-----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, BtDr1K+H0XGfFoZFbLw9y5evVdQekIkw/lLRZPLi0Qvnr98PyOQkD9E6jO3Pu6aQ GYX4vbLb/JhmJNg++6+QtQ== 0001045969-00-000183.txt : 20000316 0001045969-00-000183.hdr.sgml : 20000316 ACCESSION NUMBER: 0001045969-00-000183 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WAM NET INC CENTRAL INDEX KEY: 0001060274 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-53841 FILM NUMBER: 570181 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-K405 1 FORM 10-K405 ================================================================================ 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File No.: 333-53841 WAM!NET Inc. (Exact Name of Registrant as specified in its charter) Minnesota 41-1795247 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 655 Lone Oak Drive Eagan, Minnesota 55121 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (651) 256-5100 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. ___ No As of March 7, 2000, there were 9,494,797 shares of the Company's Common Stock outstanding. The aggregate market value of the voting stock of the company held by non-affiliates is $20,932,608. Documents Incorporated by Reference--Not applicable. ================================================================================ FORM 10-K TABLE OF CONTENTS ITEM PAGE - ---- ---- PART I ITEM 1. BUSINESS.............................................................1 ITEM 2. PROPERTIES..........................................................15 ITEM 3. LEGAL PROCEEDINGS...................................................15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...............................................16 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA................................17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............................19 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................................27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................28 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............................28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................29 ITEM 11. EXECUTIVE COMPENSATION.............................................31 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................................36 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................38 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.......................................................44 IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS.....................50 SIGNATURES - WAM!NET INC.....................................................51 FINANCIAL STATEMENT SCHEDULES...............................................F-1 (1) PART I ITEM 1. BUSINESS. Overview We are a leading global provider of business-to-business electronic services to the media industry. We enable entertainment, advertising, publishing, printing and related media businesses worldwide to collaborate on-line within their workflow chains. These businesses experience inefficiencies associated with incompatible systems and largely manual processes involving both analog and digital data. Our services and network infrastructure address this problem by providing businesses a common electronic workflow platform to seamlessly integrate their production processes and accelerate the adoption of digital workflow collaboration. Our e-services include: (1) managed data transport, (2) media application hosting, (3) managed data storage, (4) computer animation rendering and (5) Internet-based services. We offer our services under simple monthly service fee and pay-per-use pricing plans, which require no up-front capital investment by our customers. We enable businesses to achieve measurable operating efficiencies, productivity gains and cost savings. We own and operate a private, Internet Protocol or IP based global network, hosting and storage infrastructure that we have integrated with the public Internet. Customers can access our services and infrastructure through the Internet or through a dial-up or dedicated connection to our network. This provides our customers with the global access of the Internet and the reliability, security, accountability and predictability of a managed private infrastructure. By design, our network is not dependent on a single technology, protocol or telephony solution, allowing us to quickly take advantage of new network, access and storage technologies to enhance our services or reduce costs. Our services are tailored to meet the specialized needs of businesses involved in the creation, exchange, distribution and storage of media, such as magazines, newspapers, marketing materials, brand advertisements, television and radio broadcast programming and films. As the number of influential, industry-leading firms that rely on our services and applications grows, the value of our network to current and prospective customers increases. We believe media businesses that gain the most cost savings by digitally integrating their workflow chains will become the strongest proponents of our workflow platform. Many of our customers actively encourage their workflow partners to purchase our services and, in some cases, pay the fees incurred by their partners. As of December 31, 1999, we had over 1,900 customer points-of-presence consisting of dedicated network access devices and local bandwidth connectivity. In addition, we had over 6,800 users of our Internet and dial-up services globally. Users of our network and services include: o 11 of the 20 largest U.S. publishers (including Time Inc. and McGraw-Hill Companies Inc.); o 18 of the 20 largest U.S. advertising agencies (including Young & Rubicam Inc. and J. Walter Thompson, Inc.); o 12 of the 20 largest U.S. retailers (including Albertson's, Inc. and Lowe's Company, Inc.); o 16 of the 20 largest U.S. printers (including R.R. Donnelley & Sons Company, Quebecor World, Inc. and Quad/Graphics, Inc.); o 19 of the 20 largest U.S. pre-press firms (including American Color Graphics, Inc. and Applied Graphics Technologies, Inc.); 1 o 34 Fortune 100 companies (including Ford Motor Company and Wal-Mart Stores); and o 7 of the 20 largest newspaper publishing companies (including Knight-Ridder, Inc. and The Times Mirror Company). We have a significant presence with many large influential media companies that are at an early stage in their adoption of and conversion to complete digital workflow processes. Consequently, we believe there is significant opportunity to increase our revenues as these businesses, their trading partners and the media industry as a whole continue to implement digital workflow solutions. Market Opportunity The emergence of business-to-business e-commerce over the Internet and private networks is changing the way companies are conducting business. According to Forrester Research, Inc., a leading independent research firm, more than $1.3 trillion in business-to-business e-commerce will be transacted in 2003. We believe that as companies in the media industry increase the amount of business they conduct over the Internet, these businesses will increase their digital collaboration and require on-line integrated workflow chains. This workflow evolution, combined with the success of IT outsourcing, is increasing demand for industry-specific, standardized e-commerce platforms through which workflow partners can access a full range of e-services and seamlessly integrate their media production processes. The need for a standardized e-commerce platform is heightened by the fact that businesses involved in media design and production are increasingly using computers, software applications and other electronic systems in all aspects of the media production process. The demand for digital media in Web-based e- commerce and the increasing use of digital tools to create media will continue to fuel growth in data traffic. GISTICS Incorporated, a leading media research firm, estimated that in North America alone businesses would spend nearly $20 billion in 1999 on physical and digital media logistics and transportation, including the transportation of media to workflow partners using traditional physical processes such as overland or air couriers, including Federal Express, DHL Worldwide Express and United Parcel Service. We believe that five trends will continue to drive our market opportunity: o Rapid growth in the creation of digital media and expenditures for digital media production. GISTICS estimated that $317 billion would be spent in North America alone by businesses in the creation and production of media in 1999. Advances in digital media production and business-to-business e-commerce applications, coupled with the increased adoption of the Internet, are fueling rapid growth in expenditures for digital technologies and services that create, manage and distribute digital media. Businesses have large inventories of non-digital media which are difficult to store, manage and re-use. These inventories can now be digitized, stored and managed electronically for re-use and re-purposing in a wide array of end-user media materials and formats, including the Web. o Expanding use of digital media in workflow collaboration and e-commerce. The expanding use of digital media in workflow collaboration and the growth of e-commerce are driving the demand for data management, transport and storage solutions over the public Internet and private networks. Media workflow chains that design, produce, buy, sell and distribute media require many parties to share, manage and store increasingly large amounts of digital media. For example, the assembly of one weekly magazine may require hundreds of businesses in the publishing, printing, advertising and corporate marketing industries to participate in the creation and assembly of content, including photographs, advertising, graphics, editorial content and mailing lists. 2 o Growing demand for accessible, integrated and on-line media storage and hosting solutions. The growth in the creation of and demand for digital content has increased the value and the volume of businesses' digital media assets, making it more difficult and more critical to effectively manage those assets. The volume of data generated in today's business environment continues to grow at a significant rate, driving the increased use of disk storage. International Data Corporation, a leading industry research firm, estimates that multi-user disk storage grew from approximately 10 million petabytes in 1994 to 116 million petabytes in 1998, and will reach approximately 1.4 billion petabytes in 2002 (one petabyte equals 1 million megabytes). In meeting these rapidly increasing storage requirements, businesses involved in media workflow chains face several problems. These businesses must often purchase and maintain costly storage servers, hire skilled administrators to maintain these storage systems, add disk capacity to file servers, and maintain mirror copies of data at remote sites. The costs associated with the hardware, software and consulting services necessary for individual enterprises to store, manage, retrieve and distribute digital data using redundant systems can be formidable. In addition, businesses involved in media production often deal with hundreds of vendors. Storing and using media assets for collaboration among a geographically diverse workflow chain involving different companies can be cost prohibitive and impractical. This has limited the implementation of on-line workflow storage solutions. As a result, businesses in the media industry are increasingly turning to service providers that can host digital media assets in open and accessible on-line storage systems. We believe businesses that effectively manage global access to their digital media assets will enjoy considerable competitive advantages including: -- increased operating efficiencies; -- reduced time to market cycles; -- enhanced media re-purposing and deployment; -- improved ability to more rapidly exploit market opportunities; and -- expanded opportunities for collaboration with larger numbers of customers, suppliers and business workflow partners. o Emerging need by the media industry for standardized, integrated and cost-effective e-commerce solutions. We believe managers in the media industry require digital workflow collaboration to increase efficiency at each step of the production and distribution process. Individual businesses within the media industry, however, lack the resources, expertise and independence to cost-effectively create a common electronic workflow platform with the capacity to meet the industry's digital management needs. As a result, we believe managers will increasingly seek outsourced e-services and infrastructure from a single independent provider. This includes outsourced workflow applications, data transportation and storage services that can be adapted to fit their specific workflow requirements. o Continuing positive impact of the Internet market on our market. The growth of the Internet is expanding and transforming the market for managed transportation, hosting and storage of digital data. The low cost of access to and ubiquity of the Internet allows small and medium-sized businesses in geographically diverse locations to participate cost-effectively in the use of hosted applications, transport and storage services. In addition, the increased use of the Internet as a 3 medium for commerce will result in an increased number of digital files being created, transported and stored for marketing and other purposes. Business Strategy Our objective is to become the leading global provider of business-to-business e-services that enable businesses to collaborate on-line with their workflow chains. We intend to implement the following strategies to achieve our business objective: o Capitalize on our first-to-market advantage with our existing influential customer base to attract new customers worldwide and increase utilization of our services. We plan to use our first-to-market position to capitalize on the accelerating use of digital data in media workflow chains. We have established and deployed a global network, created significant brand recognition and developed relationships with many influential customers. We plan to leverage our existing relationships to draw more workflow partners into our customers' electronic workflow, to increase utilization of our services and to become an integral part of our customers' media workflow processes. We also intend to focus our sales and marketing efforts on capturing additional large and influential media companies which exert influence over the adoption of e-services within their workflow chains. o Provide a complete range of e-services that enable our customers to accelerate their adoption of digital workflow. As we expand our business, we will continue to develop and offer additional services and enhancements that will enable our customers to manage their media workflow and collaborate more efficiently. We offer our customers a variety of flexible services that provide productivity gains and cost savings. In addition to developing our own Industry Smart applications and e-services, we will continue to enable our customers to access leading third party applications and services on a transactional basis over our infrastructure. o Enter into strategic relationships to expand distribution channels, integrate emerging technologies, develop new hosted applications and services, and reduce costs. We will continue to build strategic relationships with leading suppliers to the media industry to distribute our services to new customer groups and geographic areas. In addition, we seek strategic relationships to capitalize on advanced and emerging technologies that enhance our service offerings and reduce the cost of our operations. Finally, we will continue to use strategic relationships to incorporate new applications and services that help our customers collaborate more efficiently in their media workflow chains. o Integrate public and private IP infrastructures to meet the global needs of our customers most effectively. We will continue to offer access to our services through the Internet to reach a wider group of potential customers and to enable increased collaboration among our customers and their workflow partners worldwide. Additionally, we will continue to integrate our managed private global network, hosting and storage infrastructure with the Internet to effectively meet the evolving needs of our large and small customers. o Apply our business model to other vertical markets worldwide. To take advantage of economies of scope presented by our e-services and infrastructure, we will continue to evaluate opportunities to offer our services to other vertical markets that can benefit from business-to-business electronic workflow services. 4 Services and Applications To address our customers' global on-line digital workflow needs, we offer the following two broad categories of e-services and applications: o managed data services; and o hosted media applications and managed data storage services. Our customers can access these services through the Internet at www.wamnet.com or over our managed private IP global network to collaborate with their workflow partners on-line. Most of our services are accounted for on a transactional basis, in terms of megabytes sent, megabytes stored or processing transactions executed. In addition, many of our services include a monthly minimum service fee. By offering standard service packages coupled with a complete menu of service options, we provide our customers with flexible solutions that can meet their requirements for predictability, performance and price. Managed Data Services Direct Service. This is our fastest, most secure and most reliable media transport service providing direct, guaranteed access and transport over our managed network. Customers who use this service typically participate in large media workflow chains that require a highly managed, predictable and reliable environment. This service includes installation of our network access device on our customers' premises, a dedicated leased line or wireless connection to our network, and access to our hosted Industry Smart applications, as well as training and support on a 24 hours per day, seven days per week basis. Customers may choose the capacity of their network access device and the speed of their network connection to meet their requirements. Pricing for our Direct Service includes a monthly service fee, and a transactional per megabyte pay-per-use fee. ISDN Tracked Service. Offered at a lower price point than our Direct Service, our ISDN Tracked Service does not require a dedicated on-site network access device or dedicated connection to our network. Our ISDN Tracked Service offers the security and predictability of dial-up connectivity to our network, at slower transmission speeds and without the performance guarantee of Direct Service. This service is designed for customers with confidential and time sensitive work who do not exchange a sufficient volume of data to require a dedicated service connection. With this service, we provide access to our network and hosted Industry Smart applications, an ISDN card, training and customer support on a 24 hours per day, seven days per week basis. Customers may chose either to purchase the software and hardware required for this service, or to pay a monthly service fee over the life of the contract with no up-front capital expenditure. ISDN Tracked Service is priced on a transactional, per megabyte, pay-per-use basis. We commercially released our ISDN Tracked Service in the first quarter of 1999. Internet Gateway Service. We commercially released our Internet Gateway Service in the third quarter of 1999. Our Internet Gateway Service provides anyone with an Internet connection a more predictable, secure and trackable means of exchanging digital files than currently available over the Internet. Internet Gateway Service users access and use our hosted applications through our website at www.wamnet.com. At the web site, users have access to the same sophisticated tracking, reporting and directory tools that are available with our other services to manage deliveries, view account data, and authorize other WAM!NET users to exchange files with them. Our Internet Gateway Service allows users to exchange files with any other WAM!NET user and to send files to any e-mail address or FTP site. Internet Gateway brings the capacity to automate workflows and processes using other hosted WAM!NET applications, including job tickets. Internet Gateway Service is priced on a transactional, per megabyte, pay-per-use basis. In addition to allowing subscribers to set up their own Internet Gateway 5 accounts, we offer Direct Service subscribers the opportunity to create and host Internet Gateway accounts for their customers and workflow partners, providing a standard way for them to send and receive data files. In this arrangement, hosts pay the transaction fees for their workflow partners. For example, the host may create different workflow groups, select appropriate job tickets and implement standardized data exchanges. This results in a simplified, more uniform method for Direct Service users to automate their work flow requirements. Internet Access. We currently provide dedicated Internet access as a service option for our Direct Service customers in the U.K. and plan to deploy this service on a global basis this year. This option permits our Direct Service and high-speed Internet access to be provided over the same dedicated circuit. With this service, Direct Service customers can browse the Web, or host Web, FTP, news or mail servers. We also offer additional services in conjunction with third party partners, including: network design and consulting services; firewall configuration and management services; news, Web, mail and FTP server installation and set-up; and Web-based application development services. Hosted Media Applications and Managed Data Storage Services Hosted Media Applications We host media applications that integrate our services into our customers' digital workflow processes and are tailored to meet the needs of the media industry. Customers can access these applications either through the Internet or through our dedicated infrastructure. We have developed and currently offer our own applications and plan to partner with leading application developers to host and offer their applications over our network. Transmission Manager. This application serves as the primary user interface for our Direct and ISDN Tracked Services. Transmission Manager provides customers with the capacity to establish and maintain address books, specify workflow routing instructions, create and use job ticket and specify file and job ticket editing criteria. We have also developed Transmission Manager plug-ins which enable users of industry leading media applications, such as Adobe Photoshop and Illustrator and Quark Express, to access our data transport and storage services directly from within these applications. In addition, Transmission Manager can be used for point-to-point ISDN file transmission. Info Center. This application enables customers to manage their workflow relationships and to review their use of our services by searching and viewing data transmission activities on-line, including details of each file shipment, such as confirmations of shipment and receipt, billing data and historical records of usage. In addition, this application includes an address book, which allows customers to create, authorize, restrict and manage the exchange of data among workflow partners. Electronic Job Tickets. This application enables our customers to automate the scheduling, processing and accounting of exchanged files. Information contained in the electronic job ticket that accompanies a file can be automatically entered into the recipient's data systems, with significant savings in labor costs and the elimination of errors associated with traditional manual processes. Additionally, job ticket applications can validate, edit and verify that job ticket contents and attached file formats meet user-defined criteria. Job tickets can also specify prescribed action steps which can be automatically initiated in the event of errors. Customers may choose between our standard job tickets or, for a fee, create customized job tickets to meet their specific needs. Remote Proofing. WAM!PROOF is our remote proofing and printing solution that allows customers 6 to print automatically to geographically diverse color proofers, color copiers, laser printers, and other digital output devices manufactured by 15 major suppliers, such as Kodak, Polaroid, Imation and DuPont. This application gives customers a means of rapidly distributing color proof copies of printed media to workflow chain partners for review and approval of production jobs, eliminating the delays and errors associated with messengers, overnight couriers or manual processes. Managed Data Storage Services We provide digital data storage services under the WAM!BASE(R) brand. Our storage services operate over our existing infrastructure and are billed on a per-megabyte basis. Customers choose price and performance levels, which include minimum storage volume requirements, under an annual or multi-year contract. Our customers pay periodic storage charges based upon the volume and duration of megabytes stored, including a fee per megabyte stored each month for the term of the contract, with no up-front investment. Our storage services are scalable and provide multiple benefits to our customers compared to in-house solutions, including: reduced implementation time, lower implementation costs, minimized capital expenditures and simplified pay-per-use pricing plans. We commercially released our WAM!BASE Data Archiving Service in the first quarter of this year. WAM!BASE Data Archiving Service. We offer this service for customers who need to store files centrally for access by workflow partners in geographically diverse locations. This service incorporates a simple Web-based user interface, a powerful, industry leading search engine and automated workflow backup functions. Our easy-to-use interface can index, store and search any type of media, including still images, film and video. Our storage application is hosted within our infrastructure, allowing workflow partners in multiple locations secure access to the service without having to buy identical copies of expensive media asset management software. The customer storing the data pays for the storage fees and collaborators using the data pay data transportation fees to download a copy of media assets from the archive. Because it is a hosted service, there is no up- front capital investment in software or hardware, making implementation fast and affordable compared to in-house storage solutions. We believe that influential participants in the workflow process who implement this service as a core part of their data storage strategy will encourage other members of their workflow chain to adopt the solution. WAM!BASE Digital Asset Management Service. We are developing and plan to deploy a comprehensive storage service that is intended to meet the needs of companies that require sophisticated digital asset management applications to store and manage many types of electronic media, including still images, film and video. Our service will allow subscribers to use third party applications residing on their local area network, or an application hosted by us, while still providing the efficiencies associated with storing assets in an off-site media archive. This service will allow subscribers to choose from multiple storage and software options, access speeds and pricing levels. Currently, we have a joint marketing arrangement with Canto, Inc., the developer of a leading digital asset management application for the graphics arts industry. Canto is adapting the next release of its application to support WAM!BASE Digital Asset Management Service to be jointly sold by WAM!NET and Canto. We plan to host and co-market other third party digital asset management software applications. Computer Animation Rendering Services Render on Demand. We offer a hosted service for firms involved in the production of computer generated special effects and other motion media for the film and advertising industries. The rendering process requires specialized software and extensive computing power. We host industry leading rendering applications on our network and maintain a large number of servers that may be used for this service. Large rendering projects typically require hundreds of computer processors to simultaneously 7 run sequences of a rendering job. Firms that perform rendering services in-house typically incur significant expenses to purchase rendering software applications and hardware and employ trained personnel to conduct the rendering functions. Our service allows customers to avoid investing in rendering software or a large number of servers. Our service also appeals to firms that currently maintain their own servers but may require overflow capacity for peak project times, or may wish to outsource this service altogether. We price this service based on computer processing unit hours used, and we offer this service directly and through co-marketing relationships with leading manufacturers of rendering software and hardware for the media industry. We commercially released our Render on Demand Service in the first quarter of 2000. Our Network We own and operate a private, IP-based global network connecting major media centers around the world. Our core network consists of high-speed, ATM backbone and leased dedicated high-bandwidth fiber optic capacity connecting our three strategically located network operating centers with our 30 distribution hubs. Our network and services are designed to accommodate the workflow automation requirements of our subscribers including the need to transmit large media files with greater speed, predictability, reliability and efficiency than many other networks, including the public Internet. Our network is not dependent on a single technology, protocol or telephony solution, which allows us to quickly take advantage of new network, access and storage technologies to enhance our services or reduce costs. This also permits us to offer affordable and versatile ways for our customers to use our service. Our infrastructure includes the following: o Network Operations Centers (NOCs). We have deployed primary network operations centers in North America (Eagan, Minnesota) and Europe (Brussels, Belgium). In addition, we maintain a back-up network operations center facility in Las Vegas, Nevada and are contemplating deploying a NOC in Asia. Our NOCs serve as control centers for our network, housing the specialized equipment we need to manage and monitor our network 24 hours per day, seven days per week. Each of our three regional network operating centers is capable of managing all of our data transportation, hosting and storage operations. We believe that because our customers are in time sensitive, data intensive industries, many of them rely on our services to provide guaranteed delivery. Automated network monitoring software from Hewlett Packard has been installed and configured to provide continuous monitoring capabilities, including a problem notification system that automatically alerts network engineers of problems. Key aspects of our network are continuously monitored, including network operating center equipment, distribution hub equipment, backbone lines, local customer connections and network access devices. We notify customers in the event of service disruptions or equipment failures, and manage the restoration of service. o Network Backbone Facilities. Our 31 distribution hubs are interconnected with a meshed ATM backbone provided by various carriers. Operating agreements with these carriers enable us to increase backbone bandwidth to accommodate our growth as needed. Additional network redundancy is provided by a layer of private lines leased from diverse carriers on different paths which primarily serve as network back-up. In addition, we signed an agreement with Winstar in December of 1999 that will provide WAM!NET backbone bandwidth at speeds ranging from 45Mb to 155 Mb per second on various routes in the United States. o Network Local Loop Facilities. In North America, local loop connections linking distribution hubs and network access devices at customer sites are currently provided almost exclusively by MCI 8 WorldCom and Regional Bell Operating Companies. We have agreements with Deutsche Telekom and the Nippon Telegraph and Telephone Corporation to provide local loop services in Germany and Japan, respectively, and with other providers to provide such services elsewhere in the world. In addition Winstar will provide wireless local loops at speeds ranging from multiple 1.5Mb to 155Mb per second. Winstar's technology will allow WAM!NET to deliver high speed reliable service to customers in most targeted major metro areas without the cost and time it takes to deploy fiber. This bandwidth will allow WAM!NET to offer additional services to existing customers, or to market to new customers requiring higher bandwidth. o Network Points of Presence. Our hubs consist of large Cisco Systems, Inc. routers and serve to route data traffic across our network. Our hubs are co-located with MCI WorldCom or other facility management providers and each is interconnected over our meshed ATM backbone through at least two diverse routes. We have hubs in the following cities: North America Europe Asia Atlanta Amsterdam Tokyo Boston Brussels Chicago Copenhagen Dallas Frankfurt Denver Hamburg Detroit London Las Vegas Manchester Los Angeles Munich Miami Paris Minneapolis Stockholm Montreal New York City Newark Oakland Philadelphia Seattle St. Louis Toronto Vancouver Washington D.C. o Direct Customer Points of Presence (Network Access Devices). A key differentiator of our network is our deployment of network access devices on our customers' premises. We have deployed over 1,900 network access devices of varying size and complexity based on customer needs and requirements. Our network access devices usually contain a Silicon Graphics O2 processor, a Cisco router, a CSU/DSU, an uninterruptible power supply and disk storage. Our network access devices directly connect our customers to our hubs using a dedicated fixed bandwidth circuit, providing a secure, predictable and reliable connection to our private backbone network. We control all of our network access devices remotely, allowing us to fully manage the network end-to-end and rapidly provision new services. In addition, our network access devices are scalable to allow for future customer growth as our customers' needs expand. o Storage Network Infrastructure. Our data center infrastructure provides hosting and redundant storage at mirrored sites in Eagan and Las Vegas. Our primary data center facility is located in our Eagan network operating center and includes over 40,000 square feet of environmentally controlled 9 floor space suitable for housing large-scale computer and storage systems. A back-up facility is located in our Las Vegas data center and we expect that additional data center, hosting and storage infrastructure will be available in Brussels to support European customers as needed. We currently have a variety of installed equipment with capacity to store over 40,000 petabytes of total on-line primary and back-up storage capacity and have purchase agreements in place with major storage vendors to purchase additional on-line storage capacity as demand warrants. Additionally, we have over 200 high capacity servers available for hosting our Render on Demand service and other applications. Sales and Marketing Over the past three years we have made significant investments in building a direct sales channel to service the media industry. Our initial sales and marketing strategies were aimed at penetrating the top tier of the market, which includes companies that influence others in the industry as they make technology purchasing decisions. These initial efforts captured many of the leading advertising agencies, magazine and book publishing companies, commercial printers and pre-press firms. Our current selling approach is based on a consultative selling model which leverages our strategic partnerships and customer relationships. Our sales and marketing objectives include: o expanding workflow chains by leveraging relationships with influential customers; o increasing utilization of services among existing customers using a consultative selling approach; o capturing additional multi-site customer opportunities; o developing new channels to sell and support our services; and o selling and marketing to new vertical industries worldwide. Our sales organization is structured to support vertical markets on a global basis. We currently have sales groups in North America, Europe and Japan. Our direct sales force includes coverage in cities such as: New York, Chicago, Boston, Los Angeles, Washington D.C., Dallas, San Francisco, Atlanta, Seattle, Toronto, Minneapolis, London, Amsterdam, Frankfurt, Hamburg, Oslo, Paris, Stockholm, and Tokyo. Our sales group performs the following activities: o Account Management: We work with our existing customers to expand workflow chains, implement additional service offerings, coordinate training and increase utilization. By managing our relationships with our existing customers, we seek to capture a larger portion of their digital workflow and increase our revenues. o New Customer Acquisition: We identify and target new customers with significant data transport, workflow application and storage requirements. In particular, we focus on companies that are influential in their media workflow chains. o Channel Development: We develop, implement and manage strategic channel relationships with leading suppliers to the media industry on a global basis. We are in the process of negotiating or have entered into marketing arrangements with the following strategic partners: -- SGI, a leading provider of hardware and software to the film and animation production segment of the media industry. We entered into a joint marketing agreement with SGI whereby they sell our 10 services to their customers. -- Sony, a leading provider of hardware and software to the post-production and broadcast segments of the media industry. Our joint marketing agreement with Sony designates us as its preferred third party digital asset management outsourcing services provider in North America. Sony has indicated they will begin marketing and promoting our services in the second quarter of 2000. -- Heidelberg, the world's largest manufacturer of web and sheet fed printing presses. Our multi-year co-marketing agreement with Heidelberg allows it to bundle our services with its own line of digital printing presses worldwide. Heidelberg currently has a total installed customer base of over 55,000 units globally. -- 3M/Commercial Graphics Division, the global leader in providing total image graphic solutions through materials, service, imaging systems, and information management. 3M intends to bundle our data transport services within the Scotchprint(R) Graphics Network to provide its customers the ability to send and receive large graphic files securely and efficiently. 