLE PREFERRED STOCK OF WAM!NET INC. The undersigned, Edward J. Driscoll, Jr., hereby certifies that: A. He is the duly elected and acting Secretary of WAM!NET Inc. (the "Company"), a Minnesota corporation. B. The Articles of Incorporation of this Company provide for a class of up to 49,500,000 shares known as Undesignated Stock, which shares may be issued from time to time in one or more classes or series. C. The Board of Directors of the Company is authorized, pursuant to Article 6 of the Company's Articles of Incorporation and Minnesota Statutes, Section 302A.401, to fix or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Undesignated Stock, to fix the number of shares constituting the series, and to determine the designation thereof. D. It is the desire of the Board of Directors of the Company, pursuant to its authority, to fix the rights, preferences, restrictions and other matters relating to the Undesignated Stock and the number of shares of Undesignated Stock. E. Pursuant to authority given by Article 6 of the Company's Articles of Incorporation, the Company's Board of Directors has adopted the following resolutions as of the 4th day of March, 1999; RESOLVED, that, pursuant to Article 6 of the Articles of Incorporation of WAM!NET Inc. (the "Company"), the Board of Directors of the Company (the "Board") hereby creates and designates a series of Convertible Preferred Stock, par value $0.01 per share, and authorizes the issuance of up to 878,527 of such shares, and hereby fixes the designations, powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions, of such shares, as follows: 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated ---------------------- "Class C Convertible Preferred Stock" (the "Class C Preferred Stock") and the number of shares constituting such series shall be 878,527. 2. RANK. The Class C Preferred Stock shall rank, with respect to dividend ---- rights and distribution of assets on any Liquidation of the Company (as defined herein) (a) junior to any other class or series of the Company's preferred stock which shall specifically provide that such class or series shall rank senior to the Class C Preferred Stock (the "Senior Stock"); (b) on parity with (i) the Company's Class A Preferred Stock, par value $10.00 per share (the "Class A Preferred Stock") (except with respect to a Liquidation of the Company resulting from the merger or consolidation of the Company into or with another corporation, the merger or consolidation of any other corporation into or with the Company or the sale of all or substantially all the assets of the Company, which events do not give rise to a right of the holders of the Class A Preferred Stock to receive distributions), -2- (ii) the Company's Class B Convertible Preferred Stock, par value $0.01 per share (the "Class B Preferred Stock"), (iii) the Company's Class D Convertible Preferred Stock, par value $0.01 per share (the "Class D Preferred Stock"), and (iv) any other class or series of the Company's preferred stock which shall specifically provide that such class or series shall rank on parity with the Class C Preferred Stock ((i) through (iv) collectively, the "Parity Stock"); and (c) prior to (i) the Company's common stock, par value $0.01 per share (the "Common Stock") and (ii) any other class or series of the Company's preferred stock except for any class or series which are Senior Stock or Parity Stock ((i) and (ii) together, the "Junior Stock"). 3. DIVIDENDS. (a) Payment. The holders of Class C Preferred Stock shall be --------- ------- entitled to receive dividends as set forth herein, payable only (i) if, as and when declared by the Board, out of any funds legally available therefor or (ii) to the extent declared by the Board, upon the Liquidation of the Company, subject to and as set forth in Section 4 hereof. All such dividends (X) shall be cumulative and shall accrue on each share of Class C Preferred Stock from the date of issuance thereof at the rate of SEVEN PERCENT (7%) per annum of the Original Purchase Price Per Share (as defined herein) thereof solely in the form of additional shares of Class C Preferred Stock (Y) shall be payable before any dividends shall be set apart for or paid upon Junior Stock in any year and (Z) shall be payable in accordance with Section 2 when any dividends shall be set apart for or paid upon -3- Parity Stock in any year. All such dividends declared upon Class C Preferred Stock shall be declared pro rata per share. (b) Limit on Junior Dividends and Redemption. For so long as the Class C ---------------------------------------- Preferred Stock remains outstanding, the Company shall not pay any dividend upon the Junior Stock, whether in cash or other property (other than shares of Junior Stock), or purchase, redeem or otherwise acquire any such Junior Stock; provided, however, that nothing in this Section 3(b) shall prohibit or otherwise - - ----------------- limit the ability of the Company to (i) purchase unvested shares of Common Stock from former employees of the Company at their original purchase price or (ii) make any purchase, redemption or other acquisition pursuant to arrangements existing as of the date of the initial issuance of the Class C Preferred Stock (the "Initial Issuance Date"). 4. LIQUIDATION, DISSOLUTION OR WINDING-UP. -------------------------------------- (a) Liquidation Preference. In the event of any Liquidation of the ---------------------- Company, the holders of shares of Class C Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of Senior Stock upon such Liquidation of the Company and before any payment shall be made to the holders of Junior Stock, the Liquidation Amount (as defined herein) per share of Class C Preferred Stock. If upon any such Liquidation of the Company, the remaining assets of the Company available for the distribution to its stockholders after payment in full of amounts required to be paid or -4- distributed to holders of Senior Stock shall be insufficient to pay the holders of shares of Parity Stock the full amount to which they shall be entitled, the holders of the Class C Preferred Stock shall share ratably with the holders of Parity Stock in any distribution of the remaining assets and funds of the Company in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to said shares were paid in full. After the payment of all preferential amounts required to be paid to the holders of Senior Stock and Parity Stock and any other series of the Company's preferred stock upon any Liquidation of the Company, the holders of shares of Junior Stock then outstanding shall be entitled to receive the remaining assets and funds of the Company available for distribution to its stockholders in accordance with the terms thereof. (b) Certain Definitions. (i) The term "Liquidation of the Company" shall ------------------- mean any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Company, and the merger or consolidation of the Company into or with another corporation, the merger or consolidation of any other corporation into or with the Company or the sale of all or substantially all the assets of the Company. (ii) The term "Liquidation Amount" shall mean an amount per share of Class C Preferred Stock equal to the greater of: (A) the Original Purchase Price Per Share plus any per share dividends accrued on the Class C Preferred Stock but not paid and (B) the -5- per share amount that holders of the Class C Preferred Stock would have received had they exercised their right to convert the Class C Preferred Stock to Common Stock immediately prior to a Liquidation of the Company; provided that for ------------- purposes of the antidilution provisions of Section 7 hereof and the mandatory conversion provisions of Section 8 hereof, the term "Liquidation Amount" shall exclude any dividends accrued on the Class C Preferred Stock but not paid. 5. VOTING. (a) Number of Votes. Each issued and outstanding share of Class C ------ --------------- Preferred Stock shall be entitled to the number of votes equal to (i) the number of shares of Common Stock into which each such share of Class C Preferred Stock is then convertible (as adjusted from time to time) divided by the Number of Common Shares Deemed Outstanding (as defined herein) at such time, multiplied by (ii) the aggregate number of shares of Common Stock then outstanding and entitled to vote (giving effect to the voting power of all of the securities of the Company convertible into or exchangeable for Common Stock that are entitled to vote with the Common Stock, but without giving effect to the voting power of the Class C Preferred Stock), at each meeting of stockholders of the Company (or any written consent without a meeting in accordance with the Minnesota Business Corporation Act) with respect to any and all matters presented to the stockholders of the Company for their action or consideration. Except as provided by law, by the provisions of this Section 5 or by the provisions establishing any other series of the Company's preferred stock, holders of Class C Preferred Stock and of any -6- other outstanding preferred stock shall vote together with the holders of Common Stock as a single class. (b) Protective Provisions. In addition to any other rights provided by --------------------- law, the Company shall not (i) without first obtaining the affirmative vote or written consent of a majority of the holders of the Class C Preferred Stock, voting separately as a class, amend, alter or repeal any provision of the Company's Articles of Incorporation or By-Laws in a manner that is adverse to the holders of the Class C Preferred Stock and (ii) without first obtaining the affirmative vote or written consent of a majority of the holders the Company's voting stock other than MCI WORLDCOM, Inc. (together with its majority-owned subsidiaries and other controlled affiliates, "MCI WCOM"), enter into any merger or consolidation into or with MCI WCOM or enter into any other contract or arrangement involving the sale or license of the Company's material assets with MCI WCOM (excluding contractual arrangements with MCI WCOM existing as of the Initial Issuance Date). 6. OPTIONAL CONVERSION. Each share of Class C Preferred Stock may be converted ------------------- at any time after 18 months following the Initial Issuance Date, at the option of the holder thereof, into the number of fully paid and nonassessable shares of Common Stock obtained by dividing the Original Purchase Price Per Share by the Conversion Price then in effect (the "Conversion Rate"); provided, however, that ----------------- upon any redemption of the Class C Preferred Stock contemplated by Section 9 hereof or any Liquidation of the Company, the right of conversion shall -7- terminate at the close of business on the full business day next preceding the date fixed for such redemption or for the payment of any amounts distributable on liquidation to the holders of Class C Preferred Stock. (a) Initial. The initial Conversion Rate for the Class C Preferred Stock ------- shall be one share of Common Stock for each one share of Class C Preferred Stock surrendered for conversion representing an initial Conversion Price of $11.3826902 per share of Common Stock (the "Original Purchase Price Per Share"). The applicable Conversion Rate and Conversion Price from time to time in effect is subject to adjustment as hereinafter provided. (b) No Fractional Shares. The Company shall not issue fractions of shares -------------------- of Common Stock upon conversion of Class C Preferred Stock or scrip in lieu thereof. If any fraction of a share of Common Stock would, except for the provisions of this Section 6(b), be issuable upon conversion of any Class C Preferred Stock, the Company shall in lieu thereof pay to the person entitled thereto an amount in cash equal to the current value of such fraction, calculated to the nearest one hundredth (1/100) of a share, to be computed (i) if the Common Stock is listed on any national securities exchange on the basis of the last sales price of the Common Stock on such exchange (or the quoted closing bid price if there shall have been no sales) on the date of conversion or (ii) if the Common Stock shall not be listed, on the basis of the mean between the closing bid and asked prices for the Common Stock on the date of conversion as reported by Nasdaq, or its successor, and if there are not such -8- closing bid and asked prices, on the basis of the fair market value per share as determined by the Board of Directors of the Company. (c) Adjustment. Whenever the Conversion Rate and Conversion Price shall ---------- be adjusted as provided herein, the Company shall forthwith file at each office designated for the conversion of Class C Preferred Stock, a statement, signed by the President, any Vice President or Treasurer of the Company, showing in reasonable detail the facts requiring such adjustment and the Conversion Rate that will be effective after such adjustment. The Company shall also cause a notice setting forth any such adjustments to be sent by mail, first class, postage prepaid, to each record holder of Class C Preferred Stock at his or its address appearing on the stock register. If such notice relates to an adjustment resulting from an event referred to in Section 7(g), such notice shall be included as part of the notice required to be mailed and published under the provisions of such Section 7(g). (d) Exercise. In order to exercise the conversion privilege, the holder -------- of any Class C Preferred Stock to be converted shall surrender his or its certificate or certificates therefore to the principal office of the transfer agent for the Class C Preferred Stock (or if no transfer agent be at the time appointed, then the Company at its principal office), and shall give written notice to the Company at such office that the holder elects to convert the Class C Preferred Stock represented by such certificates, or any number thereof. Such notice shall also -9- state the name or names (with address) in which the certificate or certificates for shares of Common Stock which shall be issuable on such conversion shall be issued, subject to any restrictions on transfer relating to shares of the Class C Preferred Stock or shares of Common Stock upon conversion thereof. If so required by the Company, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Company, duly authorized in writing. The date of receipt by the transfer agent (or by the Company if the Company serves as its own transfer agent) of the certificates and notice shall be the conversion date. As soon as practicable after receipt of such notice and the surrender of the certificate or certificates for Class C Preferred Stock as set forth herein, the Company shall cause to be issued and delivered at such office to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Section 6(b) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. (e) Reservation of Shares of Common Stock. The Company shall at all times ------------------------------------- while any shares of Class C Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purposes of effecting the conversion of the Class C Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time -10- be sufficient to effect the conversion of all outstanding Class C Preferred Stock. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Class C Preferred Stock, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Conversion Price. (f) No Adjustment for Dividends. Upon any such conversion, no adjustment --------------------------- to the Conversion Rate shall be made for accrued and unpaid dividends on the Class C Preferred Stock surrendered for conversion or on the Common Stock delivered. (g) Surrender. All shares of Class C Preferred Stock which shall have --------- been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall forthwith cease and terminate except only the right of the holder thereof to receive shares of Common Stock in exchange therefor and payment of any accrued and unpaid dividends on such shares of Common Stock. Any shares of Class C Preferred Stock so converted shall be retired and canceled and shall not be reissued, and the Company may from time to time take such appropriate action as may be necessary to reduce the authorized Class C Preferred Stock accordingly. 7. ANTI-DILUTION PROVISIONS. (a) General. In order to prevent dilution of the ------------------------ ------- rights granted hereunder, the Conversion Price -11- shall be subject to adjustment from time to time in accordance with this Section 7. Upon each adjustment of the Conversion Price pursuant to this Section 7, the registered holder of shares of Class C Preferred Stock shall thereafter be entitled to acquire upon conversion, at the Conversion Price resulting from such adjustment, the number of shares of Common Stock obtainable by multiplying the Conversion Price in effect immediately prior to such adjustment by the number of shares of Common Stock acquirable immediately prior to such adjustment and dividing the product thereof by the Conversion Price resulting from such adjustment. (b) Adjustment of Conversion Price. Except as provided in Sections 7(c) ------------------------------ or 7(f) below, if and whenever on or after the Initial Issuance Date, the Company shall issue or sell, or shall pursuant to Section 7(b)(1) through (10) inclusive, be deemed to have issued or sold any shares of its Common Stock for a consideration per share less than the per share Conversion Price in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale (the "Triggering Transaction"), the Conversion Price shall, subject to Section 7(b)(1) through (10) inclusive, be reduced to: (i) if a Triggering Transaction shall occur within nine months following the Initial Issuance Date, the lower of (A) the consideration per share that such Common Stock shall have been issued or sold (or deemed issued or sold) for in such Triggering Transaction or (B) the "Liquidation Amount of the Class B Preferred Stock" (as calculated in accordance with the Statement of Rights and -12- Preferences of Class B Convertible Preferred Stock of the Company) or (ii) if a Triggering Transaction shall occur at any time thereafter, the Conversion Price (calculated to the nearest one-hundredth of a cent) determined by dividing: (A) an amount equal to the sum of the product derived by multiplying the Number of Common Shares Deemed Outstanding immediately prior to such Triggering Transaction by the Conversion Price then in effect, plus the consideration, if any, received by the Company upon consummation of such Triggering Transaction by (B) an amount equal to the sum of the Number of Common Shares Deemed Outstanding immediately prior to such Triggering Transaction plus the number of shares of Common Stock issued (or deemed to be issued in accordance with Section 7(b)(1) through (10) inclusive) in connection with the Triggering Transaction. The term "Number of Common Shares Deemed Outstanding" at any given time shall mean the sum of (i) the number of shares of Common Stock outstanding at such time, (ii) the number of shares of Common Stock issuable upon conversion or exchange at such time of all of the Company's outstanding securities that are then convertible into, or exchangeable for, Common Stock and (iii) the number of shares of the Company's Common Stock deemed to be outstanding under Section 7(b)(1) through (10) inclusive, at such time. For purposes of determining the adjusted Conversion Price under this Section 7(b), the following provisions shall be applicable: (1) In case the Company at any time shall in any manner grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any -13- options for the purchase of, Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities"), whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable and the price per share for which the Common Stock is issuable upon exercise, conversion or exchange (determined by dividing (Y) the total amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of all such Options, plus, in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (Z) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities) shall be less than the Conversion Price in effect immediately prior to the time of the granting of such Option, then the total maximum amount of Common Stock issuable upon the exercise of such Options or in the case of Options for Convertible Securities, upon the conversion or exchange of such Convertible Securities shall (as of the date of granting of such Options) be deemed to be outstanding and to have been issued and sold by the Company for such price per share. No further adjustment of the Conversion -14- Price shall be made upon the actual issue of such shares of Common Stock or such Convertible Securities upon the exercise of such Options, except as otherwise provided in Section 7(b)(3). (2) In case the Company at any time shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (Y) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (Z) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Conversion Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued and sold by the Company for such price per share. No further adjustment of the Conversion Price shall be made upon the actual issue of such Common Stock upon exercise of the rights to exchange or convert under such Convertible Securities, except as otherwise provided in Section (7)(b)(3). -15- (3) If the purchase price provided for in any Options referred to in Section 7(b)(1), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in Sections 7(b)(1) or (2), or the rate at which any Convertible Securities referred to in Sections 7(b)(1) or (2) are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution of the type set forth in Sections 7(b) or 7(d)), the Conversion Price in effect at the time of such change shall forthwith be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. If the purchase price provided for in any Option referred to in Section 7(b)(1) or the rate at which any Convertible Securities referred to in Sections 7(b)(1) or (2) are convertible into or exchangeable for Common Stock, shall be reduced at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such Option or upon conversion or exchange of any such Convertible Security, the Conversion Price then in effect hereunder shall forthwith be adjusted to such respective amount as would have been obtained had such Option or Convertible Security never been issued as to such Common Stock and had adjustments been made upon the issuance of the shares of Common Stock delivered as set forth herein, but -16- only if as a result of such adjustment the Conversion Price then in effect hereunder is hereby reduced. (4) On the expiration of any Option or the termination of any right to convert or exchange any Convertible Securities, the Conversion Price then in effect hereunder shall forthwith be increased to the Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination, never been issued. (5) In case any Options shall be issued in connection with the issue or sale of other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued without consideration. (6) In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be the fair value of such consideration as determined in good faith by the Board. In case any shares of Common Stock, Options or Convertible Securities shall be issued in connection with any merger in which the Company is the surviving corporation, the amount of -17- consideration therefor shall be deemed to be the fair value of such portion of the net assets and business of the non-surviving corporation as shall be attributable to such Common Stock, Options or Convertible Securities, as the case may be. (7) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock for the purpose of this Section 7(b). (8) In case the Company shall declare a dividend or make any other distribution upon the stock of the Company payable in Options or Convertible Securities, then in such case any Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (9) For purposes of this Section 7(b), in case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right or subscription or purchase, as the case may be. -18- (10) For purposes of this Section 7(b), notwithstanding Section 7(f), in the event that the "Class B Warrants" issued to MCI WCOM on September 26, 1997 vest and become exercisable for shares of Common Stock, whether or not MCI WCOM shall exercise such Class B Warrants, the following shall apply: the consideration per share that the Common Stock shall be deemed to have been issued or sold at shall be equal to the Original Purchase Price Per Share that would have been payable by the holder of the Class C Preferred Stock on the Initial Issuance Date if the vested Class B Warrants had vested and been exercised (and the exercise price thereon had been paid to the Company) prior to the Initial Issuance Date. (c) Liquidating Dividends. In the event the Company shall declare a --------------------- dividend upon the Common Stock (other than a dividend payable in Common Stock) payable otherwise than out of earnings or earned surplus, determined in accordance with generally accepted accounting principles, including the making of appropriate deductions for minority interests, if any, in subsidiaries (herein referred to as "Liquidating Dividends"), then, as soon as possible after the conversion of any Class C Preferred Stock, the Company shall pay to the person converting such Class C Preferred Stock an amount equal to the aggregate value at the time of such exercise of all Liquidating Dividends (including but not limited to the Common Stock which would have been issued at the time of such earlier exercise and all other securities which would have been issued with respect to such Common Stock by reason of stock splits, stock dividends, mergers -19- or reorganizations, or for any other reason). For the purposes of this Section 7(c), a dividend other than in cash shall be considered payable out of earnings or earned surplus only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend as determined in good faith by the Board. (d) Subdivisions and Dividends; Combinations. In case the Company shall ---------------------------------------- at any time (i) subdivide the outstanding Common Stock or (ii) issue a stock dividend on its outstanding Common Stock, the number of shares of Common Stock issuable upon conversion of the Class C Preferred Stock shall be proportionately increased by the same ratio as the subdivision or dividend (with appropriate adjustments to the Conversion Price in effect immediately prior to such subdivision or dividend). In case the Company shall at any time combine its outstanding Common Stock, the number of shares issuable upon conversion of the Class C Preferred Stock immediately prior to such combination shall be proportionately decreased by the same ratio as the combination (with appropriate adjustments to the Conversion Price in effect immediately prior to such combination). (e) Reorganizations, etc. If any capital reorganization or -------------------- reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, cash or other property with respect to or in exchange for Common -20- Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of the Class C Preferred Stock shall have the right to acquire and receive upon conversion of the Class C Preferred Stock, which right shall be prior to the rights of the holders of Junior Stock, equal to the rights of the holders of Parity Stock and after and subject to the rights of holders of Senior Stock, such shares of stock, securities, cash or other property issuable or payable (as part of the reorganization, reclassification, consolidation, merger or sale) with respect to or in exchange for such number of outstanding shares of Common Stock as would have been received upon conversion of the Class C Preferred Stock at the Conversion Price then in effect. (f) Exceptions to Antidilution. The provisions of this Section 7 shall -------------------------- not apply to any Common Stock issued, issuable or deemed outstanding under Section 7(b)(1) through (10) inclusive (and no such transaction shall constitute a Triggering Transaction): (i) in connection with a public or private debt financing effected by the Company (other than with an affiliate of the Company, including MCI WCOM) within nine months after the Initial Issuance Date, (ii) after the issuance of shares of Common Stock to the public in an underwritten offering pursuant to a registration statement filed under the Securities Act of 1933, as amended (the "Securities Act") covering the offer and sale of Common Stock in which the proceeds to the Company are not less than $20 million, (iii) to any person pursuant to any stock -21- option, stock purchase or similar plan or arrangement for the benefit of employees, consultants or other representatives of the Company or its subsidiaries in effect on the Initial Issuance Date or thereafter adopted by the Board, (iv) pursuant to options, warrants and conversion rights in existence on the Initial Issuance Date (other than as provided for in Section 7(b)(10)) or (v) on conversion of the Class B Preferred Stock, the Class C Preferred Stock or the Class D Preferred Stock or the sale of any additional shares of any of the foregoing at a price not less than the applicable conversion price thereof. (g) Procedures. In the event that (i) the Company shall declare any cash ---------- dividend upon its Common Stock, (ii) the Company shall declare any dividend upon its Common Stock payable in stock or make any special dividend or other distribution to the holders of its Common Stock, (iii) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights, (iv) there shall be any capital reorganization or reclassification of the capital stock of the Company, including any subdivision or combination of its outstanding shares of Common Stock, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation, (v) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, in connection with any such event, the Company shall give to the holders of the Class C Preferred Stock (A) at least twenty (20) days prior written notice of the date on which the books of the Company -22- shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up; and (B) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, at least twenty (20) days prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (A) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (B) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification consolidation, merger, sale, dissolution, liquidation or winding-up, as the case may be. Each such written notice shall be given by first class mail, postage prepaid, addressed to the holders of the Class C Preferred Stock at the address of each such holder as shown on the books of the Company. (h) Intended Effect. If any event occurs as to which, in the opinion of --------------- the Board, the provisions of this Section 7 are not strictly applicable or if strictly applicable would not fairly protect the rights of the holders of the Class C Preferred Stock in accordance with the essential intent and principles of such provisions, then the Board shall make an adjustment in the -23- application of such provisions, in accordance with such essential intent and principles, so as to protect such rights as set forth herein, but in no event shall any adjustment have the effect of increasing the Conversion Price as otherwise determined pursuant to any of the provisions of this Section 7 except in the case of a combination of shares of a type contemplated in Section 7(d) and then in no event to an amount greater than the Conversion Price as adjusted pursuant to Section 7(d). 8. MANDATORY CONVERSION. -------------------- (a) Mandatory Conversion. Each share of Class C Preferred Stock shall -------------------- automatically be converted into shares of Common Stock at the then effective Conversion Price at any time upon the closing of an underwritten offering pursuant to an effective registration statement under the Securities Act, covering the offer and sale of Common Stock to the public at a price per share of Common Stock that is not less than (i) 110% of the Original Purchase Price Per Share, if such offering is consummated within two years following the Initial Issuance Date or (ii) 200% of the Original Purchase Price Per Share, if such offering is consummated at any time thereafter. In addition, each share of Class C Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Price for such shares (A) upon the vote to so convert of the holders of at least a majority of the shares of Class C Preferred Stock then outstanding or (B) at any time after the conversion into Common Stock of at least a majority of the shares of Class C Preferred Stock issued on the Initial Issuance Date. -24- (b) Procedures. All holders of record of shares of Class C Preferred ---------- Stock will be given at least twenty (20) days' prior written notice of the date fixed and the place designated for mandatory conversion of all of such shares of Class C Preferred Stock pursuant to this Section 8. Such notice will be sent by mail, first class, postage prepaid, to each record holder of shares of Class C Preferred Stock at such holder's address appearing on the stock register. On or before the date fixed for conversion each holder of shares of Class C Preferred Stock shall surrender his or its certificates or certificates for all such shares to the Company at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 8. On the date fixed for conversion, all rights with respect to the Class C Preferred Stock so converted will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefore, to receive certificates for the number of shares of Common Stock into which such Class C Preferred Stock has been converted and payment of any accrued and unpaid dividends thereon. If so required by the Company, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Company, duly executed by the registered holder or by his attorneys duly authorized in writing. All certificates evidencing shares of Class C Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from -25- and after the date such certificates are so required to be surrendered, be deemed to have been retired and canceled and the shares of Class C Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. As soon as practicable after the date of such mandatory conversion and the surrender of the certificate or certificates for Class C Preferred Stock as set forth herein, the Company shall cause to be issued and delivered to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Section 6(b) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. 9. REDEMPTION. ---------- (a) Redemption Price. At any time within 18 months from the Initial ---------------- Issuance Date, the Company may redeem all (but not less than all) of the shares of the Class C Preferred Stock at a per share redemption price of 110% of the Original Purchase Price Per Share, plus an amount equal to the per share dividends accrued on the Class C Preferred Stock but not paid (such amount, the "Redemption Price"). (b) Redemption Notice; Surrender. At least thirty (30) days prior to the ---------------------------- date that the Company elects to redeem the Class C Preferred Stock (the "Redemption Date"), written notice shall be mailed, postage prepaid, to each holder of record of -26- Class C Preferred Stock to be redeemed, at his or its post office address last shown on the records of the Company, notifying such holder of the number of shares so to be redeemed, specifying the Redemption Date and calling upon such holder to surrender to the Company, in the manner and at the place designated, his or its certificate or certificates representing the shares to be redeemed (such notice, the "Redemption Notice"). On or prior to each Redemption Date, each holder of Class C Preferred Stock to be redeemed shall surrender his or its certificate or certificates representing such shares to the Company, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of the Class C Preferred Stock designated for redemption in the Redemption Notice as holders of Class C Preferred Stock of the Company (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever. (c) Miscellaneous. Any shares of Class C Preferred Stock so redeemed ------------- shall be permanently retired, shall no longer be deemed outstanding and shall not under any circumstances be -27- reissued, and the Company may from time to time take such appropriate corporate action as may be necessary to reduce the authorized Class C Preferred Stock accordingly. Nothing herein contained shall prevent or restrict the purchase by the Company, from time to time either at public or private sale, of the whole or any part of the Class C Preferred Stock at such price or prices as the Company may determine, subject to the provisions of applicable law. 10. CONVERTED AND REACQUIRED SHARES. Any shares of Series C Preferred Stock ------------------------------- converted into Common Stock, redeemed, purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of undesignated stock of the Company and may be reissued subject to the conditions and restrictions on issuance in the Articles of Incorporation, in any other Certificate of Designation creating a series of preferred stock or any similar stock or as otherwise required by law. 11. SUSPENSION OF VOTING RIGHTS PENDING HSR APPROVAL. Notwithstanding anything ------------------------------------------------ to the contrary contained herein, unless and until all filings required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations of the Federal Trade Commission promulgated thereunder, in connection with the acquisition of the Class C Preferred Stock shall have been made and the applicable waiting period thereunder shall have expired or been terminated, no holder of Class C Preferred Stock shall have any voting rights as -28- a stockholder of the Company or any other right to elect, nominate, designate or vote for any member of the Company's Board of Directors. RESOLVED FURTHER, that the officers of this company be, and each of them acting alone is, hereby authorized and instructed to take all steps necessary to execute, deliver and file, with the establishment and authorization of the Company's Class D Preferred Stock, including but not limited to filing the Statement of Rights and Preferences with the Minnesota Secretary of State inn accordance with Minnesota Statutes, Section 302A.401. F. The undersigned further declares under penalty of perjury that the matters set out in the foregoing Certificate are true and correct of his own knowledge. -29- IN WITNESS WHEREOF, the undersigned has executed this certificate as of the 4th day of March, 1999. /s/ Edward J. Driscoll, Jr. --------------------------------- Edward J. Driscoll, Jr. Secretary 30 EX-4.23 9 CERT. OF DESIGNATION OF RIGHTS/PREFERENCES CLASS D EXHIBIT 4.23 CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES OF CLASS D CONVERTIBLE PREFERRED STOCK OF WAM!NET INC. The undersigned, Edward J. Driscoll, Jr., hereby certifies that: A. He is the duly elected and acting Secretary of WAM!NET Inc. (the "Company"), a Minnesota corporation. B. The Articles of Incorporation of this Company provide for a class of up to 49,500,000 shares known as Undesignated Stock, which shares may be issued from time to time in one or more classes or series. C. The Board of Directors of the Company is authorized, pursuant to Article 6 of the Company's Articles of Incorporation and Minnesota Statutes, Section 302A.401, to fix or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Undesignated Stock, to fix the number of shares constituting the series, and to determine the designation thereof. D. It is the desire of the Board of Directors of the Company, pursuant to its authority, to fix the rights, preferences, restrictions and other matters relating to the Undesignated Stock and the number of shares of Undesignated Stock. E. Pursuant to authority given by Article 6 of the Company's Articles of Incorporation, the Company's Board of Directors has adopted the following resolutions as of the 4th day of March, 1999; RESOLVED, that, pursuant to Article 6 of the Articles of Incorporation of WAM!NET Inc. (the "Company"), the Board of Directors of the Company (the "Board") hereby creates and designates a series of Convertible Preferred Stock, par value $0.01 per share, and authorizes the issuance of up to 2,196,317 of such shares, and hereby fixes the designations, powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions, of such shares, as follows: 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated ---------------------- "Class D Convertible Preferred Stock" (the "Class D Preferred Stock") and the number of shares constituting such series shall be 2,196,317. 2. RANK. The Class D Preferred Stock shall rank, with respect to dividend ---- rights and distribution of assets on any Liquidation of the Company (as defined herein) (a) junior to any other class or series of the Company's preferred stock which shall specifically provide that such class or series shall rank senior to the Class D Preferred Stock (the "Senior Stock"); (b) on parity with (i) the Company's Class A Preferred Stock, par value $10.00 per share (the "Class A Preferred Stock") (except with respect to a Liquidation of the Company resulting from the merger or consolidation of the Company into or with another corporation, the merger or consolidation of any other corporation into or with the Company or the sale of all or substantially all the assets of the Company, which events do not give rise to a right of the holders of the Class A Preferred Stock to receive distributions), -2- (ii) the Company's Class B Convertible Preferred Stock, par value $0.01 per share (the "Class B Preferred Stock"), (iii) the Company's Class C Convertible Preferred Stock, par value $0.01 per share (the "Class C Preferred Stock"), and (iv) any other class or series of the Company's preferred stock which shall specifically provide that such class or series shall rank on parity with the Class D Preferred Stock ((i) through (iv) collectively, the "Parity Stock"); and (c) prior to (i) the Company's common stock, par value $0.01 per share (the "Common Stock") and (ii) any other class or series of the Company's preferred stock except for any class or series which are Senior Stock or Parity Stock ((i) and (ii) together, the "Junior Stock"). 3. DIVIDENDS. (a) Payment. The holders of Class D Preferred Stock shall be --------- ------- entitled to receive dividends as set forth herein, payable only (i) if, as and when declared by the Board, out of any funds legally available therefor or (ii) to the extent declared by the Board, upon the Liquidation of the Company, subject to and as set forth in Section 4 hereof. All such dividends (X) shall be cumulative and shall accrue on each share of Class D Preferred Stock from the date of issuance thereof at the rate of SEVEN PERCENT (7%) per annum of the Original Purchase Price Per Share (as defined herein) thereof solely in the form of additional shares of Class D Preferred Stock (Y) shall be payable before any dividends shall be set apart for or paid upon Junior Stock in any year and (Z) shall be payable in accordance with Section 2 when any dividends shall be set apart for or paid upon -3- Parity Stock in any year. All such dividends declared upon Class D Preferred Stock shall be declared pro rata per share. (b) Limit on Junior Dividends and Redemption. For so long as the Class D ---------------------------------------- Preferred Stock remains outstanding, the Company shall not pay any dividend upon the Junior Stock, whether in cash or other property (other than shares of Junior Stock), or purchase, redeem or otherwise acquire any such Junior Stock; provided, however, that nothing in this Section 3(b) shall prohibit or otherwise - - ----------------- limit the ability of the Company to (i) purchase unvested shares of Common Stock from former employees of the Company at their original purchase price or (ii) make any purchase, redemption or other acquisition pursuant to arrangements existing as of the date of the initial issuance of the Class D Preferred Stock (the "Initial Issuance Date"). 4. LIQUIDATION, DISSOLUTION OR WINDING-UP. -------------------------------------- (a) Liquidation Preference. In the event of any Liquidation of the ---------------------- Company, the holders of shares of Class D Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of Senior Stock upon such Liquidation of the Company and before any payment shall be made to the holders of Junior Stock, the Liquidation Amount (as defined herein) per share of Class D Preferred Stock. If upon any such Liquidation of the Company, the remaining assets of the Company available for the distribution to its stockholders after payment in full of amounts required to be paid or -4- distributed to holders of Senior Stock shall be insufficient to pay the holders of shares of Parity Stock the full amount to which they shall be entitled, the holders of the Class D Preferred Stock shall share ratably with the holders of Parity Stock in any distribution of the remaining assets and funds of the Company in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to said shares were paid in full. After the payment of all preferential amounts required to be paid to the holders of Senior Stock and Parity Stock and any other series of the Company's preferred stock upon any Liquidation of the Company, the holders of shares of Junior Stock then outstanding shall be entitled to receive the remaining assets and funds of the Company available for distribution to its stockholders in accordance with the terms thereof. (b) Certain Definitions. (i) The term "Liquidation of the Company" shall ------------------- mean any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Company, and the merger or consolidation of the Company into or with another corporation, the merger or consolidation of any other corporation into or with the Company or the sale of all or substantially all the assets of the Company. (ii) The term "Liquidation Amount" shall mean an amount per share of Class D Preferred Stock equal to the greater of: (A) the Original Purchase Price Per Share plus any per share dividends accrued on the Class D Preferred Stock but not paid and (B) the -5- per share amount that holders of the Class D Preferred Stock would have received had they exercised their right to convert the Class D Preferred Stock to Common Stock immediately prior to a Liquidation of the Company; provided that for ------------- purposes of the antidilution provisions of Section 7 hereof and the mandatory conversion provisions of Section 8 hereof, the term "Liquidation Amount" shall exclude any dividends accrued on the Class D Preferred Stock but not paid. 5. VOTING. (a) Number of Votes. Each issued and outstanding share of Class D ------ --------------- Preferred Stock shall be entitled to the number of votes equal to (i) the number of shares of Common Stock into which each such share of Class D Preferred Stock is then convertible (as adjusted from time to time) divided by the Number of Common Shares Deemed Outstanding (as defined herein) at such time, multiplied by (ii) the aggregate number of shares of Common Stock then outstanding and entitled to vote (giving effect to the voting power of all of the securities of the Company convertible into or exchangeable for Common Stock that are entitled to vote with the Common Stock, but without giving effect to the voting power of the Class D Preferred Stock), at each meeting of stockholders of the Company (or any written consent without a meeting in accordance with the Minnesota Business Corporation Act) with respect to any and all matters presented to the stockholders of the Company for their action or consideration. Except as provided by law, by the provisions of this Section 5 or by the provisions establishing any other series of the Company's preferred stock, holders of Class D Preferred Stock and of any -6- other outstanding preferred stock shall vote together with the holders of Common Stock as a single class. (b) Protective Provisions. In addition to any other rights provided by --------------------- law, the Company shall not without first obtaining the affirmative vote or written consent of a majority of the holders of the Class D Preferred Stock, voting separately as a class, amend, alter or repeal any provision of the Company's Articles of Incorporation or By-Laws in a manner that is adverse to the holders of the Class D Preferred Stock. 6. OPTIONAL CONVERSION. Each share of Class D Preferred Stock may be converted ------------------- at any time, at the option of the holder thereof, into the number of fully paid and nonassessable shares of Common Stock obtained by dividing the Original Purchase Price Per Share by the Conversion Price then in effect (the "Conversion Rate"); provided, however, that upon any Liquidation of the Company, the right ----------------- of conversion shall terminate at the close of business on the full business day next preceding the date fixed for such redemption or for the payment of any amounts distributable on liquidation to the holders of Class D Preferred Stock. (a) Initial. The initial Conversion Rate for the Class D Preferred Stock ------- shall be one share of Common Stock for each one share of Class D Preferred Stock surrendered for conversion representing an initial Conversion Price of $11.3826902 per share of Common Stock (the "Original Purchase Price Per Share"). The applicable Conversion Rate and Conversion Price from time to time in effect is subject to adjustment as hereinafter provided. -7- (b) No Fractional Shares. The Company shall not issue fractions of shares -------------------- of Common Stock upon conversion of Class D Preferred Stock or scrip in lieu thereof. If any fraction of a share of Common Stock would, except for the provisions of this Section 6(b), be issuable upon conversion of any Class D Preferred Stock, the Company shall in lieu thereof pay to the person entitled thereto an amount in cash equal to the current value of such fraction, calculated to the nearest one hundredth (1/100) of a share, to be computed (i) if the Common Stock is listed on any national securities exchange on the basis of the last sales price of the Common Stock on such exchange (or the quoted closing bid price if there shall have been no sales) on the date of conversion or (ii) if the Common Stock shall not be listed, on the basis of the mean between the closing bid and asked prices for the Common Stock on the date of conversion as reported by Nasdaq, or its successor, and if there are not such closing bid and asked prices, on the basis of the fair market value per share as determined by the Board of Directors of the Company. (c) Adjustment. Whenever the Conversion Rate and Conversion Price shall ---------- be adjusted as provided herein, the Company shall forthwith file at each office designated for the conversion of Class D Preferred Stock, a statement, signed by the President, any Vice President or Treasurer of the Company, showing in reasonable detail the facts requiring such adjustment and the Conversion Rate that will be effective after such adjustment. The Company shall also cause a notice setting forth -8- any such adjustments to be sent by mail, first class, postage prepaid, to each record holder of Class D Preferred Stock at his or its address appearing on the stock register. If such notice relates to an adjustment resulting from an event referred to in Section 7(g), such notice shall be included as part of the notice required to be mailed and published under the provisions of such Section 7(g). (d) Exercise. In order to exercise the conversion privilege, the holder -------- of any Class D Preferred Stock to be converted shall surrender his or its certificate or certificates therefore to the principal office of the transfer agent for the Class D Preferred Stock (or if no transfer agent be at the time appointed, then the Company at its principal office), and shall give written notice to the Company at such office that the holder elects to convert the Class D Preferred Stock represented by such certificates, or any number thereof. Such notice shall also state the name or names (with address) in which the certificate or certificates for shares of Common Stock which shall be issuable on such conversion shall be issued, subject to any restrictions on transfer relating to shares of the Class D Preferred Stock or shares of Common Stock upon conversion thereof. If so required by the Company, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Company, duly authorized in writing. The date of receipt by the transfer agent (or by the Company if the Company serves as its own transfer agent) of the certificates and notice shall be -9- the conversion date. As soon as practicable after receipt of such notice and the surrender of the certificate or certificates for Class D Preferred Stock as set forth herein, the Company shall cause to be issued and delivered at such office to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Section 6(b) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. (e) Reservation of Shares of Common Stock. The Company shall at all times ------------------------------------- while any shares of Class D Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purposes of effecting the conversion of the Class D Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Class D Preferred Stock. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Class D Preferred Stock, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Conversion Price. (f) No Adjustment for Dividends. Upon any such conversion, no adjustment --------------------------- to the Conversion Rate shall be made for accrued -10- and unpaid dividends on the Class D Preferred Stock surrendered for conversion or on the Common Stock delivered. (g) Surrender. All shares of Class D Preferred Stock which shall have --------- been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall forthwith cease and terminate except only the right of the holder thereof to receive shares of Common Stock in exchange therefor and payment of any accrued and unpaid dividends on such shares of Common Stock. Any shares of Class D Preferred Stock so converted shall be retired and canceled and shall not be reissued, and the Company may from time to time take such appropriate action as may be necessary to reduce the authorized Class D Preferred Stock accordingly. 7. ANTI-DILUTION PROVISIONS. (a) General. In order to prevent dilution of the ------------------------ ------- rights granted hereunder, the Conversion Price shall be subject to adjustment from time to time in accordance with this Section 7. Upon each adjustment of the Conversion Price pursuant to this Section 7, the registered holder of shares of Class D Preferred Stock shall thereafter be entitled to acquire upon conversion, at the Conversion Price resulting from such adjustment, the number of shares of Common Stock obtainable by multiplying the Conversion Price in effect immediately prior to such adjustment by the number of shares of Common Stock acquirable immediately prior to such adjustment and dividing the product thereof by the Conversion Price resulting from such adjustment. -11- (b) Adjustment of Conversion Price. Except as provided in Sections 7(c) ------------------------------ or 7(f) below, if and whenever on or after the Initial Issuance Date, the Company shall issue or sell, or shall pursuant to Section 7(b)(1) through (10) inclusive, be deemed to have issued or sold any shares of its Common Stock for a consideration per share less than the per share Conversion Price in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale (the "Triggering Transaction"), the Conversion Price shall, subject to Section 7(b)(1) through (10) inclusive, be reduced to: (i) if a Triggering Transaction shall occur within nine months following the Initial Issuance Date, the lower of (A) the consideration per share that such Common Stock shall have been issued or sold (or deemed issued or sold) for in such Triggering Transaction or (B) the "Liquidation Amount of the Class B Preferred Stock" (as calculated in accordance with the Statement of Rights and Preferences of Class B Convertible Preferred Stock of the Company) or (ii) if a Triggering Transaction shall occur at any time thereafter, the Conversion Price (calculated to the nearest one-hundredth of a cent) determined by dividing: (A) an amount equal to the sum of the product derived by multiplying the Number of Common Shares Deemed Outstanding immediately prior to such Triggering Transaction by the Conversion Price then in effect, plus the consideration, if any, received by the Company upon consummation of such Triggering Transaction by (B) an amount equal to the sum of the Number of Common Shares Deemed Outstanding immediately prior to such Triggering Transaction plus -12- the number of shares of Common Stock issued (or deemed to be issued in accordance with Section 7(b)(1) through (10) inclusive) in connection with the Triggering Transaction. The term "Number of Common Shares Deemed Outstanding" at any given time shall mean the sum of (i) the number of shares of Common Stock outstanding at such time, (ii) the number of shares of Common Stock issuable upon conversion or exchange at such time of all of the Company's outstanding securities that are then convertible into, or exchangeable for, Common Stock and (iii) the number of shares of the Company's Common Stock deemed to be outstanding under Section 7(b)(1) through (10) inclusive, at such time. For purposes of determining the adjusted Conversion Price under this Section 7(b), the following provisions shall be applicable: (1) In case the Company at any time shall in any manner grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities"), whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable and the price per share for which the Common Stock is issuable upon exercise, conversion or exchange (determined by dividing (Y) the total amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus the minimum aggregate amount of additional -13- consideration payable to the Company upon the exercise of all such Options, plus, in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (Z) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities) shall be less than the Conversion Price in effect immediately prior to the time of the granting of such Option, then the total maximum amount of Common Stock issuable upon the exercise of such Options or in the case of Options for Convertible Securities, upon the conversion or exchange of such Convertible Securities shall (as of the date of granting of such Options) be deemed to be outstanding and to have been issued and sold by the Company for such price per share. No further adjustment of the Conversion Price shall be made upon the actual issue of such shares of Common Stock or such Convertible Securities upon the exercise of such Options, except as otherwise provided in Section 7(b)(3). (2) In case the Company at any time shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (Y) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible -14- Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (Z) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Conversion Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued and sold by the Company for such price per share. No further adjustment of the Conversion Price shall be made upon the actual issue of such Common Stock upon exercise of the rights to exchange or convert under such Convertible Securities, except as otherwise provided in Section (7)(b)(3). (3) If the purchase price provided for in any Options referred to in Section 7(b)(1), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in Sections 7(b)(1) or (2), or the rate at which any Convertible Securities referred to in Sections 7(b)(1) or (2) are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution of the type set forth in Sections 7(b) or 7(d)), the Conversion Price in effect at the time of such change shall forthwith be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided -15- for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. If the purchase price provided for in any Option referred to in Section 7(b)(1) or the rate at which any Convertible Securities referred to in Sections 7(b)(1) or (2) are convertible into or exchangeable for Common Stock, shall be reduced at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such Option or upon conversion or exchange of any such Convertible Security, the Conversion Price then in effect hereunder shall forthwith be adjusted to such respective amount as would have been obtained had such Option or Convertible Security never been issued as to such Common Stock and had adjustments been made upon the issuance of the shares of Common Stock delivered as set forth herein, but only if as a result of such adjustment the Conversion Price then in effect hereunder is hereby reduced. (4) On the expiration of any Option or the termination of any right to convert or exchange any Convertible Securities, the Conversion Price then in effect hereunder shall forthwith be increased to the Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination, never been issued. (5) In case any Options shall be issued in connection with the issue or sale of other securities of the Company, together comprising one integral transaction in which no specific -16- consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued without consideration. (6) In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be the fair value of such consideration as determined in good faith by the Board. In case any shares of Common Stock, Options or Convertible Securities shall be issued in connection with any merger in which the Company is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value of such portion of the net assets and business of the non-surviving corporation as shall be attributable to such Common Stock, Options or Convertible Securities, as the case may be. (7) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock for the purpose of this Section 7(b). (8) In case the Company shall declare a dividend or make any other distribution upon the stock of the Company payable in Options or Convertible Securities, then in such case any Options -17- or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (9) For purposes of this Section 7(b), in case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right or subscription or purchase, as the case may be. (10) For purposes of this Section 7(b), notwithstanding Section 7(f), in the event that the "Class B Warrants" issued to MCI WCOM on September 26, 1997 vest and become exercisable for shares of Common Stock, whether or not MCI WCOM shall exercise such Class B Warrants, the following shall apply: the consideration per share that the Common Stock shall be deemed to have been issued or sold at shall be equal to the Original Purchase Price Per Share that would have been payable by the holder of the Class D Preferred Stock on the Initial Issuance Date if the vested Class B Warrants had vested and been exercised (and the exercise price thereon had been paid to the Company) prior to the Initial Issuance Date. -18- (c) Liquidating Dividends. In the event the Company shall declare a --------------------- dividend upon the Common Stock (other than a dividend payable in Common Stock) payable otherwise than out of earnings or earned surplus, determined in accordance with generally accepted accounting principles, including the making of appropriate deductions for minority interests, if any, in subsidiaries (herein referred to as "Liquidating Dividends"), then, as soon as possible after the conversion of any Class D Preferred Stock, the Company shall pay to the person converting such Class D Preferred Stock an amount equal to the aggregate value at the time of such exercise of all Liquidating Dividends (including but not limited to the Common Stock which would have been issued at the time of such earlier exercise and all other securities which would have been issued with respect to such Common Stock by reason of stock splits, stock dividends, mergers or reorganizations, or for any other reason). For the purposes of this Section 7(c), a dividend other than in cash shall be considered payable out of earnings or earned surplus only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend as determined in good faith by the Board. (d) Subdivisions and Dividends; Combinations. In case the Company shall ---------------------------------------- at any time (i) subdivide the outstanding Common Stock or (ii) issue a stock dividend on its outstanding Common Stock, the number of shares of Common Stock issuable upon conversion of the Class D Preferred Stock shall be proportionately increased by the same ratio as the subdivision or -19- dividend (with appropriate adjustments to the Conversion Price in effect immediately prior to such subdivision or dividend). In case the Company shall at any time combine its outstanding Common Stock, the number of shares issuable upon conversion of the Class D Preferred Stock immediately prior to such combination shall be proportionately decreased by the same ratio as the combination (with appropriate adjustments to the Conversion Price in effect immediately prior to such combination). (e) Reorganizations, etc. If any capital reorganization or -------------------- reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, cash or other property with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of the Class D Preferred Stock shall have the right to acquire and receive upon conversion of the Class D Preferred Stock, which right shall be prior to the rights of the holders of Junior Stock, equal to the rights of the holders of Parity Stock and after and subject to the rights of holders of Senior Stock, such shares of stock, securities, cash or other property issuable or payable (as part of the reorganization, reclassification, consolidation, merger or sale) with respect to or in exchange for such number of outstanding shares of Common Stock as would have been received -20- upon conversion of the Class D Preferred Stock at the Conversion Price then in effect. (f) Exceptions to Antidilution. The provisions of this Section 7 shall -------------------------- not apply to any Common Stock issued, issuable or deemed outstanding under Section 7(b)(1) through (10) inclusive (and no such transaction shall constitute a Triggering Transaction): (i) in connection with a public or private debt financing effected by the Company (other than with an affiliate of the Company, including MCI WCOM) within nine months after the Initial Issuance Date, (ii) after the issuance of shares of Common Stock to the public in an underwritten offering pursuant to a registration statement filed under the Securities Act of 1933, as amended (the "Securities Act") covering the offer and sale of Common Stock in which the proceeds to the Company are not less than $20 million, (iii) to any person pursuant to any stock option, stock purchase or similar plan or arrangement for the benefit of employees, consultants or other representatives of the Company or its subsidiaries in effect on the Initial Issuance Date or thereafter adopted by the Board, (iv) pursuant to options, warrants and conversion rights in existence on the Initial Issuance Date (other than as provided for in Section 7(b)(10)) or (v) on conversion of the Class B Preferred Stock, the Class C Preferred Stock or the Class D Preferred Stock or the sale of any additional shares of any of the foregoing at a price not less than the applicable conversion price thereof. (g) Procedures. In the event that (i) the Company shall declare any cash ---------- dividend upon its Common Stock, (ii) the Company -21- shall declare any dividend upon its Common Stock payable in stock or make any special dividend or other distribution to the holders of its Common Stock, (iii) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights, (iv) there shall be any capital reorganization or reclassification of the capital stock of the Company, including any subdivision or combination of its outstanding shares of Common Stock, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation, (v) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, in connection with any such event, the Company shall give to the holders of the Class D Preferred Stock (A) at least twenty (20) days prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up; and (B) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, at least twenty (20) days prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (A) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance -22- with the foregoing clause (B) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification consolidation, merger, sale, dissolution, liquidation or winding-up, as the case may be. Each such written notice shall be given by first class mail, postage prepaid, addressed to the holders of the Class D Preferred Stock at the address of each such holder as shown on the books of the Company. (h) Intended Effect. If any event occurs as to which, in the opinion of --------------- the Board, the provisions of this Section 7 are not strictly applicable or if strictly applicable would not fairly protect the rights of the holders of the Class D Preferred Stock in accordance with the essential intent and principles of such provisions, then the Board shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights as set forth herein, but in no event shall any adjustment have the effect of increasing the Conversion Price as otherwise determined pursuant to any of the provisions of this Section 7 except in the case of a combination of shares of a type contemplated in Section 7(d) and then in no event to an amount greater than the Conversion Price as adjusted pursuant to Section 7(d). 8. MANDATORY CONVERSION. -------------------- (a) Mandatory Conversion. Each share of Class D Preferred Stock shall -------------------- automatically be converted into shares of Common Stock at the then effective Conversion Price at any time upon the -23- closing of an underwritten offering pursuant to an effective registration statement under the Securities Act, covering the offer and sale of Common Stock to the public at a price per share of Common Stock that is not less than (i) 110% of the Original Purchase Price Per Share, if such offering is consummated within two years following the Initial Issuance Date or (ii) 200% of the Original Purchase Price Per Share, if such offering is consummated at any time thereafter. In addition, each share of Class D Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Price for such shares (A) upon the vote to so convert of the holders of at least a majority of the shares of Class D Preferred Stock then outstanding or (B) at any time after the conversion into Common Stock of at least a majority of the shares of Class D Preferred Stock issued on the Initial Issuance Date. (b) Procedures. All holders of record of shares of Class D Preferred ---------- Stock will be given at least twenty (20) days' prior written notice of the date fixed and the place designated for mandatory conversion of all of such shares of Class D Preferred Stock pursuant to this Section 8. Such notice will be sent by mail, first class, postage prepaid, to each record holder of shares of Class D Preferred Stock at such holder's address appearing on the stock register. On or before the date fixed for conversion each holder of shares of Class D Preferred Stock shall surrender his or its certificates or certificates for all such shares to the Company at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 8. On the date fixed for conversion, all rights with respect to the Class D Preferred Stock so converted will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefore, to receive certificates for the number of shares of -24- Common Stock into which such Class D Preferred Stock has been converted and payment of any accrued and unpaid dividends thereon. If so required by the Company, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Company, duly executed by the registered holder or by his attorneys duly authorized in writing. All certificates evidencing shares of Class D Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the date such certificates are so required to be surrendered, be deemed to have been retired and canceled and the shares of Class D Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. As soon as practicable after the date of such mandatory conversion and the surrender of the certificate or certificates for Class D Preferred Stock as set forth herein, the Company shall cause to be issued and delivered to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions -25- hereof and cash as provided in Section 6(b) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. 9. CONVERTED AND REACQUIRED SHARES. Any shares of Series D Preferred Stock ------------------------------- converted into Common Stock, redeemed, purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of undesignated stock of the Company and may be reissued subject to the conditions and restrictions on issuance in the Articles of Incorporation, in any other Certificate of Designation creating a series of preferred stock or any similar stock or as otherwise required by law. RESOLVED FURTHER, that the officers of this Company be, and each of them acting alone is, hereby authorized and instructed to take all steps necessary to execute, deliver and file, for and on behalf of this Company and in its name, any and all documents required in connection with the establishment and authorization of the Company's Class D Preferred Stock, including but not limited to filing the Statement of Rights and Preferences with the Minnesota Secretary of State in accordance with Minnesota Statutes, Section 302A.401. F. The undersigned further declares under penalty of perjury that the matters set out in the foregoing Certificate are true and correct of his own knowledge. -26- IN WITNESS WHEREOF, the undersigned has executed this certificate as of the 4th day of March 1999. /s/ Edward J. Driscoll, Jr. _____________________________________ Edward J. Driscoll, Jr. Secretary -27- EX-4.24 10 CLASS A PREFERRED STOCK EXHIBIT 4.24 WAM!NET INC. A MINNESOTA CORPORATION No. 1 115,206 Shares of 1999 Class A Preferred Stock This certifies that MCI WORLDCOM, Inc. is the registered holder of One ------------------ Hundred Fifteen Thousand Two Hundred Six Shares of 1999 Class A Preferred Stock, par value $10.00 per share (see reverse side), transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be signed by its duly authorized officers this 4th day of March, 1999. /s/ Edward J. Driscoll III -------------------------- Edward J. Driscoll III, President /s/ Edward J. Driscoll, Jr. --------------------------- Edward J. Driscoll, Jr. Secretary The 1999 Class A Preferred Stock has the rights and preferences, and is subject to mandatory redemption, as set forth in the Certificate of Designation of 1999 Class A Preferred Stock as filed of record with the Minnesota Secretary of State on March 4, 1999. The securities evidenced hereby are subject to the terms of that certain Stockholders Agreement, dated as of March 4, 1999, by and among the Corporation, Silicon Graphics, Inc. and MCI WORLDCOM, Inc., including certain restrictions on transfer. A copy of this Agreement has been filed with the Secretary of the Corporation and is available upon request. The securities evidenced hereby have not been registered under the Securities Act of 1933, as amended (the "Act") and may not be resold, transferred or otherwise disposed of other than in a transaction exempt from, or not subject to, the registration requirements of the Act or pursuant to an effective registration statement hereunder. For value received, ______________________________ does hereby sell, assign and transfer unto ____________________________ _____________________________________ Shares represented by the within Certificate and does hereby irrevocably constitute and appoint _____________________________ Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated: Note: The signature on this assignment must correspond with the name as written upon the face of the Certificate, in every particular, without alteration or enlargement or any change whatever. -2- EX-4.25 11 CONVERTIBLE CLASS B PREFERRED STOCK EXHIBIT 4.25 WAM!NET INC. A MINNESOTA CORPORATION No. 1 5,710,425 Shares of Class B Convertible Preferred Stock This certifies that Silicon Graphics, Inc. is the registered holder of ---------------------- Five Million Seven Hundred Ten Thousand Four Hundred Twenty-five Shares of Class B Convertible Preferred Stock, par value $0.01 per share (see reverse side), transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be signed by its duly authorized officers this 4th day of March, 1999. /s/ Edward J. Driscoll III ------------------------------------------- Edward J. Driscoll III, President /s/ Edward J. Driscoll, Jr. ------------------------------------------- Edward J. Driscoll, Jr. Secretary The Class B Convertible Preferred Stock has the rights and preferences as set forth in the Certificate of Designation of Class B Preferred Stock as filed of record with the Minnesota Secretary of State on March 4, 1999. The securities evidenced hereby are subject to the terms of that certain Stockholders Agreement, dated as of March 4, 1999, by and among the Corporation, Silicon Graphics, Inc. and MCI WORLDCOM, Inc., including certain restrictions on transfer. A copy of this Agreement has been filed with the Secretary of the Corporation and is available upon request. The securities evidenced hereby have not been registered under the Securities Act of 1933, as amended (the "Act") and may not be resold, transferred or otherwise disposed of other than in a transaction exempt from, or not subject to, the registration requirements of the Act or pursuant to an effective registration statement thereunder. For value received, __________ does hereby sell, assign and transfer unto ____________ Shares represented by the within Certificate and does hereby irrevocably constitute and appoint ________ Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated:_____________________ _______________________________________ NOTE: The signature on this assignment must correspond with the name as written upon the face of the Certificate, in every particular, without alteration or enlargement or any change whatever. -2- EX-4.26 12 CLASS C CONVERTIBLE PREFERRED STOCK EXHIBIT 4.26 WAM!NET INC. A Minnesota Corporation No. 1 878,527 Shares of Class C Convertible Preferred Stock This certifies that Silicon Graphics, Inc. is the registered holder of ---------------------- Eight Hundred Seventy-eight Thousand Five Hundred Twenty-seven Shares of Class C Convertible Preferred Stock, par value $0.01 per share (see reverse side), transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be signed by its duly authorized officers this 4th day of March, 1999. /s/ Edward J. Driscoll III -------------------------- Edward J. Driscoll III, President /s/ Edward J. Driscoll, Jr. --------------------------- Edward J. Driscoll, Jr. Secretary The Class C Convertible Preferred Stock has the rights and preferences, and is subject to mandatory redemption, as set forth in the Certificate of Designation of Class C Preferred Stock as filed of record with the Minnesota Secretary of State on March 4, 1999. The securities evidenced hereby are subject to the terms of that certain Stockholders Agreement, dated as of March 4, 1999, by and among the Corporation, Silicon Graphics, Inc. and MCI WORLDCOM, Inc., including certain restrictions on transfer. A copy of this Agreement has been filed with the Secretary of the Corporation and is available upon request. The securities evidenced hereby have not been registered under the Securities Act of 1933, as amended (the "Act") and may not be resold, transferred or otherwise disposed of other than in a transaction exempt from, or not subject to, the registration requirements of the Act or pursuant to an effective registration statement hereunder. For value received, ______________________________ does hereby sell, assign and transfer unto ____________________________ _____________________________________ Shares represented by the within Certificate and does hereby irrevocably constitute and appoint _____________________________ Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated: Note: The signature on this assignment must correspond with the name as written upon the face of the Certificate, in every particular, without alteration or enlargement or any change whatever. -2- EX-4.27 13 CLASS D CONVERTIBLE PREFERRED STOCK EXHIBIT 4.27 WAM!NET INC. A MINNESOTA CORPORATION No. 1 2,196,317 Shares of Class D Convertible Preferred Stock This certifies that MCI WORLDCOM, Inc. is the registered holder of Two ----------------- Million One Hundred Ninety-six Thousand Three Hundred Seventeen Shares of Class D Convertible Preferred Stock, par value $0.01 per share (see reverse side), transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be signed by its duly authorized officers this 4th day of March, 1999. /s/ Edward J. Driscoll III --------------------------------- Edward J. Driscoll III, President /s/ Edward J. Driscoll, Jr. ---------------------------------- Edward J. Driscoll, Jr. Secretary The Class D Convertible Preferred Stock has the rights and preferences as set forth in the Certificate of Designation of Class D Preferred Stock as filed of record with the Minnesota Secretary of State on March 4, 1999. The securities evidenced hereby are subject to the terms of that certain Stockholders Agreement, dated as of March 4, 1999, by and among the Corporation, Silicon Graphics, Inc. and MCI WORLDCOM, Inc., including certain restrictions on transfer. A copy of this Agreement has been filed with the Secretary of the Corporation and is available upon request. The securities evidenced hereby have not been registered under the Securities Act of 1933, as amended (the "Act") and may not be resold, transferred or otherwise disposed of other than in a transaction exempt from, or not subject to, the registration requirements of the Act or pursuant to an effective registration statement thereunder. For value received, ____________ does hereby sell, assign and transfer unto _____________ Shares represented by the within Certificate and does hereby irrevocably constitute and appoint ____________ Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated: ________________________ ______________________________ NOTE: The signature on this assignment must correspond with the name as written upon the face of the Certificate, in every particular, without alteration or enlargement or any change whatever. -2- EX-4.28 14 STOCKHOLDER'S AGREEMENT EXHIBIT 4.28 ================================================================================ STOCKHOLDERS' AGREEMENT BY AND AMONG WAM!NET INC. SILICON GRAPHICS, INC. AND MCI WORLDCOM, INC. ______________________________ Dated as of March 4, 1999 ______________________________ ================================================================================ STOCKHOLDERS' AGREEMENT Stockholders' Agreement, dated as of March 4, 1999, by and among Silicon Graphics, Inc., a Delaware corporation ("SGI"); MCI WORLDCOM, Inc., a Georgia corporation ("MCI WCOM" and, together with SGI, the "Investors"); and WAM!NET INC., a Minnesota corporation (the "Company"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, MCI WCOM is the owner of 115,206 shares of the Company's 1999 Class A Preferred Stock, par value $10.00 per share (the "Class A Preferred Stock"), in addition to certain warrants to purchase, and other securities convertible into and exchangeable for, the Company's common stock, par value $0.01 per share (the "Common Stock"); WHEREAS, SGI has, pursuant to the terms of a Preferred Stock Purchase Agreement, dated as of March 3, 1999, between the Company and SGI, agreed to purchase (i) 5,710,425 shares of the Company's Class B Convertible Preferred Stock, par value $0.01 per share (the "Class B Preferred Stock") and (ii) 878,527 shares of the Company's Class C Convertible Preferred Stock, par value $0.01 per share (the "Class C Preferred Stock"); WHEREAS, MCI WCOM has, immediately prior to the issuance of the Class B Preferred Stock and the Class C Preferred Stock, pursuant to the terms of a Subordinated Unsecured Convertible Note, dated as of January 13, 1999, issued by the Company to MCI WCOM in a principal amount of up to $25.0 million, due August 28, 1999 (the "MCI WCOM Note"), converted all of the amounts outstanding thereunder into 2,196,317 shares of the Company's Class D Convertible Preferred Stock, par value $0.01 per share (the "Class D Preferred Stock"); WHEREAS, the Class B Preferred Stock, the Class C Preferred Stock and the Class D Preferred Stock are convertible into shares of Common Stock (the "Conversion Shares" and, together with the Class A Preferred Stock, the Class B Preferred Stock, the Class C Preferred Stock and the Class D Preferred Stock, the "Subject Securities"); WHEREAS, the Investors and the Company desire to promote their mutual interests by agreeing to certain matters relating to, among other things, the operations of the Company and the disposition and voting of the Subject Securities; NOW THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements contained herein, the parties hereby agree as follows: 1. LEGENDS. The certificates evidencing the Subject Securities will bear ------- the following legend reflecting the restrictions on the sale, transfer, pledge or other disposition or encumbrance (each a "Transfer") of such securities contained herein and in the Securities Act of 1933, as amended (the "Securities Act"): 3 "The securities evidenced hereby are subject to the terms of that certain Stockholders Agreement, dated as of March 4, 1999, by and among the Company, Silicon Graphics, Inc. and MCI WORLDCOM, Inc., including certain restrictions on transfer. A copy of this Agreement has been filed with the Secretary of the Company and is available upon request. The securities evidenced hereby have not been registered under the Securities Act of 1933, as amended (the "Act") and may not be resold, transferred or otherwise disposed of other than in a transaction exempt from, or not subject to, the registration requirements of the Act or pursuant to an effective registration statement thereunder." 2. TRANSFER OF SUBJECT SECURITIES. ------------------------------ (a) Resale of Subject Securities. No Investor shall Transfer any Subject ---------------------------- Securities other than in accordance with the provisions of this Section 2. Any Transfer or purported Transfer made in violation of this Section 2 shall be null and void and of no effect. (b) Co-Sale Rights. (i) In the event any Investor intends to Transfer any -------------- Subject Securities (other than (A) the Class A Preferred Stock and (B) to any of its "affiliates" (as defined in the Securities Act) or to the Company), such Investor (the "Selling Investor") shall notify the other Investor (the "Tag- 4 Along Investor") in writing, of such proposed Transfer, its terms and conditions and the proposed purchaser (the "Purchaser"). Within twenty (20) business days of the date of such notice, the Tag-Along Investor shall notify the Selling Investor if it elects to participate in such Transfer. If the Tag-Along Investor fails to notify the Selling Investor within such twenty (20) business day period, it shall be deemed to have waived its rights under this Section 2(b). Upon notification by the Tag-Along Investor to the Selling Investor, the Tag-Along Investor shall have the right to sell, at the same price and on the same terms and conditions as the Selling Investor, an amount of Subject Securities equal to the amount of Subject Securities the Purchaser actually proposes to purchase, multiplied by a fraction, the numerator of which shall be the amount of Subject Securities issued and owned by such Tag-Along Investor, and the denominator of which shall be the aggregate amount of Subject Securities issued and owned by the Selling Investor and the Tag-Along Investor. As used herein, the term "amount of Subject Securities" shall mean the sum of (Y) all Common Stock proposed to be purchased by the Purchaser or owned by an Investor, as the case may be, plus (Z) all Common Stock issuable upon the conversion and exercise in full of the Subject Securities proposed to be purchased by the Purchaser or owned by an Investor, as the case may be, that are convertible into or exchangeable for Common Stock. 5 (ii) Notwithstanding anything contained in this Section 2(b), in the event that all or a portion of the purchase price consists of securities, and the sale of such securities to the Tag-Along Investor would require either registration under the Securities Act or the preparation of a disclosure document pursuant to Regulation D under the Securities Act (or any successor regulation) or a similar provision of any state securities law, and no such registration is otherwise being effected and no such disclosure document is otherwise being prepared, then, at the option of the Selling Investor, the Tag-Along Investor may receive, in lieu of such securities, the fair market value of such securities in cash, as determined in good faith by the Board. (c) Securities Act. The Investors understand and acknowledge that the -------------- Subject Securities have not been registered under the Securities Act and that they may not be Transferred other than in a transaction exempt from, or not subject to, the registration requirements of the Securities Act or pursuant to an effective registration statement thereunder. 3. [INTENTIONALLY OMITTED]. 4. BOARD OF DIRECTORS. Throughout the term of this Agreement, the ------------------ Investors and the Company shall take all action within their respective power (including, without limitation, the voting of all shares of capital stock of the Company owned by an Investor) to cause the Board of Directors of the Company to be 6 constituted in accordance with the Company's "Statement of Rights and Preferences of Class A Preferred Shares" and "Statement of Rights and Preferences of Class B Preferred Shares." 5. TERMINATION. The Agreement shall terminate on the earliest to occur of ----------- (a) the issuance of shares of Common Stock to the public in an underwritten offering pursuant to a registration statement filed under the Securities Act covering the offer and sale of Common Stock in which the net proceeds to the Company exceed $20,000,000 and the Class B, C and D Preferred Stock have been converted into Conversion Shares pursuant to the mandatory conversion provisions thereof or (b) the date on which the Investors and the Company shall have agreed in writing to terminate this Agreement. 6. WAIVER. MCI WCOM hereby consents to and approves the issuance of the ------ Class B Preferred Stock and the Class C Preferred Stock to SGI and the transactions and other agreements contemplated thereby and agrees to the waiver of its rights pursuant to Section 5.03 of the Subordinated Unsecured Convertible Note and Warrant Purchase Agreement, by and between the Company and MCI WCOM, dated January 13, 1999 (the "Note Agreement"). 7. AFFILIATE TRANSACTIONS. The terms of any material agreement, ---------------------- arrangement or understanding between the Company and MCI WCOM pursuant to Sections 5.01 and 5.02 of the Note Agreement shall be approved by a majority of the "Disinterested Directors" 7 of the Company (as such term is defined in the Indenture, dated as of March 5, 1998, relating to the Company's 13.25% Senior Discount Notes due 2005), subject to the provisions of Article V of the Note Agreement. 8. MISCELLANEOUS. ------------- (a) Amendments, Waivers and Consents. No provision in this Agreement may be -------------------------------- altered or amended, and compliance with any covenant or provision set forth herein may not be omitted or waived, except by an instrument in writing duly executed by the Investors and the Company. Any waiver or consent may be given subject to satisfaction of conditions stated therein and any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. (b) Notices. All notices required or permitted by this Agreement shall be ------- in writing, and shall be hand delivered, sent by facsimile or nationally recognized overnight delivery service, addressed as follows: (i) If to SGI: Silicon Graphics, Inc. 2011 N. Shoreline Blvd. Mountain View, CA 94043-1389 Attention: William M. Kelly, Senior Vice President, Corporate Operations Telephone: 650-932-0488 Facsimile: 650-932-0908 with a copy to: Testa, Hurwitz & Thibeault, LLP High Street Tower, 125 High Street 8 Boston, MA 02110 Attention: William B. Asher, Jr. Telephone: 617-248-7518 Facsimile: 617-248-7100 (ii) If to MCI WCOM: MCI WORLDCOM, Inc. 1801 Pennsylvania Avenue, NW Washington, D.C. 20006-3606 Attention: Susan Mayer, Senior Vice President Telephone: 202-887-2202 Facsimile: 202-887-3226 with a copy to: MCI WORLDCOM, Inc. 1801 Pennsylvania Avenue, NW Washington, D.C. 20006-3606 Attention: Michael Salsbury, General Counsel Telephone: 202-887-3373 Facsimile: 202-887-3353 (iii) If to the Company: WAM!NET INC. 6100 West 110th Street Minneapolis, MN 55438 Attention: Edward J. Driscoll, III, President Telephone: 612-886-5100 Facsimile: 612-887-2165 with a copy to: Willkie Farr & Gallagher 787 Seventh Avenue New York, NY 10019-6099 Attention: Daniel D. Rubino Telephone: 212-728-8000 Facsimile: 212-728-8111 or to such other person or address as a party shall specify by notice in writing to the other party. All such notices and other communications shall be effective when received. 9 (c) Binding Effect; Assignment. This Agreement shall be binding upon and -------------------------- inure to the benefit of the Company and the Investors. No assignment of rights or delegation of duties arising under this Agreement may be made by any party hereto without the prior written consent of the other party. (d) Third-Party Beneficiaries. This Agreement is for the sole benefit of ------------------------- the parties hereto and their permitted assigns and nothing herein expressed or implied shall give or be construed to give to any person, other than the parties hereto and such permitted assigns, any legal or equitable rights hereunder. (e) Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the parties hereto with respect to the subject matter contained herein and supersedes all other prior understandings or agreements, both written and oral, between the parties with respect to the matters contained herein. (f) Severability. The provisions of this Agreement are severable and, in ------------ the event that any court of competent jurisdiction shall determine that any one or more of the provisions or part of a provision contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement; but this Agreement shall be 10 reformed and construed as if such invalid or illegal or unenforceable provision, or part of a provision, had never been contained herein, and such provisions or part reformed so that it would be valid, legal and enforceable to the maximum extent possible. (g) Governing Law. This Agreement shall be governed by, and construed in ------------- accordance with, the law of the State of Minnesota without regard to its principles of conflicts of laws. (h) Headings. Article, Section and sub-Section headings in this Agreement -------- are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. (i) Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart by original or facsimile signature. (j) Expenses. Each party shall pay the fees and expenses of its respective -------- counsel, accountants and other experts (including any broker, finder, advisor or intermediary), and shall pay all other expenses incurred by it in connection with the negotiation, 11 preparation and execution of this Agreement and the consummation of the transactions contemplated hereby. 12 IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. WAM!NET INC. /s/ Allen L. Witters _________________________________ By: Allen L. Witters Its: Chief Technology Officer MCI WORLDCOM, INC. /s/ Susan Mayer _________________________________ By: Susan Mayer Its: Senior Vice President SILICON GRAPHICS, INC. /s/ William M. Kelly _________________________________ By: William M. Kelly Its: Senior Vice President 13 EX-4.29 15 CLASS A PREFERRED STOCK EXCHANGE AGREEMENT EXHIBIT 4.29 CLASS A PREFERRED STOCK EXCHANGE AGREEMENT Class A Preferred Stock Exchange Agreement, dated as of March 4, 1999, by and between MCI WORLDCOM, Inc., a Georgia corporation ("MCI WCOM") and WAM!NET INC., a Minnesota corporation (the "Company"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, MCI WCOM is the owner of 100,000 shares of the Company's Class A Preferred Stock, par value $10.00 per share (the "Old Class A Preferred Stock"), in addition to certain warrants to purchase, and other securities convertible into and exchangeable for, the Company's common stock, par value $0.01 per share (the "Common Stock"); WHEREAS, the Old Class A Preferred Stock entitles the holders thereof, voting separately as a class to elect a majority of the members of the Board of Directors of the Company; WHEREAS, the Company and Silicon Graphics, Inc., a Delaware corporation ("SGI"), have entered into a Letter of Intent, dated as of February 2, 1999 (the "LOI"), which contemplates that SGI will acquire certain convertible preferred stock of the Company and have the right to designate one member of the Board of Directors of the Company; WHEREAS, the LOI also contemplates that the terms of the Old Class A Preferred Stock will be modified such that the holders thereof, voting separately as a class, will be entitled to elect that number of the members of the Board equal to the largest whole number less than a majority of the Board; and WHEREAS, the Company and MCI WCOM desire, on the terms and subject to the conditions set forth hereon, to exchange the Old Class A Preferred Stock for 115,206 shares of the Company's 1999 Class A Preferred Stock, par value $10.00 per share, with the terms and conditions set forth in the Statement of Rights and Preferences of Class A Preferred Shares of WAM!NET Inc. a copy of which is attached hereto as Exhibit I (the "New Class A Preferred Stock"). NOW THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements contained herein, the parties hereby agree as follows: 1. Concurrent with the execution and delivery of this Agreement, MCI WCOM shall surrender to the Company its certificate evidencing all of the Old Class A Preferred Stock at the offices of the Company, 6100 West 110th Street, Minneapolis, MN 55438. 2. In consideration of the surrender of the Old Class A Preferred Stock as contemplated by Section 1, the Company shall issue to MCI WCOM a certificate evidencing the New Class A Preferred Stock. 3. Upon surrender and delivery of the Old Class A Preferred Stock contemplated by Section 1, (i) all of MCI WCOM's rights with respect thereto shall terminate and (ii) such shares shall be retired and canceled by the Company. 2 4. This Agreement is for the sole benefit of the parties hereto and their permitted assigns and, except as set forth in the final sentence of Section 5 hereof, nothing herein expressed or implied shall give or be construed to give to any person, other than the parties hereto and such permitted assigns, any legal or equitable rights hereunder. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter contained herein and supersedes all other prior understandings or agreements, both written and oral, between the parties with respect to the matters contained herein. The provisions of this Agreement are severable and, in the event that any court of competent jurisdiction shall determine that any one or more of the provisions or part of a provision contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement; but this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of a provision, had never been contained herein, and such provisions or part reformed so that it would be valid, legal and enforceable to the maximum extent possible. This Agreement shall be governed by, and construed in accordance with, the law of the State of Minnesota without regard to its principles of conflicts of laws. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which taken together 3 shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart by original or facsimile signature. 5. The parties hereto are also parties to that certain Preferred Stock, Subordinated Note and Warrant Purchase Agreement, dated November 14, 1996 (the "A Agreement"). The parties hereby agree that (a) Section 4.02 of the A Agreement is hereby amended by substituting the year "2001" for the year "2000" therein and making all such other changes as is necessary to conform Section 4.02 accordingly and (b) all references to "owners of outstanding shares" of the Company in Article IV of the A Agreement shall be deemed to include Silicon Graphics, Inc. ("SGI"), and the amount of "outstanding shares" deemed to be owned by SGI shall be equal to the amount of shares of the Company's Common Stock, par value $0.01 per share ("Common Stock"), then held by SGI, together with the number of shares of Common Stock that all securities then held by SGI are convertible into or exchangeable for. SGI shall be deemed to be an express third-party beneficiary of this Section 5. 4 IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. WAM!NET INC. /s/ Allen L. Witters _____________________________ By: Allen L. Witters Its: Chief Technology Officer MCI WORLDCOM, INC. /s/ Susan Mayer _____________________________ By: Susan Mayer Its: Senior Vice Pesident CONSENTING TO THE PROVISIONS OF SECTION 5 HEREOF ONLY: /s/ Edward J. Driscoll, III _____________________________ Edward J. Driscoll, III /s/ Allen L. Witters _____________________________ Allen L. Witters 5 EX-4.30 16 CLASS D PREFERRED STOCK CONVERSION AGREEMENT EXHIBIT 4.30 ================================================================================ CLASS D PREFERRED STOCK CONVERSION AGREEMENT BY AND BETWEEN WAM!NET INC. AND MCI WORLDCOM, INC. ______________________________ Dated as of March 4, 1999 ______________________________ ================================================================================ PREFERRED STOCK CONVERSION AGREEMENT Preferred Stock Conversion Agreement, dated as of March 4, 1999 (this "Agreement"), by and between WAM!NET INC., a Minnesota corporation (the "Company"), and MCI WORLDCOM,INC., a Georgia corporation ("Buyer"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, on January 13, 1999, the Company issued to Buyer that certain 13.25% Subordinated Unsecured Convertible Note due August 28, 2005, in an aggregate principal amount of up to $25 million (the "Note"); WHEREAS, upon an Equity Offering (as defined in the Note), the aggregate principal amount outstanding under the Note and any interest accrued thereon shall be converted into the same class of shares sold in the Equity Offering and at a Conversion Price (as defined in the Note) equal to the offering price per share in the Equity Offering; WHEREAS, the Company and Silicon Graphics, Inc., a Delaware corporation ("SGI"), have entered into that certain Preferred Stock Purchase Agreement, dated as of March 3, 1999, providing for the sale to SGI of two series of the Company's preferred stock (the "SGI Investment"), consisting of (i) 5,710,425 shares of the Company's Class B Convertible Preferred Stock, par value $0.01 per share, and (ii) 878,527 shares of the Company's Class C Convertible Preferred Stock, par value $0.01 per share; WHEREAS, the Company has designated an additional series of its preferred stock, consisting of 2,196,317 shares, par value $0.01 per share, designated as its "Class D Convertible Preferred Stock" (the "Class D Preferred Shares"); WHEREAS, the Class D Preferred Shares are convertible into shares (the "Conversion Shares") of the Company's common stock, par value $0.01 per share (the "Common Stock") in accordance with the terms of the Class D Certificate of Designation (as defined herein); and WHEREAS, the terms, limitations and relative rights and preferences of the Class D Preferred Shares are set forth in the "Statement of Rights and Preferences of Class D Convertible Preferred Shares" (the "Class D Certificate of Designation"), a copy of which is attached hereto as Exhibit I. NOW THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements contained herein, the parties hereby agree as follows: I. CONVERSION OF THE NOTE INTO CLASS D PREFERRED STOCK 1.01 Automatic Conversion. The Company and Buyer acknowledge and agree -------------------- that the SGI Investment constitutes an Equity Offering for the purposes of the Note and that, as of the date hereof and immediately prior to the consummation of the SGI Investment, the Note and any accrued interest thereon shall automatically convert into the Class D Preferred Shares. 