3M also pays a portion of the costs of our service contracts with their clients. -- Sumitomo, a global trading company whose electronics division is a provider of software, hardware and services to the media industry. Through our joint venture, we have built a sales and marketing organization to penetrate the Japanese market. -- Winstar, a leading provider of fixed wireless broadband services. Under our joint marketing agreement, Winstar, has agreed to resell our services to its customers. Additionally, Winstar has agreed to purchase at least $12.5 million of our services for its own use or resale. -- Impresse, a leading provider of solutions for print job quoting. Impresse's main service, impresse.com, is an Internet-based application for bidding and accepting printing jobs. Under our arrangement with Impresse, we will jointly market our e-services to corporate print buyers and integrate impresse.com within our network. This integration will allow impresse.com customers to route print production workflow through our services. -- Alias Wavefront, a leading developer and provider of computer animation rendering software. Our joint marketing agreement with Alias Wavefront provides that it will introduce and promote the concept of our Render on Demand service to its customers. Customer Service Our services have been designed to incorporate service level agreements that specify standard customer support service performance parameters. Under our standard service level agreement, we deliver customer support on a 24 hour per day, seven days per week basis through our three call centers located in Eagan, Brussels and Tokyo. Our customer service function is organized around a three-tier support model. Incoming calls are routed through a programmable phone system that is integrated with sophisticated customer support management software. This system automates call processing, automatically logging all incoming calls and recording the specific customer support activities used to resolve customer issues. We provide proactive customer support services geared toward ensuring the smooth operation of our services. In addition, we also offer Web-based customer support capabilities through our InfoCenter hosted application. Using this service, customers can log service requests, submit questions and access 11 application documentation on-line. We also have entered into on-site maintenance contracts with SGI to provide support and service for the customer premise equipment that we provide for our Direct Service customers. In connection with our December 1999 agreement with Winstar for backbone capacity and wireless local loop facilities, Winstar has agreed to maintain the equipment, including replacing equipment as needed to connect with Winstar's telecommunications network at a specified level of functionality over the twenty year term of the agreement. At the request of some of our subscribers, we also provide custom service level agreements for their specialized customer support requirements. These include provisions for redundant back-up systems including customer premise equipment and local loop connections and special support for customized workflow applications. Competition We face competition from a variety of companies that offer products or services that compete with, or serve as alternatives to, one or more of our service offerings. In addition, several companies have the financial resources and technical expertise to adapt or expand their product and service offerings to become directly competitive with our services. Despite limitations related to the capacity and reliability of the Internet, developments and advances in Internet technology are continually improving the functionality of the Internet. Consequently, companies that rely on the Internet to provide competitive services may be able to compete more effectively in the future. The following is a summary of the companies which may provide alternatives to our services or currently compete with us, or which may compete with us in the future: o Overland and air courier service providers. The majority of our competition comes from traditional overland and air courier services. Federal Express, DHL Worldwide Express and United Parcel Service (UPS) provide delivery services which are currently used by many of our targeted customers to physically transport data files stored on disks. While our potential customers may continue to use these services for their data transport, we believe that our managed data transport services offer superior alternatives for businesses with digital workflow requirements. o Digital courier and digital file transfer service providers. Vio Worldwide Limited, Williams-Vyvx, a business unit of Williams Communications, Inc., UPS and The docSpace Company each offer services that compete to varying degrees with our managed data transport services. o Large telecommunications carriers and Internet oriented service providers. Many of the large established and emerging carriers, such as AT&T Corp., Sprint, MCI WorldCom, Cable & Wireless plc, Global Crossing Ltd., Qwest Communications International Inc., Level 3 Communications, Inc. and Exodus Communications, Inc., are expanding their capabilities to support high-speed, end-to-end communications services. Increasingly, their bundled services include high-speed local access combined with metropolitan and wide area network services that may serve as alternatives to our services. These telecommunications companies have deployed large scale networks, have large numbers of existing customers and enjoy strong brand recognition, and, as a result, may become significant competitors. o Data network and applications service providers. Several data networking companies such as Equant N.V., Infonet Services Corporation, Concert Management Services Inc. and Global One 12 offer data networking services to business customers worldwide. These services include ATM and frame relay, private line, Internet access and network outsourcing. These companies have significant experience in offering tailored services and market their expertise. There are also a number of entrants, such as IXnet, Inc., Savvis Communication Corporation and Digital Island Inc., that are targeting specific niches to deliver customers Internet content, data traffic, and voice services worldwide. We believe that they may have the ability to expand their existing networks and service offerings to become more competitive. o Disk and tape storage equipment companies. Many established firms currently market, sell and distribute storage equipment that is primarily used to create on-site storage systems. These firms, including EMC Corp., IBM, Hitachi, Sun Microsystems, Inc., Sony, Storage Technologies, Inc. Ciprico, Inc., either have announced plans to develop, or may in the future develop, network-based storage services and storage area networks (SANs) that may utilize private networks or the Internet. These services may have similarities with our planned storage services and may include transactional, per megabyte pricing. Government Regulation We purchase the telephone equipment, routers and relays for use on our network and we combine that equipment with our software and connect the assembly with telephone circuits provided by common carriers. The common carriers are regulated by the FCC, the Canadian Radio-Television and Telecommunications Commission, or CRTC, and various state regulatory agencies. We believe that under the FCC's current interpretation of the Communications Act of 1934, as amended, the services which we offer to our customers are interstate information (enhanced) services. Consequently, we are not required to obtain licenses or other approvals from the FCC or state regulatory agencies to offer these services. However, if at some time our services are deemed to be intrastate services, certain state regulatory agencies might seek to assert jurisdiction over our products and services. We would then be required to expend substantial time and money to acquire the appropriate licenses and to comply with state regulations. We also believe that under the CRTC's interpretation of Canadian law, our services do not require us to obtain telecommunications permits or approvals in Canada. We believe that European Union directives permit us to provide our services in E.U. member states without the need to obtain licenses or other governmental approvals. Bilateral agreements exist between the U.S. and Japan and the U.S. and Hong Kong which encourage unimpeded cross-border provision of enhanced services like those offered by us. Pursuant to the World Trade Organization's General Agreement on Trade and Services, over fifty governments have agreed to permit the competitive 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 our services. Any such license or regulation may limit, delay or increase our costs to provide services in these international locations in which we may seek to expand our operations. In addition to telecommunication regulations, we may become subject to other current or future regulations in the U.S. or abroad as our business continues to develop and as governments respond to changes brought about by the growth of the Internet and e-commerce. These regulations may affect data privacy, marketing or distribution, or may be applicable to specific industries or businesses to which we may offer services. Such regulations would result in economic burdens or technical or legal constraints that could adversely affect our business. 13 Intellectual Property and Proprietary Rights It is our policy to protect our intellectual property, to seek patent protection for those aspects of our technology that we believe may be patentable and to preserve any copyrights or trade secrets (to the extent not disclosed in any patent) that may be applicable to our services and applications and their related software. We have designed most of the proprietary software necessary for the management of our services and applications, including network access device operations and a graphic user interface, Info Center, WAM!PROOF and WAM!BASE applications. We believe that our proprietary software and trade secrets applicable to the operation of our services and applications may be of equal or greater importance to us than patent or copyright protection. We are not aware of any claims of infringement of patents or other intellectual property belonging to others. However, we have conducted only a limited inquiry regarding the possibility of such claims. We have expanded our service and applications offerings in foreign countries and we will increasingly offer our services and applications in foreign countries. Some of these countries may lack intellectual property protection that is comparable to that afforded by the intellectual property laws of the U.S. Liability and Insurance Our services are supported by 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, our targeted industries' businesses are extremely time-sensitive, and delays in delivering data or damage to or loss of archival data may cause a significant loss to a customer. Our network and related services and applications and future enhancements or adaptations may contain undetected design faults and software "bugs" that, despite testing, 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 our business, financial condition and results of operations. Our customer agreements generally contain provisions limiting our liability for damages resulting from errors in the transportation or storage of data to a maximum of $100 per incident or the amount of one year's service charge for all incidents. Nevertheless, we may still be subject to significant claims and potential liability for data losses in the transportation and storage of data on our network. In addition to general business liability insurance coverage, we presently maintain errors and omissions insurance coverage in the amount of $2 million per occurrence. We also presently maintain $5 million of business interruption insurance coverage against losses from fire and other natural disasters. With respect to our data storage services, we maintain $10 million of insurance coverage against any damage or loss of data due to physical damage to our Eagan or Las Vegas facilities. In addition, we maintain a $25 million umbrella policy covering losses or liabilities above our other policies. Employees The following table sets forth a breakdown of our employees as of December 31, 1999: Number of employees --------- Development................................ 89 Marketing and sales........................ 162 Technology and operations.................. 128 Administration............................. 80 --- Total................................. 459 === 14 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. We have never had a work stoppage and no employees are represented under collective bargaining agreements. We consider our relations with our employees to be good. ITEM 2. PROPERTIES. We lease an approximately 481,000 square foot modern corporate campus located in Eagan, Minnesota, a suburb of Minneapolis. We currently occupy 160,000 square feet of this facility. SGI subleases 326,000 square feet of space, including common areas, in our corporate campus facility. The term of the sublease with SGI began on March 4, 1999 and ends on May 31, 2004. Effective as of June 1, 2001 and on each June 1, 2002 and 2003, SGI has the option to terminate the sublease by delivering at least six months' prior written notice of termination. We own 9,000 square feet of office space in Bournemouth, Dorset, England. Our other leased properties include: o an approximately 45,000 square foot office facility located in Bloomington, Minnesota which we currently sublease; o an approximately 1,580 square foot office facility located in Minneapolis where one of our network operation centers is located; o an approximately 7,970 square foot facility located in Las Vegas, where another of our network operation centers is located and which serves as a backup customer service center; o an approximately 20,000 square foot office space in Brussels, which contains our European network operation center and customer service operations; o an approximately 8,000 square foot manufacturing and warehouse facility located in Eagan; o an approximately 1,882 square foot office facility located in Missoula, Montana; o small offices in Des Moines, Iowa; Chicago, Illinois; Woburn, Massachusetts; New York, New York; Hamburg, Germany; Hague, Holland; Gothenburg, Sweden; Copenhagen, Denmark; and Paris, France for use by our sales and marketing personnel, business development managers and account executives stationed in those cities; o an 18,540 square foot office facility located in Bloomington, Minnesota; and o a 16,000 square foot office space located in Bournemouth, Dorset, England. ITEM 3. LEGAL PROCEEDINGS. 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 those warrants and attorney's fees. Although the warrants provide for downward adjustments under certain circumstances, we believe no adjustment is required. Should the warrant holders' litigation be successful, the gross proceeds receivable by us from exercise of those warrants would be reduced from approximately $8.4 million to $4.9 million. In 15 February 2000, the court denied the plaintiffs' motion for summary judgment that the warrant price should be reduced. The suit is scheduled to begin trial in April 2000. We are engaged in certain legal proceedings and claims arising in the ordinary course of our business. The ultimate liabilities, if any, which may result from these legal actions or claims against us 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 our business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On December 17, 1999, the Company held its 1999 Annual meeting of shareholders for the sole purpose of electing directors. At the Annual meeting, Edward J. Driscoll, Robert L. Hoffman and William M. Kelly were elected as the directors of the Company. 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. In January 1999 and March 1999, the Company sold to MCI WorldCom for the consideration of $10 million and $15 million, respectively, 13.25% convertible promissory notes (the "MCI Notes") in equal principal amounts together with a common stock purchase warrant entitling MCI WorldCom to purchase 350,000 shares of the Company's common stock at a purchase price of $0.01 per share. The MCI Notes provided that they would be mandatorily converted into a new class of preferred stock having a parity of rights and preferences with any class of preferred stock to be issued to SGI in an anticipated transaction between the Company and SGI. Exemption from registration is claimed under Section 4(2) of the securities Act of 1933 ("Act") and Rule 506 of the Rules ("Rules") thereunder. In March 1999, the Company sold to SGI 5,710,425 shares of Class B Convertible Preferred Stock ("Class B Stock") and 878,527 shares of Class C Convertible Preferred Stock ("Class C Stock") for an aggregate purchase price of $75 million, of which $35 million was paid in cash and $40 million was paid by conveyance to the Company of the land and building which comprise the Company's corporate campus facility. Currently, the Class B Stock and the Class C Stock are mandatorily convertible into 6,923,144 shares and 1,066,625 shares of the Company's Common Stock, subject to anti-dilution adjustments, in the event the Company conducts an underwritten public offering at an initial offering price of $12.13 per share in the case of Class B and $12.52 per share in the case of Class C. The Class B Stock may be optionally converted by the Holder at any time and the Class C Stock may be optionally converted by the Holder after September 4, 2000 into such shares of common stock, subject to anti-dilution adjustments. Exemption from registration is claimed under Section 4(2) of the Act and Rule 506 of the Rules. In March 1999 the Company sold to MCI WorldCom 2,196,317 shares of Class D Convertible Preferred Stock ("Class D Stock") for the consideration of $25 million in conversion of the MCI Notes. The Class D Stock is mandatorily convertible into 2,666,563 shares of the Company's Common Stock, subject to anti-dilution adjustments, in the event the Company conducts an underwritten public offering at an initial offering price of $12.52 per share. The Class D Stock may be optionally converted by the Holder at any time. Exemption from registration is claimed under Sections 3(a)(9) and 4(2) of the Act and Rule 506 of the Rules. In February 2000 the Company sold to SGI 10,000 shares of Class F Convertible Preferred Stock ("Class F Stock") for an aggregate purchase price of $10 million cash. The Class F Stock is convertible at the option of the holder into 1,937,984 shares of the Company's common stock, subject to anti-dilution adjustments, and is mandatorily convertible on the last trading day of the first 20 consecutive trading days during the average (weighted by daily trading volume) closing price of the stock is at least $8.00. Exemption from registration is claimed under Section 4(2) of the Act and Rule 506 of the Rules. In February and March 2000 the Company sold to Sumitomo Corporation and nine other accredited investors a total of 10,000 shares of Class G Convertible Preferred Stock ("Class G Stock") for an aggregate purchase price of $10 million cash. The Class G Stock is convertible at the option of the holder into 1,937,984 shares of the Company's common stock, subject to anti-dilution adjustments, and is mandatorily convertible in the event of an underwritten public offering. Exemption from registration is claimed under Section 4(2) of the Act and Rule 506 of the Rules. In March 2000, the Company sold to Winstar Communications Corporation 85,000 shares of the Company' of Class E Convertible Preferred Stock ("Class E Stock") for an aggregate purchase price of $85 million, of which $35 million was paid in cash and $50 million was paid through the transfer to us of 1,071,429 shares of Winstar's common stock, valued at $46.66 per share (as adjusted for the 3 for 2 stock split declared by Winstar in February 2000). In contemporaneous transactions, the Company sold to 13 accredited investors a total of 16,725 shares of the Class E stock for an aggregate consideration of $16.7 million. The Class E Stock is convertible at the option of the holder into 19,714,147 shares of the Company's common stock, subject to anti-dilution adjustments, and is mandatorily convertible on the last trading day of the first 20 consecutive trading days during the average (weighted by daily trading volume) closing price of the stock is at least $8.00. Exemption from registration is claimed under Section 4(2) of the Act and Rule 506 of the Rules. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. The following tables set forth certain historical consolidated financial and other data of our company for each of the five years in the period ended December 31, 1999. We derived our selected historical consolidated financial data as of and for each of the three years in the period ended December 31, 1999 from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We derived our selected historical consolidated financial data as of and for the year ended December 31, 1995 and 1996 from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K.
Years Ended December 31, ------------------------------------------------------------- 1995(1) 1996 1997 1998 1999 --------- --------- --------- --------- --------- (dollars in thousands, except per share data) Statement of Operations Data: Revenues: Net service revenue ................... $ 180 $ 279 $ 1,555 $ 6,799 $ 17,319 Software and hardware sales ........... -- -- -- 10,791 7,476 --------- --------- --------- --------- --------- Total revenues .......................... 180 279 1,555 17,590 24,795 Operating expenses: Network communication ................. 46 816 7,364 18,259 26,318 Cost of software and hardware ......... -- -- -- 3,537 2,905 Network operations and development .... 539 1,109 7,478 35,095 22,928 Selling, general and administrative ... 821 4,664 13,527 45,422 43,392
17
Depreciation and amortization ......... 31 447 2,668 17,668 34,875 --------- --------- --------- --------- --------- Total operating expenses ................ 1,437 7,036 31,037 119,981 130,418 --------- --------- --------- --------- --------- Loss from operations .................... (1,257) (6,757) (29,482) (102,391) (105,623) Interest and other income (expense), net (20) (839) (4,154) (20,839) (33,604) Income tax benefit ...................... -- -- -- 1,352 -- --------- --------- --------- --------- --------- Net loss ................................ (1,277) (7,596) (33,636) (121,878) (139,227) Less preferred dividends ................ -- -- (70) (70) (5,890) --------- --------- --------- --------- --------- Net loss applicable to common stock ..... $ (1,277) $ (7,596) $ (33,706) $(121,948) $(145,117) ========= ========= ========= ========= ========= Net loss applicable per common share(2) . $ (.24) $ (1.18) $ (5.19) $ (13.87) $ (15.58) Weighted average number of common shares outstanding (2) ........................ 5,263,535 6,445,785 6,496,345 8,793,961 9,315,900 Other Financial Data: Net cash used in operating activities ... $ (747) $ (6,218) $ (23,917) $ (55,878) $ (65,670) Net cash used in investing activities ... (657) (5,244) (15,599) (71,304) (25,942) Net cash provided by financing activities 2,732 24,578 25,346 132,817 113,497 EBITDA(3) ............................... (1,226) (6,310) (26,814) (84,684) (69,473) Capital expenditures .................... 657 4,244 16,599 54,584 25,208 Subscriber Contracts (end of period): Direct Service Contracts(4) ............. -- 33 496 1,479 1,918 ISDN Tracked Service Contracts(5) ....... -- -- -- -- 2,659 Internet Gateway Subscribers(6) ......... -- -- -- -- 4,167
Years Ended December 31, ------------------------------------------------------------- 1995(1) 1996 1997 1998 1999 --------- --------- --------- --------- --------- (dollars in thousands) Balance Sheet Data (end of Period): Cash and cash equivalents ........ $ 1,328 $ 14,444 $ 274 $ 6,272 $ 27,180 Total assets ..................... 2,075 20,070 29,134 125,459 435,255 Total debt(7) .................... 1,900 21,473 54,826 210,378 547,612 Shareholders' deficit ............ (371) (2,683) (30,671) (109,854) (147,885)
- ------------ (1) We were organized in September 1994 and commenced operations in March 1995. (2) If the shares of Class B, Class C and Class D convertible preferred stock had been converted as of their date of issuance in 1999, the net loss per share would have been $(8.38). (3) EBITDA represents earnings (loss) from operations before taking into consideration net interest expense, income tax expense, depreciation expense and amortization expense. We have included information concerning EBITDA as it is used by some 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 our overall financial performance. In addition, EBITDA as we have presented it may not be comparable to other similarly-titled measures of other companies. (4) Represents the number of customer point of presence at which a network access device is installed. 18 Does not include executed contracts for installations currently in process from which we have not begun to receive service fees. (5) Represents the number of customer premises that subscribe to our ISDN Tracked Service. Does not include executed contracts for installations currently in process from which we have not begun to receive service fees. (6) Represents the number of subscribers with accounts to use our Internet Gateway Service. (7) Total debt includes long-term debt, current portion of long-term debt, obligations under capitalized leases and redeemable preferred stock. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis is based on the historical results of WAM!NET Inc. and should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere herein. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Overview WAM!NET is a leading global provider of business-to-business e-services for the media industry. We enable entertainment, advertising, publishing, printing and related media businesses worldwide to collaborate on-line within their workflow chains. We offer our customers a wide array of e-services that meet their need to collaborate digitally with their workflow partners. Our services, applications and infrastructure provide a common electronic workflow platform to our customers, enabling them to achieve measurable operating efficiencies, cost savings and productivity growth. We have made substantial investments in building our global network, hosting and storage infrastructure. In addition, we have developed an array of digital workflow services to meet the needs and demands of a broad-based customer group. We have also invested in and developed a substantial and skilled customer service group, which makes our services more valuable to existing customers and more attractive to potential customers. Finally, we have made substantial investments in recruiting, training and developing a skilled and knowledgeable sales force, operations workforce and an application development workforce. We use a consultative approach in our sales and marketing efforts to both identify and meet our customers' diverse needs. Our initial focus and investment has been in building an installed base of influential customers. We seek to increase the utilization of our service offerings among our existing customers, as well as to broaden our market penetration through the addition of new customers. In December 1997, we acquired Freemail Inc., a developer of file transmission and job ticket technology, to support our business-to-business e-services. In March 1998, we established our presence in Europe with the acquisition of 4-Sight Limited, a developer and worldwide marketer of ISDN based digital data transmission applications. 4-Sight had primarily sold software and hardware supporting digital transmission of data to its customer base. 19 We offer a wide array of e-services including: (1) managed data transport, (2) media application hosting, (3) managed data storage, (4) computer animation rendering and (5) Internet-based services. Our services and network infrastructure provide businesses a common electronic platform to seamlessly integrate their production processes and accelerate the adoption of digital workflow collaboration. Access to these services is provided through our Direct Service, ISDN Tracked Service and Internet Gateway Service. Our initial focus through 1998 was our Direct Service. This is our fastest, most secure and reliable media transport service, providing direct, guaranteed access and transport over our managed network. Our network access devices are installed on our customers' premises and are connected to our network with a dedicated leased line. We recently acquired a 20-year indefeasible right of use for backbone capacities and purchased wireless local loop facilities in the U.S. from Winstar. These facilities will allow us to offer our Direct Service customers greater bandwidth capacity and eliminate the need for a dedicated leased line at a customer's premises. In the first quarter of 1999 we began to provide access to our network through our ISDN Tracked Service. Our ISDN Tracked Service offers the security and predictability of dial-up connectivity to our network at a slower transmission speed without the performance guarantee of Direct Service. This service does not require a network access device or leased line connectivity. We introduced our Internet Gateway Service in the third quarter of 1999. Internet Gateway Service allows connection to our network over the Internet. We provide with our managed data services hosted media applications that further integrate our services into our customers' digital workflow processes, including Transmission Manager, Info Center, Electronic Job Tickets and Remote Proofing. We commercially introduced our WAM!BASE Data Archiving Service in the first quarter of 2000. Also in the first quarter of 2000, we began to offer Render on Demand, a hosted service that processes computer generated animation into high resolution motion images such as motion picture special effects. At December 31, 1999, we had over 8,700 subscribers using our business-to-business e-services. Subscribers are customer sites that access our electronic business-to-business services through our Direct Service, ISDN Tracked Service and Internet Gateway Service. Revenues Service revenue Our service revenue is directly related to the number of customers, type of service, and volume of data moved, stored or processed. Service revenue is derived primarily from annual or multi-year service contracts, many of which have automatic renewal or extension provisions. These contracts generally include a minimum monthly fee and additional charges for usage that exceeds a minimum monthly service level. We currently offer our services at scaled minimum usage fees, which typically range from $650 per month to $4,000 per month for Direct Service, and from $45 per month to $360 per month for ISDN Tracked Service. We record monthly service revenue for Direct Service and ISDN Tracked Service based upon contracts signed with customers, following installation of equipment and commencement of service at a customer's premises. Our Internet Gateway Service is priced primarily on a per-megabyte basis and recognized as revenue in the month the service is provided. Our Render on Demand service is billed per computer processing hour and revenues are recognized as the service is provided to the customer. We began to earn service revenue from ISDN Tracked Service and Internet Gateway Service in March and September 1999, respectively. Our WAM!BASE Archive Service is priced on the basis of megabytes stored per month. Software and hardware sales Revenue from software and hardware sales has resulted primarily from the sale of 4-Sight ISDN 20 Manager software and ISDN cards. Our ISDN Tracked Service customers may choose to make a single up-front payment to purchase our software or to pay a monthly service fee. In both cases these purchases appear as software and hardware revenue. We are in the process of shifting 4-Sight from a product sales focus to a service model. As a result, we expect software and hardware sales to decline in the future. Operating Expenses Network communication Network communication expense represents the largest direct cost associated with providing our Direct Service. Network communication expense includes the costs of providing local loop telephone circuits connecting our network access devices from a customer's premises to the nearest distribution hub and the costs of the high bandwidth backbone carrier services which connect the distribution hubs with our network operation and data storage centers. Local telephone circuit connections provided by local exchange carriers account for the substantial majority of these charges. National and international service carrier charges account for the balance of these charges. Network communication expense is generally a fixed monthly cost per circuit. We believe that growing competition among telephony and communications providers may reduce the future costs of local telephone circuit and backbone connections. We actively seek to obtain and deploy technologies that will reduce the costs of local telephone circuit connections, such as wireless technologies, remote dial-up capabilities and DSL. We also intend to use our network management tools to optimize the use of existing and planned network capacity as volume increases and traffic patterns emerge. In December 1999, we purchased a 20-year indefeasible right of use for backbone capacity and purchased wireless local loop facilities from Winstar. When Winstar's wireless technology is deployed it will allow us to deliver increased bandwidth, at speeds ranging from 1.5mb to 155mb per second, to customers in most of the major U.S. metro areas, eliminating the need for local telephone circuit connections. This increased bandwidth capability will also allow us to offer additional services to new and existing customers. Software and hardware Software and hardware expense reflects the costs of software and hardware sold. Network operations and development Network operations and development expense represents costs directly associated with developing, maintaining, managing and servicing our global private network and expanding our service offerings. These 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. Our currently installed network operation centers account for the substantial majority of these direct labor and operating costs. Most of the costs associated with the development of new services and applications, such as WAM!BASE Data Archiving Service, WAM!PROOF, ISDN Tracked Service, Internet Gateway Service and Render on Demand service, are accounted for as network operations expenses and are incurred in advance of receiving revenue. Selling, general and administrative Our selling expense consists primarily of the salaries and commissions of our direct sales force and 21 our global marketing groups, commissions for channel partners, and the costs of ongoing marketing activities such as promotions and channel development. Our sales and marketing efforts are focused on expanding our customer base and increasing utilization on our network. Accordingly we offer new and existing services and develop new channels to sell and support our services. We also seek to increase the utilization of our network with the assistance of our influential customers who encourage their workflow partners to use our services. Our 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 our administrative infrastructure necessary to manage our globally expanding operations, and professional service fees incurred in connection with financing activities, contract negotiations and business acquisitions. Depreciation and amortization We generally retain ownership of the customer premise equipment and most of the hardware and software necessary for our customers to use our services on a turn-key basis. Depreciation and amortization expense includes depreciation of this hardware and software as well as the equipment located in our distribution hubs and network operation, hosting and data storage centers. We also amortize certain costs relating to the acquisitions of 4-Sight and Freemail, which we acquired using the purchase method of accounting. We anticipate additional capital investments in our network, hosting and storage infrastructure commensurate with customer demand and market opportunity. Results of Operations Years Ended December 31, 1999, 1998 and 1997 Revenues Total revenue for the years ended December 31, 1999, 1998 and 1997, was $24.8 million, $17.6 million and $1.6 million. These were increases in revenues are due to greater demand for our services and, in 1998, also due to the acquisition of 4-Sight. Net service revenue was $17.3 million, $6.8 million and $1.6 million for the years ended December 31, 1999, 1998 and 1997. This increase in net service revenue was primarily due to growth in the number of subscribers purchasing our services and increased utilization by subscribers. At December 31, 1999, we were providing transport services to approximately 8,700 subscribers, as compared to approximately 1,475 and 475 subscribers, at December 31, 1998 and 1997. Revenues from software and hardware sales for the years ended December 31, 1999 and 1998, were $7.5 million and $10.8 million. There was no revenue from software and hardware sales in 1997, as 4-Sight was not acquired until March 1998. The decrease in software and hardware sales in 1999, as compared to 1998, is the direct result of our shifting from sales of 4-Sight software and hardware as stand-alone products to sales of service contracts, partially offset by software purchases associated with ISDN Tracked Service agreements. 22 Operating Expenses Network communication Network communication expense for the years ended December 31, 1999, 1998 and 1997, was $26.3 million, $18.3 million and $7.4 million. Network communication expenses increased as a result of increased local loop connections directly related to growth in the number of our Direct Service customers, and from expenses incurred as a result of expanding our domestic and foreign network operations through the installation of additional hubs. Average monthly communication expense per Direct Service customer has declined and is expected to continue to decline, as a result of increased customer utilization of our backbone capacity and declining costs of North American local loop connections. These trends were partially offset by growth in our Direct Service customer base in Europe, where local loop costs are generally higher than in North America. We continue to incur substantial network communication expense as we deploy our network and related services and applications globally; however, we expect the network communications expense as a percentage of revenue to decline. Software and hardware The cost of software and hardware for the years ended December 31, 1999 and 1998 was $2.9 million and $3.5 million. There were no software and hardware sales or costs during 1997. This decrease between 1999 and 1998 reflects the decline in software and hardware sales as described above. Network operations and development Network operations and development expense for the years ended December 31, 1999, 1998 and 1997, was $22.9 million, $35.1 million and $7.5 million. The decrease between 1999 and 1998 was primarily due to completion of several development projects, including ISDN Tracked Service, Internet Gateway Service and WAM!BASE Data Archiving Service and the discontinuance of related outsourced development costs, partially offset by costs incurred for establishing our network operations center in Belgium and deploying our network in Europe. The growth in these expenses from 1997 to 1998 was due to the 4-Sight acquisition and the expansion of our operations. We expect that network operations costs will increase as our network expands; however, the cost of network operations as a percentage of revenue is expected to decline. Selling, general and administrative Selling, general and administrative expense for the years ended December 31, 1999, 1998 and 1997, was $43.4 million, $45.4 million and $13.5 million. The decrease between 1999 and 1998 was due to a one-time $11.4 million non-cash compensation charge related to the accelerated vesting of stock options held by certain of our officers that occurred in the period ended December 31, 1998. This decrease was partially offset by increases in other selling, general and administrative expenses associated with expanded operations during 1999. After adjusting for the one-time charge during 1998, recurring selling, general and administrative expense during the year ended December 31, 1999 increased $9.4 million, over the comparable adjusted amount for the year ended December 31, 1998. The increase was primarily due to sales and marketing efforts to launch new services and expand our customer base. The growth in these expenses from 1997 to 1998 was due to the 4-Sight acquisition and the expansion of our operations. We expect to continue to incur significant selling, general and administrative expenses as we continue to increase market penetration and traffic among existing customers. We expect selling, general and administrative expenses will continue to decline as a percentage of revenue. Depreciation and amortization Depreciation and amortization for the years ended December 31, 1999, 1998 and 1997, was $34.9 million, $17.7 million and $2.7 million. This increase was primarily due to depreciation of additional 23 network and related equipment purchased for network expansion during 1999, 1998 and 1997. Included in these totals for 1999 and 1998 was $6.6 million and $5.3 million of amortization expense relating to the goodwill recorded in connection with the 4-Sight and Freemail acquisitions. We anticipate that depreciation and amortization expense will increase in future periods as we continue to purchase equipment and expand operations, and as we begin to depreciate the wireless network facilities purchased from Winstar. Interest income Interest income for the years ended December 31, 1999, 1998 and 1997, was $0.8 million, $1.7 million and $0.2 million. The changes between 1999, 1998, and 1997 were primarily due to the changes in our average monthly balance of cash and cash equivalents during the periods. Interest expense Interest expense for the years ended December 31, 1999, 1998 and 1997, was $35.7 million, $22.6 million and $4.4 million. The increase during each of the years is related to the increase in long-term debt necessary to fund operations and to make strategic acquisitions. Included in interest expense for the years ended December 31, 1999, 1998 and 1997, are non-cash charges of $29.1 million, $18.3 million and $1.6 million related to the amortization of deferred financing charges and the value of warrants issued in connection with debt financing transactions. Other income Other income of $1.3 million in 1999 primarily relates to rental income received from SGI in connection with leasing a portion of the corporate campus facility in Eagan which we received as part of an investment by SGI in March 1999. Income taxes and net loss At December 31, 1999, we had $195.5 million of net operating loss carryforwards. These carryforwards are available to offset future taxable income through the year 2019 and are subject to the limitations of Section 382 of the Internal Revenue Code of 1986. These limitations may result in the expiration of net operating loss carryforwards before they can be utilized. We realized an income tax benefit of $1.4 million as a result of U.K. income tax and VAT benefits in the year ended December 31, 1998. Liquidity and Capital Resources Since inception, we have incurred net losses and experienced negative cash flow from operating activities. Net losses since inception have resulted in an accumulated deficit of $303.6 million as of December 31, 1999. We expect to continue to operate at a net loss and experience negative cash flow from operating activities for the foreseeable future. Through December 31, 1999, we have issued equity and debt securities and incurred other borrowings resulting in cash received by us of $361.4 million. We have used the majority of these proceeds to expand our global network, to build our customer base and for geographic expansion. In addition, we expanded our operations in Europe through the acquisition of 4-Sight for $16.4 million in cash and the issuance of equity securities. Our ability to achieve profitability and positive cash flow from operations will be dependent on substantially growing our revenues and realizing increased operating efficiencies. 24 In 1999, we entered into the following financing transactions in order to continue to fund our operating and capital requirements: In January 1999, we issued the 1999 MCI WorldCom Convertible Note and in January 1999, and March 1999, we borrowed $10.0 million and $15.0 million, respectively, under the note. In March 1999, the note was converted into 2,196,317 shares of our Class D convertible preferred stock. Dividends accumulate on the Class D convertible preferred stock at the rate of 7% per year of the original purchase price per share and are payable solely in additional shares of preferred stock, of the same class, if and when declared by the Board of Directors. The Class D convertible preferred stock (including accumulated but undeclared in-kind dividends) is currently convertible into 2,666,563 shares of common stock, subject to anti-dilution provisions. In connection with the note, we issued warrants to purchase a total of 350,000 shares of common stock. The warrants have an exercise price of $.01 and are exercisable until April 30, 2004. In March 1999, SGI purchased from us 5,710,425 shares of our Class B convertible preferred stock and 878,527 shares of our Class C convertible preferred stock. The aggregate consideration paid by SGI was $75.0 million, of which $35.0 million was paid in cash and $40.0 million was paid by the transfer to us of a corporate campus facility located in Eagan, Minnesota. The fair value of the campus facility was determined by an independent appraisal. The Class B convertible preferred stock and Class C convertible preferred stock are currently convertible into 6,923,144 shares and 1,066,625 shares of common stock, of the same class, subject to anti-dilution provisions. Dividends accumulate on the Class B and Class C convertible preferred stock at the rate of 7% per year of the original purchase price and are payable solely in additional shares of convertible preferred stock of the same class, if and when declared by the Board of Directors. In connection with the SGI investment, we entered into a preferred provider agreement that allows us to purchase hardware, software and services from SGI over a four-year period at prices based on SGI's most favored pricing models. We have made a firm commitment to purchase $35.0 million under this agreement during the period from December 31, 1998 to December 31, 2000. As of December 31, 1999, we have made purchases of approximately $12.4 million. In the event that we do not fulfill this purchase commitment, we are required to pay SGI 10% of the unfulfilled commitment. In July 1999, we entered into a two-year $20.0 million credit facility with Foothill Capital Corporation. As of December 31, 1999, we had $2.1 million in borrowings outstanding under this facility. This balance was repaid in March 2000. In September 1999, we entered into a sale-leaseback agreement with CCPRE-Eagan, LLC, an affiliate of Chase Capital Partners, New York. In connection with this agreement, we sold our corporate facilities, including land, building and personal property to CCPRE and received cash proceeds of approximately $36.5 million, net of financing expenses. As part of the agreement, we entered into a 20-year lease with three five-year options, requiring minimum monthly rent payments increasing from $481,000 to $959,000. We are responsible for all taxes, assessments, utilities and other governmental charges. We may repurchase the corporate facilities on the 24th or 36th month anniversary of the agreement. Beginning in September 2002, CCPRE may require us to repurchase the facilities for approximately $41.8 million, less the amount of certain payments under the lease. Because of the existence of this put option, the transaction has been recorded as a financing transaction. The carrying value of the liability is being accreted to the $41.8 million put value, at an effective interest rate of 18.9%. As of December 31, 1999, the accreted outstanding balance of the sale-leaseback agreement was approximately $38.2 million. In December, 1999, we entered into an agreement with Winstar pursuant to which we purchased a 20-year indefeasible right of use for backbone capacity and purchased wireless local loop facilities. Under 25 this agreement, we took title to equipment of varying bandwidth capacity; Winstar has agreed to maintain the equipment, including replacement as necessary for connectivity to Winstar's telecommunications network at a specified level of functionality over the agreement's term. We have the right to assign or sell our rights under the facility at any time. The cost of the 20-year facility is payable in an initial $20.0 million payment, which was made in January 2000, and quarterly payments, beginning at $5.0 million and increasing to approximately $24.9 million, over a seven-year period ending December 15, 2006. The network facility has been capitalized in property, plant and equipment, and we have recorded a related liability at the agreed-upon fair value of $260.3 million, which liability bears an effective interest rate of 8.3%. Under related agreements, Winstar has committed to purchase from us $12.5 million of services, which Winstar can use itself or resell to third parties. Winstar's commitment was prepaid in December 1999, this prepayment has been recorded as deferred revenue. We have also entered into a sublease agreement with Winstar for space in our Minnesota data center. In December 1999, Winstar made a one-time advance payment of approximately $12.5 million. We are required to repay this advance payment at $200,000 per month over 10 years, at an imputed interest rate of 15.7%. We have recorded the advance payment as a borrowing. Winstar is required to make monthly payments of approximately $81,000 over 10 years. Also in December 1999, we entered into a transaction providing for the purchase by Winstar of 50,000 shares of our Class E convertible preferred stock and an option for Winstar, its designated affiliates and others, to purchase an additional 50,000 shares of the same class of stock. Pursuant to the terms of this transaction, Winstar purchased a total of 85,000 shares of Class E convertible preferred stock for $85 million, of which $35 million was paid in cash and $50 million was paid in the form of 1,071,429 shares of Winstar common stock valued at $46.66 per share as adjusted for the Winstar 3-for-2 stock split declared in February 2000. Also in this transaction, other investors purchased 16,725 shares of Class E convertible preferred stock for an aggregate $16.7 million in cash. The Class E convertible preferred stock accumulates dividends at an annual rate of 7%, which are added monthly to the accreted liquidation value of the stock. Each of the two largest purchasers of Class E convertible preferred stock has the right to designate one director, and vote on an as- converted basis, not to exceed 17.5% of total voting power, on all matters submitted to the vote of common stock holders, including the election of directors. The Class E convertible preferred stock is initially convertible into 19,714,147 shares of common stock at an initial conversion rate of $5.16 per share, subject to anti-dilution provisions. Holders of Class E convertible preferred shares may convert their shares into common stock at any time, and are required to convert their shares into common stock on the last trading day of the first 20 consecutive trading days during which the weighted average closing price (weighted by daily trading volume) of the common stock is at least $8.00 per share. In February 2000, SGI purchased 10,000 shares of our Class F convertible preferred stock from us for $10 million in cash. The rights and preferences of the Class F convertible preferred stock, including its conversion provisions, are substantially the same as the rights and preferences of our Class E convertible preferred stock, except that the holders of Class F convertible preferred stock do not have the right to separately elect directors and there is no cap on the voting power of that class. The Class F convertible preferred stock is initially convertible into a total of 1,937,984 shares of common stock at an initial conversion rate of $5.16 per share, subject to anti-dilution provisions. In February and March 2000, we sold to Sumitomo and other investors 10,000 shares of our Class G convertible preferred stock for $10 million in cash. Holders of Class G convertible preferred stock have the right to vote, on an as-converted basis, with holders of common stock on all matters submitted to a vote of stockholders. The Class G convertible preferred stock is initially convertible into 1,937,984 26 shares of common stock at an initial conversion rate of $5.16 per share, subject to anti-dilution provisions. The shares of Class G convertible preferred stock will mandatorily convert into shares of common stock upon completion of an initial public offering. We believe the capital resources obtained from the foregoing transactions, together with our cash on hand will be sufficient to fund our business plan for at least the next 12 months. Impact of Year 2000 In prior years, we developed and implemented plans to become Year 2000 ready. In late 1999, we completed our remediation and testing of systems. As a result of those implementation efforts, we experienced no significant disruptions in critical information technology and non-information technology systems and believe those systems successfully responded to the Year 2000 date change. Expenses resulting from our Year 2000 efforts were not material. We are not aware of any material problems resulting from Year 2000 issues, either with our services, our internal systems, or the products and services of third parties. We will continue to monitor our critical computer applications and those of our suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Foreign Currency Exchange Rates During the year ended December 31, 1999, our revenue originating outside the U.S. was 35.7% of total revenue, substantially all of which was denominated in the local functional currency. Currently, we do not employ currency hedging strategies to reduce the risks associated with the fluctuation of foreign currency exchange rates. Our 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, our future results could be materially adversely impacted by changes in these or other factors. Interest Rates We invest 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 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, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if we sell securities that have seen a decline in market value due to changes in interest rates. Our investment securities are held for purposes other than trading. We are exposed to market risk from changes in the interest rates on certain of our outstanding debt. The outstanding loan balance under our $25 million 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, 1999, a 100 basis point change in interest rates would not change interest expense by a material amount. For fixed rate debt such as our 13.25% senior discount notes, interest rate changes affect its fair market value, but do not impact earnings or cash flows. 27 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth, as of February 29, 2000, the names, ages and positions of our executive officers and directors. Their respective backgrounds are described below. Name Age Position ---- --- -------- Edward J. Driscoll... 39 Chairman of the Board and Chief Executive Officer Gary L. Hokkanen..... 53 President Terri F. Zimmerman... 36 Chief Financial Officer Allen L. Witters..... 40 Chief Technology Officer Denice Y. Gibson..... 44 Senior Vice President of Global Operations Lisa A. Gray......... 44 Corporate General Counsel William E. Sullivan.. 51 Senior Vice President of Global Marketing Patrick J. Dirk...... 60 Director Robert L. Hoffman.... 71 Director William M. Kelly..... 46 Director Edward J. Driscoll is one of our founders and a principal shareholder. He has served as our Chairman of the Board and Chief Executive Officer since inception and was President from our inception until May 1999. Previously, Mr. Driscoll was the principal shareholder, Chief Executive Officer, and a director of Cybernet Systems, Inc. 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. 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. Mr. Driscoll currently serves on the Board of Directors of the Science Museum of Minnesota and on the Advisory Board for the Center for Graphic Communications Management and Technology of New York University. Gary L. Hokkanen has served as our President since May 1999. From 1983 until joining our company, he served in executive positions in printing, communications, data and electronics businesses. From 1997 until he joined WAM!NET, Mr. Hokkanen was Chief Executive Officer of The Miner Group, a diversified printing/print technology company. From 1994 to 1997, he served as President and CEO of World Satellite Network, Inc., a satellite communications company. Prior to that, he was President and CEO of Apollo Communications, Inc., a regional data communications company. For more than 5 years before joining our company he served as President of Cynergi Group, a firm providing senior management consulting services. Mr. Hokkanen currently serves on the Board of Directors of the Miner Group International Super Solutions Corporation, and Grafix, Inc. Terri F. Zimmerman has served as our Chief Financial Officer since August 1999. From June 1994 to July 1999 she served in various financial management capacities for Great Plains Software Inc. including the positions of Vice President of Finance and Operations, Director of Finance, and Chief Financial Officer. She was previously employed by Deloitte & Touche LLP in Minneapolis as a Senior Manager. Ms. Zimmerman holds a B.A. from the University of North Dakota. Ms. Zimmerman is a certified public accountant. Allen L. Witters is one of our founders and a principal shareholder. He has served as our Chief 29 Technology Officer since inception. He is principally responsible for designing and implementing our 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. Denice Y. Gibson has served as our Senior Vice President of Global Operations since July 1999. From October 1997 until joining our company in July 1999, Ms. Gibson served as Senior Vice President and General Manager of the Strategic Software Organization of SGI. From May 1995 until October 1997 she served as Senior Vice President and General Manager of Novell, Inc., a leading provider of network software enabled by directory services. Prior to Novell, Ms. Gibson held senior management positions with Tandem Telecommunications, Candle Corporation and Amdahl Corporation. She holds multiple degrees in psychology and engineering, including a doctorate in engineering management. Ms. Gibson has over 25 years experience in the computer industry. Lisa A. Gray has served as our Corporate General Counsel since December 1998. For more than 5 years prior to joining our company, Ms. Gray was a partner at the law firm of Larkin, Hoffman, Daly & Lindgren, Ltd. William E. Sullivan became our Senior Vice President of Global Marketing in March 2000. From February 1998 until joining our company, he served as President and Chief Executive Officer of PR 21, a marketing/PR firm and a subsidiary of Daniel J. Edelman, Inc. Prior to this he was Chief Marketing Officer for Imation, a $2.3 billion data storage and imaging company that was spun-off from 3M. Dating back to 1979 Mr. Sullivan has had various marketing positions with 3M and his own consulting firm. Patrick J. Dirk has served as a director since February 2000. Mr. Dirk has been the Chairman of the Board, President and Chief Executive Officer of Troy Group, Inc. since he co-founded the company in May 1982. From March 1984 to present, Mr. Dirk has served as a Director of Eltrax Systems, Inc., a provider of managed network services, which he co-founded in March 1984, and served as its Chairman of the Board from February 1995 until August 1995. From 1973 until 1982, Mr. Dirk was employed in various capacities by Kroy, Inc., a corporation involved in manufacturing automated lettering machines and related products, serving most recently as President and as a member of its Board of Directors. Mr. Dirk also serves as a member of the board of directors and advisory boards of several private companies. Robert L. Hoffman has served as a director since October 1995. Mr. Hoffman is a founder and recently retired shareholder of the law firm of Larkin, Hoffman, Daly & Lindgren, Ltd., where he practiced law from 1958 to 1999, and was its Chairman and President. He has been extensively involved in land use and development for the past 35 years as both an attorney and in various elected and appointed 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. William M. Kelly has served as a director since March 1999, originally as the designee of SGI, the holder of our Class B convertible preferred stock. He is a partner in the global technology group of the law firm of Davis Polk & Wardwell, and is based in Menlo Park, California. From 1994 through December 1999, Mr. Kelly held several executive positions at SGI, including at various times General 30 Counsel, Vice President of Business Development, acting Chief Financial Officer and head of the Silicon Interactive software business unit. His most recent position at SGI was as Senior Vice President of Corporate Operations. Mr. Kelly received his Bachelor of Arts and law degrees from Columbia University. He is also a director of MIPS Technologies, Inc. ITEM 11. EXECUTIVE COMPENSATION. The following table summarizes all compensation paid to our Chief Executive Officer and to each of our four other most highly compensated executive officers for each of the years ended December 31, 1999, 1998 and 1997. Summary Compensation Table
Long-Term Annual Compensation Compensation Awards ----------------------------------------- ------------------- Securities Underlying Name and Principal Position Year Salary Bonus Options(#) - --------------------------------- ---------- ------------ --------- ------------------- Edward J. Driscoll............... 1999 $ 195,000 $ 87,126 500,000 Chairman of the Board and Chief 1998 195,000 -- 750,000 Executive Officer 1997 150,000 75,000 -- Gary L. Hokkanen................. 1999 $ 183,333(1) $ 122,870 2,250,000 President 1998 -- -- -- 1997 -- -- -- Terri F. Zimmerman............... 1999 $ 75,769(2) $ 29,622 1,600,000 Chief Financial Officer 1998 -- -- -- 1997 -- -- -- Allen L. Witters................. 1999 $ 195,000 $ 76,236 500,000 Chief Technology Officer 1998 195,000 -- 750,000 1997 150,000 75,000 -- Denice Y. Gibson................. 1999 $ 97,820(3) $ 38,242 1,200,000 Senior Vice President of Global 1998 -- -- -- Operations 1997 -- -- --
- ------------ (1) Mr. Hokkanen's employment began in April 1999. (2) Ms. Zimmerman's employment began in August 1999. (3) Ms. Gibson's employment began in July 1999. The following table sets forth information with respect to stock options granted to the Chief Executive Officer and to each of our four other most highly compensated executive officers during the fiscal year ended December 31, 1999. For the fiscal year ended December 31, 1999, we did not grant any stock appreciation rights to these executives nor did we grant them any stock options at an option price below market value on the date of the grant, as determined by our Board of Directors. 31 Stock Option Grants in Last Fiscal Year
Individual Grants ------------------------------------------------------------- % of Total Potential Realizable Value Number of Options at Assumed Annual Rates Securities Granted to Exercise of Stock Price Appreciation Underlying Employees or Base for Option Term(3) Options in Fiscal Price --------------------------- Name Granted Year ($/Sh) Expiration Date 5% 10% - ------------------- ----------- ------------ ------------ ------------------ ----------- ----------- Edward J. Driscoll. 500,000(1) 6% $ 2.00 December 30, 2009 $ 628,895 $1,593,742 Gary L. Hokkanen... 750,000(2) 9% 2.00 November 7, 2009 943,342 2,390,614 1,500,000(1) 19% 2.00 December 30, 2009 1,886,684 4,781,227 Terri F. Zimmerman 600,000(2) 7% 2.00 November 7, 2009 754,674 1,912,491 1,000,000(1) 12% 2.00 December 30, 2009 1,257,789 3,187,485 Allen L. Witters... 500,000(1) 6% 2.00 December 30, 2009 628,895 1,593,742 Denice Y. Gibson... 600,000(2) 7% 2.00 November 7, 2009 754,674 1,912,491 600,000(1) 7% 2.00 December 30, 2009 754,674 1,912,491
- ------------ (1) These options vest monthly, over 48 months. (2) These options vest annually, over 3 years. (3) The potential realizable 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 we determined was $2.00 on November 2, 1999, which was the price per share attributable to the 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. The following table sets forth information with respect to the value of unexercised stock options held by the Chief Executive Officer and each of the four other most highly compensated executive officers as of December 31, 1999. None of the persons listed in the table below exercised any stock options during 1999. Fiscal Year-End Option Values Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at Fiscal Year-End at Fiscal Year-End(1) --------------------------- -------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ------------------- ----------- ------------- ----------- ------------- Edward J. Driscoll... 2,750,000 500,000 $2,080,000 $ -- Gary L. Hokkanen..... 250,000 2,000,000 -- -- Allen L. Witters..... 2,750,000 500,000 2,080,000 -- Terri F. Zimmerman... 200,000 1,400,000 -- -- Denice Y. Gibson..... 200,000 1,000,000 -- -- - ------------ (1) Amount based on the fair market value of our common stock on December 31, 1999, as determined by our Board of Directors, less the exercise price payable under the options. 32 Directors' Compensation We do not pay annual compensation to our directors. 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, we granted Mr. Hoffman 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 as of December 31, 1999. In December 1999, we granted Mr. Hoffman an additional 75,000 stock options at an exercise price of $2.00 per share, which options expire December 31, 2009, all of which were vested and exercisable as of December 31, 1999. In December 1999, we granted Mr. Kelly 75,000 stock options at an exercise price of $2.00 per share vesting monthly over 12 months and expiring December 31, 2009. Board Committees Our board of directors has a compensation committee and an audit committee. The members of the compensation committee are Messrs. Kelly and Hoffman. The compensation committee is responsible for determining the salaries and incentive compensation of our management and key employees and administering our stock option plan. The members of the audit committee are Messrs. Kelly, Hoffman and Dirk. The responsibilities of the audit committee include: o recommending to our board of directors an independent audit firm to audit our financial statements and to perform services related to the audit; o reviewing the scope and results of our audits with our independent auditors; o considering the adequacy of our internal accounting control procedures; and o considering auditors' independence. Compensation Committee Interlocks and Insider Participation No member of our compensation committee is or has ever been an officer or employee of ours or an officer or employee of any of our subsidiaries. During 1998, none of our executive officers served on the compensation committee or as a director of another entity whose executive officers served on our compensation committee or Board of Directors. From inception, certain legal services have been provided to us by Larkin, Hoffman, Daly & Lindgren, Ltd. Robert L. Hoffman, a member of the compensation committee, was a shareholder of Larkin, Hoffman, Daly & Lindgren, Ltd. until 1999. See "Certain Transactions -- Other Agreements." Employment Agreements We have entered into employment agreements with Edward J. Driscoll, Gary L. Hokkanen, Terri F. Zimmerman, Allen L. Witters, Denice Y. Gibson and Lisa A. Gray. These agreements are for one-year terms that automatically renew unless the employee's employment is terminated earlier in accordance with the terms summarized below. The salary to be received by each executive is the base salary in effect as of January 1, 2000, which is to be reviewed periodically at intervals of not more than twelve (12) 33 months in accordance with our salary review policies. Each executive is eligible to participate in an executive bonus plan as approved by the Board of Directors on an annual basis and eligible to participate in all benefit programs we offer. Each of the employment agreements may be terminated by us for cause or by the respective executive without further obligation on the part of either party. If any of the executives were terminated without cause, then the executive would be entitled to: o base salary through his or her next contract renewal date and any bonus to which he or she would have been entitled had he or she remained in our employ through his or her next annual renewal date; o a severance cash payment equal to two (2) times the executive's then annual base salary; o coverage under our health and major medical plans for a period of 18 months after termination; and o acceleration of any of the executive's unvested stock options. In the event of a change of control, each executive would have rights similar to those to which they are entitled if they are terminated for cause. Each executive is subject to a two-year non-compete agreement after they leave our employ, except under circumstances where we terminate them without cause or following a change of control. Stock Option Plans The Board of Directors adopted the 1994 stock option plan in September 1994, and our shareholders approved it in October 1994. The 1994 stock option plan has been subsequently amended, most recently on April 24, 1998, in conjunction with the adoption of the 1998 combined stock option plan, to reflect our name change to WAM!NET Inc., to incorporate prior amendments to the 1994 stock option plan and to limit the number of shares of common stock available for issuance under the amended 1994 stock option plan to 7,000,000. The Board of Directors adopted the 1998 combined stock option plan and the amendments to the 1994 stock option plan on April 24, 1998, and our shareholders approved the plans on May 30, 1998. Each stock option plan is currently administered by the Board of Directors. Our plans provide for the grant of stock options which qualify as "incentive stock options" under Section 422 of the Federal Tax Code, as well as the grant of stock options which are "nonqualified options." Under each plan, the Board of Directors or, if the Board of Directors appoints one, a stock option committee, has complete discretion to select the grantees and to establish the terms and conditions of each option, subject in all cases to the applicable provisions of the plan and the Federal Tax Code. Options granted under a plan are not transferable and are subject to various other conditions and restrictions. Participation in the amended 1994 stock option plan is limited to (i) our officers and regular full-time executive, administrative, professional, production and technical employees who are salaried employees and (ii) consultants and non-employee directors. Participation in the combined 1998 stock option plan is limited to our employees and to non-employee directors and non-employee consultants. The 1998 combined stock option plan permits the grant of options to eligible employees who are foreign nationals on such terms and conditions different from those specified in the 1998 stock option plan as may, in the judgment of the Board or the stock option committee, be necessary or desirable to foster and promote achievement of the purposes of the 1998 stock option plan, and, in furtherance of such purposes, 34 the Board or such committee may make such addenda, modifications, amendments, procedures and subplans as may be necessary or advisable to comply with provisions of applicable laws in other countries in which we operate or have employees. An addendum to the 1998 combined stock option plan extends the benefits of stock options granted under the 1998 combined stock option plan to our employees or those of our subsidiaries who are residents of the United Kingdom. A total of 7,000,000 shares of common stock have been reserved for issuance upon the exercise of options granted under the amended 1994 stock option plan and a total of 25,000,000 shares of common stock have been reserved for issuance upon the exercise of options granted under the 1998 combined stock option plan, subject to adjustment for stock splits or recapitalizations. Shares subject to cancelled, unexercised, lapsed or terminated options are available for subsequently granted options under a plan. Upon exercise of an option, payment of the exercise price in cash is required, or, at the Board of Directors' discretion, by the delivery of shares of common stock 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; however, 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 of Directors may terminate either plan and, subject to certain limitations, may amend either plan at any time without shareholder approval. As of December 31, 1999, there were 6,797,022 options issued and outstanding under the amended 1994 stock option plan at exercise prices ranging from $0.45 to $8.00 per share. As of December 31, 1999, there were 8,183,617 options issued and outstanding under the 1998 combined stock option plan, at exercise prices ranging from $2.00 to $8.00 per share. In addition to options granted under the plans, we have also granted certain officers and consultants options to purchase a total of 5,465,000 shares of common stock at exercise prices ranging from $0.45 to $3.90 per share. 35 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information as of March 1, 2000, with respect to the beneficial ownership of our common stock by: o each person known by us to own beneficially more than five percent of the outstanding shares of our common stock, o our directors and our executive officers named in the Summary Compensation Table under "Management -- Executive Compensation," and o all directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, based on factors including voting and investment power with respect to shares. Shares of common stock subject to options, warrants and convertible securities that are exercisable or convertible within 60 days of March 1, 2000, are deemed outstanding for the purpose of computing the percentage ownership of the person holding such options, warrants or convertible securities, but such shares are not deemed outstanding for computing the percentage ownership of any other person. Certain of the outstanding shares of our capital stock are subject to a voting agreement. Unless otherwise indicated, the address for each stockholder is c/o WAM!NET Inc., 655 Lone Oak Drive, Eagan, Minnesota 55121. Shares Percentage Beneficial Owner(1) Beneficially Owned Beneficial Owned ------------------- ------------------ ---------------- Edward J. Driscoll(2)................... 4,791,666 39.0% Gary L. Hokkanen(3)..................... 604,165 6.0 Terri F. Zimmerman(4)................... 262,500 2.7 Allen L. Witters(2)..................... 4,791,666 39.0 Denice Y. Gibson(5)..................... 250,000 2.6 Robert L. Hoffman(6).................... 150,000 1.6 William M. Kelly(7)..................... 25,000 * Patrick J. Dirk(8)...................... 124,957 1.3 MCI WorldCom, Inc.(9)................... 32,355,272 77.3 Winstar(10)............................. 16,472,868 63.4 SGI(11)................................. 8,861,128 48.3 Cerberus(12)............................ 2,906,977 23.4 Sumitomo(13)............................ 968,992 9.3 James L. Ecker(14)...................... 922,520 9.3 James R. Clancy(15)..................... 875,000 8.4 George H. Frisch(16).................... 700,000 7.0 John R. Kauffman(17).................... 575,000 5.7 David A. Townsend(18)................... 1,317,300 13.9 All directors and executive officers as a group (10 persons)(2)(3)(4)(5)(6)(7)(8)...... 11,557,245 68.3 - ---------- * Represents beneficial ownership of less than one percent of outstanding shares of our common stock. (1) Except as indicated by footnote, we understand the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to community property laws where applicable. 36 (2) Includes 2,770,833 shares issuable upon exercise of vested stock options and 20,833 shares issuable upon exercise of stock options which will vest within 60 days. (3) Includes 302,082 shares issuable upon exercise of vested stock options and 302,083 shares issuable upon exercise of stock options which will vest within 60 days. (4) Includes 231,250 shares issuable upon exercise of vested stock options and 31,250 shares issuable upon exercise of stock options which will vest within 60 days. (5) Includes 225,000 shares issuable upon exercise of vested stock options and 25,000 shares issuable upon exercise of stock options which will vest within 60 days. (6) Issuable upon exercise of vested stock options. Address: Larkin, Hoffman, Daly & Lindgren, Ltd., 1500 Northwest Financial Center, 7900 Xerxes Avenue South, Bloomington, MN 55431. (7) Includes 12,500 shares issuable upon exercise of vested stock options and 12,500 shares issuable upon options which will vest within 60 days. Address: Davis Polk and Wardwell, 1600 El Camino Road, Menlo Park, CA 94025 (8) Includes 4,167 shares issuable upon exercise of stock options which will vest within 60 days. Address: TROY Group, Inc., 2331 South Pullman Street, Santa Anna, CA 72705 (9) Includes 24,688,709 shares issuable upon exercise of warrants that are currently exerciseable, 5 million shares issuable upon conversion of a convertible subordinated note in the aggregate principal amount of $5.0 million and 2,196,317 shares of Class D convertible preferred stock which are currently convertible into 2,666,563 shares of common stock and are mandatorily convertible into shares upon completion of an underwritten public offering at an offering price of $12.52 per share. Excludes (i) 19,049,766 shares issuable upon exercise of warrants that will terminate unexercised upon repayment of our $25 million revolving credit facility with a portion of the net proceeds from this offering and (ii) shares issuable upon conversion of accrued interest on a convertible note at fair market value on the date of conversion. See "Use of Proceeds." MCI WorldCom also owns 115,206 shares of Class A preferred stock. (10) Includes 85,000 shares of Class E convertible preferred stock which are currently convertible into 16,472,868 shares of common stock and are mandatorily convertible into common stock, at the then effective conversion rate, at any time after the completion of an underwritten public offering, on the last trading day of the first consecutive 20 trading days during which the average closing price (weighted by daily trading volume) of the common stock is at least $8.00 per share. Address: 685 Third Ave., New York, NY 10017 (11) Includes 5,710,425 shares of Class B convertible preferred stock which are currently convertible into 6,923,144 shares of common stock and are mandatorily convertible into shares of common stock upon completion of an underwritten public offering at an offering price of $12.13 per share, and 10,000 shares of Class F convertible preferred stock which are currently convertible into 1,937,984 shares of common stock and are mandatorily convertible into shares of common stock, at the then effective conversion rate, at any time after the completion of an underwritten public offering, on the last trading day of the first consecutive 20 trading days during which the average closing price (weighted by daily trading volume) of the common stock is at least $8.00 per share. Excludes 878,527 shares of Class C convertible preferred stock which are mandatorily convertible into 1,066,625 shares of common stock upon completion of an underwritten public offering at 37 offering price of $12.52 per share. The Class C convertible preferred stock becomes convertible at the option of the holders, beginning September 2000. Address: 2011 N. Shoreline Blvd., Mountain View, CA 94043-1389. (12) Includes 15,000 shares of Class E convertible preferred stock which are currently convertible into 2,906,977 shares of common stock and are mandatorily convertible into shares of common stock, at the then effective conversion rate, at any time after the completion of an underwritten public offering, on the last trading day of the first consecutive 20 trading days during which the average closing price (weighted by daily trading volume) of the common stock is at least $8.00 per share. Address: 450 Park Ave., New York, NY 10022 (13) Includes 5,000 shares of Class G convertible preferred stock which are currently convertible into 968,992 shares of common stock and are mandatorily convertible into common stock upon completion of an underwritten public offering. Address: 1-2-2 Hitotsubashi, Chiyoda-Ku, Tokyo, 100 Japan (14) Includes 416,665 shares issuable upon exercise of warrants that are currently exercisable and 50,000 shares owned by the Ecker Family Limited Partnership, of which Mr. Ecker is a partner. Address: 5061 Interlachen Bluff, Edina, MN 55436. (15) Includes 812,500 shares issuable upon exercise of vested stock options and 62,500 shares issuable upon exercise of stock option which will vest within 60 days. (16) Includes 450,000 shares issuable upon exercise of currently exercisable options and warrants. Address: 5030 Woodlawn Blvd., Minneapolis, MN 55417. (17) Includes 575,000 shares issuable upon exercise of vested stock options. Address: 303 South Kootenia Creek Road, Stevensville, MT 59870. (18) Address: 2 Poole Road, Bournemouth, Dorset, BH 25 QY England. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 1996 MCI WorldCom Convertible Note In September 1996, we issued the $5.0 million 1996 MCI WorldCom convertible note to MCI WorldCom. As of December 31, 1999, $6.1 million was outstanding under the note, which included $1.1 million of accrued but unpaid interest. Interest on the 1996 MCI WorldCom convertible note accrues at an annual rate of 10%, payable semi-annually. The principal amount of the convertible note is convertible into 5 million shares of our common stock. The shares of common stock issuable upon conversion of the 1996 MCI WorldCom convertible note are subject to registration rights. We have entered into a subordination agreement with MCI WorldCom that covers the 1996 MCI WorldCom convertible note. See "-- 1998 MCI WorldCom Agreement" below. 1996 MCI WorldCom Preferred Stock, Subordinated Note and Warrant Purchase Agreement 1999 Class A Preferred Stock. In November 1996, we entered into a preferred stock, subordinated note and warrant purchase agreement with MCI WorldCom. Pursuant to this agreement, we issued 100,000 shares of our Class A preferred stock to MCI WorldCom for an aggregate purchase price of $1.0 million. MCI WorldCom has exchanged its shares of Class A preferred stock for 115,206 shares of a new series of Class A preferred stock. Holders of shares of the new series 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 38 single class, on all matters submitted to a vote of shareholders. 1996 MCI WorldCom Subordinated Note. Pursuant to the preferred stock, subordinated note and warrant purchase agreement, we also issued to MCI WorldCom a $28.5 million subordinated note due December 31, 2003, of which $23.0 million aggregate principal amount was outstanding as of December 31, 1999. Interest on the outstanding principal amount of the MCI WorldCom subordinated note accrues at an annual rate of 7%, and is payable semi-annually. 1996 MCI WorldCom Warrants. Pursuant to the preferred stock, subordinated note and warrant purchase agreement, we also issued to MCI WorldCom warrants to purchase, on or before December 31, 2000, up to 20,787,500 shares of common stock. These warrants have an exercise price of $1.16 per share, increasing at a rate of $0.016 per quarter, subject to anti-dilution provisions. The shares of common stock issuable upon exercise of the warrants are subject to registration rights. The new series of Class A preferred stock and the 1996 MCI WorldCom Subordinated Note are also covered by our subordination agreement with MCI WorldCom. See "-- 1988 MCI WorldCom Agreement" below. MCI WorldCom Guaranteed Revolving Credit Facility In September 1997, we entered into a revolving credit facility with The First National Bank of Chicago as lender and agent. 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. At December 31, 1999, we had borrowed the full $25.0 million available under the revolving credit facility. In consideration of MCI WorldCom's guaranty, we 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 anti-dilution provisions. The Class A warrants may be exercised until December 31, 2000. The Class B warrants are exercisable only if the revolving credit facility is not repaid in September 2000. We intend to repay this facility prior to maturity. 1998 MCI WorldCom Agreement In February 1998, in connection with the issuance of our 13.25% senior discount notes due 2005, MCI WorldCom agreed to defer, until September 5, 2005, all cash payments of principal, premium and interest on, or dividend, distribution, redemption and other payments 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. The agreement 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 13.25% senior discount notes following an event of default with respect to those notes. The agreement grants MCI WorldCom the right to convert into shares of common stock, at the fair market value on the date of such conversion, (a) accrued but unpaid interest on the 1996 MCI WorldCom convertible note, and (b) accrued but unpaid interest on the 1996 MCI WorldCom subordinated note from December 31, 2003 through the date such amount is converted into common stock. 1999 MCI WorldCom Convertible Note In January 1999, we issued a convertible note to MCI WorldCom in the principal amount of up to $25 million, due August 28, 2005. On January 13 and March 4, 1999, respectively, we borrowed $10 million 39 and $15 million on the terms provided for in the note. The note automatically converted into 2,196,317 shares of our Class D convertible preferred stock immediately prior to the closing of SGI's March 1999 equity investment described below. The Class D convertible preferred stock (including accumulated but undeclared in-kind dividends) is currently convertible into 2,666,563 shares of our common stock at the conversion price of $10.04 per share, subject to anti- dilution provisions, and is mandatorily convertible in the event of an underwritten public offering of our common stock at a price of at least $12.52 per share. In connection with the issuance of the 1999 MCI WorldCom convertible note, we also issued warrants to MCI WorldCom to purchase 350,000 shares of our common stock at an exercise price of $0.01 per share. MCI WorldCom is entitled to registration rights with respect to the common stock underlying the Class D convertible preferred stock and the 1999 MCI WorldCom warrants. Other Agreements with MCI WorldCom MCI WorldCom has guaranteed the performance of our obligations under an Amended and Restated Service Provision Agreement, dated February 12, 1999 between us and Time Inc. We have entered into service arrangements with MCI WorldCom, including an Application for Data Services pursuant to which MCI WorldCom provides us with interexchange telecommunications service, frame relay service and ATM service, and co-location agreements pursuant to which we lease space for our distribution hubs. We believe 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 our arrangements with MCI WorldCom, we have guaranteed monthly usage levels of data communications with MCI WorldCom totaling in aggregate approximately $2.9 million and $1.7 million for the years ending December 31, 2000 and 2001, respectively. If these agreements are terminated prior to their expiration date, we will be liable to MCI WorldCom for termination contingencies equal to the difference between the guaranteed monthly usage level and the amount actually used each year. Our data communications expense under telecommunication contracts with MCI WorldCom was approximately $16.7 million, $11.8 million and $5.5 million for the years ended December 31, 1999, 1998 and 1997. In addition, in connection with the issuance of the 1999 MCI WorldCom convertible note, we have agreed to make available to MCI WorldCom certain technology developed by us for integration with MCI WorldCom's infrastructure and product and service suites on terms mutually acceptable to us and MCI WorldCom, provided that this technology is provided on terms and conditions that are at least as favorable, when viewed in their entirety, as we provide (or may in the future provide) to any other person or entity not affiliated with MCI WorldCom. SGI Investments In March 1999, we consummated a transaction in which SGI purchased (a) 5,710,425 shares of our Class B convertible preferred stock and (b) 878,527 shares of our Class C convertible preferred stock. The Class B convertible preferred stock is currently convertible while the Class C convertible preferred stock may not be converted until the earlier of September 4, 2000, or the consummation of an underwritten public offering of our common stock. The Class B convertible preferred stock (including accumulated but undeclared in-kind dividends) is currently convertible into 6,923,144 shares of our common stock at the conversion price of $9.77 per share. The Class C convertible preferred stock (including accumulated but undeclared in-kind dividends) is currently convertible into 1,066,625 shares of our common stock at the conversion price of $10.04 per share. The Class B and Class C convertible preferred stock are subject to anti-dilution provisions and are mandatorily convertible in the event of an underwritten public offering of our common stock at a price of at least $12.13 and $12.52 per share, respectively. SGI is entitled to registration rights with respect to the shares of common stock underlying the Class B and Class C convertible preferred stocks. 40 The Class B convertible preferred stock has the right, voting separately as a class, to elect one member to our Board of Directors. As consideration for the issuance of the Class B and the Class C convertible preferred stock to SGI, we received $75 million, of which $35 million was paid in cash and $40 million was paid by way of transfer to us of SGI's corporate campus facility located in Eagan, Minnesota. See "Properties." In connection with SGI's investment, we entered into a preferred provider agreement, pursuant to which we have developed a list of existing SGI customers in the entertainment industry that we believe represent a significant revenue opportunity for us over the next three years. SGI has 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 other matters applicable to the sale of our service to these potential customers. In addition, we intend to explore with SGI a broader strategic relationship that we believe will enable us to obtain the benefit of SGI's presence in the entertainment industry and other selected commercial accounts. The preferred provider agreement also allows us to purchase hardware, software and services over a four year period at prices based on SGI's most favored pricing models. Pursuant to our preferred provider agreement, we have made a firm $35 million purchase commitment during the period commencing December 1, 1998 and ending December 31, 2000. We will be obligated to pay SGI an amount equal to 10% of the unpurchased commitment if we do not purchase the entire commitment amount during that period. As of December 31, 1999, we had made purchases of approximately $12.4 million. We believe that the discounted prices, reduced commissions and lower servicing fees for such products and services will result in lower network operations expense in the future. In February 2000, SGI purchased additional shares of preferred stock pursuant to a subscription right we granted to SGI in connection with its initial equity investment in our company in March 1999. SGI purchased 10,000 shares of Class F convertible preferred stock for $10 million in cash. The Class F convertible preferred stock accumulates dividends at an annual rate of 7%, added monthly to the accreted liquidation value of the stock, and votes as a class on an "as converted" basis with the common stock. The Class F convertible preferred stock is convertible into a total of 1,937,984 shares of common stock at a conversion rate of $5.16 per share, subject to anti-dilution provisions. Stockholders' Agreement Concurrently with the closing of SGI's initial investment in March 1999, we entered into a stockholders' agreement with SGI and MCI WorldCom pursuant to which SGI and MCI WorldCom each agreed to provide the other party with certain tag-along rights with respect to the transfer of any shares of the Class B, Class C or Class D convertible preferred stock owned by them, or the transfer of any shares of common stock into which such stock may be converted. In addition, the parties have agreed that the terms of future material agreements between us and MCI WorldCom must be approved by a majority of the disinterested directors on our Board of Directors. On March 8, 2000, the stockholders' agreement was amended to provide Winstar and Cerberus Partners, L.P. the same tag-along rights as SGI and MCI WorldCom, and broadened the securities subject to the terms of the agreement to include the Class E, F and G convertible preferred stock owned by the parties. Winstar Agreement In December 1999, we entered into an agreement with Winstar pursuant to which we purchased a 20-year indefeasible right of use for backbone capacity and purchased wireless local loop facilities. Under 41 this agreement, we took title to equipment of varying bandwidth. Winstar has agreed to maintain this equipment, including replacement as necessary, and maintain its connectivity to Winstar's telecommunications network at a specified level of functionality over the agreement's term. We have the right to assign or sell our rights under the agreement. We made an initial $20.0 million payment in January 2000 for our 20- year indefeasible right of use, and are required to make quarterly payments, beginning at $5.0 million and increasing to approximately $24.9 million, over the seven-year period ending December 15, 2006. The indefeasible right of use has been capitalized in property, plant and equipment and we have recorded a related liability at the agreed-upon fair value of $260.3 million, which liability bears an effective interest rate of 8.3%. Under related agreements, Winstar has committed to purchase from us $12.5 million of services, which Winstar may sell to third parties. Winstar's commitment was prepaid in December 1999. This prepayment has been recorded as deferred revenue. We have also entered into a sublease agreement with Winstar for approximately 78,000 square feet of computer operation, office and common area space in our Minnesota data centers. In December 1999, Winstar made a one- time advance payment of approximately $12.5 million. We are required to repay this advance payment at $200,000 per month over 10 years, at an imputed interest rate of 15.75%. We have recorded the advance payment as a borrowing. The sublease has an initial term of 10 years, during which Winstar must pay monthly payments in the approximate amount of $81,000 and its prorated share of utilities, taxes and operating expenses. Winstar has the option to extend the sublease for two successive 5 year terms at 50% of then prevailing market rates and its share of those expenses. In connection with the foregoing agreements with Winstar, Winstar purchased 50,000 shares of our Class E convertible preferred stock and exercised an option to purchase an additional 35,000 shares of such stock for an aggregate purchase price of $85 million. Of this amount, $35 million was paid in cash and $50 million was paid through the transfer to us of 1,071,429 shares of Winstar's common stock valued at $46.66 per share (as adjusted for a 3-for-2 stock split declared by Winstar in February 2000). The Class E convertible preferred stock accumulates dividends at an annual rate of 7%, added monthly to the accreted liquidation value of the stock. Each of the two largest holders of Class E convertible preferred stock has the right to designate one director, and vote on an as-converted basis, not to exceed 17.5% of total voting power, on all matters submitted to the vote of common stock holders, including the election of directors. The Class E convertible preferred stock is initially convertible into a total of 19,714,147 shares of common stock at an initial conversion rate of $5.16 per share, subject to anti-dilution provisions. Other Agreements In February and March 2000, Sumitomo and other investors purchased 10,000 shares of our Class G convertible preferred stock for $10 million in cash. Holders of Class G convertible preferred stock have the right to vote, on an as-converted basis, with holders of common stock on all matters submitted to a vote of stockholders. The Class G convertible preferred stock is convertible into 1,937,984 shares of common stock, at a conversion rate of $5.16 per share, subject to anti-dilution provisions. The Class G convertible preferred stock will mandatorily convert into common stock in the event of an underwritten public offering of our common stock. In March 2000, other investors purchased 16,725 shares of Class E convertible preferred stock from us for $16.7 million in cash. Edward J. Driscoll, Jr., father of our Chairman of the Board and Chief Executive Officer, purchased 250,000 shares of common stock at our inception in 1994. As consideration for such shares, Mr. Driscoll paid us $500 and agreed to provide consulting services to us. In January 1998, Mr. Driscoll was granted an option to purchase up to 200,000 shares of common stock at a price of $3.90 per share as partial 42 consideration for his agreement to provide additional consulting services to us. Mr. Driscoll is a shareholder of Larkin, Hoffmann, Daly & Lindgren, Ltd., which provides legal services to us. George H. Frisch, who provides legal services to us, purchased 250,000 shares of common stock at our inception in 1994. As consideration for such shares, Mr. Frisch paid us $500 and agreed to provide legal services to us. In November 1995, Mr. Frisch was granted warrants to purchase an additional 150,000 shares of common stock at the price of $0.60 per share as partial consideration for his agreement to provide additional legal services to us. In addition, Mr. Frisch was granted, in July 1997, an option to purchase up to 100,000 shares of common stock at a price of $0.96 per share, and he was granted, in January 1998, an option to purchase up to 200,000 shares of common stock at a price of $3.90 per share, in both cases as partial consideration for his agreement to provide additional legal services to us. We loaned $305,000 to Allen L. Witters, our Chief Technology Officer, on September 1, 1998, of which approximately $300,000 remains outstanding. As security for the repayment of principal of and interest on this indebtedness, Mr. Witters granted us a lien on 60,000 shares of our common stock. In consideration for our purchase from David Townend of 31,680,000 ordinary shares of 4-Sight Limited in connection with the 4-Sight acquisition in February 1998, Mr. Townend received $8.0 million in cash 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 that comprises the deferred consideration for our purchase of 4-Sight. Mr. Townend is Managing Director of our subsidiary, WAM!NET U.K. Limited. The delivery of the additional 750,000 shares of common stock is contingent on WAM!NET U.K. Limited achieving certain sales objectives over the three year period ending March 13, 2001. Specifically, former shareholders of 4-Sight will be entitled to receive 625,000 shares of common stock if revenues attributable to customer sites outside the U.S. and Canada and receivable by WAM!NET or any of its subsidiaries exceeds $50 million for the period from March 13, 1998 to March 13, 2001. Former shareholders of 4-Sight will be entitled to receive an additional 125,000 shares of common stock if such revenues exceed $70 million for such period. From inception, certain legal services have been provided to us by Larkin, Hoffman, Daly & Lindgren, Ltd. Edward J. Driscoll, Jr., father of our Chairman of the Board and Chief Executive Officer, and Robert L. Hoffman, one of our directors, are shareholder of Larkin, Hoffman, Daly & Lindgren, Ltd. We have been advised that the amounts paid to this firm have not exceeded 5% of its total gross revenues in any of the past three years. 43 PART IV 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. The Company filed the following Current Reports on Form 8-K during the three months ended December 31, 1999: Current Report on Form 8-K filed on October 8, 1999, announcing the financing with Chase Capital Partners and the restructuring of our relationship with MCI WorldCom. (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. 2.3 (4) June 1, 1999 Amendment to the Agreement and Plan of Reorganization dated December 17, 1997 by and among WAM!NET Inc. (formerly 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. 44 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 Intentionally omitted. 4.14 (2) Warrants to purchase 4,157,500 Shares of Common Stock of the Company exercisable on or before December 31, 2000, issued to WorldCom Inc. on December 16, 1996 (Incorporated herein by reference to exhibit 10.6 of the Company's Registration Statement on Form S-4 (File No. 333-53841) filed with the Securities and Exchange Commission on May 28, 1998). 4.15 (2) Certificate for 13.25% Subordinated Unsecured Convertible Note due August 28, 2005 ($25,000,000 Note) issued to MCI WorldCom, Inc. on January 13, 1999. 4.16 (2) Certificate for 1,679,234 Class A Warrants and 2,840,967 Class B Warrants to purchase Common Stock of the Company, issued to WorldCom Inc. on September 26, 1997 (Incorporated herein by reference to exhibit 10.9 of the Company's Registration Statement on Form S-4 (File No. 333-53841) filed with the Securities and Exchange Commission on May 28, 1998). 4.17 (2) Subordinate Unsecured Convertible Note and Warrant Purchase Agreement between the Company and MCI WorldCom, Inc. dated January 13, 1999. 4.18 (2) Preferred Stock Purchase Agreement by and between the Company and Silicon Graphics, Inc. dated as of March 3, 1999. 4.19 (2) Certificate for 150,000 Warrants to purchase shares of Common Stock for the purchase price of $.01 per share issued to MCI WorldCom, Inc on January 13, 1999. 4.20 (2) Certificate of Designation of Rights and Preferences of Class A Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999, as corrected and filed with the Secretary of State of this State of Minnesota on March 5, 1999. 4.21 (2) Certificate of Designation of Rights and Preferences of Class B Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999. 4.22 (2) Certificate of Designation of Rights and Preferences of Class C Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999. 45 4.23 (2) Certificate of Designation of Rights and Preferences of Class D Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999. 4.24 (2) Certificate representing 115,206 shares of Class A Preferred Stock of the Company issued to MCI WorldCom. Inc. on March 4, 1999. 4.25 (2) Certificate representing 5,710,425 shares of Class B Convertible Preferred Stock of the Company issued to Silicon Graphics, Inc. on March 4, 1999. 4.26 (2) Certificate representing 878,527 shares of Class C Convertible Preferred Stock of the Company issued to Silicon Graphics, Inc. on March 4, 1999. 4.27 (2) Certificate representing 2,196,317 shares of Class D Convertible Preferred Stock of the Company issued to MCI WorldCom. Inc. on March 4, 1999. 4.28 (2) Stockholders Agreement by and among the Company, Silicon Graphics, Inc. and MCI WorldCom, Inc. dated as of March 4, 1999. 4.29 (2) Class A Preferred Stock Exchange Agreement by and between the Company and MCI WorldCom, Inc. dated as of March 4, 1999. 4.30 (2) Class D Preferred Stock Conversion Agreement by and between the Company and MCI WorldCom, Inc. dated as of March 4, 1999. 4.31 * Certificate of Designation of Rights and Preferences of Class E Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on February 16, 1999, as corrected and filed with the Secretary of State of the State of Minnesota on March 1 and March 8, 2000. 4.32 * Certificate of Designation of Rights and Preferences of Class F Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on February 11, 1999, as corrected and filed with the Secretary of State of the State of Minnesota on March 1 and March 9, 2000. 4.33 * Certificate of Designation of Rights and Preferences of Class G Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 6, 2000. 4.34 * Securities Purchase Agreement dated as of December 31, 1999, by and between the Company and Winstar Communications, Inc. 4.35 * Securities Purchase Agreement dated as of March 14, 2000, by and between the Company and Cerberus Partners, L.P. 4.36 * Securities Purchase Agreement dated as of February 3, 2000, by and between the Company and Silicon Graphics, Inc. 4.37 * Preferred Stock Purchase Agreement, dated as of February 18, 2000, by and between the Company and the buyers listed on Schedule 1.1 thereto. 4.38 * Form of Certificate for Shares of Class E Convertible Preferred Stock of the Company. 46 4.39 * Form of Certificate for Shares of Class F Convertible Preferred Stock of the Company. 4.40 * Form of Certificate for Shares of Class G Convertible Preferred Stock of the Company. 4.41 * Certificate for 200,000 Warrants to purchase shares of Common Stock for the purchase price of $.01 per share issued to MCI WorldCom, Inc. in connection with the 13.25% subordinated unsecured convertible note, dated January 13, 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 Allen 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 Intentionally omitted. 10.14 Intentionally omitted. 10.15 Intentionally omitted. 10.16 Intentionally omitted. 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 47 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 (3) Preferred Provider Agreement by and between the Company and Silicon Graphics, Inc., dated as of March 4, 1999 (portions of this exhibit have been omitted pursuant to a request for confidential treatment and have been filed with the Securities Commission under separate cover). 10.23 (2) Sale and Purchase Agreement by and between Silicon Graphics, Inc., on behalf of itself and its wholly-owned subsidiary, Cray Research, L.L.C., and the Company dated as of March 4, 1999. 10.24 (2) Lease by and between the Company and Silicon Graphics, Inc. on behalf of itself and its wholly-owned subsidiary, Cray Research, L.L.C., with respect to the Company's corporate campus facility located in Eagan, Minnesota dated as of March 4, 1999. 10.25 Intentionally omitted. 10.26 Intentionally omitted. 10.27 (4) Loan and Security Agreement dated July 16, 1999, by and between Foothill Capital Corporation and the Company. 10.28 (5) Purchase and Sale Agreement and Escrow Instructions dated September 30, 1999, between the Company and CCPRE-Eagan, LLC. 10.29 (5) Amendment Number One to Purchase and Sale Agreement and escrow Instructions dated September 30, 1999, between the Company and CCPRE-Eagan, LLC. 10.30 (5) Net Lease dated September 30, 1999 between the Company and CCPRE-Eagan, LLC. 10.31 * Master Agreement, dated as of December 31, 1999, by and between the Company and Winstar Communications, Inc. 23.1 * Consent of Ernst & Young LLP 27.1 * Financial Data Schedule. - ---------------- 48 (1) Incorporated herein by reference to the Company's Registration Statement on Form S-4 (File No. 333-53841), filed with the SEC on May 28, 1998. (2) Incorporated herein by reference to the Company's Annual Report on Form 10-K, filed with the SEC on March 31, 1999. (3) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q filed with the SEC on May 17, 1999. (4) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 4, 1999. (5) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q filed with the SEC on November 12, 1999. * Filed herein. 49 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, secure our customers and increase utilization of its network and infrastructure, 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, SGI and Winstar Communications, Inc. who have the ability to control the Company, including the election of directors and the direction of the affairs and operations of the business and (7) the ability to secure financing to fund operations. 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. 50 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 14th day of March, 2000. WAM!NET INC. By: /s/ Terri F. Zimmerman --------------------------- Name: Terri F. Zimmerman Title: 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 15, 2000 - ----------------------------- and Chief Executive Edward J. Driscoll III Officer /s/ Robert L. Hoffman Director March 15, 2000 - ----------------------------- Robert L. Hoffman /s/ William M. Kelly Director March 15, 2000 - ----------------------------- William M. Kelly /s/ Patrick J. Dirk Director March 15, 2000 - ----------------------------- Patrick J. Dirk 51 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL SCHEDULE OF WAM!NET INC. 1. Financial Statements Report of Independent Auditors..................... F-2 Consolidated Balance Sheets........................ F-3 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-7 2. Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts... F-24 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 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, 1998 and 1999, and the related consolidated statements of operations, shareholders' deficit and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14 (a). These financial statements and schedules 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of WAM!NET Inc. at December 31, 1998 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Ernst & Young LLP Minneapolis, Minnesota March 2, 2000 F-2 WAM!NET Inc. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
December 31, --------------------------- 1998 1999 ------------- ------------ Assets Current assets: Cash and cash equivalents............................................ $ 6,272 $ 27,180 Accounts receivable, net of allowance of $430 and $1,570 at December 31, 1998 and 1999.......................................... 3,466 3,982 Inventory............................................................ 1,534 1,254 Prepaid expenses and other current assets............................ 3,187 4,018 --------- --------- Total current assets................................................... 14,459 36,434 Property, plant and equipment, net..................................... 62,467 358,336 Goodwill, net.......................................................... 27,734 21,421 Deferred financing charges, net........................................ 20,183 18,300 Other assets........................................................... 616 764 --------- --------- Total assets........................................................... $ 125,459 $ 435,255 ========= ========= Liabilities and shareholders' deficit Current liabilities: Accounts payable..................................................... $ 17,098 $ 13,739 Accrued salaries and wages........................................... 4,801 2,839 Accrued expenses..................................................... 3,036 6,450 Deferred revenue..................................................... -- 2,500 Current portion of long-term debt.................................... 5,324 55,950 --------- --------- Total current liabilities.............................................. 30,259 81,478 Deferred revenue....................................................... -- 10,000 Long-term debt, less current portion................................... 203,914 490,450 Class A Redeemable Preferred Stock..................................... 1,140 1,212 Shareholders' deficit: Class B Convertible Preferred Stock.................................. -- 57 Class C Convertible Preferred Stock.................................. -- 9 Class D Convertible Preferred Stock.................................. -- 22 Common Stock......................................................... 93 95 Additional paid-in capital........................................... 54,302 156,680 Accumulated deficit.................................................. (164,387) (303,614) Accumulated other comprehensive income (loss)...................... 138 (1,134) --------- --------- Total shareholders' deficit.................................. (109,854) (147,885) --------- --------- Total liabilities and shareholders' deficit.................. $ 125,459 $ 435,255 ========= =========
See accompanying notes. F-3 WAM!NET Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Year Ended December 31, ---------------------------------------- 1997 1998 1999 ------------ ---------- ----------- Revenues: Net service revenue........................................ $ 1,555 $ 6,799 $ 17,319 Software and hardware sales................................ -- 10,791 7,476 ---------- ---------- ---------- Total revenues............................................... 1,555 17,590 24,795 Operating expenses: Network communication fees................................. 7,364 18,259 26,318 Cost of software and hardware.............................. -- 3,537 2,905 Network operations and development......................... 7,478 35,095 22,928 Selling, general and administrative........................ 13,527 45,422 43,392 Depreciation and amortization.............................. 2,668 17,668 34,875 ---------- ---------- ---------- 31,037 119,981 130,418 ---------- ---------- ---------- Loss from operations......................................... (29,482) (102,391) (105,623) Other income (expense): Interest income............................................ 202 1,748 814 Interest (expense)......................................... (4,356) (22,626) (35,693) Other income............................................... -- 39 1,275 ---------- ---------- ---------- Net loss before income tax benefit......................... (33,636) (123,230) (139,227) Income tax benefit......................................... -- 1,352 -- ---------- ---------- ---------- Net loss..................................................... (33,636) (121,878) (139,227) Less preferred dividends................................... (70) (70) (5,890) ---------- ---------- ---------- Net loss applicable to common stock.......................... $ (33,706) $ (121,948) $ (145,117) ========== ========== ========== Net loss applicable per common share -- basic and diluted.................................................... $ (5.19) $ (13.87) $ (15.58) ========== ========== ========== Weighted average number of common shares outstanding -- basic and diluted........................... 6,496,345 8,793,961 9,315,900 ========== ========== ==========
See accompanying notes. F-4 WAM!NET Inc. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (In thousands, except per share amounts)
Convertible Accumulated Common Stock Preferred Stock Additional Other --------------- --------------- Paid-In Accumulated Comprehensive Description Issued Amount Issued Amount Capital Deficit Income Total - ----------- ------ ------ ------ ------- -------- ----------- ------------- --------- Balance at December 31, 1996................. 6,480 $65 -- $ -- $ 6,125 $ (8,873) $ -- $ (2,683) Accumulated and unpaid dividends in connection with Class A Redeemable Preferred Stock........ -- -- -- -- (70) -- -- (70) Amortization of stock options.............. -- -- -- -- 426 -- -- 426 Value of warrants issued in connection with line of credit in September......... -- -- -- -- 4,766 -- -- 4,766 Issuance of Common Stock upon merger with FreeMail............................ 125 1 -- -- 487 -- -- 488 Issuance of Common Stock upon debt conversion at a price of $.38 per share.................................... 65 1 -- -- 24 -- -- 25 Exercise of stock options.................. 30 -- -- -- 13 -- -- 13 Net loss................................... -- -- -- -- -- (33,636) -- (33,636) ----- --- ------- ------ -------- --------- ------- --------- Balance at December 31, 1997................. 6,700 67 -- -- 11,771 (42,509) -- (30,671) Accumulated and unpaid dividends in connection with Class A Redeemable....... -- -- -- -- (70) -- -- (70) Preferred Stock Amortization of stock options.............. -- -- -- -- 12,538 -- -- 12,538 Value of warrants issued in connection with Senior Discounted Notes............. -- -- -- -- 10,047 -- -- 10,047 Issuance of Common Stock upon merger with 4-Sight............................. 2,500 25 -- -- 19,975 -- -- 20,000 Issuance of Common Stock upon debt conversion at a price of $.38 per share................................... 65 1 -- -- 24 -- -- 25 Exercise of stock options.................. 23 -- -- -- 17 -- -- 17 Comprehensive loss: Net loss................................. -- -- -- -- -- (121,878) -- (121,878) Foreign currency translation adjustment............................. -- -- -- -- -- -- 138 138 --------- Total comprehensive loss................... -- -- -- -- -- -- -- (121,740) ----- --- ------- ------ -------- --------- ------- --------- Balance at December 31, 1998................. 9,288 93 -- -- 54,302 (164,387) 138 (109,854) Accumulated dividends in connection with Class A Redeemable Preferred Stock.................................... -- -- -- -- (72) -- -- (72) Amortization of stock options.............. -- -- -- -- 166 -- -- 166 Value of warrants issued in connection with financing transaction............... -- -- -- -- 2,796 -- -- 2,796 Issuance of Convertible Preferred Stock.................................... -- 8,785 88 99,410 -- -- 99,498 Issuance of Common Stock upon debt conversion at a price of $.38 per share................................... 198 2 -- -- 73 -- -- 75 Exercise of stock options.................. 9 -- -- -- 5 -- -- 5 Comprehensive loss: Net loss................................. -- -- -- -- -- (139,227) -- (139,227) Foreign currency translation adjustment.. -- -- -- -- -- -- (1,272) (1,272) --------- Total comprehensive loss................... -- -- -- -- -- -- -- (140,499) ----- --- ------- ------ -------- --------- ------- --------- Balance at December 31, 1999................. 9,495 $95 8,785 $88 $156,680 $(303,614) $(1,134) $(147,885) ===== === ======= ====== ======== ========= ======= =========