2 1.02 Duration, Rights and Preferences of the Class D Preferred Stock. The --------------------------------------------------------------- Class D Preferred Shares shall have and enjoy the rights and preferences as are set forth in the Class D Certificate of Designation. II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY 2.01 The Company hereby represents, warrants and covenants to Buyer that, as of the date hereof: (a) Corporate Organization and Power; Qualification. The Company (i) is ----------------------------------------------- duly organized, validly existing and in good standing as a corporation under the laws of the state of Minnesota, (ii) has all corporate power and authority to own its properties and to carry on its businesses as now being conducted and (iii) is duly qualified and in good standing as a foreign corporation, and is authorized to do business, in all jurisdictions in which the character of its properties or the nature of its businesses requires such qualification or authorization, except for qualifications and authorizations the lack of which, individually or in the aggregate, would not reasonably be expected to result in a material adverse effect on the business, financial condition, results of operations, assets or liabilities of the Company and its subsidiaries taken as a whole (a "Material Adverse Effect"). (b) Subsidiaries. Set forth on Schedule 2.01(b) hereto is a complete list ------------ of all of the subsidiaries of the Company. Except as set forth on Schedule 2.01(b) hereto, the Company does 3 not own, directly or indirectly, any capital stock or other equity securities of any corporation, nor does the Company have any direct or indirect ownership interest, including interests in partnerships and joint ventures, in any other entity or business. Each of the subsidiaries has been duly incorporated, is validly existing and in good standing under the laws of its respective jurisdiction of incorporation and is duly qualified and in good standing as a foreign corporation, and is authorized to do business, in all jurisdictions in which the character of its properties or the nature of its businesses requires such qualification or authorization, except for qualifications and authorizations the lack of which, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect. Each of the subsidiaries has the requisite power and authority to own and hold its properties and to carry on its business as now being conducted. Except as disclosed in the registration statements, reports and proxy statements filed by the Company with the Securities and Exchange Commission (the "SEC Reports"), disclosed in the Financial Statements (as defined herein) or set forth on Schedule 2.01(b) hereto: (i) all of the outstanding shares (other than director's qualifying shares, if any) of capital stock of each of the subsidiaries are owned beneficially and of record by the Company, one of its subsidiaries or any combination thereof, in each case free and clear of any liens, charges, restrictions, claims or encumbrances created or suffered by the Company or any of its subsidiaries, other than restrictions on transfer imposed by the 4 Securities Act of 1933, as amended (the "Securities Act"), or any other provision of applicable law; and (ii) there are no outstanding subscriptions, warrants, options, convertible securities or other rights (contingent or other) pursuant to which any of the subsidiaries is or may become obligated to issue any shares of its capital stock to any person other than the Company or a subsidiary. (c) Power and Authority; Authorization; Enforceability. The Company has -------------------------------------------------- all requisite corporate power and authority necessary to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement and to consummate the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company, enforceable against it in accordance with its terms, except as enforceability against the Company may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to the rights of creditors generally and other general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) and except as any rights to indemnity and contribution 5 contemplated by Section 6.02 may be limited by applicable federal and state securities laws and public policy considerations. (d) No Violations; Consents and Approvals. The execution and delivery by ------------------------------------- the Company of this Agreement, the performance by the Company of its obligations hereunder and the consummation by the Company of the transactions contemplated hereby will not (i) violate, conflict with, result in a breach of, constitute a default under, or result in or require the creation of any lien upon any assets of the Company under its Articles of Incorporation, as amended (the "Charter"), By-laws or any material contract to which the Company is a party or by which the Company or any of its properties may be bound or (ii) require any consent or approval other than such consents and approvals to be obtained before the Closing and those that have been obtained which are final and not subject to review on appeal or to collateral attack and are in full force and effect, except for such violations, conflicts, breaches, defaults or liens which, or consents or approvals which, if not obtained, would not reasonably be expected to, individually or in the aggregate, result in a Material Adverse Effect. (e) Litigation; Compliance with Laws. Except as disclosed in the SEC -------------------------------- Reports, disclosed in the Financial Statements or set forth on Schedule 2.01(e), there are no (i) actions, suits, claims, proceedings or investigations instituted and pending or, to the knowledge of the Company, threatened, against or affecting the Company or any of its subsidiaries, at law or in equity, or 6 before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) arbitration proceedings relating to the Company instituted and pending under collective bargaining agreements or otherwise or (iii) governmental inquiries instituted and pending or, to the knowledge of the Company, threatened, against or affecting the Company, any of which would reasonably be expected to result in a Material Adverse Effect. Except for any defaults which would not reasonably be expected to result in a Material Adverse Effect, neither the Company nor any of its subsidiaries is in default with respect to any order, writ, injunction or decree known to or served upon the Company of any court or of any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. Except where the failure to do so would not reasonably be expected to result in a Material Adverse Effect, neither the Company nor any of its subsidiaries has failed to comply with any laws, rules, regulations and orders applicable to its respective business, operations, properties, assets, products and services, the Company and each of its subsidiaries has all necessary permits, licenses and other authorizations required to conduct its business as presently conducted and the Company and each of its subsidiaries has operated its respective business pursuant to and in compliance with the terms of all such permits, licenses and other authorizations. 7 (f) Taxes. The Company has filed (or obtained extensions of the time by ----- which it is required to file) all United States federal, state and local income tax returns and all other material tax returns required to be filed by it, and has paid all taxes shown due on the returns so filed as well as the other taxes, assessments and governmental charges which have become due, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. The Company will continue to make all such filings in a timely manner and pay all such taxes, assessments and other governmental charges required of it. (g) Capitalization. (i) As of the date hereof, the authorized capital -------------- stock of the Company consists of 500,000,000 shares, the designations and classes of which are set forth on Schedule 2.01(g) hereto. The Company does not hold any of its shares in treasury. (ii) As of the date hereof, 9,291,027 shares of Common Stock and 100,000 shares of the Company's Class A Preferred Stock, par value $10.00 per share (the "Class A Preferred Stock"), are issued and outstanding and have been validly issued and are fully paid and nonassessable and are not subject to preemptive rights. (iii) Except as contemplated by this Agreement, disclosed in the SEC Reports, disclosed in the Financial Statements or set forth on Schedule 2.01(g) hereto, as of the date hereof there are 8 no outstanding subscriptions, options, warrants or other rights of any kind to acquire any additional shares of capital stock of the Company or other instruments or securities convertible into or exchangeable for, or which otherwise confer on the holder thereof any right to acquire, any such additional shares of capital stock, nor is the Company committed to issue any such option, warrant, right or security. Except as provided for in the Charter, disclosed in the SEC Reports or set forth on Schedule 2.01(g) hereto, the Company has no obligation (contingent or other) to purchase, redeem or otherwise acquire any of its equity securities or any interest therein or to pay any dividend or make any other distribution in respect thereof. All of the outstanding securities of the Company were issued in compliance with the registration requirements under applicable federal and state securities laws (or pursuant to applicable exemptions therefrom). (iv) Except as contemplated by this Agreement, disclosed in the SEC Reports or disclosed in the Financial Statements, as of the date hereof, there are no agreements relating to voting, purchase or sale of capital stock between the Company and any of its stockholders or affiliates, and to the best of the Company's knowledge, there are no such agreements among any of its stockholders. (v) The Class D Preferred Shares are duly authorized, validly issued, fully paid and nonassessable, and have the rights, preferences and privileges specified in the Class D 9 Certificate of Designation. The Conversion Shares are duly authorized and have been reserved for issuance and, when issued upon conversion in accordance with the terms of the Class D Certificate of Designation will be validly issued, fully paid and nonassessable, and will be free and clear of all liens, encumbrances and restrictions (other than those contemplated hereby, created or suffered by Buyer (or the current holder thereof) and restrictions on transfer imposed by the Securities Act or any other applicable federal or state securities laws, and the rules and regulations promulgated thereunder). Neither the issuance, sale or delivery of the Class D Preferred Shares nor the contemplated issuance or delivery of the Conversion Shares is subject to any currently existing preemptive right of stockholders of the Company, any right of first refusal or other right in favor of any person, in each case except for rights that have been waived. (h) Financial Statements. The Company has delivered to Buyer copies of its -------------------- financial statements (including balance sheets, income statements, changes in stockholders equity, statements of cash flow and any related notes) for the year ended December 31, 1998 (the "Financial Statements") and will deliver to Buyer (as soon as practicable but in no event later than March 31, 1999) audited copies of the Financial Statements. The Financial Statements (i) fairly present, in all material respects, the financial condition, assets and liabilities of the Company as of the date thereof and the results of its operations 10 and changes in its cash flows for the periods covered thereby, (ii) were prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved, except as may be noted therein, and (iii) were prepared from the books and records of the Company, which books and records are complete and correct and fairly reflect all material transactions of the Company's business. (i) Absence of Certain Changes. Except as contemplated by this Agreement, -------------------------- disclosed in the SEC Reports or set forth on Schedule 2.01(i) hereto, since December 31, 1998, (i) there has been no change in the assets, liabilities or financial condition of the Company and its subsidiaries (on a consolidated basis) from that reflected in the balance sheet of the Company and its subsidiaries as of December 31, 1998, except for changes (A) in the ordinary course of business or (B) which in the aggregate have not resulted in and would not reasonably be expected to result in a Material Adverse Effect and (ii) there has not been any event or change that would reasonably be expected to result in a Material Adverse Effect, individually or in the aggregate, whether or not insured against (excluding general economic or industry changes). (j) No Brokers. No broker, finder or investment banker is entitled to any ---------- brokerage, finder's or other fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of the Company. 11 (k) Proprietary Information of Third Parties. Except for such claims that ---------------------------------------- would not reasonably be expected to result in a Material Adverse Effect, to the knowledge of the Company, no third party has claimed or has reason to claim that the Company or any of its subsidiaries has (a) violated or may be violating any of the terms or conditions of any non-competition or non-disclosure agreement with such third party, (b) disclosed or may be disclosing or utilized or may be utilizing any trade secret or proprietary information or documentation of such third party or (c) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. Neither the Company nor any of its subsidiaries has utilized and does not propose to utilize any trade secret or any information or documentation proprietary to any other person in violation of existing arrangements with such person, and to the knowledge of the Company, neither the Company nor any of its subsidiaries has violated any confidential relationship which any such person may have had with any third party, in connection with the development, manufacture or sale of any product or the development or sale of any service of the Company. (l) Patents, Trademarks, Etc. Set forth on Schedule 2.01(l) hereto is a ------------------------- list of all domestic and foreign trademarks, trademark applications, patents, registered copyrights (except copyrighted software licensed to the Company in its ordinary course of business) and patent applications owned by, registered in the name of or licensed to or from the Company and its 12 subsidiaries as of the date hereof. Except where the failure to do so would not reasonably be expected to result in a Material Adverse Effect, the Company and its subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (including those necessary for the use and protection of the names and/or marks "WAM!NET", "WAM!BASE" and "WAM!PROOF") or other intellectual property (collectively, "Intellectual Property") necessary to carry on its business as presently conducted. Except as set forth on Schedule 2.01(l) hereto, neither the Company nor any subsidiary has received any notice of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect. (m) The Year 2000. Except where the failure to do so would not reasonably -------------- be expected to result in a Material Adverse Effect, the Company has used (or is in the process of using) reasonable procedures to verify that any of its software licensed or otherwise provided to its customers and any software used in 13 its business will recognize and process date fields after the turn of the century, and perform date-dependent calculations and operations (including sorting, comparing and reporting) after the turn of the century correctly, and has used (or is in the process of using) reasonable efforts to ensure that any such software will not produce invalid and incorrect results as a result of the change of century (all without human intervention, other than original data entry of valid dates), provided that such software receives correct and properly formatted date inputs from all software and hardware that exchanges data with or provides data to the software. (n) Title to Properties. Except as disclosed in the SEC Reports, the ------------------- Company and its subsidiaries have good and valid title to all real and personal property which they own and which are reflected on the Financial Statements (except for assets and properties sold, consumed or otherwise disposed of by them in the ordinary course of business since December 31, 1998), and such assets and properties are owned free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind, except (i) those securing indebtedness reflected on the Financial Statements or indebtedness incurred in the ordinary course of business and consistent with past practice after the date thereof, (ii) mechanics', materialmens' and other liens which have arisen in the ordinary course of business or (iii) mortgages, pledges, liens, security interests, claims, restrictions or encumbrances which, individually or in the 14 aggregate, would not be reasonably likely to impair, in any material respect, the continued use of such asset or property. (o) Agreements. Except as set forth in Schedule 2.01(o) hereto or ---------- disclosed in the Financial Statements, all material agreements, contracts or instruments required to be filed as exhibits to the SEC Reports have been so filed. Neither the Company nor any of its subsidiaries is in breach or default of any agreement, contract, instrument or other commitment, except for such breaches and defaults which would not reasonably be expected to result in a Material Adverse Effect. To the knowledge of Company, no other party to any of such agreements, contracts, instruments or other commitments is, as of the date of this Agreement, in breach or default (and no event has occurred which with notice or the lapse of time or both would constitute a default or violation) thereunder, except for such breaches and defaults which would not reasonably be expected to result in a Material Adverse Effect. The Company is in full compliance with all of the terms and provisions of its Charter and By-laws, except where the failure to so comply would not reasonably be expected to result in a Material Adverse Effect. (p) Transactions With Affiliates. Except as disclosed in the SEC Reports ---------------------------- or disclosed in the Financial Statements, neither the Company nor any subsidiary is a party to any transaction of the type required to be disclosed pursuant to Item 404 of Regulation S-K under the Securities Act. (q) Disclosure. Neither this Agreement (including the Schedules hereto) ---------- nor the SEC Reports (as of the date filed with 15 the Securities and Exchange Commission) contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. None of the statements, documents, certificates or other items prepared by the Company and supplied to Buyer or its counsel in connection with the transactions contemplated hereby (other than those relating to (i) projected financial information, (ii) plans and objectives regarding the Company's future operations, (iii) future economic performance and (iv) assumptions underlying any of the matters described in (i) through (iii), each as to which no representation or warranty is given) contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading. III. REPRESENTATIONS AND WARRANTIES OF BUYER 3.01 Buyer hereby represents, warrants and covenants to the Company that: (a) Corporate Organization and Power; Qualification. Buyer (i) is duly ----------------------------------------------- organized, validly existing and in good standing as a corporation under the laws of the state of Georgia and (ii) has all corporate power and authority to own its properties and to carry on its businesses as now being conducted. 16 (b) Power and Authority; Authorization; Enforceability. Buyer has all -------------------------------------------------- requisite corporate power and authority necessary to execute and deliver this Agreement and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Buyer and no other corporate proceedings on the part of Buyer are necessary to authorize this Agreement and to consummate the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by Buyer and constitutes the valid and binding obligation of Buyer, enforceable against it in accordance with its terms, except as enforceability against Buyer may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to the rights of creditors generally and other general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) and except as any rights to indemnity and contribution contemplated by Section 6.02 may be limited by applicable federal and state securities laws and public policy considerations. (c) No Violations; Consents and Approvals. The execution and delivery by ------------------------------------- Buyer of this Agreement, the performance by Buyer of its obligations hereunder and the consummation by Buyer of the transactions contemplated hereby will not (i) violate, conflict with, result in a breach of, constitute a default under, or result in or require the creation of any lien upon any assets of 17 Buyer under its certificate of incorporation, by-laws (or other comparable charter documents) or any material contract to which Buyer is a party or by which Buyer or any of its properties may be bound or (ii) require any consent or approval other than such consents and approvals to be made and obtained before the Closing and those that have been obtained which are final and not subject to review on appeal or to collateral attack and are in full force and effect, except for such violations, conflicts, breaches, defaults or liens which, or consents or approvals which, if not obtained would not reasonably be expected to, individually or in the aggregate, result in a material adverse effect on the business, financial condition, results of operations, assets or liabilities of Buyer. (d) Due Diligence. Buyer has sufficient knowledge and experience in ------------- investing in companies similar to the Company in terms of the Company's stage of development and is capable of evaluating the merits and risks of its investment in the Company contemplated by the automatic conversion provisions of the Note and is able to bear the economic risk of such investment for an indefinite period of time. Buyer has been given access to full and complete information regarding the Company and has utilized such access to its satisfaction for the purpose of obtaining information Buyer desires or deems relevant to its investment decision. Buyer has had the opportunity to ask questions of and receive answers from representatives of the Company concerning the terms and conditions of this Agreement, to discuss the Company's business, management and financial affairs with the 18 Company's management and to obtain any additional information Buyer desires or deems relevant. Buyer has obtained, to the extent it has deemed necessary, professional advice with respect to the risks inherent in the investment in the Class D Preferred Shares and the Company, including, without limitation, the matters relating to the Company's business and financial condition set forth in the SEC Reports. (e) Investment Intent. Buyer has acquired the Class D Preferred Shares for ----------------- its own account for investment and not with a view towards the resale, transfer or distribution thereof, nor with any present intention of distributing the Class D Preferred Shares in violation of the Securities Act or any other applicable federal or state securities laws, and the rules and regulations promulgated thereunder. Buyer understands that no public market currently exists for the Class D Preferred Shares or the Common Stock, and that no such public market may ever exist. Buyer further understands and agrees that the Class D Preferred Shares have not been (and the Conversion Shares, upon issuance, will not be) registered under the Securities Act by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act, that the Class D Preferred Shares and the Conversion Shares will bear a legend (and the Company will make a notation on its transfer books) to such effect and the Class D Preferred Shares (and, upon issuance, the Conversion Shares) must be held indefinitely unless subsequently disposed of pursuant to an effective registration statement under the Securities Act or in a transaction exempt from, or not 19 subject to, the registration requirements thereof. Buyer agrees that if it sells any Conversion Shares pursuant to Rule 144A under the Securities Act, it will take all necessary steps in order to perfect the exemption from registration provided thereby, including, without limitation, obtaining on behalf of the Company information to enable the Company to establish a reasonable belief that the purchaser is a "qualified institutional buyer" (within the meaning of Rule 144A) and advising such purchaser that Rule 144A is being relied upon with respect to such resale. Buyer was not organized for the specific purpose of acquiring the Class D Preferred Shares and is an "accredited investor" within the meaning of Rule 501(a) of the Securities Act. (f) No Brokers. No broker, finder or investment banker is entitled to any ---------- brokerage, finder's or other fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of Buyer. IV. [INTENTIONALLY OMITTED] V. [INTENTIONALLY OMITTED] VI. OTHER AGREEMENTS 6.01 [INTENTIONALLY OMITTED] 6.02 Registration Rights. ------------------- (a) Piggy-back Registration. If, commencing one (1) year after the date ----------------------- hereof, the Company proposes to claim an exemption 20 under Section 3(b) of the Securities Act for a public offering of any of its securities or to register under the Securities Act (except pursuant to a registration statement on Form S-4 or S-8 (or any substitute form adopted by the Commission) or any other form that does not permit the inclusion of shares by its security holders) its Common Stock, it will give written notice to Buyer of its intention to do so and, upon the written request of Buyer given within twenty (20) days after receipt of any such notice (which request shall specify the number of Conversion Shares intended to be sold or disposed of by Buyer and the nature of any proposed sale or other disposition thereof), the Company will use its best efforts to cause all Conversion Shares that Buyer shall have requested the registration of to be included in such notification or the registration statement proposed to be filed by the Company; provided, however, -------- ------- that nothing herein shall prevent the Company from, at any time, abandoning or delaying any such registration initiated by it. If any such registration shall be underwritten in whole or in part, the Company may require that the Conversion Shares requested for inclusion pursuant to this Section 6.02 be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the managing underwriter, as expressed in writing delivered to Buyer, the inclusion of all of the Conversion Shares of Common Stock originally covered by a request for registration would reduce the number of Common Stock to be offered by the Company or interfere with the successful marketing of the Common Stock 21 offered by the Company, the number of Conversion Shares otherwise to be included pursuant to this Section 6.02 in the underwritten public offering may be reduced; provided, however, that any such required reduction shall be pro rata -------- ------- among all persons (other than the Company and any other persons demanding registration pursuant to existing rights who are entitled to be protected against any such reduction) who are participating in such offering. Conversion Shares which are thus excluded from the underwritten public offering shall be withheld from the market for a period, not to exceed 90 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. All expenses of such offering, except the fees of special counsel to Buyer and brokers' commissions or underwriting discounts payable by Buyer, shall be borne by the Company. (b) Demand Registration. In addition, on one occasion only, commencing ------------------- upon the later of one (1) year after the date hereof and the date that is six months after an IPO, upon request by Buyer to register the Conversion Shares, the Company will promptly use its reasonable best efforts to register such shares under the Securities Act; provided that (i) such request must be made ------------- within five (5) years from the date hereof and (ii) the Company may delay the filing of any registration statement requested pursuant to this Section 6.02(b) to a date not more than ninety (90) days following the date of such request if in the opinion of the Company's principal investment banker at the time of such request such a delay is necessary in order not to 22 adversely affect the Company's financing efforts then underway or if in the opinion of the Company such a delay is necessary or advisable to avoid disclosure of material nonpublic information. The costs and expenses directly related to any registration requested pursuant to this Section 6.02(b), including, but not limited to, legal fees of the Company's counsel, audit fees, printing expenses, filing fees of the Commission and the National Association of Securities Dealers, Inc. and fees and expenses relating to qualifications under state securities or blue sky laws incurred by the Company shall be borne entirely by the Company; provided, however, that the persons for whose account -------- ------- the securities covered by such registration are sold shall bear the expenses of brokers' commissions or underwriting discounts applicable to their shares and fees of their legal counsel. If Buyer is the only person whose shares are included in the registration pursuant to this Section 6.02(b), Buyer shall bear the expense of inclusion of any audited financial statements contained in the registration statement which are not dated as of the Company's fiscal year-end or are not otherwise prepared by the Company for its own business purposes. The Company shall keep effective and maintain any registration statement specified in this Section 6.02(b) for such period as may be necessary for Buyer to dispose of the Conversion Shares so registered, and from time to time shall amend or supplement, at Buyer's expense, the prospectus used in connection therewith to the extent necessary in order to comply with applicable law; provided that the -------- ---- Company shall not be obligated to maintain any registration statement for 23 a period of more than nine (9) months. If, at the time any written request for registration is received by the Company pursuant to this Section 6.02(b), the Company had previously determined to proceed with the preparation and filing of a registration statement under the Securities Act in connection with the proposed offer and sale of Common Stock, such written request shall be deemed to have been given pursuant to Section 6.02(a) rather than this Section 6.02(b), and the rights of Buyer shall be governed by Section 6.02(a) hereof. (c) Registration Procedures. If and whenever the Company is required by ----------------------- the provisions of Sections 6.02(a) or 6.02(b) hereof to effect the registration of Conversion Shares under the Securities Act, the Company will: (i) prepare and file with the Commission a registration statement with respect to such securities, and use its reasonable best efforts to cause such registration statement to become and remain effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed nine (9) months; (ii) prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed nine (9) months; (iii) furnish to the security holders participating in such registration and to the underwriters of the securities being 24 registered, such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such participating security holders and underwriters may reasonably request in order to facilitate the public offering of such securities; (iv) use its reasonable best efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as such participating security holders and underwriters may reasonably request in writing within 30 days following the original filing of such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (v) notify the participating security holders, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (vi) notify such participating security holders promptly of any request by the Commission for the amending or supplementing of such registration statement or prospectus or for additional information; (vii) prepare and file with the Commission, promptly upon the request of any such participating security holders, any amendments or supplements to such registration statement or 25 prospectus which, in the opinion of counsel for such holders (and concurred with by counsel for the Company), is required under the Securities Act or the rules and regulations promulgated thereunder in connection with the distribution of such Conversion Shares by such holder; (viii) prepare and promptly file with the Commission and promptly notify such participating security holders of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; (ix) advise such participating security holders, promptly after it shall receive notice of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose, and promptly use its reasonable best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; and (x) furnish on the effective date of the registration statement and, if such registration includes an underwritten public offering, at the closing provided for in the underwriting 26 agreement: (A) opinions, dated such respective dates, of counsel representing the Company for the purposes of such registration, addressed to the underwriters, covering such matters as such persons may reasonably request in customary form as would be given to underwriters in connection with underwritten offerings and (B) letters, dated such respective dates, from the independent certified public accountants of the Company addressed to the underwriters, in customary form and concerning matters of the type customarily covered in "comfort" letters in connection with underwritten offerings, and such other matters as permitted by the Statement on Accounting Standards No. 72. (d) Indemnification. In connection with such registration, the Company --------------- shall indemnify Buyer, its officers, directors, employees and agents, and any person who controls Buyer within the meaning of Section 15 of the Securities Act, against all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in any registration statement or prospectus, (and as amended or supplemented, if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission contained in information furnished in writing to the Company by Buyer expressly for use therein, and Buyer agrees that it will indemnify and hold harmless the Company and each of its officers who signs such 27 registration statement and each of its directors and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act with respect to losses, claims, damages or liabilities which are caused by any untrue statement or omission contained in information furnished in writing to the Company by Buyer expressly for use therein. (e) Contribution. In addition, in connection with any such registration, ------------ the Company and Buyer agree that if the indemnification to be provided for pursuant to Section 6.02(d) is unavailable to an indemnified party as provided herein in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the Company or Buyer (as the case may be), in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and Buyer, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand, and of Buyer, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statements of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by Buyer, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid 28 or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, without limitation, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Company and Buyer agree that it would not be just and equitable if contribution pursuant to this Section 6.02(e) were determined by a pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in this Section 6.02(e). Notwithstanding the provisions of this Section 6.02(e), Buyer shall not be required to contribute any amount in excess of the amount by which the total price which Buyer's securities were sold to the public. The parties agree that in connection with any such registration, no person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (f) Termination. The registration rights provided in this Section 6.02 ----------- shall terminate on the earliest to occur of: (i) the date that is five (5) years from the date hereof and (ii) the date on which all of the Conversion Shares then held by Buyer could be sold pursuant to Rule 144(k) under the Securities Act (or any comparable or successor provision). 6.03 Confidentiality. (a) Without the consent of the other party, --------------- neither Buyer nor the Company shall make any public comment, statement or communication with respect to, or otherwise 29 disclose or permit the disclosure of the terms of this Agreement and the transactions contemplated hereby, and each party shall cause its authorized officers, directors, partners, employees, counsel, accountants, agents and other representatives (collectively, "Representatives") to strictly comply with the foregoing. (b) Each of the parties hereby covenants and agrees to use due care to prevent the disclosure of the information and other material furnished under or in connection with this Agreement to persons other than its Representatives who have a need to know such information or to have access to such material in connection with Buyer's investment in the Company and who have agreed to keep such information and material confidential. For purposes of this Section 6.03(b), "due care" means at least the same level of care that a person would use to protect the confidentiality of its own sensitive or proprietary information, and this obligation shall survive termination of this Agreement. (c) Notwithstanding Sections 6.03(a) and (b), either party may disclose or deliver any information or other material disclosed to or received by it (i) should such party be advised by its counsel that such disclosure or delivery is required by law, regulation, legal process or administrative order, if the disclosing party has first provided the other party with prompt notice of the request to disclose or deliver such information or other material a reasonable period of time in advance of making such disclosure or delivery so as to enable such other party to 30 seek a protective order or other appropriate remedy or (ii) in connection with a public or private financing effected by the Company, to the extent required in any Registration Statement, prospectus or other offering document, or to the extent necessary to make any statements contained in any of the foregoing not misleading. 6.04 Information Rights. From and after the date hereof until the earlier ------------------ to occur of (i) the issuance of shares of Common Stock to the public in an underwritten offering pursuant to a registration statement filed under the Securities Act covering the offer and sale of Common Stock (an "IPO") and (ii) the date on which Buyer no longer owns any Class D Preferred Shares, within 45 days following the end of each of its first three fiscal quarters and within 90 days following the end of its fourth fiscal quarter, the Company shall furnish Buyer with a copy of its financial statements, (including balance sheets, income statements, changes in stockholders equity and statements of cash flow) for each of such quarters and fiscal year, respectively. In addition, during such period, the Company will furnish Buyer with such additional financial and business information, including monthly or other periodic financial statements as the Company may prepare from time to time, upon the reasonable request of Buyer. 6.05 Subscription Right. (a) From and after the date hereof until the ------------------ earlier of (i) an IPO and (ii) the date on which Buyer no longer owns any Class D Preferred Shares, if the Company 31 proposes to issue equity securities of any kind (the term "equity securities" shall include for the purposes of this Section 6.05, any equity securities and all warrants, options or other rights to acquire equity securities, and debt securities convertible into or exchangeable for equity securities) of the Company (other than the issuance of securities (i) upon conversion of or exercise securities of the Company outstanding as of the date hereof, (ii) in an IPO, (iii) pursuant to the acquisition of another entity by the Company by merger, purchase of substantially all of the assets or other form of reorganization, (iv) pursuant to an employee stock option plan, stock bonus plan, stock purchase plan or other management equity program, (v) to vendors, customers and consultants of the Company for purposes primarily other than the raising of capital or (vi) in connection with a public or private debt financing effected by the Company (other than with an affiliate of the Company) or upon the conversion or exercise of any securities so issued), then the Company shall: (A) give written notice to Buyer setting forth in reasonable detail: (1) the designation and all of the terms and provisions of the securities proposed to be issued (the "Proposed Securities"), including, where applicable, the voting powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereof; (2) the price and other terms of the proposed sale of Proposed Securities; (3) the amount of Proposed Securities proposed to be issued; and (4) such other information as Buyer may reasonably request in order to evaluate the proposed 32 issuance; and (B) offer to issue to Buyer a portion of the Proposed Securities equal to a percentage determined by dividing (1) the number of Conversion Shares by (2) the total number of shares of Common Stock then outstanding (including for purposes of this calculation, conversion and exercise in full of all securities then outstanding that are then convertible into or exchangeable for Common Stock). (b) Buyer must exercise its purchase right hereunder within fifteen (15) days after receipt of such notice from the Company. To the extent that the Company offers two or more securities in units, Buyer must purchase such units as a whole and will not be given the opportunity to purchase only one of the securities making up such unit. Upon the expiration of such fifteen-day period, the Company will be free to sell Proposed Securities that Buyer has not elected to purchase during the ninety (90) days following such expiration on terms and conditions no more favorable to the purchasers thereof than those offered to Buyer. Any Proposed Securities offered or sold by the Company after such 90-day period must be reoffered to Buyer pursuant to this Section 6.05. (c) The election by Buyer not to exercise its subscription rights under this Section 6.05 in any one instance shall not affect its right (other than in respect of a reduction in its percentage holdings) as to any subsequent proposed issuance of equity securities by the Company. Any sale of equity securities by the Company without first giving Buyer the rights described in this Section 6.05 shall be void and of no force and effect. 33 6.06 By-laws. The Company shall at all times cause its By-laws to provide ------- that the number of directors fixed in accordance therewith shall in no event conflict with any of the terms or provisions of the Preferred Shares as set forth in the Charter. The Company shall at all times maintain provisions in its By-laws or Charter indemnifying all directors to the maximum extent permitted under the Minnesota Business Corporation Act. VII. MISCELLANEOUS 7.01 Amendments, Waivers and Consents. No provision in this Agreement may -------------------------------- be altered or amended, and compliance with any covenant or provision set forth herein may not be omitted or waived, except by an instrument in writing duly executed by Buyer and the Company. Any waiver or consent may be given subject to satisfaction of conditions stated therein and any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 7.02 Notices. All notices required or permitted by this Agreement shall be ------- in writing, and shall be hand delivered, sent by facsimile or nationally recognized overnight delivery service, addressed as follows: (a) If to Buyer: MCI WORLDCOM, Inc. 515 E. Amite. Jackson, MS 39201 Attention: Susan Mayer Senior Vice President Telephone: (202) 887-2202 Facsimile: (202) 887-3226 34 with a copy to: MCI WORLDCOM, Inc. 515 E. Amite. Jackson, MS 39201 Attention: Michael Salsbury General Counsel Telephone: (601) 360-8977 Facsimile: (601) 360-8282 (b) If to the Company: WAM!NET INC. 6100 West 110th Street Minneapolis, MN 55438 Attention: Edward J. Driscoll, III, President Telephone: 612-886-5100 Facsimile: 612-887-2165 with a copy to: Willkie Farr & Gallagher 787 Seventh Avenue New York, NY 10019-6099 Attention: Daniel D. Rubino Telephone: 212-728-8000 Facsimile: 212-728-8111 or to such other person or address as a party shall specify by notice in writing to the other party. All such notices and other communications shall be effective when received. 7.03 Binding Effect; Assignment. This Agreement shall be binding upon and -------------------------- inure to the benefit of the Company and Buyer. No assignment of rights or delegation of duties arising under this Agreement may be made by any party hereto without the prior written consent of the other party. 7.04 Third-Party Beneficiaries. This Agreement is for the sole benefit of ------------------------- the parties hereto and their permitted assigns and nothing herein expressed or implied shall give or be 35 construed to give to any person, other than the parties hereto and such permitted assigns, any legal or equitable rights hereunder. 7.05 Entire Agreement. This Agreement (including all Schedules and Exhibit ---------------- hereto) constitutes the entire agreement between the parties hereto with respect to the subject matter contained herein and supersedes all other prior understandings or agreements, both written and oral, between the parties with respect to the matters contained herein. 7.06 Severability. The provisions of this Agreement are severable and, in ------------ the event that any court of competent jurisdiction shall determine that any one or more of the provisions or part of a provision contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement; but this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of a provision, had never been contained herein, and such provisions or part reformed so that it would be valid, legal and enforceable to the maximum extent possible. 7.07 Governing Law. This Agreement shall be governed by, and construed in ------------- accordance with, the law of the State of Minnesota without regard to its principles of conflicts of laws. 36 7.08 Headings. Article, Section and sub-Section headings in this Agreement -------- are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 7.09 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart by original or facsimile signature. 7.10 Expenses. Each party shall pay the fees and expenses of its -------- respective counsel, accountants and other experts (including any broker, finder, advisor or intermediary), and shall pay all other expenses incurred by it in connection with the negotiation, preparation and execution of this Agreement and the consummation of the transactions contemplated hereby. 37 IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. WAM!NET INC. /s/ Allen L. Witters _________________________________ By: Allen L. Witters Its: Chief Technology Officer MCI WORLDCOM, INC. /s/ Susan Mayer _________________________________ By: Susan Mayer Its: Senior Vice President 38 EX-10.23 17 SALE AND PURCHASE AGREEMENT EXHIBIT 10.23 SALE AND PURCHASE AGREEMENT This Sale and Purchase Agreement (the "AGREEMENT"), is made as of March 4, 1999 (the "EFFECTIVE DATE"), between SILICON GRAPHICS, INC., a corporation organized under the laws of the State of Delaware ("SGI"), on behalf of itself and its wholly-owned subsidiary, CRAY RESEARCH, L.L.C., a limited liability company organized under the laws of the State of Delaware ("CRAY") (SGI and Cray are hereinafter collectively referred to as "SELLER"), and WAM!NET INC., a corporation organized under the laws of the State of Minnesota ("WAM!NET"). In consideration of the mutual covenants and agreements hereinafter contained, the parties agree as follows: 1. SALE AND PURCHASE OF PROPERTY. Seller shall sell to WAM!NET, and ----------------------------- WAM!NET shall purchase from Seller the following property (collectively, the "PROPERTY"): (a) Real Property. Certain land (the "REAL PROPERTY") situated ------------- in the City of Eagan (the "CITY"), in the County of Dakota, State of Minnesota, commonly known as 655 Lone Oak Parkway, Eagan, Minnesota, consisting of Lots 1 and 2, Block 1, Cray Second Addition, together with (a) all fences, buildings, fixtures and other improvements thereon (the "IMPROVEMENTS") and (b) all easements, air rights, and other rights benefiting or appurtenant to the Real Property and Improvements; provided, however, that the Property shall only include such development and parking rights as provided in the Development Rights Distribution Agreement and Parking Allocation Agreement (both as defined below); (b) Personal Property. All of Seller's right, title and interest ----------------- in the furniture, fixtures, equipment, mechanical systems, wiring, cabling, keys, machinery and such other personal property owned by Seller and specifically described in Exhibit 1(b) attached hereto ("PERSONAL ------------ PROPERTY"); (c) Development and Parking Rights. All of Seller's right, title ------------------------------ and interest in and to a portion of the development rights and parking entitlements granted and/or approved for or in connection with the Real Property (the "DEVELOPMENT AND PARKING RIGHTS") as provided in a Development Rights Distribution Agreement (the "DEVELOPMENT RIGHTS DISTRIBUTION AGREEMENT") and Allocation of Parking Spaces Agreement (the "PARKING ALLOCATION AGREEMENT") both in substantially the same forms as Exhibit 1(c) attached hereto; ------------ (d) Permits. All of Seller's right, title and interest in and to ------- each and every permit, approval, license, certificate, variance and other governmental permissions which relate to or benefit the Real Property or Improvements, except as otherwise provided in the Development Rights Distribution Agreement and Parking Allocation Agreement (the "PERMITS"). 2. PURCHASE PRICE AND MANNER OF PAYMENT. The total purchase price ------------------------------------ ("PURCHASE PRICE") to be paid by WAM!NET to Seller for the Property shall be Forty Million and No/100 Dollars ($40,000,000.00). The Purchase Price shall be payable by the issuance of Class B Preferred Stock of WAM!NET pursuant to terms and conditions of that certain Preferred Stock Purchase Agreement of even date herewith by and between Seller, as buyer, and WAM!NET, as seller (the "STOCK PURCHASE AGREEMENT"). For purposes of this Agreement, the parties hereto agree that a portion of the Purchase Price in the amount of $1,000,000 shall be allocable to the purchase price for the Personal Property. 