See accompanying notes. F-5 WAM!NET Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Year Ended December 31, ----------------------------------------- 1997 1998 1999 ----------- ------------ ------------ Operating activities Net loss..................................................................... $(33,636) $(121,878) $(139,227) Adjustments to reconcile net loss to net cash used in operating activities: Noncash interest expense, including related warrant values................. 1,624 18,295 29,080 Value of stock options issued to employees and consultants................. 426 12,522 166 Depreciation and amortization.............................................. 2,668 17,668 34,875 Loss on disposal of property and equipment................................. 797 69 1,746 Changes in operating assets and liabilities: Accounts receivable...................................................... (386) 647 (516) Prepaid expenses and other assets........................................ (415) (8,424) (969) Accounts payable......................................................... 1,832 14,795 (3,359) Deferred Revenue......................................................... -- -- 12,500 Accrued expenses......................................................... 3,173 10,428 34 -------- --------- --------- Net cash used in operating activities........................................ (23,917) (55,878) (65,670) Investing activities Purchases of property and equipment.......................................... (16,599) (54,584) (25,208) Patent expenditures.......................................................... -- (370) (87) Business acquisitions (net of cash acquired)................................. -- (16,350) (647) Proceeds from sale of investments............................................ 1,000 -- -- -------- --------- --------- Net cash used in investing activities........................................ (15,599) (71,304) (25,942) Financing activities Proceeds from sale of preferred stock........................................ -- -- 34,707 Proceeds from borrowings (net of financing expenses)......................... 36,958 161,800 95,771 Proceeds from exercise of stock options...................................... -- 15 5 Payments on borrowings....................................................... (11,612) (28,998) (16,986) -------- --------- --------- Net cash provided by financing activities.................................... 25,346 132,817 113,497 Effect of foreign currencies on cash......................................... -- 363 (977) -------- --------- --------- Net (decrease) increase in cash and cash equivalents......................... (14,170) 5,998 20,908 Cash and cash equivalents at beginning of year............................... 14,444 274 6,272 -------- --------- --------- Cash and cash equivalents at end of year..................................... $ 274 $ 6,272 $ 27,180 ======== ========= ========= Supplemental schedule of noncash financing activities Value of interest cost assigned to warrants.................................. $ 4,766 $ 10,047 $ 4,297 Equipment financed through equipment financing............................... 1,764 -- -- Conversion of accrued interest to subordinated debt.......................... 1,363 1,965 1,837 Issuance of convertible preferred stock in exchange for land, building, and furniture and fixtures................................. -- -- 40,000 Dividends declared but unpaid................................................ 70 70 60 Purchase of network facilities............................................... 260,280 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 75 Conversion of accrued dividends to preferred stock........................... -- -- 152 Conversion of debt to preferred stock........................................ -- -- 24,791 Supplemental schedule of cash flow information Cash paid for interest....................................................... 1,208 2,276 6,332
See accompanying notes. F-6 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 1. Significant Accounting Policies Description of Business The Company is a leading global provider of business-to-business e-services for the media industry. The Company enables entertainment, advertising, publishing, printing and related media businesses worldwide to collaborate on- line within their workflow chains. The Company offers customers a wide array of e-services that meet their need to collaborate digitally with their workflow partners. The Company's services, applications and infrastructure provide a common electronic workflow platform for customers, enabling them to achieve measurable operating efficiencies, cost savings and productivity growth. Consolidation Policy and Foreign Currency Translations The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its 90% owned joint venture. All significant intercompany accounts and transactions have been eliminated in consolidation. All assets and liabilities are translated to U.S. dollars at year-end exchange rates, while elements of the income statement are translated at average exchange rates in effect during the year. The functional currencies of the Company's foreign subsidiaries are considered to be the respective subsidiary's local currency. All translation gains and losses resulting from fluctuations in currency exchange rates of these subsidiaries are recorded in equity as a component of accumulated other comprehensive loss. 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 provide for monthly minimum usage amounts by the customer. The Company recognizes the minimum monthly amount as earned 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 may offer service rebates. Revenue from hardware and software sales is recognized upon delivery of the hardware and software, unless there are remaining obligations. Other service fees are recognized as revenue in the period the service is provided to the customer. Deferred Revenue Deferred revenue represents amounts received in advance of providing the related services. (See Note 4). 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, certificates of deposit and United States Treasury Bills. Cash equivalents are considered available for sale and are stated at cost, which approximates fair value. Accounts Receivable The Company grants credit to customers in the normal course of business. Management performs on-going credit evaluations of customers and maintains allowances for potential credit losses, which, when F-7 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) realized, have generally been within management expectations. No single customer or region represents a significant concentration of credit risk. Inventories Inventories, principally software and hardware held for sale, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. 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 thirty years. Goodwill The excess of the cost over the fair value of 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, on an on-going basis, based on estimated future cash flows from the related operations. Accumulated amortization was $5,308 and $11,954 at December 31, 1998 and 1999. Deferred Financing Costs Deferred financing costs represent costs related to the issuance of debt and are capitalized and amortized over the related lives of the debt. Accumulated amortization was $5,959 and $11,135 at December 31, 1998 and 1999. 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. 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 1997, 1998 and 1999 were $3,364, $13,447 and $8,278, respectively. The Company capitalizes software developed for internal use in accordance with Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The amounts capitalized are amortized over two years. During 1998 and 1999 the Company capitalized $1,659 and $3,129. Accumulated amortization was $350 and $2,206 at December 31, 1998 and 1999. 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-8 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) Net Loss Per Common Share The Company's basic net loss per share is computed by dividing net loss by 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 loss per share as presented is the same as basic earnings per share as the effect of outstanding options, warrants and convertible securities is anti-dilutive. Stock-Based Compensation The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," but applies Accounting Principles Board Opinion No. 25 (APB 25) and related interpretations in accounting for its stock plans. Under APB 25, when the exercise price of an employee stock option equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Use of Estimates Preparation of the Company's consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from those estimates. Reclassification Certain 1997 and 1998 amounts have been reclassified to conform to the 1999 presentation. 2. Property, Plant and Equipment Property, plant and equipment is summarized as follows: December 31, --------------------- 1998 1999 -------- -------- Land ............................... $ -- $ 8,800 Building ........................... 605 30,931 Network facilities ................. -- 260,280 Network equipment .................. 50,907 65,941 Other support equipment ............ 18,046 23,989 Furniture and fixtures ............. 2,802 4,180 Leasehold improvements ............. 6,506 3,888 -------- -------- 78,866 398,009 Less accumulated depreciation ...... (16,399) (39,673) -------- -------- $ 62,467 $358,336 ======== ======== F-9 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) 3. Long-Term Debt Long-term debt consisted of: December 31, --------------------- 1998 1999 -------- -------- 13.25% senior discount notes.................. $138,975 $157,999 Lines of credit............................... 24,000 27,137 Equipment financing........................... 18,860 21,041 Sale-leaseback financing...................... -- 38,246 Subordinated notes payable.................... 27,403 29,165 Other financing (see Note 4).................. -- 12,532 Network facilities financings (see Note 4).... -- 260,280 -------- -------- 209,238 546,400 Less current portion.......................... (5,324) (55,950) -------- -------- $203,914 $490,450 Senior Discount Notes On March 5, 1998, the Company sold 208,530 units of 13.25% Senior Discount Notes due 2005 (Notes). Each unit consists of a $1 principal note and three warrants. The aggregate principal amount of the notes payable at maturity is $208,530. The sale of the Units resulted in net proceeds to the Company of $119,203. Cash interest does not accrue nor is it payable prior to March 1, 2002. Thereafter, cash interest on the Notes will accrue on the Notes at a rate of 13.25% 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 valued using the Black-Scholes pricing model at $10,047, which is being amortized as interest expense over the life of the Notes. Amortization of the warrants value was $867 and $1,166 for the years ended December 31, 1998 and 1999. Lines of Credit The Company has a $25,000 line of credit agreement with a bank which expires in September 2000. 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, 1999, the amount outstanding on the line of credit was $25,000. The line of credit has both Eurodollar and Floating Rate advances. The Eurodollar and Floating Rate advances accrue interest at LIBOR plus 55 basis points (6.00 % at December 31, 1999) and prime (8.5% at December 31, 1999). Interest on the LIBOR borrowings is payable upon maturity and on the prime borrowings is payable quarterly. 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 valued at $4,766, using the Black-Scholes pricing model, and are being amortized as interest expense over the life of the agreement. Amortization of the warrants for the years ended December 31, 1997, 1998 and 1999 was $502, $1,589 and $1,589. The Class B warrants are exercisable only if the line of credit is not repaid in September 2000. F-10 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) It is management's intention to fully repay the line of credit on or before its due date. The Class B warrants were deemed to have no value based on management's intentions and ability to repay the line of credit prior to maturity. In July 1999, the Company entered into a $20,000 credit facility with Foothill Capital Corporation ("Foothill"), which expires in July 2001. The credit facility contains a $10,000 term loan which was repaid from the proceeds of the Sale/Lease Back Agreement with CCPRE Eagan, LLC. The remainder of the facility is a revolving credit facility under which Foothill will lend the Company up to an additional $10,000 based upon a borrowing base consisting of the Company's recurring billings and collections from its U.S. customers. Amounts outstanding under the credit facility incur interest at the Wells Fargo Bank reference rate plus 1.75% (10.25% at December 31, 1999). The credit facility is secured by a lien on certain unencumbered and lienable assets. The credit facility requires the Company to maintain certain financial covenants. Foothill has agreed under certain circumstances to subordinate or release its lien on equipment to permit us to obtain equipment financing from third parties. The credit facility is automatically renewable at maturity until canceled in accordance with its terms. As of December 31, 1999, the Company has borrowed $2,137 under the credit facility. Equipment Financing The Company has entered into various notes payable with equipment financing companies. Monthly payments on the installment notes range from $11 to $149, including imputed interest at rates ranging from 11.65% to 15.58%. The various notes are due between April 2001 through November 2002 and are secured by equipment. Sale-Leaseback Financing On September 30, 1999, the Company entered into a sale-leaseback back agreement with CCPRE-Eagan, LLC ("CCPRE"), a Delaware Limited Liability Company, and an affiliate of Chase Bank, New York. In connection with the agreement, the Company sold its corporate facilities, including land, building and personal property to CCPRE and received cash proceeds of $36,538, net of financing expenses. As part of the agreement, the Company entered into a 20 year lease, requiring minimum monthly rent payments increasing from $481 to $959, with three five-year options. The Company is responsible for all taxes, assessments, utilities and other governmental charges. The Company may repurchase the corporate facilities on the 24th or 36th month anniversary of the agreement for $45,600. Beginning in September 2002, CCPRE may require the Company, to repurchase the facilities for approximately $41,800, less the amount of certain payments under the lease. Because of the existence of this put option, the transaction has been recorded as a financing transaction. The carrying value of the liability is being accreted to the $41,800 put value, at an effective interest rate of 18.9%. As additional consideration for the agreement, the Company issued ten-year warrants to purchase 325,000 shares of common stock at an initial exercise price of $12.00 per share. The warrants contain an antidilution clause and also contain a put feature that can be exercised on or after September 30, 2004 if the Company has not completed an initial public offering. The put feature would require the Company to repurchase the warrant or shares exercised at 92% of the appraised value of the common stock, less the exercise price. The warrant, which is recorded as a liability, was valued at $1,500, using the Black-Scholes pricing model, and is being amortized as interest expense over a three-year period. F-11 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) Subordinated Notes Payable In March through May of 1995, the Company issued a total of $250 of convertible subordinated notes. From 1995 to 1999, all of the notes were converted into 657,900 shares of common stock at the conversion price of $.38 per share. In September 1996, the Company issued to MCI WorldCom a $5,000 convertible subordinated note originally due September 1999. 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 and 1999, $635 and $507, of accrued interest was converted into additional subordinated notes. As of December 31, 1998 and 1999 the outstanding balance of the note was $5,635 and $6,142. In November 1996, the Company entered into a 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, as originally stated in the agreement, were initially required to be redeemed in December 1999 at a price of $10.00 per share plus an amount equal to all accumulated and unpaid dividends. In connection with the Silicon Graphics, Inc. investment ("SGI investment") (see Note 6), MCI WorldCom exchanged its shares of Class A preferred stock for 115,206 shares of a new Series of 1999 Class A preferred stock with terms substantially the same as the original Class A preferred stock entitling 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. Dividends are payable at the rate of 7% and began to cumulate on January 1, 1997, whether or not earned. As of December 31, 1998 and 1999 the accumulated and unpaid dividends were $140 and $60. Under the Subordinated Note Agreement, the Company has available an aggregate amount of $28,500. The note accrues interest at 7% per annum with an original due date of December 2003. During 1999, $1,330 of accrued interest was converted into additional subordinated notes. The amount outstanding on the subordinated note agreement was $21,693 and $23,023 at December 31, 1998 and December 31, 1999. In connection with the Investment Agreement, the Company sold, at a price of $.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 valued using the Black-Scholes pricing model at $4,906, which is being amortized as interest expense over the life of the warrant agreement. In each of the years ended December 31, 1997, 1998 and 1999 the Company recorded amortization expense of $1,226. The initial exercise price of $.96 per share increased to $.98 per share on March 31, 1997, and thereafter increases by an amount of $0.016 per share on the last day of each calendar quarter during the term of the warrant, commencing with the calendar quarter ending June 30, 1997. The exercise price was $1.16 per share on December 31, 1999. None of the warrants have been exercised as of December 31, 1999. On February 11, 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 10% Convertible Subordinated Note, due September 30, 1999, the Class A preferred stock owned by MCI WorldCom, and the 7% Subordinated Note, due December 31, 2003, until 180 days following the stated maturity of the 13.25% Senior Discount Notes due 2005. The agreement also provides that the payment of the principal and interest on the 10% Convertible Subordinated Note and the 7% Subordinated Note may be accelerated only in the event of the acceleration of the payment of the principal amount of the 13.25% Senior Discount Notes following an event of default with respect to the 13.25% Senior Discount Notes. F-12 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) The agreement grants MCI WorldCom an option to convert into shares of common stock at the fair market value on the date of such conversion interest otherwise due on the 10% Subordinated Note and interest on the outstanding principal amount of the 7% Subordinated Note from December 31, 2003 through the date such amount is paid. The carrying amounts of the Company's debt instruments in the balance sheets at December 31, 1998 and 1999 approximate fair value. Maturities of long-term debt as of December 31, 1999 are as follows: 2000......................... $ 55,950 2001......................... 15,085 2002......................... 54,287 2003......................... 25,119 2004......................... 41,805 Thereafter................... 354,154 --------- 546,400 Less current maturities ..... (55,950) --------- $ 490,450 ========= 4. Purchase of Network Facilities from Winstar In December 1999, the Company entered into an agreement with Winstar Communications (Winstar) pursuant to which the Company purchased a 20-year indefeasible right of use for backbone and wireless local loop facilities. Under this agreement, the Company will take title to equipment of varying bandwidth; Winstar will maintain the equipment, including replacement as necessary, and maintain its connectivity to Winstar's telecommunications network at a specified level of functionality over the agreement's term. The Company has the right to assign or sell its rights under the facility at any time during the agreement's term. The cost of the 20-year facility is payable in an initial $20,000 payment, which was paid in January 2000, and quarterly payments, beginning at $5,000 and increasing to $24,862, over a seven-year period ending December 15, 2006. The network facility has been capitalized in property, plant and equipment and the Company has recorded a related liability at the agreed-upon fair value of $260,280, which liability bears an effective interest rate of 8.3%. Under a related agreement Winstar made a five-year commitment to purchase $12,500 of services from the Company, which can be used internally by Winstar or resold to its customers. The commitment was prepaid in December 1999, and recorded as deferred revenue. The companies have also entered into a sublease agreement for space in the Company's Minnesota data center. Winstar will make monthly payments over 10 years of approximately $81, plus a one-time advance payment, made in December 1999, of $12,532. The Company is required to repay this one-time advance at $200 per month over 10 years, at an imputed interest rate of 15.75%. The advance payment has been recorded by the Company as a borrowing (see Note 3). 5. Capital Stock The Company has the following classes of capital stock: o Undesignated preferred stock, 1,099,525 shares authorized which may be issued in one or more series; none issued and outstanding at December 31, 1997, 1998, and 1999. o Class A redeemable preferred stock, 115,206 shares authorized of $10 par value; 100,000, 100,000 and 115,206 shares issued and outstanding at December 31, 1997, 1998 and 1999 (see Note 3). F-13 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) o Class B convertible preferred stock, 5,710,425 shares authorized of $.01 par value; 0, 0 and 5,710,425 shares issued and outstanding at December 31, 1997, 1998 and 1999 (see Note 6). o Class C convertible preferred stock, 878,527 shares authorized of $.01 par value; 0, 0 and 878,527 shares issued and outstanding at December 31, 1997, 1998 and 1999 (see Note 6). o Class D convertible preferred stock, 2,196,317 shares authorized of $.01 par value; 0, 0 and 2,196,317 shares issued and outstanding at December 31, 1997, 1998 and 1999 (see Note 6). o Class E convertible preferred stock, 115,000 shares authorized of $.01 par value, none issued and outstanding at December 31, 1997, 1998, and 1999. (See Note 16). o Class F convertible preferred stock, 50,000 shares authorized of $.01 par value, none issued and outstanding at December 31, 1997, 1998, and 1999. (See Note 16). o Class G convertible preferred stock, 10,000 shares authorized of $.01 par value, none issued and outstanding at December 31, 1997, 1998, and 1999. o Common Stock, 490,000,000 shares authorized of $.01 par value; 6,699,740, 9,288,194 and 9,494,797 shares issued and outstanding at December 31, 1997, 1998 and 1999. 6. Preferred Stock In January 1999, the Company issued the 1999 MCI WorldCom Convertible Note (Note) and in January 1999 and March 1999 the Company borrowed $10,000 and $15,000 under the Note. In March 1999, the Note was converted into 2,196,317 shares of the Company's Class D convertible preferred stock, par value $.01 per share. Dividends accumulate on the Class D convertible preferred stock at the rate of 7% per year of the original purchase price per share and are payable solely in additional shares of preferred stock if and when declared by the Board of Directors. The Class D shares of convertible preferred stock are convertible into shares of common stock on a one for one basis, subject to anti-dilution provisions. In connection with the Note, the Company issued warrants to purchase a total of 350,000 shares of common stock. The warrants have an exercise price of $.01 and are exercisable from April 30, 1999 until April 30, 2004. In March 1999, the Company entered into an investment with Silicon Graphics, Inc. (SGI), providing for the purchase 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 $75,000, of which $35,000 was paid in cash and $40,000 was paid by transfer to the Company of a campus facility located in Eagan, Minnesota. The fair value of the campus facility was determined by an independent appraisal. The Class B preferred stock and the Class C preferred stock will be convertible on a one-to-one basis into common stock, subject to anti-dilution provisions, 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 convertible are subject to certain registration rights. Dividends accumulate on the Class B and Class C preferred stock at the rate of 7% per year of the original purchase price and are payable solely in additional shares of preferred stock if and when declared by the Board of Directors. In connection with the SGI Investment, the Company entered into a preferred provider agreement which allows it to purchase hardware, software and services over a four year period at prices based on SGI's most favored pricing models. Pursuant to the preferred provider agreement, the Company has made F-14 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) a firm commitment to purchase $35,000 during the period from December 31, 1998 to December 31, 2000. As of December 31, 1999, the Company has made purchases of $12,374. In the event the Company does not fulfill this purchase requirement, it is required to pay SGI 10% of the unfilled commitment. 7. Stock Options and Warrants Stock Options The Company's 1994 Incentive Stock Option Plan (1994 Plan) provides for the granting of incentive and non-qualified stock options to certain eligible employees and non-employee directors of the Company. Under the 1994 Plan, 7,000,000 shares of common stock have been reserved for the granting of stock options. In September 1998, the Company adopted the 1998 Combined Stock Option Plan (1998 Plan). The 1998 Plan provides for the granting of incentive and non-qualified stock options to certain eligible employees (including foreign nationals) and non-employee directors and consultants of the Company and any subsidiary corporation of the Company. Under the 1998 Plan, 25,000,000 shares of common stock have been reserved for the granting of stock options. Additionally, the Company has authorized the grant of options to management personnel for up to 5,465,000 shares of the Company's common stock outside of the Plans. A majority of the options granted under the above Plans 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, expiring December 31, 2007. These options vested in incremental amounts based on the number of installed customer sites. In 1998, the Board of Directors agreed to amend the stock option agreements, vesting the options immediately. The amendment created a new measurement date which resulted in the Company recording $11,405 as compensation expense in January 1998. Option activity is summarized as follows:
Weighted Shares Average Available Options Outstanding Exercise for Grant -------------------------- Price Under Plans Plans Non-Plan Per Share ----------- ----------- ----------- --------- Balance at December 31, 1996 ............... 5,079,000 1,992,400 4,377,500 $ .90 Additional shares reserved for issuance .. 15,000,000 -- -- Granted .................................. (3,020,250) 3,020,250 347,500 1.19 Canceled ................................. 157,750 (157,750) -- .80 Exercised ................................ -- (30,000) -- .45 ----------- ----------- ----------- ----- Balance at December 31, 1997 ............... 17,216,500 4,824,900 4,725,000 1.00 Additional shares reserved for issuance .. 9,928,600 -- -- Granted .................................. (4,265,000) 4,265,000 750,000 7.31 Canceled ................................. 196,235 (196,235) -- 4.60 Exercised ................................ -- (22,664) -- .77 ----------- ----------- ----------- ----- Balance at December 31, 1998 ............... 23,076,335 8,871,001 5,475,000 3.16 Granted .................................. (8,075,970) 8,075,970 -- 2.43 Canceled ................................. 1,957,099 (1,957,099) (10,000) 6.24 Exercised ................................ -- (9,233) -- .50 ----------- ----------- ----------- ----- Balance at December 31, 1999 ............... 16,957,464 14,980,639 5,465,000 $2.57 =========== =========== =========== =====
F-15 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) At December 31, 1997, 1998 and 1999, 2,075,226, 8,937,698 and 12,017,861 options were exercisable with weighted average exercise prices of $.78, $2.20 and $2.42. The following information applies to grants that are outstanding at December 31, 1999: Options Outstanding -------------------------------------- Options Exercisable Weighted ---------------------- Average Weighted Weighted Remaining Average Average Number Contractual Exercise Number Exercise Exercise Price Outstanding Life Price Exercisable Price -------------- ------------ ----------- ----------- ------------ -------- $ .45 703,250 1.8 years $ .45 703,250 $ .45 .96 7,966,528 5.6 years .96 7,481,943 .96 2.00 7,500,720 9.9 years 2.00 840,590 2.00 3.90 1,105,588 6.4 years 3.90 981,422 3.90 8.00 3,169,553 7.9 years 8.00 2,010,656 8.00 ---------- ---------- $ .45-- $8.00 20,445,639 7.5 years $ 2.57 12,017,861 $ 2.42 ========== ========== The fair values of the options granted during 1997, 1998 and 1999 was $ .33, $1.57 and $ .97 per share. 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 1997, 1998 and 1999: risk-free interest rate of 6.5%, 4.78% and 5.88%; 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, as required by FASB Statement No. 128, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net loss and net loss per common share, had the fair value based method been used, are set forth below: 1997 1998 1999 -------- --------- --------- Net loss applicable to common stock, as reported ......................... $(33,706) $(121,948) $(145,117) Pro forma net loss .................... (35,236) (127,304) (147,423) Net loss per common share as reported . $ (5.19) $ (13.87) $ (15.58) Pro forma net loss per common share ... (5.42) (14.48) (15.82) F-16 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) Warrants Warrants have been issued in connection with various financing transactions. The warrants are immediately exercisable. The following is a table of the warrants to purchase shares of the Company's common stock:
Exercise Warrants Price Expiration Outstanding Exercisable per Share Date ----------- ----------- --------- ---------- Balance at December 31, 1996 ...... 27,559,165 27,559,165 $ .60 - $1.50 2000-2003 Granted: Line of credit (see Note 3) .. 22,601,005 8,396,170 3.90 2000 ---------- ---------- Balance at December 31, 1997 ...... 50,160,170 35,955,335 .60 - 3.90 Granted: 13.25% Senior Discount Notes (see Note 3) ............... 1,257,436 1,257,436 .01 2005 ---------- ---------- Balance at December 31, 1998 ...... 51,417,606 37,212,771 .01 - 3.90 Granted: 1999 MCI WorldCom Convertible Note (see Note 6) .................... 350,000 350,000 .01 2004 Sale-Leaseback Financing (see Note 3) ............... 325,000 325,000 12.00 2009 ---------- ---------- Balance at December 31, 1999 ...... 52,092,606 37,887,771 $ .01 -$12.00 ========== ==========
8. Income Taxes At December 31, 1999, the Company had net operating loss carryforwards of approximately $195,464. These carryforwards are available to offset future taxable income through 2019 and are subject to the limitations of Internal Revenue Code Section 382 resulting from changes in ownership. The Company recorded a foreign income tax benefit of $1,352 in 1998. The effective tax rate differs from the statutory rate primarily as a result of the following: 1997 1998 1999 ----- ----- ----- 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-17 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) Components of deferred tax assets are as follows: December 31, ---------------------- 1998 1999 -------- -------- Deferred assets: Net operating loss.............. $ 45,282 $ 74,276 Deferred interest............... 4,323 10,206 Stock option amortization....... 4,892 4,937 Other........................... 199 6,783 -------- -------- 54,696 96,202 Deferred liability: Depreciation and amortization... (1,602) (3,193) -------- -------- Net deferred income tax assets.... 53,094 93,009 Valuation allowance............... (53,094) (93,009) -------- -------- Net deferred income taxes......... $ -- $ -- ======== ======== 9. Commitments and Contingencies Telecommunications Contracts 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. MCI WorldCom is the Company's largest supplier of telecommunications services accounting for charges of $5,538, $11,840 and $16,735 for the years ended December 31, 1997, 1998 and 1999. Guaranteed monthly usage levels of data communications with certain of the Company's telecommunication vendors and MCI WorldCom at December 31, 1999 aggregate to the following annual amounts: Guaranteed Guaranteed Usage Usage (MCI (all vendors) WorldCom) ------------- ----------- 2000.................... $ 7,204 $ 2,940 2001.................... 4,030 1,658 2002.................... 1,373 -- 2003.................... 899 -- 2004.................... 187 -- -------- ------- $ 13,693 $ 4,598 ======== ======= F-18 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) The termination contingency of data communications with certain of the Company's telecommunication vendors and MCI WorldCom at December 31, 1999 aggregates to the following annual amounts: Termination Termination Contingency Contingency (all vendors) (WorldCom) ------------- ---------- December 31: 1999...................... $8,408 $3,212 2000...................... 3,096 1,490 2001...................... 707 -- 2002...................... 523 -- 2003...................... 524 -- Operating Leases The Company also leases certain general office facilities. Operating expenses including maintenance, utilities, real estate taxes and insurance are paid by the Company. Total rent expense under operating leases was $592, $2,189 and $2,586 for the years ended December 31, 1997, 1998 and 1999. Future minimum lease obligations in excess of one year at December 31, 1999 are as follows: 2000.................................... $ 1,381 2001.................................... 1,189 2002.................................... 942 2003.................................... 664 2004.................................... 417 Thereafter.............................. 627 ------- $ 5,220 ======= Contingent Liabilities 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 those warrants and attorney's fees. Although the warrants provide for adjustments under certain circumstances, the Company believes no adjustment is required. Should that litigation be successful, the gross proceeds receivable by the Company from exercise of those warrants would be reduced from approximately $8,400 to $4,900. In February 2000, the court denied the plaintiff's motion for summary judgement that the warrant price should be reduced. The suit is scheduled to begin trial in April 2000. 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 adverse effect on the financial position of the Company. 10. Savings and Retirement Plan The Company has a 401(K) savings and retirement plan covering all eligible employees. Employees may contribute up to 15% of their compensation. The Company does not make contributions to the plan. F-19 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) 11. Business Acquisitions Acquisition of FreeMail, Inc. In December 1997, the Company acquired the outstanding common stock of FreeMail, Inc. (FreeMail). The results of operations of the acquired business are included in the accompanying financial statements since the date of acquisition. The Company issued 125,000 shares of Common Stock, with a fair value of $488, as consideration in connection with the acquisition. In accordance with the acquisition, the Company was to 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 were not to exceed $3,000. Effective June 1, 1999 the Company amended the agreement to change the amount and rate of payment of contingent consideration due to the former FreeMail shareholders. The Company decreased the amount payable from $3,000 to $2,000, payable $1,000 in cash and $1,000 in shares of our common stock at fair market value. The rate of payment has also been changed from 5% of revenue from a selected class of customers to 5% of our total collected revenue, calculated quarterly. In accordance with this amendment, the first payment was made on October 30, 1999 for the quarter ended September 30, 1999. As of December 31, 1999, the Company recorded $647 as additional goodwill, which represents the contingent payments made. 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. Acquisition of 4-Sight Limited 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 $20,000 in cash plus related acquisition expenses of $500 and 2,500,000 shares of the Company's Common Stock valued at $20,000. In addition, the former shareholders of 4-Sight will be entitled to receive up to an additional 750,000 shares of the Company's Common Stock in the event certain sales objectives are met over the three years ending March 2001. No shares have been issued as of December 31, 1999. 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 $32,100 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 $ 21,109 Net loss............. (37,942) (121,922) Net loss per share .. $ (4.22) $ (13.86) 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 F-20 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) projection of future results and do not reflect any synergies that might be achieved from combined operations. 12. Joint Venture On July 27, 1999, the Company entered into a joint venture agreement with Sumitomo Corporation, Electronics Division to distribute services in Japan. Under this agreement the Company's wholly-owned Japanese subsidiary and Sumitomo have agreed to form a Japanese joint venture company to be known as WAM!NET Japan K.K. Initially, the Company will own 90% of WAM!NET Japan K.K., and Sumitomo will own 10%. Sumitomo has an option to purchase up to 40% ownership interest in WAM!NET Japan unless that purchase would reduce the Company's ownership below 51%. The joint venture agreement provides that the Company will furnish the use of equipment, infrastructure, and some support services. Additionally, it requires the Company to fund the joint venture future operations. The operations of the joint venture in 1999 were not material. 13. Related Party Transactions On September 1, 1998, the Company entered into a $305 Secured Recourse Promissory Note and Pledge Agreement with its Chief Technology Officer. The Note accrues interest at 7% annually. A partner at the Company's external legal counsel is also the father of the Company's President and Chief Executive Officer and owns 250,000 shares of Common Stock of the Company and holds an option to purchase 200,000 shares of the Company's common stock. Additionally, another partner of this firm, is also a director of the Company and holds an option to purchase 150,000 shares of the Company's common stock. During the years ended December 31, 1997, 1998 and 1999, the Company incurred legal fees and expenses of approximately $157, $1,111 and $1,227, to such firm for services rendered in connection with litigation and for general legal services. Management believes the fees paid for 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 and 1999, no single customer accounted for more than 10% of net sales. F-21 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) 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: Year Ended December 31, --------------------------------- 1997 1998 1999 ------- --------- --------- Net sales to unaffiliated customers: United States...................... $ 1,555 $ 8,216 $ 15,945 Europe............................. -- 9,005 8,333 Rest of World...................... -- 369 517 ------- --------- --------- Total net sales...................... $ 1,555 $ 17,590 $ 24,795 ======= ========= ========= Identifiable assets: United States...................... $29,134 $ 107,101 $ 419,777 Europe............................. -- 18,358 15,358 Rest of World...................... -- -- 120 ------- --------- --------- Total assets......................... $29,134 $ 125,459 $ 435,255 ======= ========= ========= "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. Identifiable assets are classified based on the location of the Company's facilities. 16. Subsequent Events In December, 1999, the Company entered into a transaction providing for the purchase by Winstar of 50,000 shares of the Company's Class E convertible preferred stock and an option for Winstar, its designated affiliates and others, to purchase an additional 50,000 shares of the same class of stock. The purchase of these shares was finalized in March, 2000. Pursuant to the terms of this transaction, Winstar purchased a total of 85,000 shares of Class E convertible preferred stock for $85,000, of which $35,000 was paid in cash and $50,000 was paid in the form of $1,071,429 shares of Winstar common stock valued at $46.66 per share (as adjusted for the 3 for 2 Winstar stock split declared in February 2000). Other investors purchased 16,725 shares of Class E convertible preferred stock for an aggregate $16,725 in cash. The Class E convertible preferred stock accumulates dividends at an annual rate of 7%, which are added monthly to the accreted liquidation value of the stock. Each of the two largest purchasers of Class E convertible preferred stock has the right to elect one director, and vote on an as-converted basis, not to exceed 17.5% of the total voting power, on all matters submitted to the vote of common stock holders, including the election of directors. The Class E convertible preferred stock is currently convertible into 19,714,147 shares of common stock at an initial conversion of $5.16 per share of common stock subject to anti-dilution provisions. Holders of Class E convertible preferred stock may convert their shares into common stock at any time, and are required to convert their shares into common stock, after an initial public offering of the Company's common stock, the common stock trades for a price of at least $8.00 per share for twenty consecutive trading days. In February 2000, SGI purchased 10,000 shares of Class F convertible preferred stock for $10,000 in cash. The rights and preferences of the Class F convertible preferred stock, including its conversion provisions, are substantially the same as the rights and preferences of the Class E convertible preferred stock, except that the holders of Class F preferred stock do not have the right to separately elect directors and there is no cap on the voting power of that class. The Class F convertible preferred stock is initially F-22 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) convertible into a total of 1,937,984 shares of common stock, at an initial conversion rate of $5.16 per share, subject to anti-dilution provisions. In February 2000, the Company sold to Sumitomo and certain other investors 10,000 shares of Class G convertible preferred stock for an aggregate of $10,000 in cash. Holders of Class G convertible preferred stock have the right to vote, on an as-converted basis, with holders of common stock on all matters submitted to a vote of common stockholders. The Class G convertible preferred stock is initially convertible into 1,937,984 shares of common stock, at an initial conversion rate of $5.16 per share, subject to anti-dilution provisions. The shares of Class G convertible preferred stock will mandatorily convert into shares of common stock upon completion of an initial public offering. F-23 Schedule II -- Valuation and qualifying accounts
Deductions -------------------------- Charged Balance at to costs Charged Balance at beginning and to other end of Description of period Additions expenses accounts period - ---------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts December 31, 1999 $430,000 $1,148,000 -- $8,000 $1,570,000 December 31, 1998 10,000 420,000 430,000 December 31, 1997 -- 12,500 2,500 10,000
F-24 EX-4.31 2 CERTIFICATE OF DESIGNATION CLASS E CONVERTIBLE EXHIBIT 4.31 CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES OF CLASS E 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 10,000,000 shares known as Undesignated Stock, par value $.01 per share, 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 December 31, 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 115,000 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 E Convertible Preferred Stock" (the "Class E Preferred Stock") and the number of shares constituting such series shall be 115,000. 2. RANK. The Class E 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 E 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), (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"), (iv) the Company's Class D Convertible Preferred Stock, par value $0.01 per share (the "Class D Preferred Stock"), and (v) 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 E 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 Undesignated Stock except for any class or series which is Senior Stock or Parity Stock ((i) and (ii) together, the "Junior Stock"). 3. DIVIDENDS. (a) Each holder of Class E Preferred Stock shall be entitled to receive, in respect of each Dividend Period, when, as 2 and if declared by the Board of Directors of the Company, out of funds legally available for the payment of dividends, cumulative dividends in an amount per share equal to the Applicable Percentage of the Accreted Value as of the immediately preceding Dividend Payment Date (or, for the initial Dividend Period, as of the date of issuance). Dividends paid pursuant to this paragraph 3(a) shall be payable in arrears monthly on the last day of each month (each of such dates being a "Dividend Payment Date" and each such monthly period being a "Dividend Period"). Such dividends shall accrue from the date of issue (except that dividends on any amounts added to Accreted Value pursuant to Section 3(b) shall accrue from the date such amounts are added to Accreted Value), whether or not in any Dividend Period or Periods there shall be funds of the Company legally available for the payment of such dividends. Each such dividend shall be payable to the holders of record of shares of the Class E Preferred Stock on the 25th day of each month, as they appear on the stock records of the Company at the close of business on such record dates. (b) At the Company's option, dividends may be paid in cash. If dividends are not paid in cash on any Dividend Payment Date for the immediately preceding Dividend Period (or portion thereof if less than a full Dividend Period), the unpaid amount shall be added to the Accreted Value for purposes of calculating succeeding periods' dividends. Notwithstanding anything else contained herein, once any dividends for the immediately preceding Dividend Period (or portion thereof if less than a full Dividend Period) are so added to Accreted Value, such dividends will no longer be payable in cash. (c) The Applicable Percentage for each full Dividend Period for the Class E Preferred Stock shall be 0.5834%. The Applicable Percentage for the initial Dividend Period, or any other period shorter or longer than a full Dividend Period, on the Class E Preferred Stock shall be computed on the basis of a per annum rate of 7.0008% and the actual number of days elapsed over 12 30-day months and a 360-day year. (d) So long as any shares of the Class E Preferred Stock are outstanding, no dividends, except as described in the next succeeding sentence, shall be declared or paid or set apart for payment on Parity Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Class E Preferred Stock (or the unpaid amount shall have been added to the Accreted Value pursuant to Section 3(b)) for all Dividend Periods terminating on or prior to the date of payment of the dividend on such class or series of Parity Stock. When dividends are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, all dividends declared upon shares of the Class E Preferred Stock and all dividends declared upon any other class or series of Parity Stock shall be declared ratably in proportion to the respective 3 amounts of dividends accrued on the Class E Preferred Stock and accrued and unpaid on such Parity Stock. (e) Limit on Junior Dividends and Redemption. For so long as the Class E 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(e) shall prohibit or otherwise limit the ability of the Company to make any purchase, redemption or other acquisition pursuant to written agreements existing as of the date of filing of the Certificate of Designation of the Class E Preferred Stock (the "Filing 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 E 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 E 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 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 E 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. (ii) The term "Liquidation Amount" shall mean an amount per share of Class E Preferred Stock equal to the greater of: (A) the Accreted Value plus any per share dividends accrued 4 on the Class E Preferred Stock (whether or not earned or declared) since the most recent Dividend Payment Date and (B) the per share amount that holders of the Class E Preferred Stock would have received had they exercised their right to convert the Class E Preferred Stock to Common Stock immediately prior to a Liquidation of the Company. 5. VOTING. (a) Number of Votes. Each issued and outstanding share of Class E Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which each such share of Class E Preferred Stock is then convertible (as adjusted from time to time), at each meeting of holders of the Common Stock 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 such shareholders for their action or consideration, provided that no holder (based solely on its ownership of Class E Preferred Stock) shall be entitled to more than the number of votes equal to 19.9% (the "Maximum Percentage") of the voting power of the Voting Securities outstanding on the record date for which a vote is being taken (and therefore to the extent that its ownership of Class E Preferred Stock would entitle it to voting power in excess of 19.9%, the voting power shall be reduced to that percentage) and provided further that, with respect to any holder of fewer than 50,000 shares of Class E Preferred Stock, the Maximum Percentage shall be reduced to the percentage which bears the same proportion to 19.9% as the number of shares of Class E Preferred Stock held by such holder bears to 50,000. 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 E Preferred Stock and of any other outstanding preferred stock then entitled to vote shall vote together with the holders of Common Stock as a single class. (b) Class E Directors. Each of the two holders who purchase the largest number of shares of Class E Preferred Stock shall have the right to appoint a person to serve as a director of the Company (a "Class E Director") for so long as such holder continues to own shares of Class E Preferred Stock and/or shares of Common Stock issued on conversion or redemption of shares of Class E Preferred Stock which together represent beneficial ownership of at least 40% of the number of shares of Common Stock issuable upon conversion or redemption of the Class E Preferred Stock initially purchased by such holder (without giving effect to the anti-dilution provisions contained in Section 7 hereof). Any vacancy in the position of a Class E Director may be filled by and only by the holder who appointed the Class E Director whose position has become vacant. Each Class E Director may, during his or her term of office, be removed at any time, with or without cause, by and only by the holder who appointed such Class E Director. 5 (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 E Preferred Stock, voting separately as a class, (A) 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 E Preferred Stock, or (B) authorize the issuance of a class or series of capital stock having preferences or rights with respect to dividends or dissolution or the distribution of assets that would be superior to the preferences or rights of the Class E Preferred Stock, and (ii) without first obtaining the affirmative vote or written consent of a majority of the holders of the Company's Voting Securities other than MCI WORLDCOM, Inc. (together with its majority-owned subsidiaries and other controlled affiliates, "MCI WCOM"), (A) authorize any transaction of a type referred to in clause (i) or clause (ii) of the definition of "Change of Control," (B) authorize or consent to any liquidation, dissolution or winding-up of the affairs of the Company, or (C) 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 Filing Date). 6. OPTIONAL CONVERSION. At any time and from time to time, each share of Class E Preferred Stock may be converted, at the option of the holder thereof, into the number of fully paid and nonassessable shares of Common Stock obtained by dividing the amount determined pursuant to clause (A) of the definition of Liquidation Amount 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 E Preferred Stock. No notice delivered by the Company of any proposed redemption, change of control or other event will limit in any way the holders' rights to convert Class E Preferred Stock into Common Stock of the Company. (a) Initial Conversion Rate. The initial Conversion Rate for the Class E Preferred Stock shall be 193.7984 shares of Common Stock for each one share of Class E Preferred Stock surrendered for conversion representing an initial Conversion Price of $5.16 per share of Common Stock. The applicable Conversion Rate and Conversion Price from time to time in effect is subject to adjustment as hereinafter provided. (b) No Fractional Shares. If any fraction of a share of Common Stock would be issuable upon conversion of any Class E Preferred Stock, the Company shall round up to the next whole 6 share the number of shares of Class E Preferred Stock to be issued upon such conversion. (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 E 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 E 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 E 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 E 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 E 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 E 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. Within three Market Days after receipt of such notice and the surrender of the certificate or certificates for Class E 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 E Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purposes of effecting the 7 conversion of the Class E 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 E 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 E 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) Surrender. All shares of Class E 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 E 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 E 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 E 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 Filing 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 that is (i) at any time prior to the closing of a Qualified Initial Public Offering, less than the per share Conversion Price in effect immediately prior to the time of such issue or sale or (ii) at any time during the three-year period after the closing of a Qualified Initial Public Offering, less than 90% of the Current Market Price Per Common Share calculated as of the date of such issue or sale, then forthwith upon such issue or sale (the "Triggering Transaction"), the 8 Conversion Price shall, subject to Section 7(b)(1) through (10) inclusive, be reduced to 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 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 9 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 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 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 10 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 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). 11 (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. (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 consideration per share that the Common Stock shall be deemed to have been issued or sold at shall be equal to $4.98. (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 the Company shall pay to the person converting such Class E Preferred Stock an amount equal to the aggregate value of such 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 12 conversion of the Class E 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 E 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 E Preferred Stock shall have the right to acquire and receive upon conversion of the Class E 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 E 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) 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 (A) in effect on the Filing Date or (B) thereafter adopted by the Board and approved by the holders of the Voting Securities, (ii) pursuant to options, warrants and conversion rights in existence on the Filing Date (other than as provided for in Section 7(b)(10)) or (iii) on conversion of the Class B Preferred Stock, the Class C Preferred Stock or the Class D Preferred Stock. (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 13 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 E 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 E 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 E 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 E Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price in effect on the last Market 14 Day of the first consecutive period of twenty Market Days during which the Current Market Price Per Common Share is at least 155% of the Liquidation Amount beginning after the later to occur of the closing of an underwritten offering which is a "Qualified Initial Public Offering" pursuant to an effective registration statement under the Securities Act or the third anniversary of the date of issuance of the Class E Preferred Stock ("Initial Issuance Date"). (b) A "Qualified Initial Public Offering" shall mean an initial public offering of the Company's Common Stock raising not less than $50,000,000 of gross proceeds. (c) Procedures. All holders of record of shares of Class E Preferred Stock will be given prompt written notice of the occurrence of mandatory conversion and at least sixty (60) days prior written notice of the date fixed for any optional conversion and also of the place designated for conversion of all of such shares of Class E Preferred Stock. Such notice will be sent by mail, first class, postage prepaid, to each record holder of shares of Class E Preferred Stock at such holder's address appearing on the stock register. Each holder of shares of Class E 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 of occurrence of mandatory conversion or the date fixed for any optional conversion, all rights with respect to the Class E 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 E 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 E 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 E Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates. As soon as practicable after the surrender of the certificate or certificates for Class E 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 as provided in Section 6(b) in 15 respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. 9. CHANGE OF CONTROL OFFER. (a) Promptly after the occurrence of a Change of Control (the date of such occurrence being the "Change of Control Date"), the Company shall commence (or cause to be commenced) an offer to purchase all outstanding shares of Class E Preferred Stock pursuant to the terms described in Section 9(d) (the "Change of Control Offer") at a purchase price equal to the Change of Control Amount on the Change of Control Payment Date, and shall purchase (or cause the purchase of) any shares of Class E Preferred Stock tendered in the Change of Control Offer pursuant to the terms hereof. (b) At the Company's option, the Change of Control Amount shall be payable in cash or in shares of Common Stock (or the securities of the entity into which the Common Stock became converted in connection with the Change of Control), which shares shall be valued for purposes of this Section 9(b) at 97% of the Current Market Price Per Common Share on the Change of Control Payment Date. (c) If the Company elects to pay the Change of Control Amount in cash, prior to the mailing of the notice referred to in Section 9(d), but in any event within 30 days following the date on which a Change of Control has occurred, the Company shall (A) promptly determine if the purchase of the Class E Preferred Stock for cash would violate or constitute a default under the indebtedness of the Company or the terms of any other series of the Company's outstanding preferred stock and (B) either shall repay to the extent necessary all such indebtedness or preferred stock of the Company that would prohibit the repurchase of the Class E Preferred Stock pursuant to a Change of Control Offer or obtain any requisite consents or approvals under instruments governing any indebtedness or preferred stock of the Company to permit the repurchase of the Class E Preferred Stock for cash. The Company shall first comply with this Section 9(c) before it shall repurchase for cash any Class E Preferred Stock pursuant to this Section 9. (d) Within 30 days following the date on which a Change in Control has occurred, the Company shall send, by first-class mail, postage prepaid, a notice to each holder of Class E Preferred Stock. If applicable, such notice shall contain all instructions and materials necessary to enable such holders to tender Class E Preferred Stock pursuant to the Change of Control Offer. Such notice shall state: (i) that a Change of Control has occurred, that a Change of Control Offer is being made pursuant to this 16 Section 9 and that all Class E Preferred Stock validly tendered and not withdrawn will be accepted for payment; (ii) the purchase price (including the amount of accrued dividends, if any) and the purchase date (which must be no earlier than 30 days nor later than 60 days from the date such notice is mailed, other than as may be required by law) (the "Change of Control Payment Date"); (iii) that any shares of Class E Preferred Stock not tendered will continue to accrue dividends; (iv) that, unless the Company defaults in making payment therefor, any share of Class E Preferred Stock accepted for payment pursuant to the Change of Control Offer shall cease to accrue dividends after the Change of Control Payment Date; (v) that holders electing to have any share of Class E Preferred Stock purchased pursuant to a Change of Control Offer will be required to surrender stock certificates representing such shares of Class E Preferred Stock, properly endorsed for transfer, together with such other customary documents as the Company and the Transfer Agent may reasonably request to the Transfer Agent and registrar for the Class E Preferred Stock at the address specified in the notice prior to the close of business on the business day prior to the Change of Control Payment Date; (vi) that holders will be entitled to withdraw their election if the Company receives, not later than five business days prior to the Change of Control Payment Date, a telegram, facsimile transmission or letter setting forth the name of the holder, the number of shares of Class E Preferred Stock the holder delivered for purchase and a statement that such holder is withdrawing its election to have such shares of Class E Preferred Stock purchased; (vii) that holders who tender only a portion of the shares of Class E Preferred Stock represented by a certificate delivered will, upon purchase of the shares tendered, be issued a new certificate representing the unpurchased shares of Class E Preferred Stock; and (viii) the circumstances and relevant facts regarding such Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control). (e) The Company will comply with any tender offer rules under the Exchange Act which then may be applicable in connection with any offer made by the Company to repurchase the 17 shares of Class E Preferred Stock as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Certificate of Designation, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligation under this Certificate of Designation by virtue thereof. (f) On the Change of Control Payment Date, the Company shall (i) accept for payment the shares of Class E Preferred Stock validly tendered pursuant to the Change of Control Offer, (ii) pay to the holders of shares so accepted the purchase price therefor in cash or Common Stock (or the securities of the entity into which the Common Stock became converted in connection with the Change of Control) as provided above and (iii) cancel each surrendered certificate and retire the shares represented thereby. Unless the Company defaults in the payment for the shares of Class E Preferred Stock tendered pursuant to the Change of Control Offer, dividends will cease to accrue with respect to the shares of Class E Preferred Stock tendered and all rights of holders of such tendered shares will terminate, except for the right to receive payment therefor on the Change of Control Payment Date. (g) To accept the Change of Control Offer, the holder of a share of Class E Preferred Stock shall deliver, prior to the close of business on the business day prior to the Change of Control Payment Date, written notice to the Company (or an agent designated by the Company for such purpose) of such holder's acceptance, together with certificates evidencing the shares of Class E Preferred Stock with respect to which the Change of Control Offer is being accepted, duly endorsed for transfer. (h) For the avoidance of doubt, nothing in this Section 9 shall restrict the right of the holders of Class E Preferred Stock, in connection with a Change of Control, to convert and to receive the kind and amount of consideration payable to holders of Common Stock in respect of the Common Stock into which the Class E Preferred Stock may be converted. 10. CERTAIN MERGERS. In connection with any consolidation with or merger with or into, any person in a transaction where the Common Stock is converted into or exchanged for securities of such person or an affiliate of such person, the Company covenants that the person issuing such securities will be organized and existing under the laws of a jurisdiction which allows for the issuance of preference stock and that the Class E Preferred Stock shall be converted into or exchanged for and shall become shares of such person having in respect of such person substantially the same powers, preference and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereon that the Class E Preferred Stock had immediately prior to such transaction. 18 11. REDEMPTION. (a) Mandatory Redemption. On December 31, 2008, the Company will be required to redeem all of the outstanding shares of Class E Preferred Stock at a redemption price per share equal to the Liquidation Amount on such date. (b) Optional Redemption. At any time after the third anniversary of the Initial Issuance Date, the Company may, at its option, redeem all (but not less than all) of the shares of Class E Preferred Stock at a cash redemption price equal to 155% of the Liquidation Amount on the date specified for redemption plus accrued dividends thereon from such date to the date of payment of the redemption price. (c) Notice. Notice of such redemption shall be given by the Company by first class mail, postage prepaid, mailed not less than 30 days nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed at such holder's address as the same appears on the stock register of the Company; provided that neither the failure to give such notice nor any defect therein shall affect the validity of the giving of notice for the redemption of any share of Class E Preferred Stock to be redeemed except as to the holder to whom the Company has failed to give said notice or except as to the holder whose notice was defective. Each such notice shall state: (i) the redemption date; (ii) the redemption price; (iii) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (iv) that dividends on the shares to be redeemed will cease to accrue on such redemption date. (d) Dividends; Payment. Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Company in providing money for the payment of the redemption price of the shares called for redemption), dividends on the shares of Class E Preferred Stock so called for redemption shall cease to accrue, and all rights of the holders thereof as shareholders of the Company (except the right to receive from the Company the redemption price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state), such share shall be redeemed by the Company at the redemption price aforesaid. 12. CONVERTED AND REACQUIRED SHARES. Any shares of Class E 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 19 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. 13. PRE-EMPTIVE RIGHTS. Until the closing of a Qualified Initial Public Offering, the holders of the Class E Preferred Stock shall have pre-emptive rights to the extent set forth in Section 302A.413 of the Minnesota Business Corporation Act as in effect on the Filing Date, except that the provisions of subdivision 4, clause (e) thereof shall not apply. 14. AMENDMENT. If any proposed amendment to the Articles of Incorporation, including this Certificate of Designation, would alter or change the preferences, special rights or powers given to the holders of the Class E Preferred Stock so as to affect such holders adversely, or would authorize the issuance of a class or classes of stock having preferences or rights with respect to dividends or dissolution or the distribution of assets that would be superior to the preferences or rights of the Class E Preferred Stock, then the holders of the Class E Preferred Stock shall be entitled to vote as a class upon such amendment, and the affirmative vote of two-thirds of the outstanding shares of Class E Preferred Stock shall be necessary for the adoption thereof, in addition to such other vote as may be required by law. 15. MISCELLANEOUS. If, in connection with a Change of Control Offer pursuant to Section 9 or a redemption pursuant to Section 11, the Company determines to pay the Change of Control Amount or the redemption price in shares of Common Stock, the Company will (a) file a registration statement to register such shares of Common Stock under the Securities Act, (b) cause such registration statement to be effective at or prior to the time that the Company will deliver such shares to the holders of Class E Preferred Stock, (c) have such shares listed on the principal trading market for the Common Stock and (d) take such other actions as may reasonably be required to register the issuance (or, as appropriate, the re-sale) of the shares of Common Stock to be delivered to the holders of the Class E Preferred Stock to enable such shares of Common Stock to be sold without restriction. 16. DEFINITIONS. The following terms, as used herein, shall have the following meanings: "Accreted Value" equals, with respect to one share of Class E Preferred Stock, $1,000, plus the amount of any dividends added to Accreted Value in accordance with Section 3(b) (which aggregate amount shall be subject to adjustment whenever there shall occur a stock split, combination, re-classification or other similar event involving the Class E Preferred Stock). 20 "Change of Control" means: (i) the sale, lease, transfer, conveyance other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act, other than a holder of Class E Preferred Stock on the Initial Issuance Date, (ii) the consummation of any transaction (including any merger or consolidation) the result of which is that (A) any "person" (as defined above) other than a holder of Class E Preferred Stock on the Initial Issuance Date becomes the beneficial owner (as determined in accordance with Rules 13d-3 and 13d-5 under the Exchange Act except that a person will be deemed to have beneficial ownership of all shares that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the Voting Securities of the Company, other than in connection with an underwritten public offering of securities of the Company or (B) the holders of Voting Securities become entitled to receive less than 50% of the voting power of holders of the equity securities of the surviving entity, or (iii) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. "Change of Control Amount" means, with respect to one share of Class E Preferred Stock, the greater of (i) 125% of the Liquidation Amount per share on the Change of Control Payment Date or (ii) the per share amount a holder of Class E Preferred Stock would have received had he exercised his right to convert a share of Class E Preferred Stock into shares of Common Stock immediately prior to the issuance of a Change of Control. "Continuing Directors" means individuals who constituted the Board of Directors of the Company on the Filing Date (the "Incumbent Directors"); provided that any individual becoming a director during any year shall be considered to be an Incumbent Director if such individual's election, appointment or nomination was recommended or approved by at least two-thirds of the other Incumbent Directors continuing in office following such election, appointment or nomination present, in person or by telephone, at any meeting of the Board of Directors of the Company, after the giving of a sufficient notice to each Incumbent Director so as to provide a reasonable opportunity for such Incumbent Directors to be present at such meeting. "Current Market Price Per Common Share" means, as of any date, the average (weighted by daily trading volume) of the Daily Prices per share of Common Stock for the 20 consecutive Market Days immediately prior to such date. "Daily Price" means, as of any date, (i) if the shares of such class of Common Stock then are listed and traded on the New York Stock Exchange, Inc. ("NYSE"), the closing price on such 21 date as reported on the NYSE Composite Transactions Tape; (ii) if the shares of such class of Common Stock then are not listed and traded on the NYSE, the closing price on such date as reported by the principal national securities exchange on which the shares are listed and traded; (iii) if the shares of such class of Common Stock then are not listed and traded on any such securities exchange, the last reported sale price on such date on Nasdaq National Market; or (iv) if the shares of such class of Common Stock then are not traded on the Nasdaq National Market, the average of the highest reported bid and lowest reported asked price on such date as reported by Nasdaq. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Market Day" means a day on which the principal national securities market or exchange on which the Common Stock is listed or admitted for trading is open for the transaction of business. "Securities Act" means the Securities Act of 1933, as amended. "Voting Securities" means securities of the Company ordinarily having the power to vote for the election of directors of the Company, including but not limited to the Common Stock and all classes and series of Undesignated Stock the holders of which have the right to vote with holders of the Common Stock as a class. 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 E 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. 22 IN WITNESS WHEREOF, the undersigned has executed this certificate as of the 31st day of December, 1999 /s/ Edward J. Driscoll, Jr. ----------------------------------------- Edward J. Driscoll, Jr. Secretary 23 ARTICLES OF CORRECTION OF CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES OF CLASS E CONVERTIBLE PREFERRED STOCK AND CLASS F 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 E Convertible Preferred Stock, as follows, and does hereby correct and amend the Certificate of Designation of Rights and Preferences of Class F Convertible Preferred stock, as follows, effective as of the 16th day of February, 2000, and the 11th day of February, 2000, respectively: 1.) The undersigned, Edward J. Driscoll, Jr., executed and filed a Certificate of Designation of Rights and Preferences of Class E Convertible Preferred Stock which was filed with the Minnesota Secretary of State on February 16, 2000. 2.) The undersigned, Edward J. Driscoll, Jr., executed and filed a Certificate of Designation of Rights and Preferences of Class F Convertible Preferred Stock which was filed with the Minnesota Secretary of State on February 11, 2000. 3.) The Certificate of Designation of Rights and Preferences of Class E Convertible Preferred Stock inadvertently indicated that the Articles of Incorporation of the Corporation provide for a class of up to 10,000,000 shares known as Undesignated Stock, whereas the Amended Articles of Incorporation of the Corporation provide for a class of up to 9,900,000 shares known as Undesignated Stock. 4.) The Certificate of Designation of Rights and Preferences of Class F Convertible Preferred Stock inadvertently indicated that the Articles of Incorporation of the Corporation provide for a class of up to 50,000,000 shares known as Undesignated Stock, whereas the Amended Articles of Incorporation of the Corporation provide for a class of up to 9,900,000 shares known as Undesignated Stock. 5.) Subpart B of said Certificate of Designation of Rights and Preferences of Class E Convertible Preferred Stock should read: "The Articles of Incorporation of this Company provide for a class of up to 9,900,000 shares known as Undesignated Stock, par value $.01 per share, which shares may be issued from time to time in one or more classes or series." 6.) Subpart B of said Certificate of Designation of Rights and Preferences of Class F Convertible Preferred Stock should read "The Articles of Incorporation of this Company provide for a class of up to 9,900,000 shares known as Undesignated Stock, par value $.01 per share, which shares may be issued from time to time in one or more classes or series." IN WITNESS WHEREOF, I have hereunder subscribed my name effective the 29th day of February, 2000. /s/ Edward J. Driscoll, Jr. ---------------------------------- Edward J. Driscoll, Jr., Secretary AMENDMENT TO CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES OF CLASS E 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 9,900,000 shares known as Undesignated Stock, par value $.01 per share, 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 December 31, 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 116,725 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 E Convertible Preferred Stock" (the "Class E Preferred Stock") and the number of shares constituting such series shall be 116,725. 2. RANK. The Class E 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 E 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), (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"), (iv) the Company's Class D Convertible Preferred Stock, par value $0.01 per share (the "Class D Preferred Stock"), and (v) 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 E 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 Undesignated Stock except for any class or series which is Senior Stock or Parity Stock ((i) and (ii) together, the "Junior Stock"). 