3. CONDITIONS TO WAM!NET'S OBLIGATIONS. The obligations of WAM!NET ----------------------------------- under this Agreement are conditioned upon satisfaction or waiver by WAM!NET of each of the following by the Closing Date: (a) Title Insurance. The Title Insurer (as defined below) is --------------- prepared to issue the Title Policy (as defined below), showing fee title to the Real Property and Improvements vested in WAM!NET, subject only to the Permitted Exceptions (as defined below). (b) Performance of Seller's Obligations. Seller shall have ----------------------------------- performed all of the obligations required to be performed by Seller under this Agreement, as and when required by this Agreement. (c) Closing of Stock Purchase Agreement. The closing of the ----------------------------------- transactions contemplated in the Stock Purchase Agreement shall occur simultaneously with the Closing of the transactions contemplated in this Agreement. (d) Representations and Warranties. The representations and ------------------------------ warranties of Seller contained in this Agreement will be true now and on the Closing Date as if made on the Closing Date. 4. CONDITIONS TO SELLER'S OBLIGATIONS. The obligations of Seller ---------------------------------- under this Agreement are conditioned upon satisfaction or waiver by Seller of each of the following by the Closing Date: (a) Performance of WAM!NET's Obligations. WAM!NET shall have ------------------------------------ performed all of the obligations required to be performed by WAM!NET under this Agreement, as and when required by this Agreement. -2- (b) Closing of Stock Purchase Agreement. The closing of the ----------------------------------- transactions contemplated in the Stock Purchase Agreement shall occur simultaneously with the Closing of the transactions contemplated in this Agreement. (c) Representations and Warranties. The representations and ------------------------------ warranties of WAM!NET contained in this Agreement will be true now and on the Closing Date as if made on the Closing Date. 5. TITLE MATTERS. ------------- (a) Title Evidence. WAM!NET hereby acknowledges receipt and an -------------- approval of the following (collectively, the "TITLE EVIDENCE"): (1) Title Insurance Commitment. A commitment for an ALTA -------------------------- Form B 1992 Owner's Policy of Title Insurance dated as of December 17, 1998 (Re-issue No. 1), as amended by endorsements attached thereto (the "TITLE COMMITMENT"), issued by Commonwealth Land Title Insurance Company (the "TITLE INSURER"), a copy of which is attached hereto as Exhibit 5(a)(1), together with copies of all underlying recorded title --------------- exception documents referred to in Schedule B thereof. (2) Survey. A survey of the Real Property dated March 2, ------ 1999 (Re-issue No. 1) (the "SURVEY"), certified to Seller, WAM!NET and the Title Insurer, and all survey matters and title exceptions shown therein. (b) Permitted Title Exceptions. Seller shall convey to WAM!NET -------------------------- insurable fee title to the Real Property, subject only to the following title exceptions (collectively, "PERMITTED EXCEPTIONS"): (1) Liens to secure payment of non-delinquent real estate taxes and assessments; (2) Title Insurer's standard preprinted exceptions to coverage under the Title Policy, excluding such exceptions related to survey matters, parties in possession and liens for labor, materials and services; (3) All title exceptions disclosed by the Title Commitment; (4) All title exceptions shown on the Survey; (5) That certain unrecorded Amendment to Agreement (Land Use Covenants and Restrictions) dated February 28, 1992 which amends Agreement (Land Use -3- Covenants and Restrictions) dated December 2, 1986, filed of record December 3, 1986, as Document No. 754646; (6) The Parking Allocation Agreement; and (7) The Development Rights Distribution Agreement. (c) Title Policy. At Closing, Title Insurer shall issue to ------------ WAM!NET an owner's title insurance policy ("TITLE POLICY") issued by the Title Insurer pursuant to the Title Commitment, or a suitably marked up Title Commitment initialed by the Title Insurer undertaking to issue such a Title Policy within a reasonable time in the form required by the Title Commitment. 6. CLOSING AND POSSESSION. The closing of the purchase and sale ---------------------- contemplated by this Agreement (the "CLOSING") shall occur on the same date as the closing contemplated in the Stock Purchase Agreement, unless postponed or extended in writing by the parties (the "CLOSING DATE"). The Closing shall take place at 10:00 a.m. local time at the offices of Larkin, Hoffman, Daly & Lindgren, Ltd., in Bloomington, Minnesota, or at such other place and time as may be acceptable to Seller and WAM!NET. (a) Seller's Closing Documents. On the Closing Date, Seller -------------------------- shall execute and/or deliver to WAM!NET the following (collectively, the "SELLER'S CLOSING DOCUMENTS"): (1) A General Warranty Deed (the "GENERAL WARRANTY DEED") in the form attached hereto as Exhibit 6(a)(1), conveying fee title to --------------- the Real Property to WAM!NET, free and clear of all encumbrances, other than the Permitted Exceptions; (2) The Development Rights Distribution Agreement and Parking Allocation Agreement; (3) The Lease Agreement (as defined below); (4) A warranty bill of sale for the Personal Property in the form attached hereto as Exhibit 6(a)(4), conveying title to the --------------- Personal Property to WAM!NET, free and clear of all liens and encumbrances created by or through Seller; (5) Such affidavits by Seller in substantially the same form attached hereto as Exhibit 6(a)(5), or other documents as may be --------------- reasonably required by the Title Insurer in order to record Seller's Closing Documents and issue the Title Policy required by Section 5 of this Agreement; -4- (6) A nonforeign affidavit in substantially the same form attached hereto as Exhibit 6(a)(6), containing such information as is --------------- required by IRC Section 1445(b)(2) and its regulations; (7) A well disclosure statement and individual sewage treatment system disclosure form in substantially the same forms attached hereto as Exhibit 6(a)(7), disclosing any wells and sewage --------------- treatment systems existing on the Real Property. If no wells exist thereon, a statement to that effect may be inserted on the General Warranty Deed in lieu of delivering the well disclosure statement; (8) A current corporate resolution of SGI and unanimous written consent of the board of directors of Cray, authorizing the transactions contemplated by this Agreement and the execution and delivery of Seller's Closing Documents; (9) The Management Agreement (as defined below); (10) All original documents that may be necessary for WAM!NET to continue to operate the Property. Notwithstanding the foregoing delivery requirement, delivery of such originals shall be delayed until such time as the Management Agreement expires or is terminated. WAM!NET may at any time make copies of the original documents. Where necessary to comply with statutory record retention requirements, Seller may retain originals of records and provide copies to WAM!NET. (b) WAM!NET's Closing Documents. On the Closing Date, WAM!NET --------------------------- will execute and/or deliver to Seller the following (collectively, "WAM!NET'S CLOSING DOCUMENTS"): (1) The Purchase Price to be paid as required by Section 2 hereof; (2) The Development Rights Distribution Agreement and Parking Allocation Agreement; (3) The Lease Agreement; (4) The Management Agreement; (5) Such affidavits of WAM!NET or other documents as may be reasonably required by the Title Insurer in order to record WAM!NET's Closing Documents and issue the Title Policy required by SECTION 5 of this Agreement. -5- (6) A current corporate resolution of WAM!NET, authorizing the transactions contemplated by this Agreement and the execution and delivery of WAM!NET's Closing Documents; 7. PRORATIONS. Seller and WAM!NET shall make the following ---------- prorations and allocations at Closing: (a) Title Insurance and Closing Fee. Seller shall pay the cost ------------------------------- of the Title Evidence. WAM!NET shall pay the premium for the Title Policy. Seller and WAM!NET will each pay one-half of any reasonable and customary closing fee or charge imposed by the Title Insurer or its designated closing agent. (b) Deed Tax. Seller shall pay all state deed tax due on the -------- General Warranty Deed to be delivered by Seller under this Agreement. (c) Real Estate Taxes and Special Assessments. Seller and ----------------------------------------- WAM!NET shall prorate non-delinquent general real estate taxes and the current installment of assessments payable in the year of closing as of the Closing Date based upon a calendar year basis. If the amount of such real estate taxes cannot be finally determined on the Closing Date, the taxes shall be prorated based upon the previous year's real estate taxes. When the actual amount of such taxes, including any interest payable therewith, is determined and announced by the appropriate public authorities, WAM!NET shall pay the full amount of such taxes and offset or credit, as applicable, the difference between Seller's estimated pro rata portion of the taxes and the Seller's pro rata portion of the actual taxes against or towards, as applicable, any amount owed by Seller to WAM!NET under the Lease Agreement. WAM!NET shall assume any assessments levied, "pending," deferred or constituting a lien against the Real Property as of the Closing Date. (d) Recording Costs. Seller will pay the cost of recording all --------------- documents necessary to place record title in Seller in the condition warranted by Seller in this Agreement. WAM!NET will pay the cost of recording all other documents. (e) Sales Tax. Seller shall pay sales tax of the State of --------- Minnesota, if any, due by reason of the transactions contemplated by this Agreement. (f) Utilities. Promptly following the Closing, Seller shall --------- notify all utilities serving the Property of the pending change in ownership and direct that all future billings be made to WAM!NET at its notice address with no interruption of service. Seller shall cause all meters for utilities to be read during the daylight hours on the -6- Closing Date, and Seller shall pay all charges for all utilities through that time. Seller and WAM!NET shall prorate as of the Closing Date any charges for utilities that are paid each month pursuant to the Lease Agreement. Seller shall transfer to WAM!NET any and all prepaid deposits or rents on utilities or services if they are transferable or refundable, and WAM!NET shall pay those amounts to Seller within thirty (30) days following Seller's written demand therefor. (g) Attorneys' Fees. Seller and WAM!NET shall each pay its own --------------- attorneys' fees in connection with the preparation and negotiation of this Agreement and the Closing, except that a party defaulting under this Agreement or any of its respective closing documents shall pay the reasonable attorneys' fees and court costs incurred by the nondefaulting party to enforce its rights regarding such default. 8. REPRESENTATIONS, WARRANTIES AND INDEMNITY BY SELLER. Seller --------------------------------------------------- represents and warrants to WAM!NET as follows: (a) Organization; Authority. SGI and Cray are duly organized and ----------------------- in good standing under the laws of the State of Delaware; and are duly qualified to transact business in the State of Minnesota. SGI and Cray have the requisite organizational power and authority to execute and perform this Agreement and any Seller's Closing Documents to be signed by them; such documents have been (or will be prior to Closing) duly authorized by all necessary corporate action on the part of SGI and all necessary company action on the part of Cray and at the Closing shall have been duly executed and delivered; such execution, delivery, and performance by Seller of such documents does not conflict with or result in a violation of each Seller's governing documents, any judgment, order, or decree of any court or arbiter to which Seller is a party, or any agreement by which Seller is bound; and such documents are and shall be valid and binding obligations of Seller, enforceable in accordance with their terms. (b) Title to Real Property. Seller owns the Real Property, free ---------------------- and clear of all encumbrances, except the Permitted Exceptions. Seller owns Outlot D, Cray Second Addition ("OUTLOT D") free and clear of all encumbrances. (c) Title to Personal Property. Seller owns the Personal -------------------------- Property, free and clear of all encumbrances created by or through Seller. (d) Utilities. Except as otherwise disclosed in Exhibit 8 --------- --------- attached hereto, (i) gas, sanitary, and storm sewer and water lines are connected to the Property; and (ii) Seller has received no written notice of actual or -7- threatened reduction or curtailment of any utility service now supplied to the Property. (e) Litigation and Other Matters. Except as otherwise disclosed ---------------------------- in Exhibit 8 attached hereto, to Seller's actual knowledge, there are no --------- lawsuits, administrative or arbitration hearings, governmental investigations or proceedings affecting the Real Property or Improvements or the use thereof, and Seller has not received notice of any such proceedings or threatened proceedings. (f) Rights of Others to Purchase Property. Except as otherwise ------------------------------------- disclosed in Exhibit 8 attached hereto, Seller has not entered into any --------- other contracts or agreements for the sale of all or any portion of the Property, and there are no existing rights of first refusal or options to purchase all or any portion of the Property, or any other rights of others that would prevent the consummation of this Agreement. (g) Private Restrictions. Except as otherwise disclosed in -------------------- Exhibit 8 attached hereto, to Seller's actual knowledge, there are no --------- unrecorded contracts, leases, private restrictions or agreements with any public authority that do not appear in the Title Commitment and that will adversely affect the present or future uses that may be made of the Real Property or Improvements. (h) Condemnation. Except as otherwise disclosed in Exhibit 8 ------------ --------- attached hereto, to Seller's actual knowledge, there are no pending condemnation, eminent domain or other similar action, suit or proceeding that would affect the Property. (i) Real Estate Tax Appeals. Except as otherwise disclosed in ----------------------- Exhibit 8 attached hereto, to Seller's actual knowledge, there are no --------- pending real estate tax appeals in connection with the Real Property, and there are no assessment agreements which currently set a minimum market value on the Real Property or the Improvements. (j) Assessments. Except as otherwise disclosed in Exhibit 8 ----------- --------- attached hereto, to Seller's actual knowledge, there are no actual or proposed special assessments or reassessments of the Real Property. (k) FIRPTA. Seller is not a "foreign person," "foreign ------ partnership," "foreign trust" or "foreign estate," as those terms are defined in Section 1445 of the Internal Revenue Code. (l) Hazardous Substances. Except as otherwise disclosed in the -------------------- documents listed in Exhibit 8(t) attached hereto, to the Seller's actual ------------ knowledge: (1) no toxic or -8- hazardous substances or wastes, pollutants, or contaminants (including, without limitation, asbestos, urea formaldehyde, the group of organic compounds known as polychlorinated biphenyls, petroleum products including gasoline, fuel oil, crude oil, and various constituents of such products, and any hazardous substance (collectively "HAZARDOUS SUBSTANCES") as defined in any federal, state or local law rule or ordinance (collectively, the "ENVIRONMENTAL LAWS") dealing with environmental matters have been generated, treated, stored, released, or disposed of, or otherwise placed, deposited in, or located on the Real Property by Seller, or any party controlling, under common control of, or controlled by, Seller in violation of Environmental Laws; (2) no activity has been undertaken on the Real Property by Seller, or any party controlling, under common control of, or controlled by, Seller; that would cause or contribute to (a) the Real Property becoming a treatment, storage, or disposal facility within the meaning of the Environmental Laws, (b) a release or threatened release of toxic or hazardous wastes or substances, pollutants, or contaminants, from the Real Property within the Environmental Laws, or (c) the discharge of pollutants or effluents into any water source or system, the dredging or filling of any waters, or the discharge into the air of any emissions that would require a permit under any Environmental Laws; (3) no substances or conditions exist in or on the Real Property that may support a claim or cause of action under any Environmental Laws; (4) no above-ground or underground tanks are located in or about the Real Property or have been located under, in, or about the Real Property and have subsequently been removed or filled; and (5) to the extent storage tanks exist on or under the Real Property, such storage tanks have been duly registered with all appropriate regulatory and governmental bodies and otherwise are in compliance with applicable Environmental Laws. (m) Americans With Disabilities Act. Except as otherwise ------------------------------- disclosed in that certain Accessibility Audit from RSP Architects, Ltd dated April 1993 (the "ADA REPORT"), to the Seller's actual knowledge there are no existing violations of Title III of the Americans With Disabilities Act of 1990 (the "ADA") and the ADA Accessibility Guidelines for Buildings and Facilities (the "GUIDELINES") at the Real Property. (n) Operating Statement. Attached hereto as Exhibit 8(n) is a ------------------- ------------ copy of the unaudited operating statement for the Real Property for the 1997-1998 fiscal year, which is true, accurate and complete in all material respects. (o) Compliance with Laws. Except as otherwise disclosed in -------------------- Exhibit 8, Seller has not received any notice of violations of any existing --------- local, state, and federal regulations concerning the maintenance and operation of the -9- Real Property, including zoning, building, health and safety, fire safety and environmental codes and laws, and to the Seller's actual knowledge no facts or circumstances exist which would constitute a violation thereof. (p) Occupants/Tenants. As of the Effective Date there are no ----------------- tenants, licensees, or occupants of the Real Property other than Seller, and there are no leases, licenses or occupancy agreements outstanding in connection with the Real Property. (q) Outlot D Transfers. Seller shall give written notice to any ------------------ prospective purchaser or mortgagee of Outlot D of the existence of WAM!NET's access rights (as described in Section 13 hereof) over and across Outlot D prior to Outlot D being sold, mortgaged, pledged, encumbered, assigned, or otherwise transferred to another party. (r) Service Agreements and Contracts. Except as listed in -------------------------------- Exhibit 8 there are no service agreements or contracts in connection with --------- the operation of the Property that bind the Real Property or may require performance by WAM!NET by reason of acquisition of title to the Real Property by WAM!NET. (s) Development and Parking Rights. To the Seller's actual ------------------------------ knowledge: (i) the Real Property together with Outlots A, B, C and D, Cray Second Addition and Outlot G, Lone Oak Addition possess certain development and parking rights as summarized in the Development Rights Distribution Agreement and the Parking Allocation Agreement; and (ii) there are no other documents or information regarding such rights other than the documents and information set forth in Exhibit 8(t) and the Permitted Exceptions. ------------ (t) All Documents. Exhibit 8(t) attached hereto contains a true, ------------- ------------ correct and complete list of all material documents, information and records in Seller's possession or under Seller's control which pertain to the ownership and use of the Property, except for service and maintenance agreements executed in connection with operation of the Property. For purposes of this Agreement, "Seller's actual knowledge" shall mean the actual knowledge (without inquiry or investigation of Raymond Johnson, Vice President, Corporate Real Estate, Facilities and Services, Merey Price, Manager, Corporate Facilities, Mark Lichty, on-site building engineer, and Michael Hirahara, Manager, Corporate Facilities. Except for the specific representations and warranties contained in this Agreement, Seller makes no express or implied representations and warranties to WAM!NET regarding the Property, the condition of the Property -10- or its fitness for any particular use, and Buyer acknowledges and agrees that it is acquiring the Property on an "as-is, where-as" basis. The foregoing representations and warranties shall survive the Closing until the first anniversary thereof, except for the representations and warranties contained in Sections 8(e), (l) and (o) which shall survive for one (1) full year following the date on which each respective portion of the Property is turned over to WAM!NET for WAM!NET's exclusive use, or shared use for common areas of the Property. If written notice of a claim has been given prior the expiration of the applicable representations and warranties, the relevant representations and warranties shall survive as to such claim until the claim has been finally resolved. Seller will indemnify WAM!NET, its successors and assigns against, and will hold WAM!NET harmless from, any expenses or damages, including reasonable attorneys' fees, that WAM!NET incurs because of the breach of any of the above representations and warranties. In no event, however, shall Seller have any liability to WAM!NET for incidental, consequential, special or punitive damages arising from the breach of any such representations and warranties. 9. REPRESENTATIONS, WARRANTIES AND INDEMNITY BY WAM!NET. WAM!NET ---------------------------------------------------- represents and warrants to Seller as follows: (a) WAM!NET is duly organized and in good standing under the laws of the State of Minnesota; that WAM!NET is duly qualified to transact business in the State of Minnesota; that WAM!NET has the power and authority to execute this Agreement and any WAM!NET's Closing Documents signed by it; that all such documents have been duly authorized by all necessary corporate action on the part of WAM!NET and at the Closing shall have been duly executed and delivered; that the execution, delivery, and performance by WAM!NET of such documents does not conflict with or violate WAM!NET's articles of incorporation, bylaws, or any judgment, order or decree of any court or arbiter or any agreement by which WAM!NET is bound; and that all such documents are valid and binding obligations of WAM!NET and are enforceable in accordance with their terms. (b) WAM!NET has conducted a review of the Title Commitment (including all underlying documents) and Survey; a review of the documents and information listed on Exhibit 8(t), and inspections of the Property as ------------ deemed necessary or desirable by WAM!NET, including, without limitation, an engineering inspection of the structure of the Improvements. WAM!NET further represents and warrants that Seller has provided sufficient access to the Property for conducting such tests and inspections as WAM!NET has deemed necessary or desirable; WAM!NET has satisfied itself as to the condition of the Property, the operations of the Property and the suitability of the Property for the purposes intended by WAM!NET; and WAM!NET will be relying solely upon its own inspections, investigations and due -11- diligence review of the Property and not upon any representations, warranties or statements made or information provided by Seller, except for those representations and warranties expressly set forth in Section 9 above. WAM!NET further acknowledges and agrees that it is acquiring the Property subject to all existing laws, ordinances, rules and regulations. (c) The foregoing representations and warranties shall survive the Closing until the first anniversary thereof. If written notice of a claim has been given prior the expiration of the applicable representations and warranties, the relevant representations and warranties shall survive as to such claim until the claim has been finally resolved. WAM!NET will indemnify Seller against, and will hold Seller harmless from, any expenses or damages, including reasonable attorneys' fees, that Seller incurs because of the breach of any of the above representations and warranties. In no event, however, shall WAM!NET have any liability to Seller for incidental, consequential, special or punitive damages arising from the breach of any such representations and warranties. 10. LEASE-BACK TO SELLER. At Closing, WAM!NET and Seller shall -------------------- execute the Lease Agreement (the "LEASE AGREEMENT") attached hereto as Exhibit ------- 10 pursuant to which WAM!NET shall lease-back certain portions of the Property - - -- to Seller. The term of the Lease Agreement shall commence on the Closing Date and shall terminate as provided therein. 11. NON-SOLICITATION. WAM!NET and Seller agree that, except upon ---------------- the prior written consent of the other party, each party shall be prohibited from directly soliciting the employees of the other party during the term of the Lease Agreement. 12. MANAGEMENT AGREEMENT. At Closing, WAM!NET and Seller shall -------------------- execute the Management Agreement (the "MANAGEMENT AGREEMENT") attached hereto as Exhibit 12 pursuant to which Seller shall continue to manage the operations of - - ---------- the Real Property pursuant to the terms and conditions therein. 13. ACCESS RIGHTS; EASEMENTS. ------------------------ (a) The Survey discloses the existence of a gravel road running from Lot 1, Block 1 of the Real Property across Outlot D (the "GRAVEL ROAD") to Lone Oak Road. Seller hereby grants to WAM!NET (to be effective on the Closing Date) a license to use the Gravel Road for emergency access between the Real Property and Lone Oak Road (the "LICENSE"). If access from the Real Property to Lone Oak Road is required either for emergency use or as a condition to further development of the Real Property, WAM!NET shall use reasonable efforts to obtain the approvals necessary to locate a permanent access on the Real Property and not on -12- Outlot D. If the City of Eagan, Dakota County or other governing authorities limit access to a single location on Lone Oak Road, Seller and WAM!NET agree to share an access road and establish the same by easement agreement. The foregoing license shall automatically terminate upon the parties establishing a permanent, joint access route on and over a limited portion of Outlot D. (b) The parties agree to negotiate in good faith with regard to any easements that may need to be granted for access, utility and/or drainage purposes with regard to existing utilities and/or drainage benefiting or burdening the Real Property and such other real property owned by Seller, including without limitation a permanent, joint access route on and over Outlot D and Seller's access to Outlot A, Cray Second Addition over the existing private road located on Lot 1, Block 1. The parties will use reasonable efforts to identify any such easements within sixty (60) days following the closing. In no event shall either party be required to grant an easement which would unreasonably interfere with its current or proposed use or development of such party's respective property. The provisions of this Section 13 shall survive the closing of the transactions contemplated in this Agreement, and shall not merge into the deed delivered to WAM!NET pursuant to the terms of this Agreement. (c) The Survey discloses the existence of a gravel road running from Lot 1, Block 1 to Seller's adjoining property to the East of the Real Property. Seller and WAM!NET hereby acknowledge that the existence of such gravel road does not give rise to any easement rights to the Real Property or Seller's adjoining property upon which such gravel road is located. 14. BROKER'S COMMISSION. Seller represents to WAM!NET that it has ------------------- not engaged a broker in connection with the transactions contemplated by this Agreement. WAM!NET represents to Seller that it has not engaged a broker in connection with the sale and purchase of the Property pursuant to this Agreement. Seller shall indemnify and hold WAM!NET harmless from and against any and all liability to which WAM!NET may be subjected by any broker's, finder's, or similar fee with respect to the transactions contemplated by this Agreement to the extent such fee is attributable to any action undertaken by or on behalf of Seller or any affiliate of Seller. WAM!NET shall indemnify and hold Seller harmless from and against any and all liability to which Seller may be subjected by reason of any broker's, finder's, or similar fee with respect to the transactions contemplated by this Agreement to the extent such fee is attributable to any action undertaken by or on behalf of WAM!NET. 15. ASSIGNMENT. Prior to Closing, neither Seller nor WAM!NET may ---------- transfer or assign its rights under this Agreement -13- for any purpose, without the prior written consent of the other party. After Closing, either party may assign any remaining rights and obligations under this Agreement to a third party provided such assignee assumes in writing the remaining obligations to be performed under this Agreement. In no event shall the assignment or other transfer of this Agreement by either party relieve such party of its obligations and liabilities under this Agreement. 16. SURVIVAL. Except as provided herein, all of the covenants, -------- representations and warranties made in this Agreement, or in any schedule, exhibit, certificate, or document delivered in connection with this Agreement will survive and be enforceable after the Closing. 17. NOTICES. Any notice required or permitted to be given under any ------- provision of this Agreement shall be in writing and shall be deemed to have been given in accordance with this Agreement, if it is mailed, by United States certified mail, return receipt requested, postage prepaid; or if deposited cost paid with a nationally recognized, reputable overnight courier, properly addressed as follows: If to Seller: See Address(s) set forth in the Stock Purchase Agreement with a copy to: Zamansky Professional Association 3901 IDS Tower 80 South Eighth Street Minneapolis MN 55402 Attn: Ronald A. Zamansky If to WAM!NET: See Address(s) set forth in the Stock Purchase Agreement with a copy to: Larkin, Hoffman, Daly & Lindgren, Ltd. 1500 Norwest Financial Center 7900 Xerxes Avenue South Minneapolis, MN 55431 Attention: Thomas P. Stoltman Notice shall be effective, and the time for response to any notice by the other party shall commence to run, three (3) business days after any such mailing or deposit. Either Seller or WAM!NET may change its address for the service of notice by giving notice of such change to the other party, in any manner above specified, ten (10) days prior to the effective date of such change. 18. CAPTIONS; EXHIBITS. The section and paragraph headings or ------------------ captions appearing in this Agreement are for -14- convenience only, are not a part of this Agreement, and are not to be considered in interpreting this Agreement. All schedules, exhibits, addenda or attachments referred to herein are hereby incorporated in and constitute a part of this Agreement. 19. ENTIRE AGREEMENT; MODIFICATION. This written Agreement (which is ------------------------------ an exhibit to the Stock Purchase Agreement) and the Stock Purchase Agreement constitute the complete agreement between Seller and WAM!NET and supersedes any prior oral or written agreements between them regarding the Property. There are no oral agreements that change this Agreement, and no amendment of any of its terms will be effective unless in writing and executed by both Seller and WAM!NET. 20. BINDING EFFECT. This Agreement binds and benefits Seller and -------------- WAM!NET and their respective successors and assigns. 21. CONTROLLING LAW. This Agreement has been made under, and will be --------------- interpreted and controlled by, the laws of the State of Minnesota. 22. WAIVER. No waiver of the provisions of this Agreement shall be ------ effective unless in writing, executed by the party to be charged with such waiver. No waiver shall be deemed a continuing waiver or waiver in respect of any subsequent breach or default, either of similar or different nature, unless expressly stated in writing. 23. COUNTERPARTS. This Agreement may be executed in any number of ------------ counterparts and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one Agreement. 24. FACSIMILE SIGNATURES. This Agreement may be executed with -------------------- signatures transmitted by facsimile and shall constitute a binding agreement with such signatures. Nonetheless, any party providing facsimile signatures shall provide the other party with the original signatures within five (5) business days after providing the facsimile signature page(s). 25. SEVERABILITY. If any provision of this Agreement is invalid or ------------ unenforceable, such provision shall be deemed to be modified to be within the limits of enforceability or validity, if feasible; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. 26. LIMITATION OF LIABILITY. Upon Closing, WAM!NET shall neither ----------------------- assume nor undertake to pay, satisfy or discharge any liabilities, obligations or commitments of any Seller in connection with any service, maintenance or similar agreements executed in connection with the operation of the Property. -15- 27. REMEDIES. Time is of the essence of this Agreement. If either -------- party fails to perform any of its obligations under this Agreement, the other party may exercise any remedies that may be available to such party in law or in equity. Except as otherwise specified elsewhere herein, all rights, powers or remedies afforded the parties hereunder, under the Stock Purchase Agreement, or at law or in equity shall be cumulative and the exercise of one shall not bar exercise of another. 28. FURTHER ASSURANCES. At any time and from time to time after the ------------------ Closing Date, each party shall, upon request of another party, execute, acknowledge and deliver all such further and other assurances and documents, and will take such action consistent with the terms of this Agreement as may be reasonably requested to carry out the transactions contemplated herein, and to permit each party to enjoy its rights and benefits hereunder. Seller and WAM!NET have executed this Agreement as of the date set forth on page 1 hereof. WAM!NET: SELLER: WAM!NET INC. SILICON GRAPHICS, INC. By:/s/ Allen L. Witters By:/s/ William M. Kelly - - ---------------------------- --------------------------- - - ---------------------------- --------------------------- (Print Name) Allen L. Witters (Print Name) William M. Kelly Its: Chief Technology Officer Its: Senior Vice President -16- EX-10.24 18 LEASE BETWEEN WAM!NET, INC AND SILICON GRAPHICS EXHIBIT 10.24 LEASE ----- THIS LEASE is entered into and made as of March 4, 1999 by and between WAM!NET INC., a Minnesota corporation ("Landlord"), and SILICON GRAPHICS, INC., a Delaware corporation ("SGI"), on behalf of itself and its wholly-owned subsidiary, CRAY RESEARCH, L.L.C., a Delaware limited liability company ("Cray") (SGI and Cray are collectively referred to hereinafter as "Tenant"). WITNESSETH: Landlord, in consideration of the rents and covenants hereinafter set forth, does hereby demise, let and lease to Tenant, and Tenant does hereby hire, take and lease from Landlord, on the terms and conditions hereinafter set forth, the following described rentable area, hereinafter called the "Premises", to have and to hold the same, with all appurtenances specified herein, for the term hereinafter specified. 1. DESCRIPTION OF THE PREMISES --------------------------- (a) Premises. The "Premises" will initially include all buildings and -------- common areas comprising the Cray Research campus located at 655 Lone Oak Parkway, in the City of Eagan, County of Dakota, State of Minnesota (hereinafter called the "Project"), consisting of approximately 480,724 square feet of rentable area within Buildings A, D, E and F, as more particularly shown on Exhibit A attached hereto and made a part hereof. Landlord and Tenant - - --------- acknowledge that said total rentable area of the Project includes approximately 93,756 square feet of interior common area. During the Term, Tenant shall also have the right to use all personal property of Landlord currently located in the Premises. At such times that the rentable area of the Premises is reduced, said personal property currently located therein shall remain in the vacated portions of the original Premises and Tenant shall no longer have the right to use the same. All such personal property shall be surrendered to Landlord in the same condition as on the Commencement Date (as hereinafter defined) subject to ordinary and reasonable wear and tear. (b) Reduction of Rentable Area. -------------------------- (1) On or before March 15, 1999, Tenant shall vacate all of Building A, which includes approximately 62,107 square feet of rentable area, as shown on Exhibit B-1 attached hereto and made a part hereof, in which event the ----------- Premises shall consist of approximately 418,617 square feet of rentable area. (2) On or before May 15, 1999, Tenant shall vacate approximately 92,821 square feet of rentable area located within Building E as shown on Exhibit B-2 attached hereto and made a part hereof, in which event the Premises - - ----------- shall consist of approximately 325,796 square feet of rentable area (which calculation of rentable area includes approximately 67.8% of the square footage of the interior common area). (3) As of June 1, 2001, Tenant shall vacate approximately 220,000 square feet of rentable area located within Buildings E and F as shown on Exhibit B-3 attached hereto and made a part hereof, in which event the Premises - - ----------- shall consist of approximately 105,796 square feet of rentable area (which calculation of rentable area includes approximately 22.0% of the square footage of the interior common area); provided, however, that if, on or before June 1, 2000, Tenant delivers to Landlord a revised plan to vacate all or any portion of the Premises, Landlord and Tenant shall meet and confer and negotiate in good faith to amend this Lease to allow Tenant to vacate additional rentable area within the Premises, and the Premises shall be further reduced with regard to the rentable area so vacated by Tenant, which additional reduction shall be effective as of the later of the date vacated by Tenant or June 1, 2001. (4) Landlord and Tenant shall equally share any and all costs necessary to separate the remaining Premises from the rentable area vacated by Tenant as provided in subsections (1), (2) and (3) above, including (a) the cost of constructing such demising walls, corridors, heating, ventilation, and air conditioning modifications, utility installations and security systems as agreed upon by Landlord and Tenant (collectively, the "Demising Improvements"), and (b) the cost to remove the Demising Improvements upon expiration or earlier termination of this Lease. Tenant shall construct the Demising Improvements in a good and workmanlike manner and in compliance with applicable laws and building codes. Prior to constructing the Demising Improvements, Landlord and Tenant shall meet and confer in good faith for purposes of agreeing upon the Demising Improvements and the cost thereof. If at any time Landlord and Tenant are unable to so agree after using reasonable efforts, then either party shall have the right to deliver notice to the other party of such disagreement (the "Notice of Disagreement"). The parties shall continue to use good faith efforts to agree for five (5) business days after delivery of the Notice of Disagreement, and within said period shall provide to each other their respective Demising Improvements proposal. If the parties are unable to reach agreement within said period, Landlord and Tenant shall each promptly identify an architect or other qualified design professional. Said two (2) architects (or other qualified design professionals) shall promptly mutually select a third architect or other qualified design professional (the "Expert"). The Expert shall review and analyze each parties' Demising Improvements proposal and shall be required to select one of the two proposals, as the Expert deems appropriate. Said decision of the Expert shall be final and binding on Landlord and Tenant, unless Landlord and Tenant mutually agree otherwise in writing. -2- (c) Common Areas. Tenant shall have the non-exclusive right to use ------------ all common areas of the Project, including, without limitation, sidewalks, driveways, parking areas, corridors, cafeterias, lobbies, recreational facilities and other amenities, in accordance with the terms of this Lease. 2. TERM ---- The term of this Lease (the "Term") shall commence on March 4, 1999 (the "Commencement Date") and end on May 31, 2004 (the "Expiration Date"), unless sooner terminated as provided in this Lease. Effective as of June 1, 2001 and on each June 1 thereafter until June 1, 2003, Tenant shall have the option to terminate this Lease by delivering to Landlord at least six (6) months' prior written notice of termination (which notice shall be delivered not sooner than June 1, 2001, providing a termination date of not sooner than six (6) months thereafter). 3. RENT ---- (a) Base Rent. No Base Rent shall be payable with respect to the --------- period from the Commencement Date through May 31, 1999. From June 1, 1999 through May 31, 2001, Tenant shall pay to Landlord, at the address listed below in Paragraph 25, Base Rent for the Premises in the amount of Twelve Dollars ($12.00) per square foot of rentable area per year, which is equal to Three Million Nine Hundred Nine Thousand Five Hundred Fifty-two and no/100 Dollars ($3,909,552.00), payable in equal monthly installments of Three Hundred Twenty Five Thousand Seven Hundred Ninety-six and no/100 Dollars ($325,796.00) in advance, on or before June 1, 1999 and continuing on or before the first day of each and every month thereafter throughout said period of the Term. With respect to the portion of the Premises which Tenant continues to occupy under this Lease from and after June 1, 2001, the Base Rent shall be in the amount of Twelve and 60/100 Dollars ($12.60) per square foot of rentable area per year, payable in monthly installments at the rate of One and 05/100 Dollars($1.05) per square foot of rentable area per month. If the Commencement Date shall be a day other than the first day of a calendar month or the Expiration Date shall be a day other than the last day of a calendar month, the Base Rent installment for such first or last fractional month shall be prorated accordingly, based on a thirty (30) day month. Tenant's obligation to pay Base Rent and any and all other amounts due hereunder is a separate and independent covenant and obligation. Tenant shall pay all Base Rent and all other amounts as shall become due from and payable by Tenant to Landlord under this Lease at the times and in the manner provided herein, without abatement and without notice, demand, setoff or counterclaim. (b) Taxes and Operating Expenses. Tenant shall pay as additional rent ---------------------------- Tenant's Proportionate Share (as defined below) of all Taxes (as defined below) and Operating Expenses (as -3- defined below), which shall accrue and be due and payable from and after the Commencement Date as provided hereinbelow. (1) Definitions. ----------- a. "Tenant's Proportionate Share" of Operating Expenses shall mean the percentage determined by dividing the then existing rentable area of the Premises by the total rentable area within the Project. From the Commencement Date through May 31, 1999, Tenant's Proportionate Share shall be one hundred percent (100%) and, commencing on June 1, 1999 through May 31, 2001, Tenant's Proportionate Share shall be sixty-seven and eight tenths percent (67.8%). If the rentable area of the Premises is reduced in accordance with the terms of this Lease, then Tenant's Proportionate Share shall be adjusted to be the percentage determined by a fraction, the numerator of which is the reduced rentable area of the Premises, and the denominator of which is 480,724. Notwithstanding any contrary or inconsistent provision herein, for the period of the Term from the Commencement Date until June 1, 1999, Tenant's Proportionate Share shall be fixed at one hundred percent (100%), irrespective of Tenant's use or occupancy of the Premises. b. "Taxes" shall mean all real estate taxes, installments of special assessments, sewer charges, transit taxes, taxes based upon receipt of rent and any other federal, state or local governmental charge, general, special, ordinary or extraordinary (excluding income, franchise, or other taxes based upon Landlord's income or profit, unless imposed in lieu of real estate taxes) which shall now or hereafter be levied, assessed or imposed against the Project and shall apply to said obligations at such time in which said obligations are accrued or levied. Taxes shall not include any additional taxes attributable to the improvement of any portion of the Project occupied by Landlord or any other tenant (besides Tenant). Tenant shall be obligated to pay one hundred percent (100%) of all Taxes attributable to the improvement of any portion of the Premises by or on behalf of Tenant. c. "Operating Expenses" shall mean all of Landlord's costs and expenses of operation and maintenance of the Project and the surrounding walks, driveways, parking lots, recreational facilities and other amenities and landscaped areas (within the area described or shown in Exhibit "A") as determined by Landlord in accordance with ----------- generally accepted accounting principles or other recognized accounting practices, consistently applied, including by way of illustration and not limitation: costs (including -4- attorneys' fees) incurred in connection with any good faith contest of Taxes (but only to the extent of savings resulting from such contest); insurance premiums for the insurance required to be maintained by Landlord as provided herein and such other insurance as is otherwise typically maintained by owners of class-A office buildings in the Minneapolis/St. Paul metropolitan area; personal property taxes on personal property used in the Project by Landlord in operating or maintaining the Project; water, electrical and other utility charges other than the separately billed electrical and other charges described in Paragraph 7 hereof; the charges of any property manager or independent contractor who, under a contract with Landlord, or its representatives, does any of the work of operating, maintaining or repairing of the Project (which shall not exceed the approximate amount, per square foot, of such charges paid for property management of comparable properties in the Minneapolis-St. Paul metropolitan area), service and other charges incurred in the operation and maintenance of the elevators and the heating, ventilation and air conditioning system; cleaning services; tools and supplies; landscape maintenance costs; building security services; license and permit fees; wages, bonuses and related employee benefits payable to the onsite employees of Landlord (but only to the extent such employees are engaged in the management or maintenance of the Project, and then only if neither Cray nor SGI is responsible for serving as, or engaging the services of, the property manager of the Project) or its property management agent; such other costs and expenses which would, under generally accepted accounting principles applicable to real estate leasing transactions, be regarded as operating and maintenance costs and expenses. If Landlord shall install a labor saving device, equipment or such other improvement intended to improve the operating efficiency of any system within the Project (such as an energy management computer system) then Landlord may add to Operating Expenses of the Project, in each year during the useful life of such installed device or equipment, an amount equal to the lesser of (i) annual depreciation or amortization allowance of the cost of such installed device or equipment as determined in accordance with applicable regulations of the Internal Revenue Service or generally accepted accounting principles, or (ii) the savings in Operating Expenses that results from such installation. Notwithstanding the preceding to the contrary, Operating Expenses shall not include any of the following-described expenses: any costs incurred by Landlord in connection with the construction of any alterations, additions or improvements for the sole benefit of Landlord or other occupants of the Project; -5- financing and refinancing costs, including interest on debts relating to mortgage loans and rental fees under any ground or underlying leases; business or income taxes; depreciation or amortization expense (except as provided herein); costs in excess of the insurance deductible (which deductible shall in no event exceed $50,000.00) incurred by Landlord in connection with repairs and restorations following the occurrence of a casualty loss; leasing commissions and other costs of leasing incurred by Landlord; costs of restoring the building or other improvements following a taking or transfer in lieu thereof; costs incurred by Landlord as a result of Landlord making new improvements to rentable area in the part of the Project that is occupied by Landlord, which are made to cause the Project to comply with applicable laws, ordinances, building codes, rules or regulations, and which improvements are not required as a result of improvements made by Tenant to the Premises; costs in excess of the insurance deductible incurred as a result of the negligent or intentional acts of Landlord or other occupants of the Project; and costs which would be capitalized under generally accepted accounting principles (except as otherwise provided herein). Operating Expenses shall, in any event, include the cost of necessary or appropriate capital repairs and replacements to the Project, which shall be amortized on a monthly basis over the useful life of the capital item on a straight-line basis. (2) Payment of Taxes. Tenant shall pay to Landlord Tenant's ---------------- Proportionate Share of all Taxes on or before the later of (i) the twentieth (20th) day prior to the date the applicable Taxes are due and payable or (ii) the tenth (10th) day following Landlord's written demand therefor (which demand shall be accompanied by a copy of the related tax bill or other accurate statement of the amount of the Taxes). Subject to the foregoing and subject to rights of Landlord to contest or dispute Taxes, Landlord shall pay the Taxes to the applicable taxing authority(ies) on or before the date they are due and payable. (3) Payment of Operating Expenses. Landlord shall deliver to Tenant ----------------------------- a written estimate of the Operating Expenses and the portion thereof payable by Tenant for the ensuing year or portion thereof. On or before the first day of each month during the Term, Tenant shall pay such estimated amount of Tenant's annualized share of such Operating Expenses in twelve (12) equal monthly installments, in advance. Following the expiration of each calendar year, Landlord shall furnish Tenant a statement showing in reasonable detail the actual Operating Expenses for the preceding calendar year. Within thirty (30) days after service of the aforementioned statement, Tenant shall pay to Landlord, or Landlord shall credit against the next rent payment or payments due from Tenant, as the case may be, the -6- difference between Tenant's actual Proportionate Share of Operating Expenses for the preceding calendar year and the amount of Operating Expenses paid by Tenant during such year. If this Lease shall commence, expire or be terminated on any date other than the last day of a calendar year, then Tenant's Proportionate Share of Operating Expenses and Taxes for such partial calendar year shall be prorated on the basis of the number of days during the year this Lease was in effect in relation to the total number of days in such year. Without limiting other obligations of Tenant which shall survive the expiration of the Term, the obligations of Tenant to pay Operating Expenses and Taxes shall survive the expiration of the Term. Subject to the foregoing obligation of Tenant to pay its Proportionate Share of Operating Expenses, and subject to the right of Landlord to contest or dispute all or any part of the Operating Expenses, Landlord shall pay the Operating Expenses on or before the date they are due and payable. (4) Audit. Tenant or its accountants shall have the right to inspect, ----- at reasonable times and locations and in a reasonable manner, during the ninety (90) day period following the delivery of Landlord's statement of Operating Expenses for a given calendar year, such of Landlord's books and records as pertain to and contain information concerning such costs and expenses in order to verify the amounts thereof; unless Tenant takes written exception to any item within ninety (90) days after the furnishing of the statement, such statement shall be considered as final and accepted by Tenant; if Tenant shall dispute any item or items included in the determination of Landlord's Operating Expenses for a given calendar year, and such dispute is not resolved by the parties hereto within sixty (60) days after the date on which Tenant gives written notice to Landlord of the disputed items, then either party may, within thirty (30) days thereafter, request that a firm of certified public accountants mutually selected by Landlord and Tenant render an opinion as to whether or not the disputed item or items may properly be included in the determination of Landlord's Operating Expenses of the Project for such year; and the opinion of such firm on the matter shall be conclusive and binding upon the parties hereto; the fees and expenses incurred in obtaining such an opinion shall be borne by Tenant unless: (aa) Landlord's statement contains errors aggregating more than four percent (4%) of the Operating Expenses for the Project; and (bb) neither Cray nor SGI is responsible for serving as, or engaging the services of, the property manager of the Project. (c) Net Lease. Landlord and Tenant intend that this Lease shall be --------- deemed and construed to be a "net lease," and Base Rent, Operating Expenses, Taxes and all other charges, costs and sums to be paid by Tenant hereunder shall be paid to Landlord absolutely net and without any charges, assessments, impositions, expenses or deductions of any kind or nature whatsoever, except as otherwise explicitly stated in this Lease. -7- (d) Service Charge. Tenant's failure to pay any monetary payment -------------- required of Tenant hereunder within ten (10) days of the due date therefor shall result in the imposition of a service charge for such late payment in the amount of two percent (2%) of the amount due. In addition, any sum not paid within thirty (30) days of the due date therefor shall bear interest at a rate equal to the greater of eighteen percent (18%) per annum or the then-current prime rate (as listed in the "Money Rates" section of the Wall Street Journal) plus two ------------------- percent (2%) per annum (or such lesser percentage as may be the maximum amount permitted by law) from the date due until paid. 4. TENANT FINISH IMPROVEMENTS -------------------------- Tenant accepts the Premises in "AS IS, with all faults" condition, with no representations or warranties of any kind by or on behalf of Landlord with regard to the Premises. Landlord shall have no obligation to construct any tenant improvements or make any other changes to the Premises except as expressly provided herein. 