3. DIVIDENDS. (a) Each holder of Class E Preferred Stock shall be entitled to receive, in respect of each Dividend Period, when, as 2 and if declared by the Board of Directors of the Company, out of funds legally available for the payment of dividends, cumulative dividends in an amount per share equal to the Applicable Percentage of the Accreted Value as of the immediately preceding Dividend Payment Date (or, for the initial Dividend Period, as of the date of issuance). Dividends paid pursuant to this paragraph 3(a) shall be payable in arrears monthly on the last day of each month (each of such dates being a "Dividend Payment Date" and each such monthly period being a "Dividend Period"). Such dividends shall accrue from the date of issue (except that dividends on any amounts added to Accreted Value pursuant to Section 3(b) shall accrue from the date such amounts are added to Accreted Value), whether or not in any Dividend Period or Periods there shall be funds of the Company legally available for the payment of such dividends. Each such dividend shall be payable to the holders of record of shares of the Class E Preferred Stock on the 25th day of each month, as they appear on the stock records of the Company at the close of business on such record dates. (b) At the Company's option, dividends may be paid in cash. If dividends are not paid in cash on any Dividend Payment Date for the immediately preceding Dividend Period (or portion thereof if less than a full Dividend Period), the unpaid amount shall be added to the Accreted Value for purposes of calculating succeeding periods' dividends. Notwithstanding anything else contained herein, once any dividends for the immediately preceding Dividend Period (or portion thereof if less than a full Dividend Period) are so added to Accreted Value, such dividends will no longer be payable in cash. (c) The Applicable Percentage for each full Dividend Period for the Class E Preferred Stock shall be 0.5834%. The Applicable Percentage for the initial Dividend Period, or any other period shorter or longer than a full Dividend Period, on the Class E Preferred Stock shall be computed on the basis of a per annum rate of 7.0008% and the actual number of days elapsed over 12 30-day months and a 360-day year. (d) So long as any shares of the Class E Preferred Stock are outstanding, no dividends, except as described in the next succeeding sentence, shall be declared or paid or set apart for payment on Parity Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Class E Preferred Stock (or the unpaid amount shall have been added to the Accreted Value pursuant to Section 3(b)) for all Dividend Periods terminating on or prior to the date of payment of the dividend on such class or series of Parity Stock. When dividends are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, all dividends declared upon shares of the Class E Preferred Stock and all dividends declared upon any other class or series of Parity Stock shall be declared ratably in proportion to the respective 3 amounts of dividends accrued on the Class E Preferred Stock and accrued and unpaid on such Parity Stock. (e) Limit on Junior Dividends and Redemption. For so long as the Class E 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(e) shall prohibit or otherwise limit the ability of the Company to make any purchase, redemption or other acquisition pursuant to written agreements existing as of the date of filing of the Certificate of Designation of the Class E Preferred Stock (the "Filing 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 E 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 E 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 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 E 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. (ii) The term "Liquidation Amount" shall mean an amount per share of Class E Preferred Stock equal to the greater of: (A) the Accreted Value plus any per share dividends accrued 4 on the Class E Preferred Stock (whether or not earned or declared) since the most recent Dividend Payment Date and (B) the per share amount that holders of the Class E Preferred Stock would have received had they exercised their right to convert the Class E Preferred Stock to Common Stock immediately prior to a Liquidation of the Company. 5. VOTING. (a) Number of Votes. Each issued and outstanding share of Class E Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which each such share of Class E Preferred Stock is then convertible (as adjusted from time to time), at each meeting of holders of the Common Stock 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 such shareholders for their action or consideration, provided that no holder (based solely on its ownership of Class E Preferred Stock) shall be entitled to more than the number of votes equal to 17.5% (the "Maximum Percentage") of the voting power of the Voting Securities outstanding on the record date for which a vote is being taken (and therefore to the extent that its ownership of Class E Preferred Stock would entitle it to voting power in excess of 17.5%, the voting power shall be reduced to that percentage) and provided further that, with respect to any holder of fewer than 50,000 shares of Class E Preferred Stock, the Maximum Percentage shall be reduced to the percentage which bears the same proportion to 17.5% as the number of shares of Class E Preferred Stock held by such holder bears to 50,000. 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 E Preferred Stock and of any other outstanding preferred stock then entitled to vote shall vote together with the holders of Common Stock as a single class. (b) Class E Directors. Each of the two holders who purchase the largest number of shares of Class E Preferred Stock shall have the right to appoint a person to serve as a director of the Company (a "Class E Director") for so long as such holder continues to own shares of Class E Preferred Stock and/or shares of Common Stock issued on conversion or redemption of shares of Class E Preferred Stock which together represent beneficial ownership of at least 40% of the number of shares of Common Stock issuable upon conversion or redemption of the Class E Preferred Stock initially purchased by such holder (without giving effect to the anti-dilution provisions contained in Section 7 hereof). Any vacancy in the position of a Class E Director may be filled by and only by the holder who appointed the Class E Director whose position has become vacant. Each Class E Director may, during his or her term of office, be removed at any time, with or without cause, by and only by the holder who appointed such Class E Director. 5 (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 E Preferred Stock, voting separately as a class, (A) 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 E Preferred Stock, or (B) authorize the issuance of a class or series of capital stock having preferences or rights with respect to dividends or dissolution or the distribution of assets that would be superior to the preferences or rights of the Class E Preferred Stock, and (ii) without first obtaining the affirmative vote or written consent of a majority of the holders of the Company's Voting Securities other than MCI WORLDCOM, Inc. (together with its majority-owned subsidiaries and other controlled affiliates, "MCI WCOM"), (A) authorize any transaction of a type referred to in clause (i) or clause (ii) of the definition of "Change of Control," (B) authorize or consent to any liquidation, dissolution or winding-up of the affairs of the Company, or (C) 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 Filing Date). 6. OPTIONAL CONVERSION. At any time and from time to time, each share of Class E Preferred Stock may be converted, at the option of the holder thereof, into the number of fully paid and nonassessable shares of Common Stock obtained by dividing the amount determined pursuant to clause (A) of the definition of Liquidation Amount 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 E Preferred Stock. No notice delivered by the Company of any proposed redemption, change of control or other event will limit in any way the holders' rights to convert Class E Preferred Stock into Common Stock of the Company. (a) Initial Conversion Rate. The initial Conversion Rate for the Class E Preferred Stock shall be 193.7984 shares of Common Stock for each one share of Class E Preferred Stock surrendered for conversion representing an initial Conversion Price of $5.16 per share of Common Stock. The applicable Conversion Rate and Conversion Price from time to time in effect is subject to adjustment as hereinafter provided. (b) No Fractional Shares. If any fraction of a share of Common Stock would be issuable upon conversion of any Class E Preferred Stock, the Company shall round up to the next whole 6 share the number of shares of Class E Preferred Stock to be issued upon such conversion. (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 E 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 E 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 E 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 E 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 E 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 E 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. Within three Market Days after receipt of such notice and the surrender of the certificate or certificates for Class E 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 E Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purposes of effecting the 7 conversion of the Class E 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 E 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 E 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) Surrender. All shares of Class E 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 E 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 E 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 E 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 Filing 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 that is (i) at any time prior to the closing of a Qualified Initial Public Offering, less than the per share Conversion Price in effect immediately prior to the time of such issue or sale or (ii) at any time during the three-year period after the closing of a Qualified Initial Public Offering, less than 90% of the Current Market Price Per Common Share calculated as of the date of such issue or sale, then forthwith upon such issue or sale (the "Triggering Transaction"), the 8 Conversion Price shall, subject to Section 7(b)(1) through (10) inclusive, be reduced to 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 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 9 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 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 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 10 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 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). 11 (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. (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 consideration per share that the Common Stock shall be deemed to have been issued or sold at shall be equal to $4.98. (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 the Company shall pay to the person converting such Class E Preferred Stock an amount equal to the aggregate value of such 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 12 conversion of the Class E 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 E 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 E Preferred Stock shall have the right to acquire and receive upon conversion of the Class E 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 E 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) 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 (A) in effect on the Filing Date or (B) thereafter adopted by the Board and approved by the holders of the Voting Securities, (ii) pursuant to options, warrants and conversion rights in existence on the Filing Date (other than as provided for in Section 7(b)(10)) or (iii) on conversion of the Class B Preferred Stock, the Class C Preferred Stock or the Class D Preferred Stock. (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 13 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 E 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 E 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 E 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 E Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price in effect on the last Market 14 Day of the first consecutive period of twenty Market Days during which the Current Market Price Per Common Share is at least 155% of the Conversion Price beginning after the later to occur of the closing of an underwritten offering which is a "Qualified Initial Public Offering" pursuant to an effective registration statement under the Securities Act or the third anniversary of the date of issuance of the Class E Preferred Stock ("Initial Issuance Date"). (b) A "Qualified Initial Public Offering" shall mean an initial public offering of the Company's Common Stock raising not less than $50,000,000 of gross proceeds. (c) Procedures. All holders of record of shares of Class E Preferred Stock will be given prompt written notice of the occurrence of mandatory conversion and at least sixty (60) days prior written notice of the date fixed for any optional conversion and also of the place designated for conversion of all of such shares of Class E Preferred Stock. Such notice will be sent by mail, first class, postage prepaid, to each record holder of shares of Class E Preferred Stock at such holder's address appearing on the stock register. Each holder of shares of Class E 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 of occurrence of mandatory conversion or the date fixed for any optional conversion, all rights with respect to the Class E 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 E 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 E 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 E Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates. As soon as practicable after the surrender of the certificate or certificates for Class E 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 as provided in Section 6(b) in 15 respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. 9. CHANGE OF CONTROL OFFER. (a) Promptly after the occurrence of a Change of Control (the date of such occurrence being the "Change of Control Date"), the Company shall commence (or cause to be commenced) an offer to purchase all outstanding shares of Class E Preferred Stock pursuant to the terms described in Section 9(d) (the "Change of Control Offer") at a purchase price equal to the Change of Control Amount on the Change of Control Payment Date, and shall purchase (or cause the purchase of) any shares of Class E Preferred Stock tendered in the Change of Control Offer pursuant to the terms hereof. (b) At the Company's option, the Change of Control Amount shall be payable in cash or in shares of Common Stock (or the securities of the entity into which the Common Stock became converted in connection with the Change of Control), which shares shall be valued for purposes of this Section 9(b) at 97% of the Current Market Price Per Common Share on the Change of Control Payment Date. (c) If the Company elects to pay the Change of Control Amount in cash, prior to the mailing of the notice referred to in Section 9(d), but in any event within 30 days following the date on which a Change of Control has occurred, the Company shall (A) promptly determine if the purchase of the Class E Preferred Stock for cash would violate or constitute a default under the indebtedness of the Company or the terms of any other series of the Company's outstanding preferred stock and (B) either shall repay to the extent necessary all such indebtedness or preferred stock of the Company that would prohibit the repurchase of the Class E Preferred Stock pursuant to a Change of Control Offer or obtain any requisite consents or approvals under instruments governing any indebtedness or preferred stock of the Company to permit the repurchase of the Class E Preferred Stock for cash. The Company shall first comply with this Section 9(c) before it shall repurchase for cash any Class E Preferred Stock pursuant to this Section 9. (d) Within 30 days following the date on which a Change in Control has occurred, the Company shall send, by first-class mail, postage prepaid, a notice to each holder of Class E Preferred Stock. If applicable, such notice shall contain all instructions and materials necessary to enable such holders to tender Class E Preferred Stock pursuant to the Change of Control Offer. Such notice shall state: (i) that a Change of Control has occurred, that a Change of Control Offer is being made pursuant to this 16 Section 9 and that all Class E Preferred Stock validly tendered and not withdrawn will be accepted for payment; (ii) the purchase price (including the amount of accrued dividends, if any) and the purchase date (which must be no earlier than 30 days nor later than 60 days from the date such notice is mailed, other than as may be required by law) (the "Change of Control Payment Date"); (iii) that any shares of Class E Preferred Stock not tendered will continue to accrue dividends; (iv) that, unless the Company defaults in making payment therefor, any share of Class E Preferred Stock accepted for payment pursuant to the Change of Control Offer shall cease to accrue dividends after the Change of Control Payment Date; (v) that holders electing to have any share of Class E Preferred Stock purchased pursuant to a Change of Control Offer will be required to surrender stock certificates representing such shares of Class E Preferred Stock, properly endorsed for transfer, together with such other customary documents as the Company and the Transfer Agent may reasonably request to the Transfer Agent and registrar for the Class E Preferred Stock at the address specified in the notice prior to the close of business on the business day prior to the Change of Control Payment Date; (vi) that holders will be entitled to withdraw their election if the Company receives, not later than five business days prior to the Change of Control Payment Date, a telegram, facsimile transmission or letter setting forth the name of the holder, the number of shares of Class E Preferred Stock the holder delivered for purchase and a statement that such holder is withdrawing its election to have such shares of Class E Preferred Stock purchased; (vii) that holders who tender only a portion of the shares of Class E Preferred Stock represented by a certificate delivered will, upon purchase of the shares tendered, be issued a new certificate representing the unpurchased shares of Class E Preferred Stock; and (viii) the circumstances and relevant facts regarding such Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control). (e) The Company will comply with any tender offer rules under the Exchange Act which then may be applicable in connection with any offer made by the Company to repurchase the 17 shares of Class E Preferred Stock as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Certificate of Designation, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligation under this Certificate of Designation by virtue thereof. (f) On the Change of Control Payment Date, the Company shall (i) accept for payment the shares of Class E Preferred Stock validly tendered pursuant to the Change of Control Offer, (ii) pay to the holders of shares so accepted the purchase price therefor in cash or Common Stock (or the securities of the entity into which the Common Stock became converted in connection with the Change of Control) as provided above and (iii) cancel each surrendered certificate and retire the shares represented thereby. Unless the Company defaults in the payment for the shares of Class E Preferred Stock tendered pursuant to the Change of Control Offer, dividends will cease to accrue with respect to the shares of Class E Preferred Stock tendered and all rights of holders of such tendered shares will terminate, except for the right to receive payment therefor on the Change of Control Payment Date. (g) To accept the Change of Control Offer, the holder of a share of Class E Preferred Stock shall deliver, prior to the close of business on the business day prior to the Change of Control Payment Date, written notice to the Company (or an agent designated by the Company for such purpose) of such holder's acceptance, together with certificates evidencing the shares of Class E Preferred Stock with respect to which the Change of Control Offer is being accepted, duly endorsed for transfer. (h) For the avoidance of doubt, nothing in this Section 9 shall restrict the right of the holders of Class E Preferred Stock, in connection with a Change of Control, to convert and to receive the kind and amount of consideration payable to holders of Common Stock in respect of the Common Stock into which the Class E Preferred Stock may be converted. 10. CERTAIN MERGERS. In connection with any consolidation with or merger with or into, any person in a transaction where the Common Stock is converted into or exchanged for securities of such person or an affiliate of such person, the Company covenants that the person issuing such securities will be organized and existing under the laws of a jurisdiction which allows for the issuance of preference stock and that the Class E Preferred Stock shall be converted into or exchanged for and shall become shares of such person having in respect of such person substantially the same powers, preference and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereon that the Class E Preferred Stock had immediately prior to such transaction. 18 11. REDEMPTION. (a) Mandatory Redemption. On December 31, 2008, the Company will be required to redeem all of the outstanding shares of Class E Preferred Stock at a redemption price per share equal to the Liquidation Amount on such date. (b) Optional Redemption. At any time after the third anniversary of the Initial Issuance Date, the Company may, at its option, redeem all (but not less than all) of the shares of Class E Preferred Stock at a cash redemption price equal to 155% of the Liquidation Amount on the date specified for redemption plus accrued dividends thereon from such date to the date of payment of the redemption price. (c) Notice. Notice of such redemption shall be given by the Company by first class mail, postage prepaid, mailed not less than 30 days nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed at such holder's address as the same appears on the stock register of the Company; provided that neither the failure to give such notice nor any defect therein shall affect the validity of the giving of notice for the redemption of any share of Class E Preferred Stock to be redeemed except as to the holder to whom the Company has failed to give said notice or except as to the holder whose notice was defective. Each such notice shall state: (i) the redemption date; (ii) the redemption price; (iii) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (iv) that dividends on the shares to be redeemed will cease to accrue on such redemption date. (d) Dividends; Payment. Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Company in providing money for the payment of the redemption price of the shares called for redemption), dividends on the shares of Class E Preferred Stock so called for redemption shall cease to accrue, and all rights of the holders thereof as shareholders of the Company (except the right to receive from the Company the redemption price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state), such share shall be redeemed by the Company at the redemption price aforesaid. 12. CONVERTED AND REACQUIRED SHARES. Any shares of Class E 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 19 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. 13. PRE-EMPTIVE RIGHTS. Until the closing of a Qualified Initial Public Offering, the holders of the Class E Preferred Stock shall have pre-emptive rights to the extent set forth in Section 302A.413 of the Minnesota Business Corporation Act as in effect on the Filing Date, except that the provisions of subdivision 4, clause (e) thereof shall not apply. 14. AMENDMENT. If any proposed amendment to the Articles of Incorporation, including this Certificate of Designation, would alter or change the preferences, special rights or powers given to the holders of the Class E Preferred Stock so as to affect such holders adversely, or would authorize the issuance of a class or classes of stock having preferences or rights with respect to dividends or dissolution or the distribution of assets that would be superior to the preferences or rights of the Class E Preferred Stock, then the holders of the Class E Preferred Stock shall be entitled to vote as a class upon such amendment, and the affirmative vote of two-thirds of the outstanding shares of Class E Preferred Stock shall be necessary for the adoption thereof, in addition to such other vote as may be required by law. 15. MISCELLANEOUS. If, in connection with a Change of Control Offer pursuant to Section 9 or a redemption pursuant to Section 11, the Company determines to pay the Change of Control Amount or the redemption price in shares of Common Stock, the Company will (a) file a registration statement to register such shares of Common Stock under the Securities Act, (b) cause such registration statement to be effective at or prior to the time that the Company will deliver such shares to the holders of Class E Preferred Stock, (c) have such shares listed on the principal trading market for the Common Stock and (d) take such other actions as may reasonably be required to register the issuance (or, as appropriate, the re-sale) of the shares of Common Stock to be delivered to the holders of the Class E Preferred Stock to enable such shares of Common Stock to be sold without restriction. 16. DEFINITIONS. The following terms, as used herein, shall have the following meanings: "Accreted Value" equals, with respect to one share of Class E Preferred Stock, $1,000, plus the amount of any dividends added to Accreted Value in accordance with Section 3(b) (which aggregate amount shall be subject to adjustment whenever there shall occur a stock split, combination, re-classification or other similar event involving the Class E Preferred Stock). 20 "Change of Control" means: (i) the sale, lease, transfer, conveyance other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act, other than a holder of Class E Preferred Stock on the Initial Issuance Date, (ii) the consummation of any transaction (including any merger or consolidation) the result of which is that (A) any "person" (as defined above) other than a holder of Class E Preferred Stock on the Initial Issuance Date becomes the beneficial owner (as determined in accordance with Rules 13d-3 and 13d-5 under the Exchange Act except that a person will be deemed to have beneficial ownership of all shares that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the Voting Securities of the Company, other than in connection with an underwritten public offering of securities of the Company or (B) the holders of Voting Securities become entitled to receive less than 50% of the voting power of holders of the equity securities of the surviving entity, or (iii) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. "Change of Control Amount" means, with respect to one share of Class E Preferred Stock, the greater of (i) 125% of the Liquidation Amount per share on the Change of Control Payment Date or (ii) the per share amount a holder of Class E Preferred Stock would have received had he exercised his right to convert a share of Class E Preferred Stock into shares of Common Stock immediately prior to the issuance of a Change of Control. "Continuing Directors" means individuals who constituted the Board of Directors of the Company on the Filing Date (the "Incumbent Directors"); provided that any individual becoming a director during any year shall be considered to be an Incumbent Director if such individual's election, appointment or nomination was recommended or approved by at least two-thirds of the other Incumbent Directors continuing in office following such election, appointment or nomination present, in person or by telephone, at any meeting of the Board of Directors of the Company, after the giving of a sufficient notice to each Incumbent Director so as to provide a reasonable opportunity for such Incumbent Directors to be present at such meeting. "Current Market Price Per Common Share" means, as of any date, the average (weighted by daily trading volume) of the Daily Prices per share of Common Stock for the 20 consecutive Market Days immediately prior to such date. "Daily Price" means, as of any date, (i) if the shares of such class of Common Stock then are listed and traded on the New York Stock Exchange, Inc. ("NYSE"), the closing price on such 21 date as reported on the NYSE Composite Transactions Tape; (ii) if the shares of such class of Common Stock then are not listed and traded on the NYSE, the closing price on such date as reported by the principal national securities exchange on which the shares are listed and traded; (iii) if the shares of such class of Common Stock then are not listed and traded on any such securities exchange, the last reported sale price on such date on Nasdaq National Market; or (iv) if the shares of such class of Common Stock then are not traded on the Nasdaq National Market, the average of the highest reported bid and lowest reported asked price on such date as reported by Nasdaq. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Market Day" means a day on which the principal national securities market or exchange on which the Common Stock is listed or admitted for trading is open for the transaction of business. "Securities Act" means the Securities Act of 1933, as amended. "Voting Securities" means securities of the Company ordinarily having the power to vote for the election of directors of the Company, including but not limited to the Common Stock and all classes and series of Undesignated Stock the holders of which have the right to vote with holders of the Common Stock as a class. 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 E 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. 22 IN WITNESS WHEREOF, the undersigned has executed this certificate as of the 8th day of March, 2000. /s/ Edward J. Driscoll, Jr. ----------------------------------------- Edward J. Driscoll, Jr. Secretary 23 EX-4.32 3 CERTIFICATE OF DESIGNATION CLASS F CONVERTIBLE EXHIBIT 4.32 CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES OF CLASS F 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 50,000,000 shares known as Undesignated Stock, par value $.01 per share, 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 February 3, 2000: 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 50,000 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 F Convertible Preferred Stock" (the "Class F Preferred Stock") and the number of shares constituting such series shall be 50,000. 2. RANK. The Class F 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 F 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), (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"), (iv) the Company's Class D Convertible Preferred Stock, par value $0.01 per share (the "Class D Preferred Stock"), (v) the Company's Class E Preferred Stock, par value $0.01 per share (the "Class E Preferred Stock"), and (vi) 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 F 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 Undesignated Stock except for any class or series which is Senior Stock or Parity Stock ((i) and (ii) together, the "Junior Stock"). 2 3. DIVIDENDS. (a) Each holder of Class F Preferred Stock shall be entitled to receive, in respect of each Dividend Period, when, as and if declared by the Board of Directors of the Company, out of funds legally available for the payment of dividends, cumulative dividends in an amount per share equal to the Applicable Percentage of the Accreted Value as of the immediately preceding Dividend Payment Date (or, for the initial Dividend Period, as of the date of issuance). Dividends paid pursuant to this paragraph 3(a) shall be payable in arrears monthly on the last day of each month (each of such dates being a "Dividend Payment Date" and each such monthly period being a "Dividend Period"). Such dividends shall accrue from the date of issue (except that dividends on any amounts added to Accreted Value pursuant to Section 3(b) shall accrue from the date such amounts are added to Accreted Value), whether or not in any Dividend Period or Periods there shall be funds of the Company legally available for the payment of such dividends. Each such dividend shall be payable to the holders of record of shares of the Class F Preferred Stock on the 25th day of each month, as they appear on the stock records of the Company at the close of business on such record dates. (b) At the Company's option, dividends may be paid in cash. If dividends are not paid in cash on any Dividend Payment Date for the immediately preceding Dividend Period (or portion thereof if less than a full Dividend Period), the unpaid amount shall be added to the Accreted Value for purposes of calculating succeeding periods' dividends. Notwithstanding anything else contained herein, once any dividends for the immediately preceding Dividend Period (or portion thereof if less than a full Dividend Period) are so added to Accreted Value, such dividends will no longer be payable in cash. (c) The Applicable Percentage for each full Dividend Period for the Class F Preferred Stock shall be 0.5834%. The Applicable Percentage for the initial Dividend Period, or any other period shorter or longer than a full Dividend Period, on the Class F Preferred Stock shall be computed on the basis of a per annum rate of 7.0008% and the actual number of days elapsed over 12 30-day months and a 360-day year. (d) So long as any shares of the Class F Preferred Stock are outstanding, no dividends, except as described in the next succeeding sentence, shall be declared or paid or set apart for payment on Parity Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Class F Preferred Stock (or the unpaid amount shall have been added to the Accreted Value pursuant to Section 3(b)) for all Dividend Periods terminating on or prior to the date of payment of the dividend on such class or series of Parity Stock. When dividends are not paid in full or a sum 3 sufficient for such payment is not set apart, as aforesaid, all dividends declared upon shares of the Class F Preferred Stock and all dividends declared upon any other class or series of Parity Stock shall be declared ratably in proportion to the respective amounts of dividends accrued on the Class F Preferred Stock and accrued and unpaid on such Parity Stock. (e) Limit on Junior Dividends and Redemption. For so long as the Class F 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(e) shall prohibit or otherwise limit the ability of the Company to make any purchase, redemption or other acquisition pursuant to written agreements existing as of the date of filing of the Certificate of Designation of the Class F Preferred Stock (the "Filing 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 F 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 F 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 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 F 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. 4 (ii) The term "Liquidation Amount" shall mean an amount per share of Class F Preferred Stock equal to the greater of: (A) the Accreted Value plus any per share dividends accrued on the Class F Preferred Stock (whether or not earned or declared) since the most recent Dividend Payment Date and (B) the per share amount that holders of the Class F Preferred Stock would have received had they exercised their right to convert the Class F Preferred Stock to Common Stock immediately prior to a Liquidation of the Company. 5. VOTING. (a) Number of Votes. Each issued and outstanding share of Class F 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 F 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 F Preferred Stock) at each meeting of holders of the Common Stock 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 such shareholders 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 F Preferred Stock and of any other outstanding preferred stock then entitled to vote 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 F Preferred Stock, voting separately as a class, (A) 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 F Preferred Stock, or (B) authorize the issuance of a class or series of capital stock having preferences or rights with respect to dividends or dissolution or the distribution of assets that would be superior to the preferences or rights of the Class F Preferred Stock, and (ii) without first obtaining the affirmative vote or written consent of a majority of the holders of the Company's Voting Securities other than MCI WORLDCOM, Inc. (together with its majority-owned subsidiaries and other controlled affiliates, "MCI WCOM"), (A) authorize any transaction of a type referred to in clause (i) or clause (ii) of the definition of "Change of Control," (B) authorize or consent to any liquidation, dissolution or winding-up of the affairs of the Company, or (C) 5 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 Filing Date). 6. OPTIONAL CONVERSION. At any time and from time to time, each share of Class F Preferred Stock may be converted, at the option of the holder thereof, into the number of fully paid and nonassessable shares of Common Stock obtained by dividing the amount determined pursuant to clause (A) of the definition of Liquidation Amount 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 F Preferred Stock. No notice delivered by the Company of any proposed redemption, change of control or other event will limit in any way the holders' rights to convert Class F Preferred Stock into Common Stock of the Company. (a) Initial Conversion Rate. The initial Conversion Rate for the Class F Preferred Stock shall be 193.79845 shares of Common Stock for each one share of Class F Preferred Stock surrendered for conversion representing an initial Conversion Price of $5.16 per share of Common Stock. The applicable Conversion Rate and Conversion Price from time to time in effect is subject to adjustment as hereinafter provided. (b) No Fractional Shares. If any fraction of a share of Common Stock would be issuable upon conversion of any Class F Preferred Stock, the Company shall round up to the next whole share the number of shares of Class F Preferred Stock to be issued upon such conversion. (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 F 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 F 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). 6 (d) Exercise. In order to exercise the conversion privilege, the holder of any Class F 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 F 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 F 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 F 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. Within three Market Days after receipt of such notice and the surrender of the certificate or certificates for Class F 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 F 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 F 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 F 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 F 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) Surrender. All shares of Class F 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 7 accrued and unpaid dividends on such shares of Common Stock. Any shares of Class F 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 F Preferred Stock accordingly. 