5. CABLE PLANT ----------- Tenant shall have the right to maintain and to exclusively use all existing cable plant and any related facilities and equipment located within the Buildings to the extent serving solely the Premises. Tenant shall have the right to use such cable plant and such related facilities and equipment in the same manner in which Tenant has previously used the same prior to the sale and transfer of the Project by Tenant to Landlord. Such maintenance shall be performed with due care by qualified professionals, in a good workmanlike manner, and shall be carried out in a manner which will not unreasonably interfere with the use of the cable plant and related facilities and equipment by Landlord. Landlord shall have the right to maintain and to exclusively use all existing cable plant and any related facilities and equipment located within the Buildings to the extent not serving solely the Premises. Landlord and Tenant shall split the existing cable plant as mutually agreed to serve the Premises and the balance of the Project. Landlord and Tenant shall meet within thirty (30) days after the date hereof to establish plans to so split the existing cable plant. 6. USE OF THE PREMISES ------------------- (a) Specific Use. The Premises shall be used exclusively for purposes ------------ of general, administrative and sales office, research and development, training and for any other lawful purpose incidental thereto, and shall not be used for any other purpose; provided, however, that Tenant shall have the right to use the Premises in a manner consistent with the uses to -8- which Tenant has put the Premises during the period prior to the sale and transfer of the Project to the Landlord. (b) Covenants Regarding Use. In connection with its use of the ----------------------- Premises, Tenant agrees to do the following: (1) Tenant shall use the Premises and conduct its business thereon in a safe, careful, reputable and lawful manner; shall keep and maintain the Premises in as good a condition as they were on the Commencement Date, subject to ordinary and reasonable wear and tear, and shall make all necessary repairs to the Premises other than those which Landlord is obligated to make as provided elsewhere herein. (2) Tenant shall not commit, nor allow to be committed, in, on or about the Premises, the Buildings or the Project, any act of waste, including any act which might deface, damage or destroy the Project, Buildings, or any part thereof; use or permit to be used on the Premises any equipment or other thing which might cause injury to person or property; permit any objectionable or offensive noise or odors to be emitted from the Premises. (3) Tenant shall not overload the floors of the Premises beyond their designed weightbearing capacity. Notwithstanding the foregoing sentence to the contrary, but subject to Paragraph 10(b) hereof, Tenant shall have the right to continue to use the Premises in the same manner as Tenant has used the Premises prior to the sale and transfer of the Premises to Landlord. (4) Tenant shall not use the Premises, nor allow the Premises to be used, for any purpose or in any manner which would invalidate any policy of insurance now or hereafter carried on the Project or increase the rate of premiums payable on any such insurance policy. Should Tenant fail to comply with this covenant, Landlord may require Tenant to reimburse Landlord as additional rent for any increase in premiums charged during the term of this Lease on the insurance carried by Landlord on the Premises and attributable to the use being made of the Premises by Tenant. Notwithstanding the foregoing provisions of this subsection (4) to the contrary, Tenant shall have the right to continue to use the Premises in the same manner as Tenant has used the Premises prior to the sale and transfer of the Premises to Landlord. (c) Compliance with Laws. Tenant shall not use or permit the use of -------------------- any part of the Premises for any purpose prohibited by law. Tenant shall, at Tenant's sole expense, comply with all laws, statutes, ordinances, rules, regulations and orders of any federal, state, municipal or other governmental agency thereof having jurisdiction over and relating to the use of the Premises, except that Tenant shall not be responsible for or required to make structural repairs to the Buildings or the -9- Premises unless, they are required as a result of Tenant's use or improvement of the Premises from and after the Commencement Date, or Tenant's negligence or willful misconduct. (d) Compliance with Project Rules and Regulations. Landlord and --------------------------------------------- Tenant shall comply with and conform to the rules and regulations attached to this Lease, made a part hereof and marked Exhibit "C". ----------- (e) Compliance with Zoning. Tenant knows the character of its ---------------------- operation in the Premises and that applicable zoning ordinances and regulations are of public record. Tenant shall have sole responsibility for its compliance therewith, and Tenant's inability so to comply shall not be cause for Tenant to terminate this Lease. 7. UTILITIES AND OTHER BUILDING SERVICES ------------------------------------- (a) Services to be Provided. Landlord shall furnish Tenant with the ----------------------- following utilities and building services to the extent reasonably necessary for Tenant's use and occupancy of the Premises or as may be required by law or directed by governmental authority: (1) Heating, ventilation and air conditioning; (2) Electricity for lighting and operating business machines and equipment in the Premises and the common areas and facilities of the Buildings; (3) Water for lavatory and drinking purposes; (4) Automatic elevator service; (5) Washing of interior and exterior windows; (6) Replacement of all lamps, bulbs, starters and ballasts used in the Project; (7) Cleaning and maintenance of the common areas and facilities of the Project and the walks, driveways, parking lots and landscaped areas within the Project, including the removal of rubbish and snow; and (8) Repair and maintenance of the Project and certain systems within the Premises to the extent specified in Paragraph 10(a) hereof. (b) Additional Services. If Tenant uses any other utilities or ------------------- building services in addition to those identified above or uses any of the above utilities or building services in frequency, scope, quality or quantities greater than normally required by the other tenant(s) in the Project (including Landlord), then the incremental cost thereof shall be borne by -10- Tenant, who shall reimburse Landlord monthly for the same as provided in Paragraph 7(d) hereof. If Landlord or any other tenant of the Project uses any other utilities or building services in addition to those identified above or uses any of the above utilities or building services in frequency, scope, quality or quantities greater than normally required by Tenant, then the incremental cost thereof shall be excluded from Operating Expenses for purposes of this Lease, to be effective as of such time that Landlord is made aware of such additional use. If Landlord determines that Tenant has installed or connected any machinery or equipment that exceeds the designed load capacity of the Project's electrical system or is incompatible therewith, then Landlord shall have the right, as a condition to granting its consent, to make such modifications to any utility system or other parts of the Project or the Premises, or to require Tenant to make such modifications to the equipment to be installed or connected, as is reasonably necessary before such equipment may be so installed or connected. The cost of any such modifications shall be borne by Tenant, who shall reimburse Landlord for the same (or any portion thereof paid by Landlord) as provided in Paragraph 7(d) hereof. This paragraph shall not apply to any machinery or equipment that exists as of the Commencement Date. (c) Interruption of Services. Tenant understands, acknowledges and ------------------------ agrees that any one or more of the utilities or building services identified above may be interrupted by reason of accident, emergency or other causes beyond Landlord's control, or may be discontinued or diminished temporarily by Landlord or other persons until certain repairs, alterations or improvements can be made; that Landlord does not represent or warrant the uninterrupted availability of such utilities or building services; and that any such interruption, unless caused by the intentionally wrongful act of Landlord shall not be deemed an eviction or disturbance of Tenant's right to possession, occupancy and use of the Premises or any part thereof, or render Landlord liable to Tenant in damages by abatement of rent or otherwise, or relieve Tenant from the obligation to perform its covenants under this Lease. (d) Payment for Utilities and Buildings Services. The cost of -------------------------------------------- additional utilities and other building services furnished by Landlord at the request of Tenant or as a result of Tenant's activities as provided in Paragraph 7(b) hereof shall be borne by Tenant, who shall be separately billed therefor and who shall reimburse and pay Landlord monthly for the same as additional rent, at the same time the next monthly installment of Base Rent and other additional rent is due. Tenant agrees to give reasonable advance notice, in writing, to Landlord of its request for additional services. (e) Computer Areas. Landlord and Tenant shall each be responsible for -------------- their own utilities consumption costs associated -11- with their respective computer areas within Building E. Tenant acknowledges that its computer area is located on Level 2 of Building E. Within thirty (30) days after the date hereof, representatives of Landlord and Tenant shall meet to establish the method for determining respective responsibility for such utilities costs. If the parties are unable to mutually agree within said thirty (30) days then, at Landlord's option, (i) each party's large electrical equipment, such as computers, shall be separately submetered, and/or (ii) each party's computer areas shall be separately submetered, to determine electrical consumption. In such event, each party shall be responsible for all costs and expenses of the submetered electricity supplied to their respective computer areas and, if necessary, Tenant's Proportionate Share of the balance of the electricity costs shall be equitably adjusted. The costs of installing any such submeters in Tenant's computer area shall be borne by Tenant. The costs of installing any such submeters in Landlord's computer area shall be borne by Landlord. 8. PARKING ------- Tenant and its employees, agents, contractors, invitees and guests shall have the non-exclusive right to park vehicles in the parking areas of the Project on an undesignated basis at no additional charge to Tenant or its employees, agents, contractors, invitees and guests. 9. SIGNS ----- Subject to the terms and conditions of this Paragraph 9, Tenant shall have the right to retain and maintain signs, advertisements, and notices on or in the Project or on or about the Premises which have existed prior to the Commencement Date; provided, however, that Landlord and Tenant shall mutually agree on the signage to be installed by Tenant in the Project from and after the Commencement Date. Tenant shall not inscribe, paint, affix or display any additional signs, advertisements, or notices without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. Upon the expiration or early termination of this Lease, Tenant shall remove all of its signs and shall repair and restore any damage or injury in connection therewith, at Tenant's sole expense. Landlord shall have the right to erect and/or otherwise install such signage as desired by Landlord, provided that it complies with city ordinances and other applicable laws and regulations. If city ordinances or other applicable laws or regulations impose restrictions or limitations preventing Landlord from installing signage in size and quantity equaling in area and visibility Tenant's existing signage, then Tenant agrees to share and/or reduce the size and/or quantity of its signs to the extent necessary to allow Landlord to install legal and conforming signage equaling in area and visibility Tenant's existing signage. Landlord shall pay all costs and expenses for Landlord's signage. Landlord shall also pay the cost, if any, of -12- modifying Tenant's existing signage if necessary to allow Landlord to install Landlord's signage as permitted by this paragraph. Any new directional signs on the Project shall be subject to the mutual approval of Landlord and Tenant, which shall not be unreasonably withheld or delayed. 10. REPAIRS, MAINTENANCE, ALTERATIONS, IMPROVEMENTS AND FIXTURES ------------------------------------------------------------ (a) Repair and Maintenance of Project. Landlord shall keep and --------------------------------- maintain in good order, condition and repair the roof, exterior and interior loadbearing walls (including any plate glass windows comprising a part thereof), foundation, basement, the common areas and facilities of the Project and the electrical, plumbing, heating, ventilation and air conditioning systems serving the Premises and other parts of the Project. The cost of all noncapitalized repairs required to be made by Landlord shall be an Operating Expense of the Project (unless such non-capitalized repairs are required to be made by the negligence, misuse, or default of Landlord, its employees or agents, or the negligence, misuse or default of other occupants of the Project or their employees or agents) unless made necessary by the negligence, misuse or default of Tenant, its employees or agents, in which event they shall be borne by Tenant, who shall be separately billed and shall reimburse Landlord for the same as Additional Rent. (b) Repair and Maintenance of Premises. Except as provided in ---------------------------------- Paragraph 10(a) hereof, Tenant shall, at its own expense, keep and maintain the Premises in good order, condition and repair at all times during the Term, subject to damage by casualty loss and Tenant shall promptly repair all damage to the Premises and replace or repair all damaged or broken fixtures, equipment and appurtenances with materials equal in quality and class to the original materials, and within any reasonable period of time. If in any one event the cost of such repair or replacement is estimated to exceed Ten Thousand and no/100 Dollars ($10,000.00), then such repair or replacement shall be under the supervision and subject to the approval of Landlord. If Tenant fails to do so, Landlord may, but need not make such repairs and replacements, and Tenant shall pay Landlord the cost thereof within thirty (30) days following Landlord's written demand therefor, plus an amount equal to fifteen percent (15%) of any costs or expenses paid by Landlord, in order to reimburse Landlord for overhead, general conditions, fees and other costs and expenses arising from Landlord's actions or involvement. (c) Alterations or Improvements. During the Term, Tenant shall have --------------------------- the right to make such alterations, additions or improvements to the Premises ("Improvements") as deemed necessary or desirable by Tenant, provided that such Improvements are constructed in accordance with the terms and conditions of this subsection (c). However, Tenant shall not make any Improvements of a structural nature without obtaining Landlord's prior written consent. At the time Tenant desires to make any -13- Improvements with a cost in excess of Fifty Thousand and no/100 Dollars ($50,000.00), Tenant shall submit (i) a general plan or layout to Landlord for Landlord's review and (ii) an express written notice that Landlord must notify Tenant within fifteen (15) days if Landlord will require Tenant to remove such Improvements prior to the Expiration Date, and, within fifteen (15) days following receipt of such plan and notice, Landlord shall notify Tenant in writing if Landlord will require Tenant to remove such Improvements prior to the Expiration Date ("Removal Notice"). Tenant shall not have the right to make any Improvements to or on the common areas of the Project. All Improvements shall be made in compliance with all applicable laws and building codes, in a good and workmanlike manner and in quality equal to or better than the original construction of the Project. Tenant shall promptly pay all costs attributable to such Improvements and shall indemnify, defend and hold harmless Landlord from and against any mechanic's liens or other liens or claims filed or asserted as a result thereof and against any costs or expenses which may be incurred as a result of building code violations attributable to such work. Tenant shall promptly repair any damage to the Premises or the Project caused during the construction of such Improvements. Landlord shall give proper notice to Tenant of any possible claim with respect to which Tenant's obligation to indemnify, defend and hold harmless Landlord may apply and Tenant shall have the right to defend any such claim with counsel of Tenant's choosing. All Improvements made by Tenant to the Premises during the Term shall remain the property of Tenant and Tenant shall be entitled to all depreciation and amortization of costs in connection therewith. Prior to surrender of the Premises to Landlord, Tenant shall remove any Improvements identified by Landlord for removal in the Removal Notice and, at Landlord's request provided at least fifteen (15) days prior to the Expiration Date or earlier termination of the Lease, such other Improvements constructed by Tenant during the Term which were not submitted to Landlord for its prior review. Any damage caused by such removal shall be repaired at Tenant's cost and expense. Notwithstanding the preceding to the contrary, Tenant shall have no obligation to remove any Improvements that existed on the Commencement Date, or any Improvements that Tenant installed during the Term and which Landlord did not identify for removal following Landlord's review of the general plans. In the event Tenant so fails to remove any Improvements that Tenant is obligated to remove, Landlord may have same removed and the Premises so repaired at Tenant's expense. If any Improvements to the Premises cause the need for additional alterations or improvements to any other part of the Project or the Premises, including, but without limitation, any system(s) of the Project and/or any other changes to comply with applicable codes, ordinances or other laws (collectively, "Additional Improvements"), the installation of such Additional Improvements shall be subject to the terms and conditions of this subsection (c) and Tenant shall be required to pay the cost of installing such Additional Improvements. -14- (d) Trade Fixtures. Any trade fixtures installed on the Premises by -------------- Tenant at its own expense during the Term, such as movable partitions, counters, shelving, showcases, mirrors and the like may, and, at the request of Landlord, shall be removed on the Expiration Date or earlier termination of this Lease, provided that Tenant is not then in default, that Tenant bears the cost of such removal, and further that Tenant repair at its own expense any and all damage to the Premises resulting from the original installation of and subsequent removal of such trade fixtures. If Tenant fails so to remove any and all such trade fixtures from the Premises on the Expiration Date or earlier termination of this Lease, all such trade fixtures shall become the property of Landlord unless Landlord elects to require their removal, in which case Tenant shall promptly remove same and restore the Premises to their prior condition. In the event Tenant so fails to remove same, Landlord may have same removed and the Premises so repaired to their prior condition at Tenant's expense. (e) Cabling. During the Term, Tenant shall have the right to install ------- such cabling in the Premises as deemed necessary or desirable by Tenant, subject to the terms of this subsection (e). At the time Tenant desires to install any such cabling, Tenant shall submit (i) a general plan or layout to Landlord for Landlord's review and (ii) an express written notice that Landlord must notify Tenant within fifteen (15) days if Landlord will require Tenant to remove such cabling prior to the Expiration Date. If, within fifteen (15) days following receipt of such plan and notice, Landlord notifies Tenant in writing that Landlord will require Tenant to remove such cabling prior to the Expiration Date, then Tenant shall remove such cabling identified by Landlord prior to the Expiration Date or earlier termination of the Lease. If Tenant fails to provide such plan and notice to Landlord prior to installation of the cabling, then Tenant shall be required to remove such cabling prior to the Expiration Date or earlier termination of the Lease, unless otherwise notified in writing by Landlord. If Tenant provided said plan and notice, but Landlord does not notify Tenant, then upon the Expiration Date or earlier termination of this Lease, such items shall be deemed to be part of the realty and the property of Landlord (and shall not be removed or disabled by Tenant). If Landlord so notifies Tenant to remove any or all of such items, and Tenant fails to remove the same upon the expiration or earlier termination of this Lease, then Landlord may have the same removed at Tenant's expense. (f) Reserved Rights. Landlord reserves the right to decorate and to --------------- make, at any time or times, at its own expense, repairs, alterations, additions and improvements, structural or otherwise, in or to the Buildings, the Project or part thereof, and to perform any acts related to the safety, protection or preservation thereof, and during such operations to take into and through the Premises or any part of the Buildings all material and equipment required, provided that Landlord shall use -15- reasonable efforts to cause as little inconvenience or annoyance to Tenant as is reasonably necessary in the circumstances. Included among Landlord's rights are rights of Landlord to install security devices, walls, doorways and/or other improvements as necessary or desirable in Landlord's discretion to adequately secure space in the Project occupied or used by Landlord or other tenants from the Premises. Tenant shall cause its employees, agents, customers and invitees to comply with any security measures reasonably imposed by Landlord. 11. FIRE OR OTHER CASUALTY; CASUALTY INSURANCE ------------------------------------------ (a) Substantial Destruction of the Buildings. If the Buildings in ---------------------------------------- which the Premises is located are substantially destroyed (which, as used herein, means destruction or damage to at least seventy-five percent (75%) of said Buildings) by fire or other casualty, either party hereto may, at its option, terminate this Lease by giving written notice thereof to the other party within sixty (60) days of such casualty. In such event, Base Rent and Additional Rent shall be apportioned to and shall cease as of the date of such casualty. If neither party exercises this option, then the Premises shall be reconstructed and restored, at Landlord's expense, to substantially the same condition as they were prior to the casualty. (b) Substantial Destruction of the Premises. If the Premises are --------------------------------------- substantially destroyed (which, as used herein, means destruction or damage to at least seventy-five percent (75%) of the Premises), or rendered wholly untenantable for the purpose for which they were leased, by fire or other casualty whether or not the Buildings are substantially destroyed as provided above, then the parties hereto shall have the following options: (1) Tenant may elect to terminate the Lease or to require that the Premises be reconstructed and restored, at Landlord's expense, to substantially the same condition as the Premises existed prior to the casualty, except for repair or replacement of Tenant's personal property, equipment and trade fixtures, which shall remain Tenant's responsibility. This option shall be exercised by Tenant giving written notice to Landlord within sixty (60) days after the date of the casualty, and this Lease shall continue in full force and effect for the balance of the Term upon the same terms, conditions and covenants as are contained herein. Base Rent and Additional Rent shall be equitably abated following the occurrence of the casualty. (2) If the casualty occurs during the last twelve (12) months of the Term, either party shall have the right and option to terminate its Lease as of the date of the casualty, which option shall be exercised by written notice to be given by either party to the other party within thirty (30) days therefrom. If this option is exercised, rent shall be apportioned to and shall cease as of the date of the casualty. -16- (c) Partial Destruction of the Premises. ----------------------------------- (1) If the Premises are rendered partially untenantable for the purpose for which they were leased (which, as used herein, means the Premises are less than substantially destroyed, as defined in Paragraph 11(b) above) by fire or other casualty, then such damaged part of the Premises shall be reconstructed and restored, at Landlord's expense, to substantially the same condition as it was prior to the casualty. Base Rent and Additional Rent shall be equitably abated in proportion to the ratio between the number of square feet which is untenantable compared to the aggregate number of square feet comprising the Premises. Landlord shall use reasonable diligence in completing such reconstruction repairs, but in the event Landlord fails to complete the same within one hundred fifty (150) days from the date of the casualty, Tenant may, at its option, terminate this Lease upon giving Landlord written notice to that effect, whereupon both parties shall be released from all further obligations and liability hereunder. (2) If the casualty occurs during the last six (6) months of the Term, either party shall have the right and option to terminate its Lease as of the date of the casualty, which option shall be exercised by written notice to be given by either party to the other party within thirty (30) days therefrom. If this option is exercised, rent shall be apportioned to and shall cease as of the date of the casualty. (d) Casualty Insurance. ------------------ (1) Landlord shall at all times during the Term, carry, as an Operating Expense of the Project, a "Special Forms and Extended Perils" property insurance policy insuring the Project, including the Premises, against loss or damage by fire or other casualty (namely, the perils against which insurance is afforded by the standard fire insurance policy and extended coverage endorsement) for the full replacement cost thereof; provided, however, that Landlord shall not be obligated to insure against any loss or damage to personal property (including, but not limited to, any furniture, machinery, equipment, goods or supplies) of Tenant or which Tenant may have on the Premises or any trade fixtures installed by or paid for by Tenant on the Premises or any additional improvements which Tenant may construct on the Premises. Such policy shall provide coverage against physical loss, damage and theft and the perils of fire and extended coverage, including, without limitation, theft, vandalism, malicious mischief, explosion, collapse and underground hazards, sprinkler leakage, water damage, storms, subsidence, sinkhole collapse, landslide, and debris removal. Such property insurance must be from insurance companies rated at least A:X in the latest Best's Insurance Guide. Upon request, Landlord shall furnish to Tenant a certificate evidencing the existence of such insurance coverage and endorsements to such coverage. If changes to Tenant's use or operation on the -17- Premises, or any alterations or improvements made by Tenant pursuant to the provisions of Paragraph 10(c) hereof result in an increase in the premiums charged during the Term on the casualty insurance carried by Landlord on the Project, then the cost of such increase in insurance premiums shall be borne by Tenant, who shall reimburse Landlord for the same as additional rent after being billed therefor. If changes to Landlord's use or operation within Project, or any alterations or improvements made by Landlord (and not on Tenant's behalf) result in an increase in the premiums charged during the Term on the casualty insurance carried by Landlord on the Project, then the cost of such increase in insurance premiums shall be borne by Landlord, and said increase shall be excluded from Operating Expenses for purposes of this Lease. (2) Tenant shall at all times during the Term, carry, at its own expense, property insurance covering its personal property and trade fixtures installed by or paid for by Tenant or any additional improvements which Tenant may construct on the Premises, which coverage shall be no less than replacement value. Tenant shall furnish Landlord with a certificate evidencing that such coverages are in full force and effect. Such coverages shall not be canceled or amended on less than thirty (30) days notice to Landlord. (e) Waiver of Subrogation. This Paragraph 11(e) shall govern any --------------------- contrary or inconsistent provisions of this Lease. Landlord and Tenant hereby release each other and each other's employees, agents, customers and invitees from any and all liability for any loss, damage or injury to property occurring in, on or about or to the Premises, improvements to the Project or personal property within the Project, by reason of fire or other casualty which are covered by applicable standard fire and extended coverage insurance policies. Because the provisions of this paragraph will preclude the assignment of any claim mentioned herein by way of subrogation or otherwise to an insurance company or any other person, each party to this Lease shall give to each insurance company which has issued to it one or more policies of fire and extended coverage insurance notice of the terms of the mutual releases contained in this paragraph, and have such insurance policies properly endorsed, if necessary, to prevent the invalidation of insurance coverages by reason of the mutual releases contained in this paragraph. (f) Calculating Percentages. For purposes of calculating percentages ----------------------- under Paragraphs 11(a), 11(b) and 11(c), the rentable area of the common areas allocated to the area of the Premises shall be excluded, and only the actual rentable area of the Premises, excluding common areas, shall be taken into account. -18- 12. GENERAL PUBLIC LIABILITY, INDEMNIFICATION AND INSURANCE ------------------------------------------------------- (a) At all times during the Term, Landlord and Tenant shall each carry, at its own expense, for the protection of the other party, one or more policies of general liability insurance with one or more insurance companies rated A:X or better in Best's Insurance Guide, providing minimum coverages of $2,000,000 combined single limit for bodily injury and property damage per occurrence and location with $5,000,000 aggregate coverage. Such general liability insurance shall include a separation of insureds/cross liability endorsement, broad form property damage coverage and afford coverage for "personal injury" liability. At all times during the Term, Landlord and Tenant shall each carry comprehensive automobile liability insurance covering all owned, non-owned and hired automobiles, with limits of not less than $1,000,000 in primary coverage per accident for both bodily injury and property damage liability. All such insurance policy or policies shall name the other party as additional insureds and shall provide that they may not be canceled or materially changed on less than thirty (30) days prior written notice to the other party. Each party shall furnish the other with certificates of insurance evidencing such coverages prior to the Commencement Date and prior to the date of renewal. Should any party fail to carry such insurance and/or furnish to the other party within ten (10) days following such other party's request a certificate of insurance evidencing such coverage, such other party shall have the right to obtain such insurance and collect the cost thereof from the non- performing party, in which event the non-performing party shall reimburse such other party for the cost of such coverage within thirty (30) days following such other party's written demand therefor. Each party shall also provide the other with certificates evidencing workers' compensation insurance coverage as required by law and employer's liability coverage for injury, disease and death, with coverage limits of not less than $1,000,000 per accident. The insurance coverages required hereby shall be deemed to be additional obligations of each party and shall not be a discharge or limitation of such party's indemnity obligations contained hereinbelow. (b) Except for any loss, damage, or injury to person or property caused by the negligence or intentional misconduct of Landlord, Landlord's agents, employees, contractors, invitees or guests, Tenant shall be responsible for, shall insure against, and shall indemnify Landlord and hold it harmless from, any and all liability for any loss, damage or injury to person or property, arising out of use, occupancy or operations of Tenant and occurring in, on or about the Premises and Tenant hereby releases Landlord from any and all liability for the same. Tenant's obligation to indemnify Landlord hereunder shall include the duty to defend against any claims asserted by reason of such loss, damage or injury and to pay any judgments, settlements, costs, fees and expenses, including attorneys' fees, incurred in connection therewith. Landlord shall give prompt written notice to Tenant of the occurrence of any loss, damage, or injury to -19- which Tenant's duty to indemnify and hold harmless the Landlord may pertain and Tenant shall have the right to defend any claim asserted by any party with respect to such loss, damage, or injury through counsel of Tenant's selection. (c) Except for any loss, damage, or injury to person or property caused by the negligence or intentional misconduct of Tenant, or Tenant's agents, employees, contractors, invitees or guests, Landlord shall be responsible for, shall insure against, and shall indemnify Tenant and hold it harmless from, any and all liability for any loss, damage or injury to person or property occurring in, on or about the common areas and facilities for the Project and the use, occupancy or operations of Landlord and occurring in, on or about any portion of the Project occupied by Landlord, and Landlord hereby releases Tenant from any and all liability for the same. Landlord's obligation to indemnify Tenant shall include the duty to defend against any claims asserted by reason of such loss, damage or injury and to pay any judgments, settlements, costs, fees and expenses, including attorneys' fees, incurred in connection therewith. Tenant shall give prompt written notice to Landlord of the occurrence of any loss, damage, or injury to which Landlord's duty to indemnify and hold harmless the Tenant may pertain and Landlord shall have the right to defend any claim asserted by any party with respect to such loss, damage, or injury through counsel of Landlord's selection. (d) Landlord and its partners, shareholders, affiliates, officers, agents, servants and employees shall not be liable for any damage to person, property or business resulting from the loss of use thereof sustained by Tenant or by any other persons due to the Buildings or any part thereof or any appurtenances thereof becoming out of repair, or due to the happening of any accident or event in or about the Buildings, including the Premises, or due to any act or neglect of any tenant or occupant of the Buildings or of any other person. This provision shall apply particularly, but not exclusively, to damage caused by gas, electricity, snow, ice, frost, steam, sewage, sewer gas or odors, fire, water or by the bursting or leaking of pipes, faucets, sprinklers, plumbing fixtures and windows and shall apply without distinction as to the person whose act or neglect was responsible for the damage and whether the damage was due to any of the causes specifically enumerated above or to some other cause. Tenant agrees that except as set forth below in this subsection (d), all personal property located in the Premises or placed by Tenant or on behalf of Tenant upon loading docks, receiving and holding areas, or freight elevators of Buildings, shall be at the risk of Tenant only, and that Landlord shall not be liable for any loss or damage thereto or theft thereof. -20- 13. EMINENT DOMAIN -------------- If the whole or any part of the Premises or Project (including parking areas) shall be taken for public or quasipublic use by a governmental authority under the power of eminent domain or shall be conveyed to a governmental authority in lieu of such taking, and if such taking or conveyance shall cause the remaining part of the Premises to be untenantable and inadequate for use by Tenant for the purpose for which they were leased, then Tenant may, at its option, terminate this Lease as of the date Tenant is required to surrender possession of the Premises as a result of such taking. If a part of the Premises or Project shall be taken or conveyed but the remaining part is tenantable and adequate for Tenant's use, then this Lease shall be terminated as to the part taken or conveyed as of the date Tenant surrenders possession; Landlord shall make such repairs, alterations and improvements as may be necessary to render the part not taken or conveyed tenantable; and the rent shall be reduced in proportion to the part of the Premises so taken or conveyed. Tenant shall not have the right to assert a claim against the governmental authority exercising its power of eminent domain based upon the value of Tenant's leasehold interest. All compensation awarded for such taking or conveyance shall be the property of Landlord without any deduction therefrom for any present or future estate of Tenant and Tenant hereby assigns to Landlord all its right, title and interest in and to any such award. However, Tenant shall have the right to recover from the governmental authority, but not from Landlord, such compensation as may be awarded to Tenant on account of the interruption of Tenant's business, moving and relocation expenses and depreciation to and removal of Tenant's trade fixtures and personal property. 14. LIENS ----- If, because of any act or omission of Tenant or anyone claiming by, through, or under Tenant (other than Landlord), any mechanic's lien or other lien shall be filed against the Premises or the Project for work performed by or on behalf of Tenant (whether or not such lien is valid or enforceable as such), Tenant shall, at its own expense, cause the same to be discharged of record within a reasonable time, not to exceed sixty (60) days after the date of filing thereof, and shall also defend and indemnify Landlord and hold it harmless from any and all claims, losses, damages, judgments, settlements, cost and expenses, including attorneys' fees, resulting therefrom or by reason thereof. If such lien is not discharged of record within sixty (60) days after the date of filing thereof, Landlord, at its sole option, may take all action necessary to release and remove such lien (without any duty to investigate the validity thereof) and Tenant shall promptly upon notice reimburse Landlord for all sums, costs and expenses (including reasonable attorneys' fees and Landlord's Costs) incurred by Landlord in connection with such lien. -21- 15. RENTAL, PERSONAL PROPERTY AND OTHER TAXES ----------------------------------------- (a) Tenant shall pay before delinquency any and all taxes, assessments, fees or charges (hereinafter referred to as "taxes"), including any sales, gross income, rental, business occupation or other taxes, levied or imposed upon Tenant's business operation in the Premises and any personal property or similar taxes levied or imposed upon Tenant's trade fixtures, leasehold improvements or personal property located within the Premises. In the event any such taxes are charged to the account of, or are levied or imposed upon the property of Landlord, Tenant shall reimburse Landlord for the same as additional rent. Notwithstanding the foregoing, Tenant shall have the right to contest in good faith any such tax and to defer payment, if required, until after Tenant's liability therefor is finally determined. (b) If any tenant finish improvements, trade fixtures, alterations or improvements or business machines and equipment located in, on or about the Premises, regardless of whether they are installed or paid for by Landlord or Tenant and whether or not they are affixed to and become a part of the realty and the property of Landlord, are assessed for real property tax purposes at a valuation higher than that at which other such property in other space in the Project is assessed, then Tenant shall reimburse Landlord as additional rent for the amount of real property taxes shown on the appropriate county official's records as having been levied upon the Project or other property of Landlord by reason of such excess assessed valuation. 16. ASSIGNMENT AND SUBLETTING ------------------------- Tenant may not assign or otherwise transfer its interest in this Lease or sublet the Premises or any part thereof without the prior written consent of Landlord. Tenant shall notify Landlord thirty (30) days in advance of its intent to transfer, assign or sublet all or any portion of the Premises and shall, at the time Tenant requests Landlord's approval, provide Landlord with financial information on the proposed assignee or subtenant. Landlord shall have the right to grant or withhold its consent to a proposed assignment or subletting in Landlord's sole discretion; however, Landlord shall not have the right to unreasonably withhold its consent with respect to any assignment or sublease requested by Tenant hereunder, provided that (i) the request is for an assignment or sublease to one assignee or subtenant (as applicable), and (ii) there is currently no other sublease in effect and (iii) the Tenant's interest in this Lease has not previously been assigned more than once. Without limitation, in determining whether to withhold its consent with respect to an assignment or subleasing request to which said reasonableness standard applies, Landlord shall have the right to give due regard to the proposed assignee's or subtenant's financial situation, reputation, and specific proposed use, as well as security issues and the impact on common areas. In any -22- event, Tenant shall reimburse Landlord for fees and expenses incurred by Landlord (including expert and attorneys' fees) in reviewing any proposed assignment or subletting. In the event of any such assignment or subletting, Tenant shall nevertheless at all times remain fully responsible and liable for the payment of rent and the performance and observance of all of Tenant's other obligations under the terms, conditions and covenants of this Lease. No assignment or subletting of the Premises or any part thereof shall be binding upon Landlord unless such assignee or subtenant delivers to Landlord an instrument (in recordable form, if requested) containing an agreement of assumption of all of Tenant's obligations under this Lease and Landlord executes a consent form. Upon the occurrence of an event of default after the expiration of any applicable notice and cure period herein, if all or any part of the Premises are then assigned or sublet, Landlord, in addition to any other remedies provided by this Lease or by law, may, at its option, collect directly from the assignee or subtenant all rent becoming due to Landlord by reason of the assignment or subletting, and Landlord shall have a security interest in all property on the Premises to secure payment of such sums. Landlord, at its option, may also recapture any sublet space in the event of default. Any collection by Landlord from the assignee or subtenant shall not be construed to constitute a novation or release of Tenant from the further performance of its obligations under this Lease. Any rents received by Tenant from the assignment or subletting of the Premises which exceed rents payable by Tenant hereunder shall be immediately paid to Landlord as additional compensation. Landlord shall, at its option, have the right to recapture all or any part of the Premises Tenant proposes to assign or sublet upon notice from Tenant of its intent to assign or such sublet part of the Premises. Landlord shall have the right to transfer and assign, in whole or in part, all its rights and obligations hereunder and in the Buildings, the Project and all other property referred to herein, and upon such transfer, the transferor shall have no further liability hereunder and Tenant shall attorn to any such transferee. Landlord hereby consents to the sublease(s), if any, described in Exhibit "D" attached ----------- hereto and made a part hereof. Landlord hereby consents to the merger of Cray into SGI. 17. SUBORDINATION OF LEASE TO MORTGAGES ----------------------------------- This Lease shall be subject and subordinate to any mortgage or similar encumbrances, including ground or underlying leases, whether presently existing or hereafter voluntarily placed upon the Project or the Premises, including any renewals, extensions or modifications thereof, provided that, with respect to any such encumbrances hereafter placed on the Project or Premises, the holder of such encumbrance enters into a non-disturbance and attornment agreement with Tenant in a customary form, including, among other provisions, an agreement that Tenant's possession of the Premises will not be disturbed in the event of mortgage foreclosure or other similar exercise of -23- remedies, so long as Tenant is not in default hereunder after the expiration of any applicable notice and cure periods. Tenant shall, at Landlord's request, execute and deliver within ten (10) days to Landlord, without cost, a subordination, non-disturbance and attornment agreement for purposes of confirming the subordination of this Lease. 18. DEFAULTS AND REMEDIES --------------------- (a) Default by Tenant. The occurrence of any one or more of the ----------------- following events shall be a default and breach of this Lease by Tenant: (1) Tenant shall fail to pay any installment of Base Rent, Taxes, Operating Expenses or additional rent within ten (10) days after written notice that the same is due and payable; (2) Tenant shall fail to perform or observe any term, condition, covenant or obligation required to be performed or observed by it under this Lease for a period of thirty (30) days after written notice thereof from Landlord; provided, however, that if the term, condition, covenant or obligation to be performed by Tenant is of such nature that the same cannot reasonably be performed within such thirty (30) day period, such default shall be deemed to have been cured if Tenant commences such performance within said thirty day period and thereafter diligently completes the same; (3) Tenant shall abandon the Premises; or (4) Tenant makes an assignment for the benefit of creditors; or substantially all of Tenant's assets in, on or about the Premises or Tenant's interest in this Lease are attached or levied upon under execution (and Tenant does not discharge the same within sixty (60) days thereafter). (b) Remedies of Landlord. Upon the occurrence of any event of default -------------------- set forth in Paragraph 18(a) hereof, Landlord shall have the following rights and remedies, in addition to those allowed by law, any one or more of which may be exercised without further notice to or demand upon Tenant: (1) Landlord may reenter the Premises and cure any default of Tenant, in which event Tenant shall reimburse Landlord as additional rent for any costs and expenses which Landlord may incur to cure such default. (2) Landlord may terminate this Lease as of the date of such default, in which event: (A) neither Tenant nor any person claiming under or through Tenant shall thereafter be entitled to possession of the Premises, and Tenant shall immediately thereafter surrender the Premises to Landlord; (B) Landlord may reenter the Premises and dispossess Tenant or any -24- other occupants of the Premises by summary proceedings, ejectment or otherwise, and may remove their effects, without prejudice to any other remedy which Landlord may have for possession or arrearages in rent; and (C) notwithstanding the termination of this Lease, Landlord may either declare all rent which would have been due under this Lease for the balance of the Term or exercised renewal period to be immediately due and payable, whereupon Tenant shall be obligated to pay the same to Landlord, together with all loss or damage which Landlord may sustain by reason of such termination and reentry, or relet all or any part of the Premises for a term different from that which would otherwise have constituted the balance of the Term and for rent and on terms and conditions different from those contained herein, whereupon Tenant shall be obligated to pay to Landlord as liquidated damages the difference between the rent provided for herein and that provided for in any lease covering a subsequent reletting of the Premises, for the period which would otherwise have constituted the balance of the Term, together with all of Landlord's costs and expenses for preparing the Premises, for reletting, including all repairs, tenant finish improvements, marketing costs, broker's and attorney's fees, and all loss or damage which Landlord may sustain by reason of such termination, reentry and reletting, it being expressly understood and agreed that the liabilities and remedies specified above shall survive the termination of this Lease. Notwithstanding anything to the contrary herein contained, Landlord shall not have a duty to mitigate its damages following Tenant's default under this Lease. (3) Landlord may terminate Tenant's right of possession of the Premises and may repossess the Premises by unlawful detainer action, by taking peaceful possession or otherwise, without terminating this Lease, in which event Landlord may, but shall be under no obligation to, relet the same for the account of Tenant, for such rent and upon such terms as shall be satisfactory to Landlord. For the purpose of such reletting, Landlord is authorized to decorate, repair, remodel or alter the Premises. If Landlord fails to so relet the Premises, Tenant shall pay to Landlord as damages a sum equal to the rent which would have been due under this Lease for the balance of the Term or exercised renewal period as such rent shall become due and payable hereunder from time to time during the Term. If the Premises are relet and a sufficient sum shall not be realized from such reletting after paying all of the costs and expenses of all decoration, repairs, remodeling, alterations and additions and the expenses of such reletting and of the collection of the rent accruing therefrom to satisfy the rent provided for in this Lease, Tenant shall satisfy and pay the same upon demand therefor from time to time. Tenant shall not be entitled to any rents received by Landlord in excess of the rent provided for in this Lease. (4) Landlord may sue for injunctive relief or to recover damages for any loss resulting from the breach. -25- Any agreement for an extension of the Term or any additional period thereafter shall not thereby prevent Landlord from terminating this Lease for any reason specified in this Lease. If any such right of termination is exercised by Landlord during the Term or any extension thereof, Tenant's right to any further extension shall thereby be automatically canceled. Any such right of termination of Landlord contained herein shall continue during the Term and any subsequent extension hereof. (c) Default by Landlord and Remedies of Tenant. It shall be a default ------------------------------------------ and breach of this Lease by Landlord if it shall fail to perform or observe any term, condition, covenant or obligation required to be performed or observed by it under this Lease for a period of thirty (30) days after notice thereof from Tenant; provided, however, that if the term, condition, covenant or obligation to be performed by Landlord is of such nature that the same cannot reasonably be performed within such thirty (30) day period, such default shall be deemed to have been cured if Landlord commences such performance within said thirty-day period and thereafter diligently completes the same. Upon the occurrence of any such default, Tenant may sue for injunctive relief or to recover damages for any loss resulting from the breach, but Tenant shall not be entitled to terminate this Lease or withhold or abate any rent due hereunder. (d) NonWaiver of Defaults. The failure or delay by either party --------------------- hereto to enforce or exercise at any time any of the rights or remedies or other provisions of this Lease shall not be construed to be a waiver thereof, nor affect the validity of any part of this Lease or the right of either party thereafter to enforce each and every such right or remedy or other provisions. No waiver of any default and breach of this Lease shall be held to be a waiver of any other default of breach. The receipt of rent by Landlord at a time after rent is due under this Lease shall not be construed as a waiver of such default. The receipt by Landlord of less than the full rent due shall not be construed to be other than a payment on account of rent then due, nor shall any statement on Tenant's check or any letter accompanying Tenant's check be deemed an accord and satisfaction, and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of the rent due or to pursue any other remedies provided in this Lease. No act or omission by Landlord or its employees or agents during the term of this Lease shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such a surrender shall be valid unless in writing and signed by Landlord. (e) Attorney's Fees. If Tenant defaults in the performance or --------------- observance of any of the terms, conditions, covenants or obligations contained in this Lease and Landlord places the enforcement of all or any part of this Lease, the collection of any rent due or to become due or the recovery of possession of the Premises in the hands of an attorney, or if Landlord incurs any fees or out-of-pocket costs in any -26- litigation, negotiation or transaction in which Tenant causes Landlord (without Landlord's fault) to be involved or concerned, Tenant agrees to reimburse Landlord for the attorney's fees and costs incurred thereby, whether or not suit is actually filed. 19. BANKRUPTCY OR INSOLVENCY ------------------------ (a) If a petition is filed by, or an order for relief is entered against Tenant under Chapter 7 of the Bankruptcy Code and the trustee of Tenant elects to assume this Lease for the purpose of assigning it, such election or assignment, or both, may be made only if all of the terms and conditions of subparagraphs (b) and (d) below are satisfied. To be effective, an election to assume this Lease must be in writing and addressed to Landlord, and in Landlord's business judgment, all of the conditions hereinafter stated, which Landlord and Tenant acknowledge to be commercially reasonable, must have been satisfied. If the trustee fails so to elect to assume this Lease within sixty (60) days after his appointment, this Lease will be deemed to have been rejected, and Landlord shall then immediately be entitled to possession of the Premises without further obligation to Tenant or the trustee and this Lease shall be terminated. Landlord's right to be compensated for damages in the bankruptcy proceeding, however, shall survive such termination. (b) If Tenant files a petition for reorganization under Chapters 11 or 13 of the Bankruptcy Code, or if a proceeding filed by or against Tenant under any other chapter of the Bankruptcy Code is converted to a Chapter 11 or 13 proceeding and Tenant's trustee or Tenant as debtor-in-possession fails to assume this Lease within sixty (60) days from the date of the filing of such petition or conversion, then the trustee or the debtor-in-possession shall be deemed to have rejected this Lease. To be effective any election to assume this Lease must be in writing addressed to Landlord and, in Landlord's business judgment, all of the following conditions, which Landlord and Tenant acknowledge to be commercially reasonable, must have been satisfied: (1) The trustee or the debtor-in-possession has cured or has provided to Landlord adequate assurance, as defined in this subparagraph (b), that: a. The trustee will cure all monetary defaults under this Lease within ten (10) days from the date of assumption b. The trustee will cure all nonmonetary defaults under this Lease within thirty (30) days from the date of assumption. (2) The trustee or the debtor-in-possession has compensated Landlord, or has provided Landlord with adequate -27- assurance, as hereinafter defined, that within ten (10) days from the date of assumption Landlord will be compensated for any pecuniary loss it has incurred arising from the default of Tenant, the trustee, or the debtor-in-possession, as recited in Landlord's written statement of pecuniary loss sent to the trustee or debtor-in-possession. (3) The trustee or the debtor-in-possession has provided Landlord with adequate assurance of the future performance of each of Tenant's obligations under this Lease; provided, however, that: a. From and after the date of assumption of this Lease, the trustee or the debtor-in-possession shall pay the Base and Additional Rents payable under this Lease in advance in equal monthly installments on each date that such Rents are payable. b. The trustee or debtor-in-possession shall also deposit with Landlord, as security for the timely payment of Rent, an amount equal to three (3) months' Base Rent and other monetary charges accruing under this Lease; c. If not otherwise required by the terms of this Lease, the trustee or the debtor-in-possession shall also pay in advance, on each day that any installment of Base Rent is payable, one-twelfth (1/12) of Tenant's annual Taxes, Operating Expenses, and other obligations under this Lease; and d. The obligations imposed upon the trustee or the debtor- in-possession will continue for Tenant after the completion of bankruptcy proceedings. (4) Landlord has determined that the assumption of this Lease will not: a. Breach any provision in any other lease, mortgage, financing agreement, or other agreement by which Landlord is bound relating to the Property, Buildings or Project in which the Premises is located; or b. Disrupt, in Landlord's judgment, the occupant mix or occupant consistency of the Buildings or Project or any other attempt by Landlord to provide or exclude a specific variety of occupants in the Buildings or Project which, in Landlord's judgment, would be most beneficial to all of the tenants thereof (including Landlord) and would enhance the security, image, reputation, and profitability thereof. -28- (5) For purposes of this subparagraph (b), "adequate assurance" means that: a. Landlord determines that the trustee or the debtor-in- possession has, and will continue to have, sufficient unencumbered assets, after the payment of all secured obligations and administrative expenses, to assure Landlord that the trustee or the debtor-in-possession will have sufficient funds timely to fulfill Tenant's obligations under this Lease and to keep the Premises properly staffed with sufficient employees to conduct a fully operational, actively promoted business in the Premises; and b. An order shall have been entered segregating sufficient cash payable to Landlord and/or a valid and perfected first lien and security interest shall have been granted in property of Tenant, trustee, or debtor-in-possession which is acceptable in value and kind to Landlord, to secure to Landlord the obligation of the trustee or debtor-in-possession to cure all monetary and nonmonetary defaults under this Lease within the time periods set forth above. (c) In the event this Lease is assumed by a trustee appointed for Tenant or by Tenant as debtor-in-possession under the provisions of subparagraph (b) above and, thereafter, Tenant is either adjudicated bankrupt or files a subsequent petition for arrangement under Chapter 11 of the Bankruptcy Code, then Landlord may, at its option, terminate this Lease and all the tenant's rights under it, by giving written notice of Landlord's election so to terminate. (d) If the trustee or the debtor-in-possession has assumed this Lease, pursuant to subparagraph (a) or (b) above, to assign or to elect to assign Tenant's interest under this Lease or the estate created by that interest to any other person, such interest or estate may be assigned only if the intended assignee has provided adequate assurance of future performance, as defined in this subparagraph (d), of all of the terms, covenants, and conditions of this Lease. (1) For purposes of this subparagraph (d), "adequate assurance of future performance" means that Landlord has ascertained that each of the following conditions has been satisfied: a. The assignee has submitted a current financial statement, audited by a certified public accountant, which shows a net worth and working capital in amounts determined by Landlord to be sufficient to assure the future performance by the assignee of the tenant's obligations under this Lease; -29- b. If requested by Landlord, the assignee will obtain guarantees, in form and substance satisfactory to Landlord (i.e. letter(s) of credit), from one or more persons who satisfy Landlord's standards of creditworthiness; and c. Landlord has obtained consents or waivers from any third parties which may be required under any lease, mortgage, financing arrangement, or other agreement by which Landlord is bound, to enable Landlord to permit such assignment. (e) When, pursuant to the Bankruptcy Code, the trustee or the debtor- in-possession is obligated to pay reasonable use and occupancy charges for the use of all or part of the Premises, it is agreed that such charges will not be less than the Base Rent as defined in this Lease, plus additional rent and other monetary obligations of Tenant included herein. (f) Neither Tenant's interest in this Lease nor any estate of Tenant created in this Lease shall pass to any trustee, receiver, assignee for the benefit of creditors, or any other person or entity, nor otherwise by operation of law under the laws of any state having jurisdiction of the person or property of Tenant, unless Landlord consents in writing to such transfer. Landlord's acceptance of Rent or any other payments from any trustee, receiver, assignee, person, or other entity will not be deemed to have waived, or waive, either the requirement of Landlord's consent or Landlord's right to terminate this Lease for any transfer of Tenant's interest under this Lease without such consent. 20. ACCESS TO THE PREMISES ---------------------- Landlord, its employees and agents and any mortgagee of the Project shall have the right to enter any part of the Premises following at least twenty-four (24) hours' written notice (except in the event of an emergency, in which case only such notice as is reasonably possible shall be required) for the purposes of examining or inspecting the same, showing the same to prospective purchasers, mortgagees or tenants and for making such repairs, alterations or improvements to the Premises or the Project as Landlord may deem necessary or desirable. Notwithstanding anything to the contrary herein contained, Landlord agrees that it shall not unreasonably interfere with the use of the Premises by Tenant and shall use diligent and good faith efforts to preserve all confidentiality of Tenant. If (i) Landlord is unable to timely gain access to the Premises due to Tenant's security or other reasons within Tenant's control, and (ii) Landlord incurs loss or damage as a result, for example (but without limitation) due to a ruptured pipe or other repair problem, then Tenant shall be obligated to reimburse Landlord within ten (10) days after demand for any such loss or damage to -30- the extent insurance proceeds are not recovered by Landlord for the same. 21. SURRENDER OF PREMISES --------------------- Upon the expiration or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord, together with all keys, access cards, alterations, improvements, and other property as provided elsewhere herein, in broom clean condition and in good order, condition and repair, except for ordinary wear and tear, damage created by casualty loss and damage which Tenant is not obligated to repair, failing which Landlord may restore the Premises to such condition at Tenant's expense, which shall be payable upon demand. Subject to the provisions of Paragraph 10(d) hereof, upon such expiration or termination Tenant's trade fixtures, furniture and equipment shall remain Tenant's property, and if Tenant shall not then be in default under this Lease, Tenant shall have the right to remove the same prior to the expiration or earlier termination of this Lease, Tenant shall promptly repair any damage caused by any such removal, and shall restore the Premises to the condition existing prior to the installation of the items so removed. Any of Tenant's trade fixtures, furniture or equipment not so removed shall be considered abandoned and may be retained by Landlord or be destroyed or disposed of at Tenant's expense. All reference to trade fixtures shall be as described in Paragraph 10(d) hereof. 22. HOLDING OVER ------------ (a) If Tenant remains in possession of the Premises without the written consent of Landlord after the expiration or earlier termination of this Lease, Tenant shall be deemed to hold the Premises as a tenant at will subject to all of the terms, conditions, covenants and provisions of this Lease (which shall be applicable during the holdover period), except that the Base Rent shall be increased to 125% of the last current Base Rent. In addition, Tenant shall be liable to Landlord for all damages occasioned by such holding over. Tenant shall vacate and surrender the Premises to Landlord upon Tenant's receipt of notice from Landlord to vacate. No holding over by Tenant, whether with or without the written consent of Landlord, shall operate to extend this Lease except as otherwise expressly provided herein. (b) Notwithstanding the preceding subsection (a) to the contrary, but applicable only with respect to space that Tenant was to have vacated before June 1, 2001, Tenant may extend the term of this Lease for a period of up to six (6) months by providing Landlord with written notice of exercise at least ninety (90) days prior to the expiration or earlier termination of the Lease (that is, such notice must be delivered by not later than March 1, 2001), in which event Tenant shall remain a tenant subject to the same terms and conditions of this Lease, including -31- the payment of Base Rent equal to 105% of the last current Base Rent. (c) Notwithstanding the preceding subsection (a) to the contrary, applicable in situations other than as set forth in the preceding subsection (b), Tenant may extend the term of this Lease for a period of up to three (3) months by providing Landlord with written notice of exercise at least ninety (90) days prior to the expiration or earlier termination of the Lease, in which event Tenant shall remain subject to the same terms and conditions of this Lease, including the payment of Base Rent equal to one hundred five percent (105%) of the last current Base Rent. The rights granted to Tenant under this subsection (c) shall not be available with respect to any space for which Tenant exercised the rights available under the preceding subsection (b). 23. QUIET ENJOYMENT --------------- Except as provided in Paragraph 22 hereof to the extent that it may be applicable, if and so long as Tenant pays the prescribed rent and performs or observes all of the terms, conditions, covenants and obligations of this Lease required to be performed or observed by it hereunder, Tenant shall at all times during the term hereof have the peaceable and quiet enjoyment, possession, occupancy and use of the Premises without any interference from Landlord or any person or persons claiming the Premises by, through or under Landlord, subject to any mortgages, underlying leases or other matters of record to which this Lease is or may become subject provided that any such mortgagees shall be required to provide Tenant with a nondisturbance agreement allowing Tenant to remain in the Premises under the terms of this Lease in the event of a default under the mortgage by Landlord. 24. PROPERTY MANAGEMENT AGREEMENT ----------------------------- Concurrently with the execution and delivery of this Lease, Landlord, as owner, and SGI, as property manager, have entered into that certain Property Management Agreement of even date herewith under which SGI is to manage the Project for Landlord. The parties do not intend that any provision of this Lease shall give to Landlord, any independent right with respect to management of the Project which is inconsistent with the provisions of the Property Management Agreement. The parties acknowledge that a condition of the validity and effectiveness of this Lease is Landlord's and SGI's agreement to enter into the Property Management Agreement; however, termination of the Property Management Agreement shall have no effect on the continuing effectiveness of this Lease. -32- 25. NOTICE AND PLACE OF PAYMENT --------------------------- (a) All rent and other payments required to be made by Tenant to Landlord shall be delivered or mailed to Landlord' at the address set forth below or any other address Landlord may specify from time to time by written notice given to Tenant. (b) All payments required to be made by Landlord to Tenant shall be delivered or mailed to Tenant at the address set forth in Paragraph 25(c) hereof or at any other address within the United States as Tenant may specify from time to time by written notice given to Landlord. (c) Any notice, demand or request required or permitted to be given under this Lease or by law shall be deemed to have been given if reduced to writing and mailed by Registered or Certified mail, postage prepaid, to the party who is to receive such notice, demand or request at the address set forth below or at such other address as Landlord or Tenant may specify from time to time by written notice. When delivering such notice, demand or request shall be deemed to have been given as of the date it was so delivered. Landlord: Tenant: WAM!NET Inc. Silicon Graphics, Inc. 6100 West 110th Street 2011 North Shoreline Boulevard Minneapolis, MN 55438 Mountain View, CA 94043-1389 ATTN: Edward J. Driscoll III M/S 720 ATTN: Manager, Corporate Facilities With copies to: With copies to: WAM!NET INC. Silicon Graphics, Inc. 6100 West 110th Street 2011 North Shoreline Boulevard Minneapolis, Minnesota 55438 Mountain View, CA 94043-1389 Attention: Legal Counsel Attention: Legal Services and Thomas P. Stoltman, Esq. Ronald A. Zamansky, Esq. Larkin, Hoffman, Daly & Lindgren, Ltd. Zamansky Professional Association 1500 Norwest Financial Center 3901 IDS Tower 7900 Xerxes Avenue South 80 South Eighth Street Minneapolis, MN 55431 Minneapolis, MN 55402
26. MISCELLANEOUS GENERAL PROVISIONS -------------------------------- (a) Payments Deemed Rent. Any amounts of money to be paid by Tenant -------------------- to Landlord pursuant to the provisions of this Lease, whether or not such payments are denominated "rent" or "additional rent" and whether or not they are to be periodic or recurring, shall be deemed rent or additional rent for purposes -33- of this Lease; and any failure to pay any of same as provided in Paragraph 18(a) hereof shall entitle Landlord to exercise all of the rights and remedies afforded hereby or by law for the collection and enforcement of Tenant's obligation to pay rent. Tenant's obligation to pay any such rent or additional rent pursuant to the provisions of this Lease shall survive the expiration or other termination of this Lease and the surrender of possession of the Premises after any holdover period. (b) Estoppel Letters. Tenant shall, within ten (10) days following ---------------- written request from Landlord, execute, acknowledge and deliver to Landlord or to any lender, purchaser or prospective lender or purchaser designated by Landlord a written statement in a form provided by Landlord certifying (i) that this Lease is in full force and effect and unmodified (or, if modified, stating the nature of such modification), (ii) the date to which rent has been paid, (iii) that there are not, to Tenant's knowledge, any uncured defaults (or specifying such defaults if any are claimed), and (iv) such further matters regarding this Lease and/or the Premises customarily included in estoppel letters or certificates as may be reasonably requested by Landlord, provided that disclosure of confidential information by Tenant shall not be required. Any such statement may be relied upon by any prospective purchaser or mortgagee of all or any part of the Project. Tenant's failure to deliver such statement within such period shall be conclusive upon Tenant that this Lease is in full force and effect and unmodified, and that there are no uncured defaults in Landlord's performance hereunder. (c) Memorandum of Lease. If requested by Landlord or Tenant, a ------------------- memorandum of lease, containing the information required by applicable law concerning this Lease shall be prepared, executed by both parties and filed for record in the office of the county recorder in Dakota County, Minnesota. (d) Claims for Fees. Each party hereto shall indemnify and hold --------------- harmless the other party for any and all liability incurred in connection with the negotiation or execution of this Lease for any real estate broker's commission or finder's fee which has been earned by a real estate broker or other person on such party's behalf. Each party represents to the other that each party has retained corporate real estate advisors and that each party shall be responsible for the fees of their own advisors. (e) Applicable Law. This Lease and all matters pertinent thereto -------------- shall be construed and enforced in accordance with the laws of the State of Minnesota. (f) Entire Agreement. This Lease, including all Exhibits, Riders and ---------------- Addenda, constitutes the entire agreement between the parties hereto regarding the subject matter hereof and may not be modified except by an instrument in writing -34- executed by the parties hereto. Notwithstanding anything to the contrary herein contained, the parties acknowledge that the Landlord has entered into the Property Management Agreement with Tenant or SGI. (g) Binding Effect. This Lease and the respective rights and -------------- obligations of the parties hereto shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto as well as the parties themselves; provided, however, that Landlord, its successors and assigns shall be obligated to perform Landlord's covenants under this Lease only during and in respect of their successive periods as Landlord during the term of this Lease. (h) Severability. If any provision of this Lease shall be held to be ------------ invalid, void or unenforceable, the remaining provisions hereof shall not be affected or impaired, and such remaining provisions shall remain in full force and effect. (i) No Partnership. Landlord shall not, by virtue of the execution of -------------- this Lease or the leasing of the Premises to Tenant, become or be deemed a partner of Tenant in the conduct of Tenant's business on the Premises or otherwise. (j) Headings, Gender, etc. As used in this Lease, the word "person" --------------------- shall mean and include, where appropriate, an individual, corporation, partnership or other entity; the plural shall be substituted for the singular, and the singular for the plural, where appropriate; and words of any gender shall include any other gender. The topical headings of the several paragraphs of this Lease are inserted only as a matter of convenience and reference, and do not affect, define, limit or describe the scope or intent of this Lease. (k) No Right to Change Buildings Address. Landlord shall have no ------------------------------------ right to change the street address of the Buildings occupied by Tenant without the prior written consent of Tenant. Landlord reserves the right to change the name of the Project and/or any Building(s) therein. (l) Execution by Landlord. Submission of this instrument to Tenant, --------------------- or Tenant's agents or attorneys, for examination or signature does not constitute or imply an offer to lease, reservation of space, or option to lease, and this Lease shall have no binding legal effect until execution hereof by both Landlord and Tenant. (m) Time of Essence. Time is of the essence of this Lease and each of --------------- its provisions. (n) Year 2000 Disclaimer. Landlord and Tenant each hereby disclaims -------------------- any liability for any and all damages, injuries or other losses, whether ordinary, special, consequential, punitive or otherwise, arising out of, relating to or in -35- connection with (a) the failure of any automated, computerized and/or software system or other technology used in, on or about the Project or relating to the management or operation of the Project to accurately receive, provide or process date/time data (including, but not limited to, calculating, comparing and sequencing) both before and after September 9, 1999 and before, after, during and between the years 1999 A.D. and 2000 A.D., and leap year calculations and/or (b) the malfunction, ceasing to function or providing of invalid or incorrect results by any such technology as a result of date/time data. The foregoing disclaimer shall apply to any such technology used in, on or about the Project or that affect the Project, whether or not such technology is within the control of Landlord or Tenant or their respective agents or representatives. THE FOREGOING DISCLAIMER INCLUDES A DISCLAIMER BY LANDLORD OF ALL WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO THE MATTERS DESCRIBED HEREIN, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. (o) Drafting Party. The parties represent that they have been -------------- represented by legal counsel in the negotiation and preparation of this Lease and that their respective attorneys have substantially participated in the drafting of this Lease. The parties agree that the rule of construction regarding ambiguities being construed against the drafting party shall not apply. Changes from any prior drafts of this Lease shall not be used in interpreting any of the provisions of this Lease. (p) Counterparts; Facsimile Signatures. This Lease may be executed in ---------------------------------- one or more counterparts, each of which shall be deemed an original and together which shall constitute one document. Facsimile signatures on this Lease shall be deemed valid and acceptable; however, any party executing this Lease by facsimile signature shall immediately deliver not less than three (3) hard copy originals to the other party. 27. SECURITY DEPOSIT ---------------- (a) Landlord initially waives the requirement that Tenant pay a security deposit to Landlord. If on more than one occasion during the Term, Tenant fails to pay any installment of rent or any other charges required to be paid to Landlord hereunder and such failure continues beyond the period given to cure such default as set forth in paragraph 18(a) hereof, Landlord may by notice to Tenant require the immediate delivery, for security deposit purposes, of a letter of credit (the "Letter of Credit") for a sum equal to one (1) month of the then gross rent for the Premises (the "Security Deposit"). The Letter of Credit shall be held as security for the performance and observance by Tenant of all of its obligations under the terms, conditions and covenants of this Lease throughout the Term of this Lease. If Tenant performs and observes all of the terms, conditions and covenants of this Lease which are required to be performed and observed by it, Landlord shall return the Letter of -36- Credit to Tenant (within thirty (30) days) after the Expiration Date or after Tenant surrenders possession of the Premises, whichever is later. In the event of a default by Tenant in the payment of rent or the performance or observance of any of the other terms, conditions or covenants of this Lease, then Landlord may, at its option and without notice, draw on the Letter of Credit and apply all or any part of the Security Deposit in payment of such rent or to cure any other such default; and if Landlord does so, Tenant shall, upon request, deposit with Landlord the amount so applied (in cash or by an additional Letter of Credit) so that Landlord will have on hand at all times throughout the Term of this Lease the full amount of the Security Deposit. Landlord shall not be required to hold the Security Deposit (if cash) as a separate account, but may commingle it with Landlord's other funds. The use, application or retention of the Security Deposit or any portion thereof by Landlord shall not prevent Landlord from exercising any other right or remedy provided by this Lease or by law (it being intended that Landlord shall not first be required to proceed against the Security Deposit) and shall not operate as a limitation on any recovery to which Landlord may otherwise be entitled. The Letter of Credit shall be issued by Norwest Bank or U.S. Bank or their successors, or such other financial institution as is mutually agreeable to Landlord and Tenant. The Letter of Credit shall be a so-called "standby" letter of credit, in writing and signed by the issuer, in form and content reasonably acceptable to Landlord, conspicuously stating that it is a letter of credit and expressly stating that it is irrevocable and that it is transferable to the successors and assigns of Landlord under this Lease. In the event that the Letter of Credit is not transferable to such successors and assigns, Tenant agrees to cause the issuance of a substitute letter of credit (meeting the requirements of this paragraph) and issued for the benefit of each such successor or assign. (b) In the event of a sale or any other transfer of the Project, Landlord shall have the right to transfer the Security Deposit to its purchaser and, provided that the purchaser assumes liability for the return (if applicable) of the Security Deposit, Landlord shall thereupon be released by Tenant from all responsibility for the return of such deposit; and Tenant agrees to look solely to such purchaser for the return of such deposit. In the event of an assignment of this Lease, the Security Deposit shall be deemed to be held by Landlord as a deposit made by the assignee, and Landlord shall have no further responsibility for the return of such deposit to the assignor. 28. HAZARDOUS SUBSTANCES -------------------- (a) Tenant covenants that Tenant, with respect to its use and operation on the Premises and within the Project, will remain in compliance with all applicable federal, state and local statutes, ordinances, regulations, rules and other laws presently in force or hereafter enacted relating to public health, safety, -37- protection of the environment, environmental quality, contamination and clean-up of hazardous materials, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Resource, Conservation and Recovery Act of 1976, as amended, and state superfund and environmental clean-up statutes and all rules and regulations presently or hereafter enacted ("environmental laws"). Tenant will not cause or knowingly permit any violations or other failures to comply with environmental laws on or about the Premises. As used above, the term "hazardous materials" shall mean and include all hazardous and toxic substances, waste or materials, any pollutant or contaminant, including, without limitation, asbestos, PCBs, petroleum and petroleum-based products and raw materials that are included under or regulated by any environmental laws. Tenant shall not release, generate, manufacture, store, treat, transport or dispose of any hazardous material on or about the Project or any part thereof; however, Tenant may store, transport and use such hazardous materials as historically used by Tenant in the ordinary course of the operation of its business in compliance with all applicable environmental laws. Tenant will immediately notify Landlord and provide copies upon receipt of all written complaints, claims, citations, demands, inquiries, reports or notices relating to the condition of the Premises or compliance with environmental laws. Tenant shall maintain all required records and file any necessary documents with the appropriate agencies relating to the use, storage or transportation of any hazardous materials on, to, from or about the Premises. Tenant shall indemnify, defend (with counsel reasonably acceptable to Landlord and at Tenant's sole cost), and hold Landlord harmless from and against all losses, liabilities, obligations, penalties, claims, demands, judgments, costs and other damages, that may be imposed upon, incurred by or asserted or awarded against Landlord in connection with or arising from or out of: (i) the release or other deposit during the Term of this Lease of any hazardous material by Tenant, its employees, agents or contractors on, in, under or affecting all or any portion of the Project; (ii) any breach of any obligation or agreement of Tenant in this Paragraph; and/or (iii) any violation or claim of violation by Tenant of any environmental law occurring during the Term of this Lease. This indemnification obligation shall survive the termination of this Lease. (b) Landlord shall indemnify, defend (with counsel reasonably acceptable to Tenant and at Landlord's sole cost), and hold Tenant harmless from and against all losses, liabilities, obligations, penalties, claims, demands, judgments, costs and other damages, that are suffered or incurred by Tenant and caused by the release or other deposit of any hazardous material by Landlord, its employees, agents or contractors (excluding Tenant) which Tenant proves was released or deposited by Landlord, on, in, under or affecting all or any portion of the Project. This indemnification obligation shall survive the termination of this Lease. -38- IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year first above written. LANDLORD: TENANT: WAM!NET INC. SILICON GRAPHICS, INC. By: /s/ Allen L. Witters By: /s/ William M. Kelly ----------------------------- ----------------------------- Its: Chief Technology Officer Its: Senior Vice President -39- EX-10.25 19 EMPLOYMENT AGREEMENT DATED JANUARY 1, 1998 EXHIBIT 10.25 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is made effective as of January 1, 1998, by and between NETCO COMMUNICATIONS Corporation ("NetCo"), of 6100 West 110th Street, Bloomington, Minnesota 55438, and John Kauffman ("Employee") of 5321 Bryant Avenue South, Minneapolis, MN 55419. BACKGROUND. - - ---------- A. NetCo is engaged in the business of high speed electronic courier services for the transportation, storage and retrieval of large quantities of data for print and, CD-ROM prepares publishing industries as well as for medical imaging; B. NetCo desires to have the services of the Employee; and C. The Employee is willing to be employed by NetCo. Therefore, in consideration of the mutual promises set forth in this Agreement, the parties agree as follows: 1. EMPLOYMENT. Effective January 1, 1998, Employee shall serve NetCo as the Vice President of Strategic Marketing and Communications. 2. BEST EFFORTS OF EMPLOYEE. Employee agrees to perform faithfully, industriously, and to the best of Employee's ability, experience, and talents, all of the duties that may be required by the express and implicit terms of this Agreement, to the reasonable satisfaction of NetCo. Such duties shall be provided at such place(s) as the needs, business, or opportunities of NetCo may require from time to time. 3. COMPENSATION OF EMPLOYEE. As compensation for the services provided by Employee under this Agreement, NetCo will pay the Employee a monthly salary of Twelve Thousand Five Hundred Dollar's ($12,500). Upon termination of this Agreement, payments under this paragraph shall cease; provided, however, that the Employee shall be entitled to payments for periods or partial periods that occurred prior to the date of termination and for which the Employee has not yet been paid. 4. INCENTIVE STOCK OPTION. Subject to approval of the NetCo Board of Directors, and in addition to any other compensation to which the employee may be entitled by this agreement, Employee shall be entitled to receive an incentive Stock Option for Seventy Thousand (70,000) shares of NetCo Communications Corporation according to the Stock Option Agreement in Exhibit 1. The exercise price of the incentive Stock Option shall be fair market value as determined as of the date of grant by the NetCo Board of Directors, which price shall be inserted into the appropriate blank on Exhibit 1. 5. REIMBURSEMENT FOR EXPENSES IN ACCORDANCE WITH NETCO POLICY. NetCo will reimburse Employee for "out-of-pocket" expenses in accordance with NetCo policies in effect from time to time. 6. RECOMMENDATIONS FOR IMPROVING OPERATIONS. Employee shall reasonably provide NetCo with all information, suggestions, and recommendations regarding NetCo's business, of which Employee has knowledge, that will be of benefit to NetCo. 7. CONFIDENTIALITY. Employee recognizes that NetCo has and will have information regarding the following: - - - inventions - business affairs - - - machinery - processes - - - products - trade secrets - - - prices - technical matters - - - apparatus - customer lists - - - costs - product designs - - - discounts - copyrights - - - future plans and other vital information (collectively, "Information") which are valuable, special and unique assets of NetCo. Employee agrees that, except as contemplated ---------------------- by Employee's duties, Employee will not at any time or in any manner, either - - -------------------- directly or indirectly, divulge, disclose, or communicate in any manner any Information to any third party without the prior written consent of the NetCo. Employee will protect the Information and treat it as strictly confidential. A violation Agreement relating to the protection or nondisclosure of information shall be a material violation of this Agreement and will justify legal and/or equitable relief by Employee of this paragraph or of other sections or paragraphs of this. 8. TRADE SECRETS. Except as contemplated by Employee's duties, Employee shall not at any time during the term of this agreement or thereafter, or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation in any manner whatsoever any information concerning any matters affecting or relating to the business of the Corporation, including without limiting the generality of the foregoing, any of its customers, the prices it obtains or has obtained from the sale of, or at which it sells or has sold, its products, or any other information concerning the business of the Corporation, its manner of operation, its plans, processes, or other data without regard to whether all of the foregoing matters will be deemed confidential, material, or important, the parties hereto stipulating that as between them, the same are important, -2- material, and confidential and gravely affect the effective and successful conduct of the business of the Corporation, and the Corporation's good will, and that any breach of the terms of the paragraph shall be a material breach of this Agreement. 9. DISCLOSURE AND ASSIGNMENT. Except as provided elsewhere in this Agreement, Employee shall treat as for the Corporation's sole benefit and fully and reasonably promptly disclose to the Corporation, without additional compensation, all ideas, discoveries, inventions and improvements, whether patentable or not, which while the Employee is employed by the Corporation are made, conceived or reduced to practice by Employee, alone or with others, during or after usual working hours, either on or off the job, and Employee hereby assigns to the Corporation all such ideas, discoveries, inventions and improvements to be the Corporation's exclusive property. 10. DISCLOSURE AND RIGHT OF FIRST REFUSAL. Paragraph 9 or this Agreement shall not apply to any ideas, discoveries, inventions and improvements for which no equipment, supplies, facility or trade secret information of the Corporation was used, and which was developed entirely on Employee's own time, and (1) which does not relate (a) directly to the business of the Corporation or (b) to the Corporation's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Employee for the Corporation. Employee will, nonetheless, promptly disclose all such ideas, discoveries, inventions and improvements to the Corporation and offer to the Corporation the right of first refusal to enter into a license or purchase agreement covering the subject idea, discovery, invention or improvement on terms mutually agreed to by Employee and the Corporation, in the event the Corporation and Employee cannot agree on terms and Employee receives an offer to enter into a license or purchase agreement with some other party on terms more favorable to that other party than the terms offered to the Corporation, then the Corporation shall have the right and Employee shall have the obligation to offer to the Corporation the idea, discovery, invention or improvement on such favorable terms. When such an offer is made to the Corporation pursuant to the preceding sentence, it must be accepted by the Corporation within thirty (30) days; or if not accepted, the right of first refusal hereunder as to that offer shall terminate. NOTICE: Paragraph 9 hereof requires Employee to assign rights to inventions to the Corporation or its successors. Minnesota Statutes (S) 181.78 limits the scope of agreements requiring the inventions be assigned to employers. The statute states that such assignment agreements do not apply: "to an invention for which no equipment, supplies, facility or trade secret information of the employer was used and -3- which was developed entirely on the Employee's own time, and (1) which does not relate (a) directly to the business of the employer or (b) to the employers actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the Employee for the employer." (Underlining added). Please note that Paragraph 9 of this Agreement uses these statutory terms to define the inventions which are not automatically assigned to the Corporation but instead are subject to a right of first refusal in favor of the Corporation. 11. UNAUTHORIZED DISCLOSURE OF INFORMATION. If it appears that the Employee has disclosed (or has threatened to disclose) Information in violation of this Agreement, NetCo shall be entitled to an injunction to restrain Employee from disclosing, in whole or in part, such Information, or from providing any services to any party to whom such Information has been disclosed or may be disclosed. NetCo shall not be prohibited by this provision from pursuing other remedies, including a claim for losses and damages. 12. CONFIDENTIALITY AFTER TERMINATION OF EMPLOYMENT. The confidentiality provisions of this Agreement shall remain in full force and effect for a one year period after the termination of Employee's employment. 13. NON-COMPETE AGREEMENT. Recognizing that the various items of Information are special and unique assets of the company, Employee agrees and covenants that for a period of 12 months following the termination of his or her employment, whether such termination is voluntary or involuntary, Employee will not directly engage in any business competitive with NetCo, nor shall Employee cause or solicit, directly for his or her own behalf or for the benefit of a third party, any other employee or employees of the Company to terminate their employment with the Company or to engage in such competitive activities. This covenant shall apply to the geographical area that includes the United States and Canada. Directly engaging in any competitive business includes, but is not limited to, (i) engaging in a business as owner, partner or agent, (ii) becoming an employee of any third party that is engaged in such business, (iii) becoming interested directly in any such business, or (iv) soliciting any customer of NetCo for the benefit of a third party that is engaged in such business. NetCo agrees that this non-compete provision will not adversely affect the Employee's livelihood. 14. TERM/TERMINATION. Employee's employment under this Agreement shall be for an unspecified term on an "at will" basis. -4- This Agreement may be terminated, with or without cause, by either party. Each party will give notice (as provided in the paragraph of this Agreement captioned "Notices") of such action to other party. NetCo may terminate Employee's employment for cause without prior notice and with compensation to Employee only to the date of the last day of actual work by the Employee. For purposes hereof, "cause" means (i) a violation of this Agreement or any other agreement between NetCo and Employee, (ii) Employee's deliberate, willful or gross misconduct in the performance or Employee's duties on behalf of the Corporation, or (iii) Employee's being charged with a crime punishable by imprisonment. The compensation paid under this Agreement shall be the Employee's exclusive remedy. 15. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or its breach, or to the employment relationship between the Employee and the Company, shall be settled by final and binding arbitration, upon the request of either party, in Minneapolis, Minnesota. Such arbitration shall proceed in accordance with the then governing rules of the American Arbitration Association (AAA) for Commercial Arbitration or Employment Law Disputes, at the option of the petitioner. Judgment upon the award rendered may be entered and enforced in any court of competent jurisdiction. It is agreed that the parties shall choose a single, neutral arbitrator from among a panel of not less than seven (7) proposed arbitrators, and that the parties may have no more than two (2) panels of arbitrators presented to them by the AAA. The parties agree that they shall each bear their own costs associated with the arbitration, including any filing fee to be paid by them and their own legal counsel expenses. The parties further agree that they shall share equally In the reasonable costs and the fees of the neutral. 16. RETURN OF PROPERTY. Upon termination of this Agreement, the Employee shall deliver all property (including keys, records, notes, data, memoranda, models, and equipment) that is in the Employee's possession or under the Employee's control which is NetCo's property or related to NetCo's business. 17. NOTICES. All notices required or permitted under this Agreement shall be in writing and shall be deemed delivered when delivered in person or deposited in the United States mail, postage paid, addressed as follows: -5- NetCo: - - ----- Manager, Human Resources NetCo Communications Corporation 6100 West 110th Street Bloomington, Minnesota 55438 Employee: - - -------- John Kauffman 5321 Bryant Avenue South Minneapolis, MN 55419 Such addresses may be changed from time to time by either party by providing written notice in the manner set forth above. 18. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties and there are no other promises or conditions in any other agreement whether oral or written. This Agreement supersedes any prior written or oral agreements between the parties. 19. AMENDMENT. This Agreement may be modified or amended, if the amendment is made in writing and is signed by both parties. 20. SEVERABILITY. If any provisions of this Agreement shall be held to be invalid or unenforceable for any reason, the remaining provisions shall continue to be valid and enforceable. If a court finds that any provision of this Agreement is invalid or unenforceable, but that by limiting such provision it would become valid or enforceable, then such provision shall be deemed to be written, construed, and enforced as so limited. 21. WAIVER OF CONTRACTUAL RIGHT. The failure of either party to enforce any provision of this Agreement shall not be construed as a waiver or limitation of that party's right to subsequently enforce and compel strict compliance with every provision of this Agreement. -6- 22. APPLICABLE LAW. This Agreement shall be governed by the laws of the State of Minnesota. NETCO: NetCo Communications Corporation By: /s/ Michael O'Donnell ------------------------------ Its: An Authorized Officer or Agent AGREED TO AND ACCEPTED Employee: John R. Kauffman /s/ John R. Kauffman - - ------------------------------ Signature of Employee -7- Amendment No. 1 to John Kauffman Employment Agreement WAM!NET Inc. ("WAM!NET" or "Corporation") and John Kauffman ("Employee") are parties to an Employment Agreement dated January 1, 1998 (the "Employment Agreement"). It is agreed between the parties that effective January 2, 1998 paragraph 3 of the Employment Agreement be amended to read: COMPENSATION OF EMPLOYEE. As compensation for the services provided by Employee under this Agreement, WAM!NET will pay Employee a monthly base salary of $12,500.00. In addition, Employee will be entitled to quarterly bonus payments of 25,000.00 per calendar quarter. Upon termination of this Agreement, payments under this paragraph shall cease; provided, however, that Employee shall be entitled to payment of his base salary and a pro rata share of his quarterly bonus payments for periods or partial periods that occurred prior to the date of termination and for which Employee has not yet been paid. It is further agreed between the parties that, except as expressly amended by this Amendment No. 1, the Employment Agreement shall continue in full force and effect according to its terms. IN WITNESS WHEREOF, the parties hereto have duly executed the amendment. Dated: December 30, 1998 ----------------- EMPLOYEE WAM!NET Inc. /s/ John Kauffman /s/ Michael O'Donnell ------------------------- ------------------------- John Kauffman By Michael O'Donnell Its: Director of Human Resources STOCK OPTION AGREEMENT THIS AGREEMENT, made and entered into effective this 27th day of July 1997, by and between NetCo Corporation, a Minnesota corporation (hereinafter referred to as the "Corporation"), and John Kauffman, a resident of the State of Minnesota (hereinafter referred to as the "Optionee"). WHEREAS, the Corporation considers it desirable and in its best interests that the Optionee be given an inducement to acquire a proprietary interest in the Corporation and an added incentive to advance the interests of the Corporation, by possessing an option to purchase common shares of the Corporation. NOW THEREFORE, in consideration of the premises and of the mutual promises and consideration provided herein, the parties agree as follows: 1. Grant of Option. The Corporation grants to Optionee an Option --------------- (the "Option") to purchase Forty Five Thousand (45,000) common shares of the Corporation at a purchase price of Four Dollars Eighty One Cents ($4.81) per share, in the manner and subject to the conditions herein provided. 2. Time of Exercise of Option. The Option shall vest and become -------------------------- exercisable in two (2) equal installments of Twenty Two Thousand Five Hundred (22,500) shares each; the first installment being immediately vested and exercisable, and the second installment becoming vested and exercisable on December 31, 1997. To the extent then unexercised, the Option shall expire and be no longer exercisable on July 27, 2006. No provision of this Agreement to the contrary withstanding, neither the Option nor any right claimed thereby or hereby, therein or herein or thereunder or hereunder shall be exercisable by anyone on or after July 27, 2006. 3. Method of Exercise. The Option shall be exercised by written ------------------ notice to the Board of the Corporation at the Corporation's principal place of business. The notice shall be accompanied by payment of the option price for the shares being purchased (ii) in cash, (ii) by cashier's check or certified check, (iii) by surrendering to the Corporation for cancellation other shares of the Corporation having a fair market value equal to the exercise price for the shares to be issued upon exercise of the Option, or (iv) by any other form of payment that the Board of Directors of the Corporation, in its sole discretion, determines to be appropriate. The Corporation shall make prompt delivery of a certificate or certificates representing such common shares, provided that if any law or regulation requires the Corporation to take any action with respect to the common shares specified in such notice before the issuance thereof, then the date of delivery of such common shares shall be extended for the period necessary to take such action. The Option must be exercised with respect to at least 500 of the common shares, unless only a lesser number of the common shares are then exercisable, in which case it must be exercised with respect to all of such lesser number. 4. Additional Right to Convert Option. ---------------------------------- 4.1. The holder of this Option shall have the right to require the Company to convert this Option (the "Conversion Right") at any time after it is exercisable, but prior to its expiration into shares of Company Common Stock as provided for in this section 4. Upon exercise of the Conversion Right, the Company shall deliver to the holder (without payment by the holder of any Option exercise price) shares of the Company's common stock in a number equal to the quotient obtained by dividing (x) the value of the Option at the time the Conversion Right is exercised (determined by subtracting the aggregate Option exercise price at the time the Conversion Right is exercised from the aggregate Fair Market Value (defined below) of the Option shares immediately prior to the exercise of the Conversion Right by (y) the Fair Market Value of one share of common stock immediately prior to the exercise of the Conversion Right. 4.2. The Conversion Right may be exercised by the holder, at any time or from time to time, prior to its expiration, on any business day by specifying in the notice of exercise (i) the total number of shares of common stock the holder will purchase, and (ii) the number of shares of common stock that are to be acquired pursuant to the Conversion Right and not for cash. 4.3. Upon receipt of the notice of exercise, the Company will promptly deliver to the holder a certificate or certificates for the number of shares of common stock issuable upon such conversion, together with cash in lieu of any fraction of a share, and the Company will deliver to the holder a new Option representing the number of shares, if any, with respect to which the Option shall not have been exercised. 4.4. Fair Market Value of a share of common stock as of a particular date (the "Determination Date") shall mean: (a) If the Company's common stock is traded on an exchange or is quoted on NASDAQ, then the average closing or last sale prices, respectively, reported for the ten (10) business days immediately preceding the Determination Date; (b) If the Company's common stock is not traded on an exchange or on NASDAQ, but is traded in the over-the-counter market, then the average closing bid and -2- asked prices reported for the ten (10) business days immediately preceding the Determination Date; and (c) If the Company's common stock is not publicly traded, then the Fair Market Value as determined in good faith by the Company's Board of Directors upon advice of the Company's Investment Banker. 5. Reclassification, Consolidation or Merger. ----------------------------------------- 5.1. If and to the extent that the number of issued common shares of the Corporation shall be increased or reduced by change in par value, split up, reverse split, reclassification, distribution of a dividend payable in stock, or the like, the number of common shares subject to the Option and the option price per share shall be proportionately adjusted in accordance with the Plan. 5.2. If the Corporation is reorganized or consolidated or merged with another corporation, the Optionee shall be entitled to receive an option (the "New Option") covering common shares of such reorganized, consolidated or merged company in the same proportion, at an equivalent price, and subject to the same conditions as the Option. For purposes of the preceding sentence, the excess of the fair market value of the common shares subject to the Option immediately after the reorganization, consolidation or merger over the aggregate option price of such common shares shall not be more than the excess of the aggregate fair market value of all common shares subject to the Option immediately before such reorganization, consolidation or merger over the aggregate option price of such common shares, and the New Option or assumption of the Option shall not give the Optionee additional benefits which he does not have under this Option, or deprive him of benefits which he has under this Option. 6. Rights Prior to Exercise of Option. This Option is non- ---------------------------------- transferable by Optionee, except in the event of his death, and during his lifetime is exercisable only by him. No person shall have any rights as a stockholder with respect to any common shares purchasable hereunder until payment of the option price and delivery to him of such common shares as herein provided. 7. Restriction on Disposition. All common shares acquired by -------------------------- Optionee pursuant to this Agreement shall be subject to the restrictions on sale, encumbrance and other disposition contained in the Company's By-Laws, or imposed by applicable state and federal laws or regulations regarding the registration or qualification of such acquisition of common shares, and may not be sold or otherwise disposed of (i) within one year after the exercise of the Option unless Optionee has made adequate provision acceptable to the Corporation to pay the Corporation the amount of any taxes which may be assessed against the -3- Corporation as a result of such exercise, and (ii) unless the Corporation has received a prior opinion of Optionee's counsel satisfactory in form and substance to counsel for the Corporation that such transaction will not violate the Securities Act of 1933 or any applicable state law regulating the sale of securities. 8. Binding Effect. This Agreement shall inure to the benefit of and -------------- be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. "Optionee" "Corporation" NetCo Communications Corporation /s/ John Kauffman /s/ Edward J. Driscoll III - - ------------------------------ ---------------------------------- John Kauffman Edward J. Driscoll III President -4- STOCK OPTION AGREEMENT THIS AGREEMENT, made and entered into effective this 31st day of December, 1997, by and between NetCo Corporation, a Minnesota corporation (hereinafter referred to as the "Corporation"), and John Kauffman, a resident of the State of Minnesota (hereinafter referred to as the "Optionee"). WHEREAS, the Corporation considers it desirable and in its best interests that the Optionee be given an inducement to acquire a proprietary interest in the Corporation and an added incentive to advance the interests of the Corporation, by possessing an option to purchase common shares of the Corporation. NOW THEREFORE, in consideration of the premises and of the mutual promises and consideration provided herein, the parties agree as follows: 1. Grant of Option. The Corporation grants to Optionee an Option --------------- (the "Option") to purchase Seventy Thousand (70,000) common shares of the Corporation at a purchase price of Nineteen Dollars Fifty Cents ($19.50) per share, in the manner and subject to the conditions herein provided. 2. Time of Exercise of Option. -------------------------- 2.1. Subject to earlier vesting in accordance with the provisions of paragraph 2.2. hereof, the Option shall vest and become exercisable in successive installments: (a) an initial installment of Thirty Four Thousand (34,000) shares shall vest and become exercisable on October 31, 1998; and (b) the remaining installments of Three Thousand (3,000) shares shall vest and become exercisable on the last day of each successive calendar month, with such first remaining installment so vesting on November 30, 1998, and the last such remaining installment so vesting on October 31, 1999. 2.2. The Option shall vest and become immediately exercisable upon occurrence of any of the following events: (a) Optionee's employment by the Corporation is terminated otherwise than for any of the reasons specified in Section 7.1(d) hereof; (b) Optionee's employment by the Corporation is significantly changed by a management reorganization which results in either (i) Optionee having to report to someone other than the Corporation's Chief Marketing Officer or the Corporation's Chief Executive Officer, or (ii) Optionee, subject to final approvals of the Corporation's Chief Marketing Officer and Chief Executive Officer, no longer having principal authority and responsibility for product and service positioning, product and service branding, or coordination of outside advertising and/or public relations agencies. 3. Method of Exercise. The Option shall be exercised by written ------------------ notice to the Board of the Corporation at the Corporation's principal place of business. The notice shall be accompanied by payment of the option price for the shares being purchased (i) in cash, (ii) by cashier's check or certified check, (iii) by surrendering to the Corporation for cancellation other shares of the Corporation having a fair market value equal to the exercise price for the shares to be issued upon exercise of the Option, or (iv) by any other form of payment that the Board of Directors of the Corporation, in its sole discretion, determines to be appropriate. The Corporation shall make prompt delivery of a certificate or certificates representing such common shares, provided that if any law or regulation requires the Corporation to take any action with respect to the common shares specified in such notice before the issuance thereof, then the date of delivery of such common shares shall be extended for the period necessary to take such action. The Option must be exercised with respect to at least 500 of the common shares, unless only a lesser number of the common shares are then exercisable, in which case it must be exercised with respect to all of such lesser number. 4. Additional Right to Convert Option. ---------------------------------- 4.1. The holder of this Option shall have the right to require the Company to convert this Option (the "Conversion Right") at any time after it is exercisable, but prior to its expiration into shares of Company Common Stock as provided for in this section 4. Upon exercise of the Conversion Right, the Company shall deliver to the holder (without payment by the holder of any Option exercise price) shares of the Company's common stock in a number equal to the quotient obtained by dividing (x) the value of the Option at the time the Conversion Right is exercised (determined by subtracting the aggregate Option exercise price at the time the Conversion Right is exercised from the aggregate Fair Market Value (defined below) of the Option shares immediately prior to the exercise of the Conversion Right by (y) the Fair Market Value of one share of common stock immediately prior to the exercise of the Conversion Right. 4.2. The Conversion Right may be exercised by the holder, at any time or from time to time, prior to its expiration, on any business day by specifying in the notice of exercise (i) the total number of shares of common stock the holder will purchase, and (ii) the number of shares of common -2- stock that are to be acquired pursuant to the Conversion Right and not for cash. 4.3. Upon receipt of the notice of exercise, the Company will promptly deliver to the holder a certificate or certificates for the number of shares of common stock issuable upon such conversion, together with cash in lieu of any fraction of a share, and the Company will deliver to the holder a new Option representing the number of shares, if any, with respect to which the Option shall not have been exercised. 4.4. Fair Market Value of a share of common stock as of a particular date (the "Determination Date") shall mean: (a) If the Company's common stock is traded on an exchange or is quoted on NASDAQ, then the average closing or last sale prices, respectively, reported for the ten (10) business days immediately preceding the Determination Date; (b) If the Company's common stock is not traded on an exchange or on NASDAQ, but is traded in the over-the-counter market, then the average closing bid and asked prices reported for the ten (10) business days immediately preceding the Determination Date; and (c) If the Company's common stock is not publicly traded, then the Fair Market Value as determined in good faith by the Company's Board of Directors upon advice of the Company's Investment Banker. 5. Reclassification, Consolidation or Merger. ----------------------------------------- 5.1. If and to the extent that the number of issued common shares of the Corporation shall be increased or reduced by change in par value, split up, reverse split, reclassification, distribution of a dividend payable in stock, or the like, the number of common shares subject to the Option and the option price per share shall be proportionately adjusted in accordance with the Plan. 5.2. If the Corporation is reorganized or consolidated or merged with another corporation, the Optionee shall be entitled to receive an option (the "New Option") covering common shares of such reorganized, consolidated or merged company in the same proportion, at an equivalent price, and subject to the same conditions as the Option. For purposes of the preceding sentence, the excess of the fair market value of the common shares subject to the Option immediately after the reorganization, consolidation or merger over the aggregate option price of such common shares shall not be more than the excess of the aggregate fair market value of all common shares subject to the Option immediately before such reorganization, consolidation or merger over the aggregate option price of such common shares, -3- and the New Option or assumption of the Option shall not give the Optionee additional benefits which he does not have under this Option, or deprive him of benefits which he has under this Option. 6. Rights Prior to Exercise of Option. This Option is non- ---------------------------------- transferable by Optionee, except in the event of his death, and during his lifetime is exercisable only by him. No person shall have any rights as a stockholder with respect to any common shares purchasable hereunder until payment of the option price and delivery to him of such common shares as herein provided. 7. Termination of Option. --------------------- 7.1. Except as herein otherwise provided, the Option granted under this Agreement, to the extent not heretofore exercised, shall terminate upon the first to occur of the following events: (a) The expiration of twenty four (24) months after the date on which Optionee's employment by the Corporation is terminated, except if such termination be by reason of permanent and total disability or death; (b) The expiration of twelve months after the date on which Optionee's employment by the Corporation is terminated, if such termination be by reason of the Optionee's permanent and total disability or death; (c) The expiration of twelve months from the date of Optionee's death should Optionee die within three months of termination of employment by the Corporation; or (d) The termination of Optionee's employment by the Corporation for either (i) Optionee's material breach of any agreement with the Corporation or (ii) Optionee's deliberate, willful or gross misconduct in the performance or Optionee's duties on behalf of the Corporation. 7.2. To the extent then unexercised, the Option shall expire and be no longer exercisable on December 31, 2007. No provision of this Agreement to the contrary withstanding, neither the Option nor any right claimed thereby or hereby, therein or herein or thereunder or hereunder shall be exercisable by anyone on or after December 31, 2007. 8. Restriction on Disposition. All common shares acquired by -------------------------- Optionee pursuant to this Agreement shall be subject to the restrictions on sale, encumbrance and other disposition contained in the Company's By-Laws, or imposed by applicable state and federal laws or regulations regarding the registration or qualification of such acquisition of common shares, and may not be sold or otherwise disposed of (i) within one year after -4- the exercise of the Option unless Optionee has made adequate provision acceptable to the Corporation to pay the Corporation the amount of any taxes which may be assessed against the Corporation as a result of such exercise, and (ii) unless the Corporation has received a prior opinion of Optionee's counsel satisfactory in form and substance to counsel for the Corporation that such transaction will not violate the Securities Act of 1933 or any applicable state law regulating the sale of securities. 9. Binding Effect. This Agreement shall inure to the benefit of and -------------- be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. "Optionee" "Corporation" Netco Communications Corporation /s/ John Kauffman /s/ Edward J. Driscoll III - - ----------------------------- ---------------------------------- John Kauffman Edward J. Driscoll III President -5- EX-10.26 20 EMPLOYMENT AGREEMENT DATED NOVEMBER 3, 1997 EXHIBIT 10.26 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is made effective as of November 3, 1997, by and between NETCO, COMMUNICATIONS Corporation ("NetCo"), of Union Plaza - Suite 102, 333 North Washington Avenue, Minneapolis, Minnesota 55401, and David Ottinger ("Employee") of 8112 Vincent Avenue South, Bloomington, Minnesota 55431. BACKGROUND. ---------- A. NetCo is engaged in the business of high speed electronic courier services for the transportation, storage and retrieval of large quantities of data for print and CD-ROM prepress publishing industries as well as for medical imaging; B. NetCo desires to have the services of the Employee; and C. The Employee is willing to be employed by NetCo. Therefore, in consideration of the mutual promises set forth in this Agreement, the parties agree as follows: 1. EMPLOYMENT. Effective November 3, 1997, Employee shall serve NetCo as a Vice President of Operations and Engineering. 2. BEST EFFORTS OF EMPLOYEE. Employee agrees to perform faithfully, industriously, and to the best of Employee's ability, experience, and talents, all of the duties that may be required by the express and implicit terms of this Agreement, to the reasonable satisfaction of NetCo. Such duties shall be provided at such place(s) as the needs, business, or opportunities of NetCo may require from time to time. 3. COMPENSATION OF EMPLOYEE. As compensation for the services provided by Employee under this Agreement, NetCo will pay the Employee a monthly salary of $8,333.34. An additional $20,000 during your first year of employment based on achievement of specific operational objectives for service support, deployment, engineering development and network maintenance derived during your first month in this position by you and myself based on the 1997 Corporate Priorities. Upon termination of this Agreement, payments under this paragraph shall cease; provided, however, that the Employee shall be entitled to payments for periods or partial periods that occurred prior to the date of termination and for which the Employee has not yet been paid. 4. INCENTIVE STOCK OPTION. Subject to approval of the NetCo Board of Directors, and in addition to any other compensation to which the employee may be entitled by this agreement, Employee shall be entitled to receive an incentive Stock Option for up to Thirty Thousand (30,000) shares of NetCo Communications Corporation under the NetCo 1996 Stock Option Plan according to the incentive Stock Option Agreement in Exhibit 1. The exercise price of the incentive Stock Option shall be fair market value as determined as of the date of grant by the NetCo Board of Directors, which price shall be inserted into the appropriate blank on Exhibit 1. 5. REIMBURSEMENT FOR EXPENSES IN ACCORDANCE WITH NETCO POLICY. NetCo will reimburse Employee for "out-of-pocket" expenses in accordance with NetCo policies in effect from time to time. 6. RECOMMENDATIONS FOR IMPROVING OPERATIONS. Employee shall provide NetCo with all information, suggestions, and recommendations regarding NetCo's business, of which Employee has knowledge, that will be of benefit to NetCo. 7. CONFIDENTIALITY. Employee recognizes that NetCo has and will have information regarding the following: - inventions - business affairs - machinery - processes - products - trade secrets - prices - technical matters - apparatus - customer lists - costs - product designs - discounts - copyrights - future plans and other vital information (collectively, "Information") which are valuable, special and unique assets of NetCo. Employee agrees that the Employee will not at any time or in any manner, either directly or indirectly, divulge, disclose, or communicate in any manner any Information to any third party without the prior written consent of the NetCo. Employee will protect the Information and treat it as strictly confidential. A violation by Employee of this paragraph or of other sections or paragraphs of this Agreement relating to the protection or non-disclosure of information shall be a material violation of this Agreement and will justify legal and/or equitable relief. TRADE SECRETS. Employee shall not at any time during the term of this Agreement or thereafter, or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation in any manner whatsoever any information concerning any matters affecting or relating to the business of the Corporation, including without limiting the generality of the foregoing, any of its customers, the prices it obtains or has obtained from the sale of, or at which it sells or has sold, its products, or any other information concerning the business of the Corporation, its manner of operation, its plans, processes, or other data without regard to whether all of the foregoing matters will be deemed confidential, material, or -2- important, the parties hereto stipulating that as between them, the same are important, material, and confidential and gravely affect the effective and successful conduct of the business of the Corporation, and the Corporation's good will, and that any breach of the terms of the paragraph shall be a material breach of this Agreement. 8. DISCLOSURE AND ASSIGNMENT. Except as provided elsewhere in this Agreement, Employee shall treat as for the Corporation's sole benefit and fully and promptly disclose to the Corporation, without additional compensation, all ideas, discoveries, inventions and improvements, whether patentable or not, which while the Employee is employed by the Corporation are made, conceived or reduced to practice by Employee, alone or with others, during or after usual working hours, either on or off the job, and Employee hereby assigns to the Corporation all such ideas, discoveries, inventions and improvements to be the Corporation's exclusive property. 9. DISCLOSURE AND RIGHT OF FIRST REFUSAL. Paragraph 9 of this ------------------------------------- Agreement shall not apply to any ideas, discoveries, inventions and improvements for which no equipment, supplies, facility or trade secret information of the Corporation was used, and which was developed entirely on Employee's own time, and (1) which does not relate (a) directly to the business of the Corporation or (b) to the Corporation's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Employee for the Corporation. Employee will, nonetheless, promptly disclose all such ideas, discoveries, inventions and improvements to the Corporation and offer to the Corporation the right of first refusal to enter into a license or purchase agreement covering the subject idea, discovery, invention or improvement on terms mutually agreed to by Employee and the Corporation, in the event the Corporation and Employee cannot agree on terms and Employee receives an offer to in the event the Corporation and employee cannot agree on terms and Employee receives an offer to enter into a license or purchase agreement with some other party on terms more favorable to that other party than the terms offered to the Corporation, then the Corporation shall have the right and Employee shall have the obligation to offer to the Corporation the idea, discovery, invention or improvement on such favorable terms. When such an offer is made to the Corporation pursuant to the preceding sentence, it must be accepted by the Corporation within thirty (30) days; or if not accepted, the right of first refusal hereunder as to that offer shall terminate. NOTICE: Paragraph 9 hereof requires Employee to assign rights to ------ -------------------------------------------------------- inventions to the Corporation or its successors. Minnesota Statutes (S). 181.78 - - ------------------------------------------------------------------------------- limits the scope of agreements requiring the inventions be assigned to - - ---------------------------------------------------------------------- employers. The statute states that such assignment agreements do not apply: - - -------------------------------------------------------------------------- -3- "to an Invention for which no equipment, supplies, ------------------------------------------------ facility or trade secret information of the employer ---------------------------------------------------- was used and which was developed entirely on the ------------------------------------------------ Employee's own time, and (1) which does not relate (a) ------------------------------------------------------ directly to the business of the employer or (b) to the ------------------------------------------------------ employer's actual or demonstrably anticipated research ------------------------------------------------------ or development, or (2) which does not result from any ----------------------------------------------------- work performed by the Employee for the employer." ----------------------------------------------- (Underlining added). ------------------- Please note that Paragraph 9 of this Agreement uses these statutory terms to define the inventions which are not automatically assigned to the Corporation but instead are subject to a right of first refusal in favor of the Corporation. 10. UNAUTHORIZED DISCLOSURE OF INFORMATION. If it appears that the Employee has disclosed (or has threatened to disclose) Information in violation of this Agreement, NetCo shall be entitled to an injunction to restrain Employee from disclosing, in whole or in part, such Information, or from providing any services to any party to whom such Information has been disclosed or may be disclosed. NetCo shall not be prohibited by this provision from pursuing other remedies, including a claim for losses and damages. 11. CONFIDENTIALITY AFTER TERMINATION OF EMPLOYMENT. The confidentiality provisions of this Agreement shall remain in full force and effect for a One year period after the termination of Employee's employment. During such One year period, neither party shall make or permit the making of any public announcement or statement of any kind that Employee was formerly employed by or connected with NetCo. 12. NON-COMPETE AGREEMENT. Recognizing that the various items of Information are special and unique assets of the company, Employee agrees and covenants that for a period of 12 months following the termination of his or her employment, whether such termination is voluntary or involuntary, Employee will not directly engage in any business competitive with NetCo, nor shall Employee cause or solicit, directly or indirectly, for his or her own behalf or for the benefit of a third party, any other employee or employees of the Company to terminate their employment with the Company or to engage in such competitive activities. This covenant shall apply to the geographical area that includes the United States and Canada. Directly engaging in any competitive business includes, but is not limited to, (i) engaging in a business as owner, partner or agent, (ii) becoming an employee of any third party that is engaged in such business, (iii) becoming interested directly in any such business, or (iv) soliciting any customer of NetCo for the benefit of a third party that is engaged in such business. Employee agrees that this non-compete provision will not adversely affect the Employee's livelihood. -4- 13. EMPLOYEE'S INABILITY TO CONTRACT FOR NETCO. Employee shall not have the right to make any contracts or commitments for or on behalf of NetCo without first obtaining the express written consent of NetCo. 14. TERM/TERMINATION. Employee's employment under this Agreement shall be for an unspecified term on an "at will" basis. This Agreement may be terminated, with or without cause, by either party. Each party will give notice (as provided in the paragraph of this Agreement captioned "Notice") of such action to other party. NetCo may terminate Employee's employment for cause without prior notice and with compensation to Employee only to the date of the last day of actual work by the Employee. For purposes hereof, "cause" means (i) a violation of this Agreement or any other agreement between NetCo and Employee, (ii) Employee's deliberate, willful or gross misconduct in the performance or Employee's duties on behalf of the Corporation, or (iii) Employee's being charged with a crime punishable by imprisonment. The compensation paid under this Agreement shall be the Employee's exclusive remedy. 15. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or its breach, or to the employment relationship between the Employee and the Company, shall be settled by final and binding arbitration, upon the request of either party, in Minneapolis, Minnesota. Such arbitration shall proceed in accordance with the then governing rules of the American Arbitration Association (AAA) for Commercial Arbitration or Employment Law Disputes, at the option of the petitioner. Judgment upon the award rendered may be entered and enforced in any court of competent jurisdiction. It is agreed that the parties shall choose a single, neutral arbitrator from among a panel of not less than seven (7) proposed arbitrators, and that the parties may have no more than two (2) panels of arbitrators presented to them by the AAA. The parties agree that they shall each bear their own costs associated with the arbitration, including any filing fee to be paid by them and their own legal counsel expenses. The parties further agree that they shall share equally in the reasonable costs and the fees of the neutral. 16. RETURN OF PROPERTY. Upon termination of this Agreement, the Employee shall deliver all property (including keys, records, notes, data, memoranda, models, and equipment) that is in the Employee's possession or under the Employee's control which is NetCo's property or related to NetCo's business. 17. NOTICES. All notices required or permitted under this Agreement shall be in writing and shall be deemed delivered when delivered in person or deposited in the United States mail, postage paid, addressed as follows: -5- NetCo: ----- Manager, Human Resources NetCo Communications Corporation Union Plaza - Suite 102 333 North Washington Avenue Minneapolis, Minnesota 55401 Employee: -------- David Ottinger 8112 Vincent Avenue South Bloomington, MN 55431 Such addresses may be changed from time to time by either party by providing written notice in the manner set forth above. 18. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties and there are no other promises or conditions in any other agreement whether oral or written. This Agreement supersedes any prior written or oral agreements between the parties. 19. AMENDMENT. This Agreement may be modified or amended, if the amendment is made in writing and is signed by both parties. 20. SEVERABILITY. If any provisions of this Agreement shall be held to be invalid or unenforceable for any reason, the remaining provisions shall continue to be valid and enforceable. If a court finds that any provision of this Agreement is invalid or unenforceable, but that by limiting such provision it would become valid or enforceable, then such provision shall be deemed to be written, construed, and enforced as so limited. 21. WAIVER OF CONTRACTUAL RIGHT. The failure of either party to enforce any provision of this Agreement shall not be construed as a waiver or limitation of that party's right to subsequently enforce and compel strict compliance with every provision of this Agreement. -6- 22. APPLICABLE LAW. This Agreement shall be governed by the laws of -------------- the State of Minnesota. NETCO: NetCo Communications Corporation By: /s/ John Washburn -------------------------------- Its: An Authorized Officer or Agent AGREED TO AND ACCEPTED Employee: David Ottinger - - --------------------------------- Printed Name /s/ David Ottinger - - --------------------------------- Signature of Employee -7- INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT, made and entered into effective this 10th day of November, 1997, by and between NETCO COMMUNICATIONS CORPORATION, a Minnesota corporation (hereinafter referred to as the "Corporation") and DAVID OTTINGER, a resident of the State of Minnesota (hereinafter referred to as the "Employee"). WHEREAS, the Corporation considers it desirable and in its best interests that the Employee be given an inducement to acquire a proprietary interest in the Corporation and an added incentive to advance the interests of the Corporation, by possessing an option to purchase common shares of the Corporation, in accordance with Netco Communications Corporation 1994 Stock Option Plan (the "Plan") adopted by the Directors of the Corporation and ratified by Shareholders of the Corporation, as amended and ratified. NOW THEREFORE, in consideration of the premises and of the mutual promises and consideration provided herein, the parties agree as follows: 1. Definitions. Words and phrases not otherwise defined herein ----------- shall have the meanings ascribed to them, respectively, in the Plan. 2. Grant of Option. The Corporation grants to Employee an Option --------------- (the "Option") to purchase Thirty Thousand (30,000) common shares of the Corporation at a purchase price of $19.50 per share, in the manner and subject to the conditions provided herein and in the Plan. The Option hereby granted shall be an ISO as provided in the Plan. 3. Time of Exercise of Option. (a) Subject to earlier vesting and -------------------------- exercise provisions as provided in subparagraph 3(b) hereof, Employee may exercise the Option in three successive equal annual increments of ten thousand (10,000) shares first commencing on October 1, 1998; all of which options shall expire at midnight on September 30, 2004, as illustrated by the following table: Number of Shares From - To First Exercisable Cumulative Total - - --------- ----------------- ---------------- October 1, 1997 - September 30, 1998 0 0 October 1, 1998 - September 30, 1999 10,000 10,000 October 1, 1999 - September 30, 2000 10,000 20,000
Number of Shares From - To First Exercisable Cumulative Total - - --------- ----------------- ---------------- October 1, 2000 September 30, 2001 10,000 30,000 October 1, 2001 - September 30, 2004 0 30,000 On and after October 1, 2004 0 0
(b) In the event of an "Acquisition" or "Change of Control" (as those terms are hereinafter defined), the vesting and exercise dates for the Option shall be accelerated to the date and time upon which the Acquisition or Change of Control becomes effective. (c) For purposes hereof, (a) "Acquisition" means either (i) the purchase of all or substantially all of the assets of the Corporation by a third party, or (ii) the merger or consolidation of the Corporation with a third party; and (b) "Change of Control" means the election by shareholders of the Corporation of a majority of directors of the Corporation who were not nominated for election by the Corporation's management. (d) No provision of this Agreement to the contrary withstanding, neither the Option nor any right claimed thereby or hereby, therein or herein or thereunder or hereunder shall be exercisable by anyone on or after October 1, 2004. (e) With respect to common shares that are purchasable for the first time during any calendar year, the Employee may only exercise the Option to purchase that number of common shares that have an aggregate fair market value (as of the date first above written) which is less than or equal to $100,000. The Employee may exercise the Option with respect to common shares valued in excess of $100,000 in any calendar year to the extent the right to exercise the Option to purchase such shares has accumulated over a period in excess of one year. 4. Method of Exercise. The Option shall be exercised by written ------------------ notice to the Board of the Corporation, or the Committee if such exists, at the Corporation's principal place of business. The notice shall be accompanied by payment of the option price for the shares being purchased in cash or by cashier's check or certified check or, in the sole discretion of the Board, or the Committee if such exists, by such other form of payment as is permitted under the Plan. The notice shall also be accompanied by any document reasonably required by the Corporation to be executed by Employee, acknowledging the applicable restrictions on the transfer of the common shares being purchased as set forth under Section 8 of this Agreement. The Corporation shall make prompt delivery of a certificate or -2- certificates representing such common shares, provided that if any law or regulation requires the Corporation to take any action with respect to the common shares specified in such notice before the issuance thereof, then the date of delivery of such common shares shall be extended for the period necessary to take such action. The Option must be exercised with respect to at least 500 of the common shares, unless only a lesser number of the common shares are then exercisable, in which case it must be exercised with respect to all of such lesser number. 5. Termination of Option. Except as herein otherwise provided, the --------------------- Option granted under this Agreement, to the extent not heretofore exercised, shall terminate upon the first to occur of the following events: (a) The expiration of three months after the date on which Employee's employment by the Corporation is terminated, except if such termination be by reason of permanent and total disability or death; (b) The expiration of twelve months after the date on which Employee's employment by the Corporation is terminated, if such termination be by reason of the Employee's permanent and total disability or death; (c) The expiration of twelve months from the date of Employee's death should Employee die within three months of termination of employment by the Corporation; (d) The termination of Employee's employment by the Corporation for either (i) Employee's material breach of any agreement with the Corporation or (ii) Employee's deliberate, willful or gross misconduct in the performance of Employee's duties on behalf of the Corporation; or (e) October 1, 2004. 6. Reclassification, Consolidation or Merger. ----------------------------------------- 6.1 If and to the extent that the number of issued common shares of the Corporation shall be increased or reduced by change in par value, split up, reverse split, reclassification, distribution of a dividend payable in stock, or the like, the number of common shares subject to the Option and the option price per share shall be proportionately adjusted in accordance with the Plan. 6.2 If the Corporation is reorganized or consolidated or merged with another corporation, the Employee shall be entitled to receive an option (the "New Option") covering common shares of such reorganized, consolidated or merged company in the same proportion, at an equivalent price, and subject to the same conditions as the Option. For purposes of the preceding -3- sentence, the excess of the fair market value of the common shares subject to the Option immediately after the reorganization, consolidation or merger over the aggregate option price of such common shares shall not be more than the excess of the aggregate fair market value of all common shares subject to the Option immediately before such reorganization, consolidation or merger over the aggregate option price of such common shares, and the New Option or assumption of the Option shall not give the Employee additional benefits which he does not have under this Option, or deprive him of benefits which he has under this Option. 7. Rights Prior to Exercise of Option. This Option is non- ---------------------------------- transferable by Employee, except in the event of his death, and during his lifetime is exercisable only by him. No person shall have any rights as a stockholder with respect to any common shares purchasable hereunder until payment of the option price and delivery to him of such common shares as herein provided. 8. Restriction on Disposition. All common shares acquired by -------------------------- Employee pursuant to this Agreement shall be subject to the restrictions on sale, encumbrance and other disposition contained in the Company's By-Laws, or imposed by applicable state and federal laws or regulations regarding the registration or qualification of such acquisition of common shares, and may not be sold or otherwise disposed of (i) within two years from the date of the granting of the Option under which such common shares were acquired, (ii) within one year after the exercise of the Option, and (iii) unless the Corporation has received a prior opinion of Employee's counsel satisfactory in form and substance to counsel for the Corporation that such transaction will not violate the Securities Act of 1933 or any applicable state law regulating the sale of securities. 9. Binding Effect - Plan Governs. ----------------------------- 9.1 This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. -4- 9.2 This Agreement shall be construed in accordance with and shall be governed by the terms of the Plan as adopted by the Board and approved or to be approved by the shareholders of the Corporation within the meaning of Section 422 of the Internal Revenue Code of 1986, as the Plan may be amended from time to time by the Board and the shareholders of the Corporation. Employee acknowledges receipt of a copy of the Plan prior to the execution hereof. If possible, this Agreement shall be construed along with and in addition to any other agreement which the Corporation and Employee may enter into, but any provision in this Agreement which contradicts any provision of any other agreement shall take precedence and be binding over such other provision. "Employee" "Corporation" NetCo Communications Corporation /s/ David Ottinger By: /s/ Edward J. Driscoll III - - --------------------------- -------------------------------- President -5- EX-10.27 21 EMPLOYMENT AGREEMENT DATED SEPTEMBER 8, 1998 EXHIBIT 10.27 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement (this "Agreement") is made effective as of September 8, 1998, by and between WAM!NET Inc. ("WAM!NET" or the "Corporation"), of 6100 West 110th Street, Bloomington, Minnesota 55438, and Bradley E. Sparks ("Employee") of 2900 Thomas Avenue S., Apt. 1715, Minneapolis, Minnesota 55416. BACKGROUND A. WAM!NET is engaged in the business of high speed electronic courier services for the transportation, storage and retrieval of large quantities of data for print and CD-ROM prepress publishing industries as well as for medical imaging; B. WAM!NET desires to have the services of the Employee; and C. The Employee is willing to be employed by WAM!NET. Therefore, in consideration of the mutual promises set forth in this Agreement, the parties agree as follows: 1. EMPLOYMENT. Effective September 8,1998, Employee shall serve WAM!NET as Executive Vice President and Chief Financial Officer. 2. BEST EFFORTS OF EMPLOYEE. Employee agrees to perform faithfully, industriously, and to the best of Employee's ability, experience, and talents, all of the duties that may be reasonably required by the express and implicit terms of this Agreement, to the reasonable satisfaction of WAM!NET. Such duties shall be provided at such place(s) as the needs, business, or opportunities of WAM!NET may reasonably require from time to time. 3. Notwithstanding the foregoing, Employee shall also be permitted to serve on the Board of Directors of other non-competing business corporations and may participate in charitable, cultural, professional, civic, and business association activities. 4. WAM!NET shall add Employee to its Director and Officer insurance and indemnification policies. Additionally, WAM!NET hereby indemnifies and holds harmless Employer from any losses, damages, claims, and causes of action arising out of the actions or inactions of the Board of Directors and/or the Officers of the Company for any period before September 8, 1998. 5. COMPENSATION OF EMPLOYEE. As compensation for the services provided by Employee under this Agreement, WAM!NET will pay the Employee a monthly base salary of $16,666.67 (which salary may be adjusted upward by WAM!NET after the first anniversary of the date of this Agreement). In addition, a bonus of up to 30% of Employee's annualized base salary (annualized for 1998 only) may be earned if Employee achieves specific performance objectives. These objectives will be determined by Employee and the Chief Executive Officer or his successors. Upon termination of this Agreement, payments under this paragraph shall cease; provided, however, that the Employee shall be entitled to payments for periods or partial periods that occurred prior to the date of termination and for which the Employee has not yet been paid. 6. STOCK OPTIONS. Subject to approval of the WAM!NET Board of Directors, and in addition to any other compensation to which Employee may be entitled by this Agreement, Employee shall be entitled to receive Incentive Stock Options and/or Nonqualified Stock Options, as determined by the Board of Directors, (cumulatively, the "Options") for Six Hundred Thousand (600,000) shares of common stock of WAM!NET Inc. (the "Shares") under and subject to the provisions of the WAM!NET Inc. Amended and Restated 1994 Stock Option Plan and/or the WAM!NET Inc. 1998 Combined Stock Option Plan (cumulatively, the "Plans"). The exercise price of the Options shall be Fair Market Value or Eight and no/100 Dollars ($8.00) per share for Four Hundred Thousand (400,000) of the Shares, and shall be Twelve and no/100 Dollars ($12.00) for Two Hundred Thousand (200,000) of the Shares. The Options shall vest and first become exercisable as follows at the rate of twenty-five percent (25%) per year, with the first twenty-five percent (25%) becoming vested and exercisable on the first anniversary of the date of this Agreement:
Number of Shares Number of Shares ---------------- ---------------- First Exercisable First Exercisable ----------------- ----------------- Vesting Date at $8.00 Per Share at $12.00 Per Share ------------ ------------------ ------------------- First Anniversary of date of Agreement 100,000 50,000 Second Anniversary of date of Agreement 100,000 50,000 Third Anniversary of date of Agreement 100,000 50,000 Fourth Anniversary of date of Agreement 100,000 50,000
The previous provisions of this Paragraph 4 notwithstanding, any Options not then exercised by Employee shall terminate and be forfeited by Employee upon the termination of Employee's employment with WAM!NET or any subsidiary for either: (i) Employee's material breach of Paragraph 6, 7, 8, 9, 10, 11 or 12 of this Agreement, or (ii) Employee's commission of a felony or other willful act which is materially and significantly detrimental to WAM!NET. 7. STOCK GRANT. Subject to approval of the WAM!NET Board of Directors, Employee shall be entitled to purchase 37,500 shares of restricted stock at $8.00 per share under terms and conditions of a Stock Restriction Agreement to be negotiated. 2 8. RELOCATION EXPENSES. Employee is entitled to receive relocation benefits as outlined in Exhibit A, hereto. Employee may exercise his right to relocation benefits at any time prior to September 30, 1999. 9. FAMILY VISITS. WAM!NET will pay for up to 12 round trip Economy Class Airfares between Minneapolis and Washington DC to facilitate Employee's family visits, and shall reimburse Employee for reasonable expenses incurred by him for auto and lodging associated with such family visits up to two nights a month. 10. AUTOMOBILE ALLOWANCE. WAM!NET shall provide Employee with an annual automobile allowance which amount shall cover lease payments of $750.00 per month (payable monthly), plus maintenance, insurance and fuel costs associated with the use of such automobile, which will be submitted as expenses. 11. REIMBURSEMENT FOR EXPENSES IN ACCORDANCE WITH WAM!NET POLICY. WAM!NET will reimburse Employee for "out-of-pocket" expenses in accordance with WAM!NET policies in effect from time to time. 12. CONFIDENTIALITY. Employee recognizes that WAM!NET has and will have information regarding the following: - - - inventions - business affairs - - - machinery - processes - - - products - trade secrets - - - prices - technical matters - - - apparatus - customer lists - - - costs - product designs - - - discounts - copyrights - - - future plans and other vital information (collectively, "Information") which are valuable, special and unique assets of WAM!NET. Employee agrees that he will not at any time or in any manner, either directly or indirectly, divulge, disclose, or communicate in any manner any Information to any third party without prior written consent of WAM!NET. Employee will protect the Information and treat it as strictly confidential. Information under this paragraph shall not include information that is generally available in the public domain or information that WAM!NET disseminates to its the public at large or information that is filed as a matter of public record with the SEC or similar state regulatory agencies. 13. TRADE SECRETS. Employee shall not at any time during the term of this Agreement or thereafter, or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation in any manner whatsoever any information which constitutes a "trade secret" as that term is defined in section 325C.01, subd. 5 of Minnesota Statutes. In applying this paragraph, the arbitrator may also take into account the special circumstances of the Corporation's business. 3 14. DISCLOSURE AND ASSIGNMENT. Except as provided elsewhere in this Agreement, Employee shall treat for the Corporation's sole benefit and fully and promptly disclose to the Corporation, without additional compensation, all ideas, discoveries, inventions and improvements, whether patentable or not, which while the Employee is employed by the Corporation are made, conceived or reduced to practice by Employee, alone or with others, during or after usual working hours, either on or off the job, and Employee hereby assigns to the Corporation all such ideas, discoveries, inventions and improvements to be the Corporation's exclusive property. 15. DISCLOSURE AND RIGHT OF FIRST REFUSAL. Paragraph 14 of this Agreement shall not apply to any ideas, discoveries, inventions and improvements for which no equipment, supplies, facility or trade secret information of the Corporation was used, and which was developed entirely on Employee's own time, and (1) which does not relate (a) directly to the business of the Corporation or (b) to the Corporation's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Employee for the Corporation. Employee will, nonetheless, promptly disclose all such ideas, discoveries, inventions and improvements to the Corporation and offer to the Corporation the right of first refusal to enter into a license or purchase agreement covering the subject idea, discovery, invention or improvement on terms mutually agreed to by Employee and the Corporation. In the event the Corporation and Employee cannot agree on terms and Employee receives an offer to enter into a license or purchase agreement with some other party on terms more favorable to that other party than the terms offered to the Corporation, then the Corporation shall have the right and Employee shall have the obligation to offer to the Corporation the idea, discovery, invention or improvement on such favorable terms. When such an offer is made to the Corporation pursuant to the preceding sentence, it must be accepted by the Corporation within thirty (30) days; or if not accepted, the right of first refusal hereunder as to that offer shall terminate. NOTICE: Paragraph 14 hereof requires Employee to assign rights to inventions to the Corporation or its successors. Minnesota Statutes (S)181.78 limits the scope of agreements requiring the inventions be assigned employers. The statute states that such assignment agreements do not apply: "to an invention for which no equipment, supplies, facility or trade secret information of the employer was used and which was developed entirely on the Employee's own time, and (1) which does not relate (a) directly to the business of the employer or (b) to the employer's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the Employee for the employer." Please note that Paragraph 14 of this Agreement uses these statutory terms to define the inventions which are not automatically assigned to the Corporation but instead are subject to a right of first refusal in favor of the Corporation. 16. UNAUTHORIZED DISCLOSURE OF INFORMATION. If it appears that the Employee has disclosed (or has threatened to disclose) Information or Trade Secrets in violation 4 of this Agreement, WAM!NET shall be entitled to an injunction to restrain Employee from disclosing, in whole or in part, such Information, or from providing any services to any party to whom such Information has been disclosed. WAM!NET shall not be prohibited by this provision from pursuing other remedies, including a claim for losses and damages. 17. CONFIDENTIALITY AFTER TERMINATION OF EMPLOYMENT. The confidentiality provisions of this Agreement shall remain in full force and effect for a one year period after the termination of Employee's employment. 18. NON-COMPETE AGREEMENT. (a) Recognizing that the various items of Information are special and unique assets of the company, Employee agrees and covenants that for a period of 12 months following the termination of his or her employment, whether such termination is voluntary or involuntary (unless such termination is the result of a failure by WAM!NET to issue stock options or to obtain Board approval therefor in accordance with paragraph 4), Employee will not directly engage in any business competitive with WAM!NET, nor shall Employee cause or solicit, directly for his own behalf or for the benefit of a third party, any other employee or employees of WAM!NET to terminate their employment with WAM!NET to engage in such competitive activities. This covenant shall apply to the geographical area that includes the United States and Canada. Directly engaging in any competitive business includes, but is not limited to, (i) engaging in a business as owner, partner or agent (other than as an owner of less than five (5%) percent of a publicly traded company), (ii) becoming an employee of any third party that is engaged in such business, (iii) becoming interested directly in any such business, or (iv) soliciting any customer of WAM!NET for the benefit of a third party that is engaged in such business. Employee agrees that this non-compete provisions will not adversely affect the Employee's livelihood. (b) In the event that, solely because of this non-competition covenant, the Employee is precluded from working in an industry for which he is qualified by virtue of his experience, education, or training, then, WAM!NET agrees to pay, after a period of three (3) months, and up to a total period not to exceed six (6) months, the base compensation earned by the Employee immediately prior to his separation from employment. 19. EMPLOYEE'S INABILITY TO CONTRACT FOR WAM!NET. Employee shall not have the right to make any contracts or commitments for or on behalf of WAM!NET except in accordance with WAM!NET policies or with the express written consent of WAM!NET. 20. TERM/TERMINATION. Employee's employment under this Agreement shall be for an unspecified term on an "at will" basis. This Agreement may be terminated, with or without cause, by either party. Each party will give notice (as provided in the paragraph of this Agreement captioned "Notices") of such action to other party. 21. SEVERANCE PAY. If WAM!NET terminates Employee's employment other than for cause WAM!NET agrees to pay Employee as severance pay an amount equal to 6 5 months of Employee's base pay as of the date of his termination, less customary payroll deductions, to be paid in monthly installments in the same manner as paid during his employment. The first severance payment shall be made to Employee on WAM!NET's first regular payday after the date of Employee's termination. WAM!NET's responsibility to pay the severance pay will immediately terminate if Employee violates paragraphs 8, 13, or 14 of this Agreement. For purposes of this Agreement "for cause" shall mean: (1) the Employee's dishonesty or theft of WAM!NET's property; (2) the Employee's gross negligence or inefficiency in the execution of his duties; (3) the Employee's material violation of WAM!NET's rules, regulations, instructions or policies; (4) the Employee's commission of a crime or other act which would materially damage the reputation of WAM!NET; or (5) the Employee's material breach of provisions of this Agreement. 22. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or its breach, or to the employment relationship between the Employee and the Company, shall be settled by final and binding arbitration, upon the request of either party, in Minneapolis, Minnesota. Such arbitration shall proceed in accordance with the then governing rules of the American Arbitration Association (AAA) for Commercial Arbitration or Employment Law Disputes, at the option of the petitioner. Judgment upon the award rendered may be entered and enforced in any court of competent jurisdiction. It is agreed that the parties shall choose a single, neutral arbitrator from among a panel of not less than seven (7) proposed arbitrators, and that the parties may have no more than two (2) panels of arbitrators presented to them by the AAA. The parties agree that they shall each bear their own costs associated with the arbitration, including any filing fee to be paid by them and their own legal counsel expenses. The parties further agree that they shall share equally in the reasonable costs and the fees of the neutral. 23. RETURN OF PROPERTY. Upon termination of this Agreement, the Employee shall deliver all property (including keys, records, notes, data, memoranda, models, and equipment) that is in the Employee's possession or under the Employee's control which is WAM!NET's property. 24. NOTICES. All notices required or permitted under this Agreement shall be in writing and shall be deemed given when delivered in person or five (5) days after deposited in the United States mail, postage paid, addressed as follows: WAM!NET: - - ------- President WAM!NET Inc. 6100 West 110th Street Bloomington, Minnesota 55438 Employee: - - -------- Bradley E. Sparks 2900 Thomas Avenue S., Apt. 1715 Minneapolis, Minnesota 55416 6 Such addresses may be changed from time to time by either party by providing written notice in the manner set forth above. 25. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties and there are no other promises or conditions in any other agreements whether oral or written. This Agreement supersedes any prior written or oral agreements between the parties. 26. AMENDMENT. This Agreement may be modified or amended, if the amendment is made in writing and is signed by both parties. 27. SEVERABILITY. If any provisions of this Agreement shall be held to be invalid or unenforceable for any reason, the remaining provisions shall continue to be valid and enforceable. If a court finds that any provision of this Agreement is invalid or unenforceable, but that by limiting such provision it would become valid or enforceable, then such provision shall be deemed to be written, construed, and enforced as so limited. 28. WAIVER OF CONTRACTUAL RIGHT. The failure of either party to enforce any provision of this Agreement shall not be construed as a waiver or limitation of that party's right to subsequently enforce and compel strict compliance with every provision of this Agreement. 29. APPLICABLE LAW. This Agreement shall be governed by the laws of the State of Minnesota. WAM!NET: WAM!NET Inc. Dated: September 8, 1998 By: /s/ Edward J. Driscoll III __________________ _________________________________ Its: An authorized Officer or Agent AGREED AND ACCEPTED. Employee: Printed Name Bradley E. Sparks Dated: September 8, 1998 /s/ Bradley E. Sparks __________________ _____________________________________ Signature of Employee 7 EXHIBIT A RELOCATION PACKAGE Household Goods Shipment. WAM!NET will pay for the shipment of Sparks' personal - - ------------------------ household goods via a professional moving service including packing and unpacking services. WAM!NET will also pay for storage of Sparks' personal household goods for up to 90 days and delivery out of storage. Home sale Assistance - Guaranteed Buy-Out. Listing, marketing, home sale and - - ----------------------------------------- closing assistance for Sparks' current home will be provided by Edina Realty Relocation Services/American Escrow and Closing at WAM!NET'S expense. The Guaranteed Buy-Out will be at a purchase price based upon the average of two independent fee appraisals ordered by American Escrow and Closing. If the appraisals are not within 5% of each other, a third appraisal will be ordered and the purchase price will be determined by averaging the two closest appraisals. Upon determination of the purchase price American Escrow and Closing will prepare a contract to purchase the property for the purchase price. From the date of the contract Sparks will have 120 days in which to sell the house to a third party and during which time Sparks will be responsible for all home related expenses. Sparks agrees that the listing and marketing of the house during the 120 day period shall be coordinated through Edina Realty Relocation Services. If such sale does not take place within the 120 day period the home will be purchased by American Escrow and Closing at the purchase price listed in the contract. The Guaranteed Buy-Out is subject to a satisfactory home inspection and to the house being available for showings. Any work orders or repairs mandated by the inspection are to be made at Sparks' expense. The costs of any such work orders or repairs not made prior to the sale to American Escrow and Closing shall be deducted from the purchase price. Temporary Living Expenses. WAM!NET will pay for up to 90 days of temporary - - ------------------------- lodging expenses incurred by Sparks upon his arrival in the Twin City area, such lodging to be approved by WAM!NET. Home Seeking Expenses. WAM!NET will pay for the cost of Sparks to travel to the - - --------------------- Twin Cities for the purpose of locating permanent housing as well as all related and reasonable expenses incurred during this trip. Tax Gross-Up. If Sparks' uses the Home Sale Assistance and Guaranteed Buy-Out - - ------------ package offered by WAM!NET through Edina Realty Relocation Services/American Escrow and Closing WAM!NET will provide Sparks with tax liability assistance for non-deductible, taxable relocation income. Such tax liability assistance will be based on WAM!NET income only. The gross-up for federal, state and FICA will be based on established standards and will be calculated by an agent selected by WAM!NET. INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT, made and entered into effective this 11th day of September, 1998, by and between WAM!NET INC., a Minnesota corporation (hereinafter referred to as the "Corporation") and BRADLEY SPARKS, a resident of the State of Minnesota (hereinafter referred to as the "Employee"). WHEREAS, the Corporation considers it desirable and in its best interests that the Employee be given an inducement to acquire a proprietary interest in the Corporation and an added incentive to advance the interests of the Corporation, by possessing an option to purchase common shares of the Corporation, in accordance with WAM!NET Inc. 1994 Stock Option Plan (the "Plan"). NOW THEREFORE, in consideration of the premises and of the mutual promises and consideration provided herein, the parties agree as follows: 1. Definitions. Words and phrases not otherwise defined herein shall have ----------- the meanings ascribed to them, respectively, in the Plan. 2. Grant of Option. The Corporation grants to Employee an Option (the --------------- "Option") to purchase Five Thousand (37,500) common shares of the Corporation at a purchase price of $8.00 per share, in the manner and subject to the conditions provided herein and in the Plan. The Option hereby granted shall be an ISO as provided in the Plan. 3. Time of Exercise of Option. Employee may exercise the Option in four -------------------------- equal increments; the initial increment of 9,375 shares being exercisable on and after September 11, 1999 and the second increment of 9,375 shares being exercisable on and after September 11, 2000, the third increment of 9,375 shares being exercisable on and after September 11, 2001, and the fourth increment of 9,375 shares being exercisable on and after September 11, 2002. All options shall expire at midnight on September 10, 2008, as illustrated by the following table: Number of Shares From-To First Exercisable Cumulative Total ------- ----------------- ---------------- September 11, 1999 - September 10, 2000 9,375 9,375 September 11, 2000- September 10, 2001 9,375 18,750 September 11, 2001- September 10, 2002 9,375 28,125 September 11, 2002- September 10, 2003 9,375 37,500 On and after September 11, 2008 0 0
No provision of this Agreement to the contrary withstanding, neither the Option nor any right claimed thereby or hereby, therein or herein or thereunder or hereunder shall be exercisable by anyone on or after September 11, 2008. With respect to common shares that are purchasable for the first time during any calendar year, the Employee may only exercise the Option to purchase that number of common shares that have an aggregate fair market value (as of the date first above written) which is less than or equal to $100,000. The Employee may exercise the Option with respect to common shares valued in excess of $100,000 in any calendar year to the extent the right to exercise the Option to purchase such shares has accumulated over a period in excess of one year. 4. Method of Exercise. The Option shall be exercised by written notice to ------------------ the Board of the Corporation, or the Committee if such exists, at the Corporation's principal place of business. The notice shall be accompanied by payment of the option price for the shares being purchased in cash or by cashier's check or certified check or, in the sole discretion of the Board, or the Committee if such exists, by such other form of payment as is permitted under the Plan. The notice shall also be accompanied by any document reasonably required by the Corporation to be executed by Employee, acknowledging the applicable restrictions on the transfer of the common shares being purchased as set forth under Section 8 of this Agreement. The Corporation shall make prompt delivery of a certificate or certificates representing such common shares, provided that if any law or regulation requires the Corporation to take any action with respect to the common shares specified in such notice before the issuance thereof, then the date of delivery of such common shares shall be extended for the period necessary to take such action. The Option must be exercised with respect to at least 500 of the common shares, unless only a lesser number of the common shares are then exercisable, in which case it must be exercised with respect to all of such lesser number. 5. Termination of Option. Except as herein otherwise provided, the Option --------------------- granted under this Agreement, to the extent not heretofore exercised, shall terminate upon the first to occur of the following events: a. The expiration of three months after the date on which Employee's employment by the Corporation is terminated, except if such termination be by reason of permanent and total disability or death; b. The expiration of twelve months after the date on which Employee's employment by the Corporation is terminated, if such termination be by reason of the Employee's permanent and total disability or death; c. The expiration of twelve months from the date of Employee's death should Employee die within three months of termination of employment by the Corporation; d. The termination of Employee's employment by the Corporation for either (i) Employee's material breach of any agreement with the Corporation or (ii) Employee's deliberate, willful or gross misconduct in the performance or Employee's duties on behalf of the Corporation; or e. September 11, 2008. 6. Reclassification, Consolidation or Merger. ----------------------------------------- 6.1 If and to the extent that the number of issued common shares of the Corporation shall be increased or reduced by change in par value, split up, reverse split, reclassification, distribution of a dividend payable in stock, or the like, the number of common shares subject to the Option and the option price per share shall be proportionately adjusted in accordance with the Plan. 6.2 If the Corporation is reorganized or consolidated or merged with another corporation, the Employee shall be entitled to receive an option (the "New Option") covering common shares of such reorganized, consolidated or merged company in the same proportion, at an equivalent price, and subject to the same conditions as the Option. For purposes of the preceding sentence, the excess of the fair market value of the common shares subject to the Option immediately after the reorganization, consolidation or merger over the aggregate option price of such common shares shall not be more than the excess of the aggregate fair market value of all common shares subject to the Option immediately before such reorganization, consolidation or merger over the aggregate option price of such common -2- shares, and the New Option or assumption of the Option shall not give the Employee additional benefits which he does not have under this Option, or deprive him of benefits which he has under this Option. 7. Rights Prior to Exercise of Option. This Option is non-transferable by ---------------------------------- Employee, except in the event of his death, and during his lifetime is exercisable only by him. No person shall have any rights as a stockholder with respect to any common shares purchasable hereunder until payment of the option price and delivery to him of such common shares as herein provided. 8. Restriction on Disposition. All common shares acquired by Employee -------------------------- pursuant to this Agreement shall be subject to the restrictions on sale, encumbrance and other disposition contained in the Company's By-Laws, or imposed by applicable state and federal laws or regulations regarding the registration or qualification of such acquisition of common shares, and may not be sold or otherwise disposed of (i) within two years from the date of the granting of the Option under which such common shares were acquired, (ii) within one year after the exercise of the Option, and (iii) unless the Corporation has received a prior opinion of Employee's counsel satisfactory in form and substance to counsel for the Corporation that such transaction will not violate the Securities Act of 1933 or any applicable state law regulating the sale of securities. 9. Binding Effect - Plan Governs. ----------------------------- 9.1 This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. This Agreement shall be construed in accordance with and shall be governed by the terms of the Plan as adopted by the Board and approved or to be approved by the shareholders of the Corporation within the meaning of Section 422 of the Internal Revenue Code of 1986, as the Plan may be amended from time to time by the Board and the shareholders of the Corporation. Employee acknowledges receipt of a copy of the Plan prior to the execution hereof. If possible, this Agreement shall be construed along with and in addition to any other agreement which the Corporation and Employee may enter into, but any provision in this Agreement which contradicts any provision of any other agreement shall take precedence and be binding over such other provision. "Employee" "Corporation" Bradley Sparks WAM!NET Inc. /s/ Bradley E. Sparks By: /s/ Michael O'Donnell ____________________________ __________________________________ An Authorized Agent or Officer -3- NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, made and entered into effective this 11th day of September, 1998, by and between WAM!NET INC., a Minnesota corporation (hereinafter referred to as the "Corporation") and BRADLEY SPARKS, a resident of the State of Minnesota (hereinafter referred to as the "Employee"). WHEREAS, the Corporation considers it desirable and in its best interests that the Employee be given an inducement to acquire a proprietary interest in the Corporation and an added incentive to advance the interests of the Corporation, by possessing an option to purchase common shares of the Corporation, in accordance with WAM!NET Inc. 1994 Stock Option Plan (the "Plan"). NOW THEREFORE, in consideration of the premises and of the mutual promises and consideration provided herein, the parties agree as follows: 1. Definitions. Words and phrases not otherwise defined herein shall have ----------- the meanings ascribed to them, respectively, in the Plan. 2. Grant of Option. The Corporation grants to Employee an Option (the --------------- "Option") to purchase Five Thousand (362,500) common shares of the Corporation at a purchase price of $8.00 per share, in the manner and subject to the conditions provided herein and in the Plan. The Option hereby granted shall be an NQO as provided in the Plan. 3. Time of Exercise of Option. Employee may exercise the Option in three -------------------------- equal increments; the initial increment of 90,625 shares being exercisable on and after September 11, 1999 and the second increment of 90,625 shares being exercisable on and after September 11, 2000, the third increment of 90,625 shares being exercisable on and after September 11, 2001, and the fourth increment for 90,625 shares being exercisable on and after September 11, 2002. All options shall expire at midnight on September 10, 2008, as illustrated by the following table:
Number of Shares From-To First Exercisable Cumulative Total ------- ----------------- ---------------- September 11, 1999 - 90,625 9,375 September 10, 2000 September 11, 2000 - 90,625 18,750 September 10, 2001 September 11, 2001 - 90,625 28,125 September 10, 2002 September 11, 2002 - 90,625 37,500 September 10, 2003 On and after 0 0 September 11, 2008
No provision of this Agreement to the contrary withstanding, neither the Option nor any right claimed thereby or hereby, therein or herein or thereunder or hereunder shall be exercisable by anyone on or after September 11, 2008. With respect to common shares that are purchasable for the first time during any calendar year, the Employee may only exercise the Option to purchase that number of common shares that have an aggregate fair market value (as of the date first above written) which is less than or equal to $100,000. The Employee may exercise the Option with respect to common shares valued in excess of $100,000 in any calendar year to the extent the right to exercise the Option to purchase such shares has accumulated over a period in excess of one year. 4. Method of Exercise. The Option shall be exercised by written notice to ------------------ the Board of the Corporation, or the Committee if such exists, at the Corporation's principal place of business. The notice shall be accompanied by payment of the option price for the shares being purchased in cash or by cashier's check or certified check or, in the sole discretion of the Board, or the Committee if such exists, by such other form of payment as is permitted under the Plan. The notice shall also be accompanied by any document reasonably required by the Corporation to be executed by Employee, acknowledging the applicable restrictions on the transfer of the common shares being purchased as set forth under Section 8 of this Agreement. The Corporation shall make prompt delivery of a certificate or certificates representing such common shares, provided that if any law or regulation requires the Corporation to take any action with respect to the common shares specified in such notice before the issuance thereof, then the date of delivery of such common shares shall be extended for the period necessary to take such action. The Option must be exercised with respect to at least 500 of the common shares, unless only a lesser number of the common shares are then exercisable, in which case it must be exercised with respect to all of such lesser number. 5. Termination of Option. Except as herein otherwise provided, the Option --------------------- granted under this Agreement, to the extent not heretofore exercised, shall terminate upon the first to occur of the following events: a. The expiration of three months after the date on which Employee's employment by the Corporation is terminated, except if such termination be by reason of permanent and total disability or death; b. The expiration of twelve months after the date on which Employee's employment by the Corporation is terminated, if such termination be by reason of the Employee's permanent and total disability or death; c. The expiration of twelve months from the date of Employee's death should Employee die within three months of termination of employment by the Corporation; d. The termination of Employee's employment by the Corporation for either (i) Employee's material breach of any agreement with the Corporation or (ii) Employee's deliberate, willful or gross misconduct in the performance or Employee's duties on behalf of the Corporation; or e. September 11, 2008. 6. Reclassification, Consolidation or Merger. ----------------------------------------- 6.1 If and to the extent that the number of issued common shares of the Corporation shall be increased or reduced by change in par value, split up, reverse split, reclassification, distribution of a dividend payable in stock, or the like, the number of common shares subject to the Option and the option price per share shall be proportionately adjusted in accordance with the Plan. 6.2 If the Corporation is reorganized or consolidated or merged with another corporation, the Employee shall be entitled to receive an option (the "New Option") covering common shares of such reorganized, consolidated or merged company in the same proportion, at an equivalent price, and subject to the same conditions as the Option. For purposes of the preceding sentence, the excess of the fair market value of the common shares subject to the Option immediately after the reorganization, consolidation or merger over the aggregate option price of such common shares shall not be more than the excess of the aggregate fair market value of all common shares subject to the Option immediately -2- before such reorganization, consolidation or merger over the aggregate option price of such common shares, and the New Option or assumption of the Option shall not give the Employee additional benefits which he does not have under this Option, or deprive him of benefits which he has under this Option. 7. Rights Prior to Exercise of Option. This Option is non-transferable by ---------------------------------- Employee, except in the event of his death, and during his lifetime is exercisable only by him. No person shall have any rights as a stockholder with respect to any common shares purchasable hereunder until payment of the option price and delivery to him of such common shares as herein provided. 8. Restriction on Disposition. All common shares acquired by Employee -------------------------- pursuant to this Agreement shall be subject to the restrictions on sale, encumbrance and other disposition contained in the Company's By-Laws, or imposed by applicable state and federal laws or regulations regarding the registration or qualification of such acquisition of common shares, and may not be sold or otherwise disposed of (i) within two years from the date of the granting of the Option under which such common shares were acquired, (ii) within one year after the exercise of the Option, and (iii) unless the Corporation has received a prior opinion of Employee's counsel satisfactory in form and substance to counsel for the Corporation that such transaction will not violate the Securities Act of 1933 or any applicable state law regulating the sale of securities. 9. Binding Effect - Plan Governs. ----------------------------- 9.1 This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 9.2 This Agreement shall be construed in accordance with and shall be governed by the terms of the Plan as adopted by the Board and approved or to be approved by the shareholders of the Corporation within the meaning of Section 422 of the Internal Revenue Code of 1986, as the Plan may be amended from time to time by the Board and the shareholders of the Corporation. Employee acknowledges receipt of a copy of the Plan prior to the execution hereof. If possible, this Agreement shall be construed along with and in addition to any other agreement which the Corporation and Employee may enter into, but any provision in this Agreement which contradicts any provision of any other agreement shall take precedence and be binding over such other provision. "Employee" "Corporation" Bradley E. Sparks WAM!NET Inc. /s/ Bradley E. Sparks By: /s/ Michael O'Donnell ____________________________ _____________________________ An Authorized Agent or Officer -3- WAM!NET INC. NONQUALIFIED STOCK OPTION AGREEMENT 1998 COMBINED STOCK OPTION PLAN THIS AGREEMENT, made and entered into effective this 11th day of September, 1998, by and between WAM!NET Inc., a Minnesota corporation (hereinafter referred to as the "Corporation") and Bradley Sparks, an employee of the Corporation ("Employee"). WHEREAS, the Corporation considers it desirable and in its best interests that Employee be given an inducement to acquire a proprietary interest in the Corporation and an added incentive to advance the interests of the Corporation, by possessing an option to purchase common shares of the Corporation, in accordance with the WAM!NET Inc. 1998 Combined Stock Option Plan (the "Plan"). NOW THEREFORE, on the basis of the premises and of the mutual considerations provided herein, the parties agree as follows: 1. Definitions. Words and phrases not otherwise defined herein shall have ----------- the meanings ascribed to them, respectively, in the Plan. 2. Grant of Option. The Corporation grants to Employee an Option (the --------------- "Option") to purchase 139,250 common shares of the Corporation at a purchase price of $12.00 per share, in the manner and subject to the conditions provided herein and in the Plan. The Option hereby granted shall be a nonqualified stock option as provided in the Plan. 3. Time of Exercise of Option. Employee may exercise the Option in 4 -------------------------- equal increments; the initial increment for 34,812 shares being exercisable on and after September 11, 1999, the second increment for 34,812 shares being exercisable on and after September 11, 2000, the third increment for 34,813 shares being exercisable on and after September 11, 2001, and the fourth increment for 34,813 shares being exercisable on and after September 11, 2002. All options shall expire at midnight on September 10, 2008, as illustrated by the following table: Number of Shares From - To First Exercisable Cumulative Total --------- ----------------- ---------------- September 11, 1999- 34,812 34,812 September 10, 2000 September 11, 2000- 34,812 69,624 September 10, 2001 September 11, 2001- 34,813 104,437 September 10, 2002 September 11, 2002- 34,813 139,250 September 10, 2003
No provision of this Agreement to the contrary withstanding, neither the Option nor any right claimed thereby or hereby, therein or herein or thereunder of hereunder shall be exercisable by anyone on or after September 11, 2008. 4. Method of Exercise. The Option shall be exercised by written notice to ------------------ the Board of the Corporation, or the Committee if such exists, at the Corporation's principal place of business. The notice shall be accompanied by payment of the option price for the shares being purchased in cash or by cashier's check or certified check or, in the sole discretion of the Board of Directors, or the Committee if such exists, by such other form of payment as is permitted under the Plan. The notice shall also be accompanied by any document reasonably required by the Corporation to be executed by Employee, acknowledging the applicable restrictions on the transfer of the common shares being purchased as set forth under this Agreement. The Corporation shall make prompt delivery of a certificate or certificates representing such common shares, provided that if any law or regulation requires the Corporation to take any action with respect to the common shares specified in such notice before the issuance thereof, then the date of delivery of such common shares shall be extended for the period necessary to take such action. The Option must be exercised with respect to at least 100 of the common shares, unless the Option is only exercisable with respect to a lesser number of common shares, in which case it must be exercised with respect to all of such lesser number. 5. Termination of Option. Except as herein otherwise provided, the Option --------------------- granted under this Agreement, to the extent not heretofore exercised, shall terminate upon the first to occur of the following events: a. The expiration of three months after the date on which Employee ceases for a reason other than death, permanent disability, or deliberate, willful or gross misconduct to be an employee within the meaning of the Plan; b. The date on which Employee ceases to be an employee within the meaning of the Plan by reason of Employee's deliberate, willful or gross misconduct as determined by the Committee; c. The expiration of twelve months after the date on which Employee ceases to be an employee within the meaning of the Plan by reason of permanent disability; d. The expiration of twelve months from the date of Employee's death; or e. September 10, 2008 (being the date immediately preceding the 10th anniversary of the date of this Agreement). 6. Reclassification, Consolidation or Merger. ----------------------------------------- 6.1 If and to the extent that the number of issued common shares of the Corporation shall be increased or reduced by change in par value, split up, reverse split, reclassification, distribution of a dividend payable in stock, or the like, the number of common shares subject to the Option and the option price per share shall be proportionately adjusted in accordance with the Plan. 6.2 If the Corporation is reorganized or consolidated or merged with another corporation, Employee shall be entitled to receive an option (the "New Option") covering common shares of such reorganized, consolidated or merged company in the same proportion, at an equivalent price, and subject to the same conditions as the Option. For purposes of the preceding sentence, the excess of the fair market value of the common shares subject to the Option immediately after the reorganization, consolidation or merger over the aggregate option price of such common shares shall not be more than the excess of the aggregate fair market value of all common shares subject to the Option immediately before such reorganization, consolidation or merger over the aggregate option price of such common shares, and the New Option or assumption of the Option shall not give Employee additional benefits which he does not have under this Option, or deprive him of benefits which he has under this Option. 7. Rights Prior to Exercise of Option. This Option is non-transferable by ---------------------------------- Employee, except in the event of his death, and during his lifetime is exercisable only by him; provided, however, that this Option may be transferred by Employee's for estate planning purposes subject to prior or other written approval by the Corporation, or the Committee if such exists, in its sole discretion or pursuant to any policy and requirements concerning such transfers as may then be in effect. In the event of death, this Option may be exercised by Employee's personal representative or the party inheriting the Option. No -2- person shall have any rights as a stockholder with respect to any common shares purchasable hereunder until payment of the option price and delivery to him of such common shares as herein provided. 8. Restriction on Disposition. All common shares acquired by Employee -------------------------- pursuant to this Agreement shall be subject to the restrictions on sale, encumbrance and other disposition contained in the Corporation's By-Laws, or imposed by applicable laws or regulations of the State of Minnesota or the United States of America regarding the registration or qualification of such acquisition of common shares. The Corporation may require a prior opinion of its counsel, which the Corporation shall use its best efforts to obtain, that the transfer or other disposition of common shares acquired pursuant to this Agreement will not violate the Securities Act of 1933 or any applicable state law regulating the sale of securities. 9. Binding Effect - Plan Governs. ----------------------------- 9.1 This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 9.2 This Agreement shall be construed in accordance with and shall be governed by the terms of the Plan as adopted by the Board and approved or to be approved by the shareholders of the Corporation within the meaning of Section 422 of the Internal Revenue Code of 1986, as the Plan may be amended from time to time by the Board, and if appropriate the shareholders, of the Corporation. Employee acknowledges receipt of a copy of the Plan prior to the execution hereof and agrees to be bound by the terms of the Plan. If possible, this Agreement shall be construed along with and in addition to any other agreement which the Corporation and Employee may enter into, but any provision in this Agreement which contradicts any provision of any other agreement shall take precedence and be binding over such other provision. 9.3 The provisions of this Agreement, the Plan or other document incorporated therein, shall be governed by, interpreted and enforced in accordance with the laws of the State of Minnesota, unless and to the extent they are pre-empted by the laws of the United States of America. 9.4 This Agreement shall be effective as of the dated first stated above. "Employee" "Corporation" Bradley E. Sparks WAM!NET Inc. /s/ Bradley E. Sparks By: /s/ Michael O' Donnell ____________________________ __________________________________ An Authorized Agent or Officer Dated: September 11, 1998 Dated: September 11, 1998 ______________________ _____________________________ -3- NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, made and entered into effective this 11th day of September, 1998, by and between WAM!NET INC., a Minnesota corporation (hereinafter referred to as the "Corporation") and BRADLEY SPARKS, a resident of the State of Minnesota (hereinafter referred to as the "Employee"). WHEREAS, the Corporation considers it desirable and in its best interests that the Employee be given an inducement to acquire a proprietary interest in the Corporation and an added incentive to advance the interests of the Corporation, by possessing an option to purchase common shares of the Corporation, in accordance with WAM!NET Inc. 1994 Stock Option Plan (the "Plan"). NOW THEREFORE, in consideration of the premises and of the mutual promises and consideration provided herein, the parties agree as follows: 1. Definitions. Words and phrases not otherwise defined herein shall have ----------- the meanings ascribed to them, respectively, in the Plan. 2. Grant of Option. The Corporation grants to Employee an Option (the --------------- "Option") to purchase Five Thousand (60,750) common shares of the Corporation at a purchase price of $12.00 per share, in the manner and subject to the conditions provided herein and in the Plan. The Option hereby granted shall be an NQO as provided in the Plan. 3. Time of Exercise of Option. Employee may exercise the Option in three -------------------------- equal increments; the initial increment of 15,187 shares being exercisable on and after September 11, 1999 and the second increment of 15,187 being exercisable on and after September 11, 2000, the third increment of 15,188 shares being exercisable on and after September 11, 2001, and the fourth increment of 15,188 shares being exercisable on and after September 11, 2002. All options shall expire at midnight on September 10, 2008, as illustrated by the following table: Number of Shares From-To First Exercisable Cumulative Total ------- ----------------- ---------------- September 11, 1999- 15,187 15,187 September 10, 2000 September 11, 2000- 15,187 30,374 September 10, 2001 September 11, 2001- 15,188 45,562 September 10, 2002 September 11, 2002- 15,188 60,750 September 10, 2003 On and after 0 0 September 11, 2008
No provision of this Agreement to the contrary withstanding, neither the Option nor any right claimed thereby or hereby, therein or herein or thereunder or hereunder shall be exercisable by anyone on or after September 11, 2008. With respect to common shares that are purchasable for the first time during any calendar year, the Employee may only exercise the Option to purchase that number of common shares that have an aggregate fair market value (as of the date first above written) which is less than or equal to $100,000. The Employee may exercise the Option with respect to common shares valued in excess of $100,000 in any calendar year to the extent the right to exercise the Option to purchase such shares has accumulated over a period in excess of one year. 4. Method of Exercise. The Option shall be exercised by written notice to ------------------ the Board of the Corporation, or the Committee if such exists, at the Corporation's principal place of business. The notice shall be accompanied by payment of the option price for the shares being purchased in cash or by cashier's check or certified check or, in the sole discretion of the Board, or the Committee if such exists, by such other form of payment as is permitted under the Plan. The notice shall also be accompanied by any document reasonably required by the Corporation to be executed by Employee, acknowledging the applicable restrictions on the transfer of the common shares being purchased as set forth under Section 8 of this Agreement. The Corporation shall make prompt delivery of a certificate or certificates representing such common shares, provided that if any law or regulation requires the Corporation to take any action with respect to the common shares specified in such notice before the issuance thereof, then the date of delivery of such common shares shall be extended for the period necessary to take such action. The Option must be exercised with respect to at least 500 of the common shares, unless only a lesser number of the common shares are then exercisable, in which case it must be exercised with respect to all of such lesser number. 5. Termination of Option. Except as herein otherwise provided, the Option --------------------- granted under this Agreement, to the extent not heretofore exercised, shall terminate upon the first to occur of the following events: a. The expiration of three months after the date on which Employee's employment by the Corporation is terminated, except if such termination be by reason of permanent and total disability or death; b. The expiration of twelve months after the date on which Employee's employment by the Corporation is terminated, if such termination be by reason of the Employee's permanent and total disability or death; c. The expiration of twelve months from the date of Employee's death should Employee die within three months of termination of employment by the Corporation; d. The termination of Employee's employment by the Corporation for either (i) Employee's material breach of any agreement with the Corporation or (ii) Employee's deliberate, willful or gross misconduct in the performance or Employee's duties on behalf of the Corporation; or e. September 11, 2008. 6. Reclassification, Consolidation or Merger. ----------------------------------------- 6.1 If and to the extent that the number of issued common shares of the Corporation shall be increased or reduced by change in par value, split up, reverse split, reclassification, distribution of a dividend payable in stock, or the like, the number of common shares subject to the Option and the option price per share shall be proportionately adjusted in accordance with the Plan. 6.2 If the Corporation is reorganized or consolidated or merged with another corporation, the Employee shall be entitled to receive an option (the "New Option") covering common shares of such reorganized, consolidated or merged company in the same proportion, at an equivalent price, and subject to the same conditions as the Option. For purposes of the preceding sentence, the excess of the fair market value of the common shares subject to the Option immediately after the reorganization, consolidation or merger over the aggregate option price of such common shares shall not be more than the excess of the aggregate fair market value of all common shares subject to the Option immediately before such reorganization, consolidation or merger over the aggregate option price of such common -2- shares, and the New Option or assumption of the Option shall not give the Employee additional benefits which he does not have under this Option, or deprive him of benefits which he has under this Option. 7. Rights Prior to Exercise of Option. This Option is non-transferable by ---------------------------------- Employee, except in the event of his death, and during his lifetime is exercisable only by him. No person shall have any rights as a stockholder with respect to any common shares purchasable hereunder until payment of the option price and delivery to him of such common shares as herein provided. 8. Restriction on Disposition. All common shares acquired by Employee -------------------------- pursuant to this Agreement shall be subject to the restrictions on sale, encumbrance and other disposition contained in the Company's By-Laws, or imposed by applicable state and federal laws or regulations regarding the registration or qualification of such acquisition of common shares, and may not be sold or otherwise disposed of (i) within two years from the date of the granting of the Option under which such common shares were acquired, (ii) within one year after the exercise of the Option, and (iii) unless the Corporation has received a prior opinion of Employee's counsel satisfactory in form and substance to counsel for the Corporation that such transaction will not violate the Securities Act of 1933 or any applicable state law regulating the sale of securities. 9. Binding Effect - Plan Governs. ----------------------------- 9.1 This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 9.2 This Agreement shall be construed in accordance with and shall be governed by the terms of the Plan as adopted by the Board and approved or to be approved by the shareholders of the Corporation within the meaning of Section 422 of the Internal Revenue Code of 1986, as the Plan may be amended from time to time by the Board and the shareholders of the Corporation. Employee acknowledges receipt of a copy of the Plan prior to the execution hereof. If possible, this Agreement shall be construed along with and in addition to any other agreement which the Corporation and Employee may enter into, but any provision in this Agreement which contradicts any provision of any other agreement shall take precedence and be binding over such other provision. "Employee" "Corporation" Bradley E. Sparks WAM!NET Inc. /s/ Bradley E. Sparks By: /s/ Michael O'Donnell ____________________________ ________________________________ An Authorized Agent or Officer -3- EX-12.1 22 COMPUTATION OF RATIOS EXHIBIT 12 WAM!NET INC. RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS, EXCEPT RATIO)
Year Ended December 31, 1995 1996 1997 1888 -------------------------------------------------- Fixed Charges Net loss from continuing operations (1,277) (7,596) (33,636) (121,878) -------------------------------------------------- Fixed Charges: Interest expense and amortization of deferred finance charges on all indebtedness 20 903 4,356 22,626 Interest portion of rent 15 40 100 225 --------------------------------------------------- Total fixed charges 35 943 4,456 22,851 Earnings before loss and fixed charges (1,242) (6,653) (29,180) (99,027) =================================================== Ratio of earnings to fixed charges - - - - ===================================================
EX-21.1 23 LIST OF SUBSIDIARIES EXHIBIT 21 Subsidiaries of WAM!NET Inc. ---------------------------- 1. FreeMail, Inc. 2. WAM!NET Medical Inc. 3. WAM!NET International Inc. 4. WAM!NET Canada Inc. (currently Netco Communications of Canada, Inc.) 5. WAM!NET Limited 6. WAM!NET Holdings (UK) Limited 7. WAM!NET UK Limited 8. 4-Sight (Software), Ltd. 9. 4-Sight Inc. 10. WAM!NET Deutschland GmbH (currently 4-Sight Deutschland GmbH) 11. WAM!NET Nederlands B.V. 12. WAM!NET (EOC) Belgium S.A. 13. WAM!NET (Holdings) Japan K.K. 14. WAM!NET Sverige AB 15. WAM!NET Spain S.L. (Pending) 16. WAM!NET France, S.A.R.L. (Pending) EX-23.1 24 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-4 No. 333-53841) of WAM!NET Inc. and in the related Prospectus of our report dated March 19, 1999, with respect to the consolidated financial statements of WAM!NET Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ Ernst & Young LLP Minneapolis, Minnesota March 29, 1999 EX-27.1 25 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 6,272 0 3,896 430 1,534 14,459 78,866 16,399 121,079 30,398 209,238 1,000 0 93 (109,854) 121,080 10,830 17,629 3,537 21,796 98,185 430 22,626 (123,230) (1,352) (123,230) 0 0 0 (121,948) (13.87) (13.87)
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