8 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 F 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 Filing 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 that is (i) at any time prior to the closing of a Qualified Initial Public Offering, less than the per share Conversion Price in effect immediately prior to the time of such issue or sale or (ii) at any time during the three-year period after the closing of a Qualified Initial Public Offering, less than 90% of the Current Market Price Per Common Share calculated as of the date 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 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: 9 (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 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 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 10 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 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 11 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 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. (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 12 not MCI WCOM shall exercise such Class B Warrants, the consideration per share that the Common Stock shall be deemed to have been issued or sold at shall be equal to $4.98. (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 the Company shall pay to the person converting such Class F Preferred Stock an amount equal to the aggregate value of such 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 F 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 F 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 F Preferred Stock shall have the right to acquire and receive upon conversion of the Class F 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 13 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 F 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) 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 (A) in effect on the Filing Date or (B) thereafter adopted by the Board and approved by the holders of the Voting Securities, (ii) pursuant to options, warrants and conversion rights in existence on the Filing Date (other than as provided for in Section 7(b)(10)) or (iii) on conversion of the Class B Preferred Stock, the Class C Preferred Stock, the Class D Preferred Stock or the Class E Preferred Stock. (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 F 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 14 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 F 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 F 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 F Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price in effect on the last Market Day of the first consecutive period of twenty Market Days during which the Current Market Price Per Common Share is at least 155% of the Liquidation Amount beginning after the later to occur of the closing of an underwritten offering which is a "Qualified Initial Public Offering" pursuant to an effective registration statement under the Securities Act or the third anniversary of the date of issuance of the Class F Preferred Stock ("Initial Issuance Date"). (b) A "Qualified Initial Public Offering" shall mean an initial public offering of the Company's Common Stock raising not less than $50,000,000 of gross proceeds. (c) Procedures. All holders of record of shares of Class F Preferred Stock will be given prompt written notice of the occurrence of mandatory conversion and at least sixty (60) days prior written notice of the date fixed for any optional conversion and also of the place designated for conversion of all of such shares of Class F Preferred Stock. Such notice will be sent by mail, first class, postage prepaid, to each record holder of shares of Class F Preferred Stock at such holder's address appearing on the stock register. Each holder of shares of Class F 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 15 certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 8. On the date of occurrence of mandatory conversion or the date fixed for any optional conversion, all rights with respect to the Class F 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 F 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 F 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 F Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates. As soon as practicable after the surrender of the certificate or certificates for Class F 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 as provided in Section 6(b) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. 9. CHANGE OF CONTROL OFFER. (a) Promptly after the occurrence of a Change of Control (the date of such occurrence being the "Change of Control Date"), the Company shall commence (or cause to be commenced) an offer to purchase all outstanding shares of Class F Preferred Stock pursuant to the terms described in Section 9(d) (the "Change of Control Offer") at a purchase price equal to the Change of Control Amount on the Change of Control Payment Date, and shall purchase (or cause the purchase of) any shares of Class F Preferred Stock tendered in the Change of Control Offer pursuant to the terms hereof. (b) At the Company's option, the Change of Control Amount shall be payable in cash or in shares of Common Stock (or the securities of the entity into which the Common Stock became converted in connection with the Change of Control), which shares shall be valued for purposes of this Section 9(b) at 97% of the Current Market Price Per Common Share on the Change of Control Payment Date. 16 (c) If the Company elects to pay the Change of Control Amount in cash, prior to the mailing of the notice referred to in Section 9(d), but in any event within 30 days following the date on which a Change of Control has occurred, the Company shall (A) promptly determine if the purchase of the Class F Preferred Stock for cash would violate or constitute a default under the indebtedness of the Company or the terms of any other series of the Company's outstanding preferred stock and (B) either shall repay to the extent necessary all such indebtedness or preferred stock of the Company that would prohibit the repurchase of the Class F Preferred Stock pursuant to a Change of Control Offer or obtain any requisite consents or approvals under instruments governing any indebtedness or preferred stock of the Company to permit the repurchase of the Class F Preferred Stock for cash. The Company shall first comply with this Section 9(c) before it shall repurchase for cash any Class F Preferred Stock pursuant to this Section 9. (d) Within 30 days following the date on which a Change in Control has occurred, the Company shall send, by first-class mail, postage prepaid, a notice to each holder of Class F Preferred Stock. If applicable, such notice shall contain all instructions and materials necessary to enable such holders to tender Class F Preferred Stock pursuant to the Change of Control Offer. Such notice shall state: (i) that a Change of Control has occurred, that a Change of Control Offer is being made pursuant to this Section 9 and that all Class F Preferred Stock validly tendered and not withdrawn will be accepted for payment; (ii) the purchase price (including the amount of accrued dividends, if any) and the purchase date (which must be no earlier than 30 days nor later than 60 days from the date such notice is mailed, other than as may be required by law) (the "Change of Control Payment Date"); (iii) that any shares of Class F Preferred Stock not tendered will continue to accrue dividends; (iv) that, unless the Company defaults in making payment therefor, any share of Class F Preferred Stock accepted for payment pursuant to the Change of Control Offer shall cease to accrue dividends after the Change of Control Payment Date; (v) that holders electing to have any share of Class F Preferred Stock purchased pursuant to a Change of Control Offer will be required to surrender stock certificates representing such shares of Class F Preferred Stock, properly endorsed for transfer, together with such other customary documents as the Company and the Transfer Agent may reasonably request to the Transfer Agent and registrar for the Class F Preferred Stock at the address 17 specified in the notice prior to the close of business on the business day prior to the Change of Control Payment Date; (vi) that holders will be entitled to withdraw their election if the Company receives, not later than five business days prior to the Change of Control Payment Date, a telegram, facsimile transmission or letter setting forth the name of the holder, the number of shares of Class F Preferred Stock the holder delivered for purchase and a statement that such holder is withdrawing its election to have such shares of Class F Preferred Stock purchased; (vii) that holders who tender only a portion of the shares of Class F Preferred Stock represented by a certificate delivered will, upon purchase of the shares tendered, be issued a new certificate representing the unpurchased shares of Class F Preferred Stock; and (viii) the circumstances and relevant facts regarding such Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control). (e) The Company will comply with any tender offer rules under the Exchange Act which then may be applicable in connection with any offer made by the Company to repurchase the shares of Class F Preferred Stock as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Certificate of Designation, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligation under this Certificate of Designation by virtue thereof. (f) On the Change of Control Payment Date, the Company shall (i) accept for payment the shares of Class F Preferred Stock validly tendered pursuant to the Change of Control Offer, (ii) pay to the holders of shares so accepted the purchase price therefor in cash or Common Stock (or the securities of the entity into which the Common Stock became converted in connection with the Change of Control) as provided above and (iii) cancel each surrendered certificate and retire the shares represented thereby. Unless the Company defaults in the payment for the shares of Class F Preferred Stock tendered pursuant to the Change of Control Offer, dividends will cease to accrue with respect to the shares of Class F Preferred Stock tendered and all rights of holders of such tendered shares will terminate, except for the right to receive payment therefor on the Change of Control Payment Date. (g) To accept the Change of Control Offer, the holder of a share of Class F Preferred Stock shall deliver, prior to the 18 close of business on the business day prior to the Change of Control Payment Date, written notice to the Company (or an agent designated by the Company for such purpose) of such holder's acceptance, together with certificates evidencing the shares of Class F Preferred Stock with respect to which the Change of Control Offer is being accepted, duly endorsed for transfer. (h) For the avoidance of doubt, nothing in this Section 9 shall restrict the right of the holders of Class F Preferred Stock, in connection with a Change of Control, to convert and to receive the kind and amount of consideration payable to holders of Common Stock in respect of the Common Stock into which the Class F Preferred Stock may be converted. 10. CERTAIN MERGERS. In connection with any consolidation with or merger with or into, any person in a transaction where the Common Stock is converted into or exchanged for securities of such person or an affiliate of such person, the Company covenants that the person issuing such securities will be organized and existing under the laws of a jurisdiction which allows for the issuance of preference stock and that the Class F Preferred Stock shall be converted into or exchanged for and shall become shares of such person having in respect of such person substantially the same powers, preference and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereon that the Class F Preferred Stock had immediately prior to such transaction. 11. REDEMPTION. (a) Optional Redemption. At any time after the third anniversary of the Initial Issuance Date, the Company may, at its option, redeem all (but not less than all) of the shares of Class F Preferred Stock at a cash redemption price equal to 155% of the Liquidation Amount on the date specified for redemption plus accrued dividends thereon from such date to the date of payment of the redemption price. (b) Notice. Notice of such redemption shall be given by the Company by first class mail, postage prepaid, mailed not less than 30 days nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed at such holder's address as the same appears on the stock register of the Company; provided that neither the failure to give such notice nor any defect therein shall affect the validity of the giving of notice for the redemption of any share of Class F Preferred Stock to be redeemed except as to the holder to whom the Company has failed to give said notice or except as to the holder whose notice was defective. Each such notice shall state: (i) the redemption date; (ii) the redemption price; (iii) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (iv) that 19 dividends on the shares to be redeemed will cease to accrue on such redemption date. (c) Dividends; Payment. Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Company in providing money for the payment of the redemption price of the shares called for redemption), dividends on the shares of Class F Preferred Stock so called for redemption shall cease to accrue, and all rights of the holders thereof as shareholders of the Company (except the right to receive from the Company the redemption price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state), such share shall be redeemed by the Company at the redemption price aforesaid. 12. CONVERTED AND REACQUIRED SHARES. Any shares of Class F 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. 13. PRE-EMPTIVE RIGHTS. Until the closing of a Qualified Initial Public Offering, the holders of the Class F Preferred Stock shall have pre-emptive rights to the extent set forth in Section 302A.413 of the Minnesota Business Corporation Act as in effect on the Filing Date, except that the provisions of subdivision 4, clause (e) thereof shall not apply. 14. AMENDMENT. If any proposed amendment to the Articles of Incorporation, including this Certificate of Designation, would alter or change the preferences, special rights or powers given to the holders of the Class F Preferred Stock so as to affect such holders adversely, or would authorize the issuance of a class or classes of stock having preferences or rights with respect to dividends or dissolution or the distribution of assets that would be superior to the preferences or rights of the Class F Preferred Stock, then the holders of the Class F Preferred Stock shall be entitled to vote as a class upon such amendment, and the affirmative vote of two-thirds of the outstanding shares of Class F Preferred Stock shall be necessary for the adoption thereof, in addition to such other vote as may be required by law. 15. MISCELLANEOUS. If, in connection with a Change of Control Offer pursuant to Section 9 or a redemption pursuant to Section 11, the Company determines to pay the Change of Control 20 Amount or the redemption price in shares of Common Stock, the Company will (a) file a registration statement to register such shares of Common Stock under the Securities Act, (b) cause such registration statement to be effective at or prior to the time that the Company will deliver such shares to the holders of Class F Preferred Stock, (c) have such shares listed on the principal trading market for the Common Stock and (d) take such other actions as may reasonably be required to register the issuance (or, as appropriate, the re-sale) of the shares of Common Stock to be delivered to the holders of the Class F Preferred Stock to enable such shares of Common Stock to be sold without restriction. 16. 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 F Preferred Stock shall have been made and the applicable waiting period thereunder shall have expired or been terminated, no holder of Class F 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. 17. DEFINITIONS. The following terms, as used herein, shall have the following meanings: "Accreted Value" equals, with respect to one share of Class F Preferred Stock, $1,000, plus the amount of any dividends added to Accreted Value in accordance with Section 3(b) (which aggregate amount shall be subject to adjustment whenever there shall occur a stock split, combination, re-classification or other similar event involving the Class F Preferred Stock). "Change of Control" means: (i) the sale, lease, transfer, conveyance other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act, other than a holder of Class F Preferred Stock on the Initial Issuance Date, (ii) the consummation of any transaction (including any merger or consolidation) the result of which is that (A) any "person" (as defined above) other than a holder of Class F Preferred Stock on the Initial Issuance Date becomes the beneficial owner (as determined in accordance with Rules 13d-3 and 13d-5 under the Exchange Act except that a person will be deemed to have beneficial ownership of all shares that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the Voting Securities 21 of the Company, other than in connection with an underwritten public offering of securities of the Company or (B) the holders of Voting Securities become entitled to receive less than 50% of the voting power of holders of the equity securities of the surviving entity, or (iii) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. "Change of Control Amount" means, with respect to one share of Class F Preferred Stock, the greater of (i) 125% of the Liquidation Amount per share on the Change of Control Payment Date or (ii) the per share amount a holder of Class F Preferred Stock would have received had he exercised his right to convert a share of Class F Preferred Stock into shares of Common Stock immediately prior to the issuance of a Change of Control. "Continuing Directors" means individuals who constituted the Board of Directors of the Company on the Filing Date (the "Incumbent Directors"); provided that any individual becoming a director during any year shall be considered to be an Incumbent Director if such individual's election, appointment or nomination was recommended or approved by at least two-thirds of the other Incumbent Directors continuing in office following such election, appointment or nomination present, in person or by telephone, at any meeting of the Board of Directors of the Company, after the giving of a sufficient notice to each Incumbent Director so as to provide a reasonable opportunity for such Incumbent Directors to be present at such meeting. "Current Market Price Per Common Share" means, as of any date, the average (weighted by daily trading volume) of the Daily Prices per share of Common Stock for the 20 consecutive Market Days immediately prior to such date. "Daily Price" means, as of any date, (i) if the shares of such class of Common Stock then are listed and traded on the New York Stock Exchange, Inc. ("NYSE"), the closing price on such date as reported on the NYSE Composite Transactions Tape; (ii) if the shares of such class of Common Stock then are not listed and traded on the NYSE, the closing price on such date as reported by the principal national securities exchange on which the shares are listed and traded; (iii) if the shares of such class of Common Stock then are not listed and traded on any such securities exchange, the last reported sale price on such date on Nasdaq National Market; or (iv) if the shares of such class of Common Stock then are not traded on the Nasdaq National Market, the average of the highest reported bid and lowest reported asked price on such date as reported by Nasdaq. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Market Day" means a day on which the principal national securities market or exchange on which the Common Stock 22 is listed or admitted for trading is open for the transaction of business. "Securities Act" means the Securities Act of 1933, as amended. "Voting Securities" means securities of the Company ordinarily having the power to vote for the election of directors of the Company, including but not limited to the Common Stock and all classes and series of Undesignated Stock the holders of which have the right to vote with holders of the Common Stock as a class. 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 F 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. [Remainder of page intentionally left blank] 23 IN WITNESS WHEREOF, the undersigned has executed this certificate as of the 3rd day of February, 2000. /s/ Edward J. Driscoll, Jr. ----------------------------------------- Edward J. Driscoll, Jr. Secretary ARTICLES OF CORRECTION OF CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES OF CLASS E CONVERTIBLE PREFERRED STOCK AND CLASS F 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 E Convertible Preferred Stock, as follows, and does hereby correct and amend the Certificate of Designation of Rights and Preferences of Class F Convertible Preferred stock, as follows, effective as of the 16th day of February, 2000, and the 11th day of February, 2000, respectively: 1.) The undersigned, Edward J. Driscoll, Jr., executed and filed a Certificate of Designation of Rights and Preferences of Class E Convertible Preferred Stock which was filed with the Minnesota Secretary of State on February 16, 2000. 2.) The undersigned, Edward J. Driscoll, Jr., executed and filed a Certificate of Designation of Rights and Preferences of Class F Convertible Preferred Stock which was filed with the Minnesota Secretary of State on February 11, 2000. 3.) The Certificate of Designation of Rights and Preferences of Class E Convertible Preferred Stock inadvertently indicated that the Articles of Incorporation of the Corporation provide for a class of up to 10,000,000 shares known as Undesignated Stock, whereas the Amended Articles of Incorporation of the Corporation provide for a class of up to 9,900,000 shares known as Undesignated Stock. 4.) The Certificate of Designation of Rights and Preferences of Class F Convertible Preferred Stock inadvertently indicated that the Articles of Incorporation of the Corporation provide for a class of up to 50,000,000 shares known as Undesignated Stock, whereas the Amended Articles of Incorporation of the Corporation provide for a class of up to 9,900,000 shares known as Undesignated Stock. 5.) Subpart B of said Certificate of Designation of Rights and Preferences of Class E Convertible Preferred Stock should read: "The Articles of Incorporation of this Company provide for a class of up to 9,900,000 shares known as Undesignated Stock, par value $.01 per share, which shares may be issued from time to time in one or more classes or series." 6.) Subpart B of said Certificate of Designation of Rights and Preferences of Class F Convertible Preferred Stock should read "The Articles of Incorporation of this Company provide for a class of up to 9,900,000 shares known as Undesignated Stock, par value $.01 per share, which shares may be issued from time to time in one or more classes or series." IN WITNESS WHEREOF, I have hereunder subscribed my name effective the 29th day of February, 2000. /s/ Edward J. Driscoll, Jr. ---------------------------------- Edward J. Driscoll, Jr., Secretary ARTICLES OF CORRECTION OF CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES OF CLASS F 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 F Convertible Preferred stock, as follows, effective as of the 11th day of February, 2000: 1.) The undersigned, Edward J. Driscoll, Jr., executed and filed a Certificate of Designation of Rights and Preferences of Class F Convertible Preferred Stock which was filed with the Minnesota Secretary of State on February 11, 2000. 2.) The Certificate of Designation of Rights and Preferences of Class F Convertible Preferred Stock inadvertently indicated that the mandatory conversion provision would be pursuant to a formula of conversion based, in part, on a defined Liquidation Amount, whereas the mandatory conversion provision will, in fact, be pursuant to a formula of conversion based, in part, on a defined Conversion Price. 3.) Section 8, Mandatory Conversion, Subpart (a), of said Certificate of Designation of Rights and Preferences of Class F Convertible Preferred Stock should read: (a) Mandatory Conversion. Each share of Class F Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price in effect on the last Market Day of the first consecutive period of twenty Market Days during which the Current Market Price Per Common Share is at least 155% of the Conversion Price beginning after the later to occur of the closing of an underwritten offering which is a "Qualified Initial Public Offering" pursuant to an effective registration statement under the Securities Act or the third anniversary of the date of issuance of the Class F Preferred Stock ("Initial Issuance Date"). IN WITNESS WHEREOF, I have hereunder subscribed my name effective the 9th day of March, 2000. /s/ Edward J. Driscoll, Jr. ---------------------------------- Edward J. Driscoll, Jr., Secretary EX-4.33 4 CERTIFICATE OF DESIGNATION CLASS G CONVERTIBLE EXHIBIT 4.33 CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES OF CLASS G 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 the Company provide for a class of up to 9,900,000 shares known as Undesignated Stock, par value $0.01 per share, 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 February 18, 2000: 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 10,000 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 G Convertible Preferred Stock" (the "Class G Preferred Stock"), par value $0.01 per share, and the number of shares constituting such series shall be 10,000. 2. RANK. The Class G 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 G 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), (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"), (iv) the Company's Class D Convertible Preferred Stock, par value $0.01 per share (the "Class D Preferred Stock"), (v) the Company's Class E Convertible Preferred Stock, par value $0.01 per share (the "Class E Preferred Stock"), (vi) the Company's Class F Convertible Preferred Stock per value $.01 per share (the "Class F Preferred Stock) and (vii) 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 G Preferred Stock ((i) through (vi) 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 G 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 G Preferred Stock from the date of issuance thereof at the rate of SEVEN PERCENT (7%) per annum of the original purchase price per share ($1,000) for such shares of Class G Preferred Stock (the "Original Purchase Price Per Share"), solely in the form of additional shares of Class G 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 Parity Stock in any year. All such dividends declared upon Class G Preferred Stock shall be declared pro rata per share. (b) Limit on Junior Dividends and Redemption. For so long as the Class G 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 G 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 G 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 G 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 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 G 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 G Preferred Stock equal to the greater of: (A) the Original Purchase Price Per Share plus any per share dividends accrued on the Class G Preferred Stock but not paid and (B) the per share amount that holders of the Class G Preferred Stock would have received had they exercised their right to convert the Class G 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 G Preferred Stock but not paid. 5. VOTING. (a) Number of Votes. Each issued and outstanding share of Class G Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which each such share of Class G Preferred Stock is then convertible (as adjusted from time to time) 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 G Preferred Stock and of any 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 G 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 G Preferred Stock. 6. OPTIONAL CONVERSION. (a) Each share of Class G 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 redemption of the Class G Preferred Stock contemplated by Section 9 hereof or 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 G Preferred Stock. (b) Initial. Subject to the provisions of Subsection (a) of this Section 6, the initial Conversion Rate for the Class G Preferred Stock shall be 193.79844961 shares of Common Stock for each one share of Class G Preferred Stock surrendered for conversion representing an initial conversion price of $5.16 per share of Common Stock (the price per share of Common Stock at which the Class G Preferred Stock may be converted into shares of Common Stock shall be referred to herein as the "Conversion Price"). The applicable Conversion Rate and Conversion Price from time to time in effect is subject to adjustment as hereinafter provided. (c) No Fractional Shares. The Company shall not issue fractions of shares of Common Stock upon conversion of Class G 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(c), be issuable upon conversion of any Class G 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. (d) 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 G 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 G 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). (e) Exercise. In order to exercise the conversion privilege, the holder of any Class G 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 G 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 G 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 G 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 G 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(c) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. (f) Reservation of Shares of Common Stock. The Company shall at all times while any shares of Class G 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 G 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 G 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 G 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. (g) Surrender. All shares of Class G 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 G 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 G 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 G 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 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 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 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). (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 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 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. (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 Conversion Price that would have been payable by the holder of the Class G 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 G Preferred Stock, the Company shall pay to the person converting such Class G 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 G 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 G 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 G Preferred Stock shall have the right to acquire and receive upon conversion of the Class G 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 G 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 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 G 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 G 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 G 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 G 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. In addition, each share of Class G 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 G 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 G Preferred Stock issued on the Initial Issuance Date. (b) Procedures. All holders of record of shares of Class G 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 G 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 G 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 G 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 G 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 G 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 G 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 G 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 G 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. (c) Lock-up. In case of any optional conversion pursuant to Section 6 or mandatory conversion pursuant to this Section 8, the holders of the Class G Preferred Stock agree not to resell any of the Common Shares acquired upon conversion for a period not exceeding 180 days following the Company's initial public offering in accordance with customary terms and conditions of lock-up agreement as may be reasonably required by the underwriter of the offering. 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 G Preferred Stock at Original Purchase Price plus an amount equal to the per share dividends accrued on the Class G 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 G Preferred Stock (the "Redemption Date"), written notice shall be mailed, postage prepaid, to each holder of record of Class G 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 G 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 G Preferred Stock designated for redemption in the Redemption Notice as holders of Class G 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. 10. CONVERTED AND REACQUIRED SHARES. Any shares of Class G 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 the 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 the Company and in its name, any and all documents required in connection with the establishment and authorization of the Company's Class G 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 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 18th day of February, 2000. /s/ Edward J. Driscoll, Jr. ------------------------------------ Edward J. Driscoll, Jr., Secretary EX-4.34 5 SECURITIES PURCHASE AGREEMENT - WINSTAR CREDIT CORP EXHIBIT 4.34 ================================================================================ SECURITIES PURCHASE AGREEMENT dated as of December 31, 1999, among WAM!NET INC., WINSTAR COMMUNICATIONS, INC., And WINSTAR CREDIT CORP. ================================================================================ TABLE OF CONTENTS Page ---- Section 1. Authorization......................................................1 Section 2. Closing............................................................1 Section 3. Sale and Purchase of Shares........................................1 3.1. Shares......................................................1 3.2. Option......................................................1 Section 4. Representations and Warranties of the Corporation..................3 4.1. Organization; Subsidiaries..................................3 4.2. Qualification; Good Standing................................4 4.3. Corporate Authorization; Enforceability.....................4 4.4. No Conflict.................................................4 4.5. Capitalization..............................................4 4.6. Securities Laws; Applicable Corporation Laws................6 4.7. Financial Information.......................................7 4.8. Absence of Changes; Review of Interim Financials............7 4.9. Initial Budget..............................................9 4.10. Agreements.................................................9 4.11. Title to Assets...........................................11 4.12. Real Property.............................................11 4.13. Intellectual Property Rights; Proprietary Information of Third Parties..........................................11 4.14. Compliance with Laws; Governmental Authorizations.........12 4.15. Litigation................................................13 4.16. Environmental Matters.....................................13 4.17. Tax Matters...............................................13 4.18. Employee Benefit Plans....................................14 4.19. Insurance.................................................15 4.20. Related Transactions......................................15 4.21. Offering of the Shares....................................15 4.22. Disclosure................................................15 4.23. Investor Sophistication...................................16 4.24. Investment Intent.........................................16 4.25. Brokers and Finders.......................................17 4.26. Year 2000 Compliance......................................17 4.27. Minnesota Business Corporation Act........................17 Section 5. Representations and Warranties of the Purchasers..................18 5.1. Due Authorization..........................................18 5.2. Investment Representations.................................18 5.3. Brokers and Finders........................................19 5.4. Investor Sophistication....................................19 5.5. Winstar Representation.....................................19 i Section 6. Covenants of the Corporation and the Purchasers...................20 6.1. Regulatory Approvals; Reasonable Best Efforts; Further Assurances.........................................20 6.2. Certain Filings............................................20 6.3. Confidentiality............................................20 6.4. Public Announcements.......................................21 Section 7. Covenants of the Corporation......................................21 7.1. Certificate of Designations................................21 7.2. Restrictions Pending the Closing...........................21 7.3. Reservation of Shares......................................21 7.4. Use of Proceeds............................................22 7.5. Access to Records..........................................22 7.6. Budget.....................................................22 7.7. Financial Reporting and other Information..................22 7.8. Payment of Obligations.....................................23 7.9. Insurance..................................................23 7.10. Certain Notices...........................................23 7.11. Conduct of Business.......................................24 7.12. Related Transactions......................................24 7.13. Internal Controls; Accountants Review.....................24 7.14. Board Designees...........................................25 7.15. Indenture.................................................26 7.16. Tag-Along Agreements......................................26 7.17. [Reserved.]...............................................26 7.18. Consents..................................................26 Section 8. Registration Rights of the Purchasers.............................26 8.1. Demand Registration........................................26 8.2. "Piggy-Back" Registration..................................27 8.3. General Terms..............................................28 8.4. Underwriting Agreement.....................................29 8.5. Road Show..................................................29 8.6. Registration of Winstar Shares.............................29 Section 9. Conditions to Each Closing........................................29 9.1. Conditions of Each Party...................................29 9.2. Conditions to Obligations of the Purchasers................30 9.3. Conditions to Obligations of the Corporation...............31 Section 10. Termination......................................................31 10.1. Effect of Termination.....................................32 Section 11. Miscellaneous....................................................33 11.1. Survival..................................................33 11.2. Indemnification...........................................33 11.3. Fees and Expenses.........................................34 11.4. Assignment; Parties in Interest...........................34 11.5. Entire Agreement..........................................35 ii 11.6. Notices..................................................35 11.7. Amendments...............................................36 11.8. Counterparts.............................................36 11.9. Headings.................................................36 11.10. Governing Law............................................36 11.11. Jurisdiction.............................................36 11.12. No Waiver................................................37 11.13. Binding Effect...........................................37 11.14. Cumulative Powers........................................37 INDEX........................................................................38 iii SECURITIES PURCHASE AGREEMENT, dated as of December 31, 1999, among WAM!NET INC., a Minnesota corporation (the "Corporation"), Winstar Communications, Inc., a Delaware corporation ("Winstar") and Winstar Credit Corp., a Delaware corporation and a wholly-owned subsidiary of Winstar ("Winstar Sub"). WHEREAS, the Corporation desires to sell to Winstar Sub 50,000 shares (the "Shares") of its Class E Convertible Preferred Stock, $.01 par value (the "Class E Preferred Stock"), and Winstar Sub desires to purchase the Shares from the Corporation upon the terms and subject to the conditions set forth below. NOW THEREFORE, the parties hereto agree as follows: Section 1. Authorization. The Corporation has authorized the issuance and sale, upon the terms and subject to the conditions set forth in this Agreement, of the Shares for a purchase price of $1,000 per Share ("Per Share Price") or $50,000,000 in the aggregate. The powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations, and restrictions of the Class E Preferred Stock are set forth in the Statement of Rights and Preferences of Class E Preferred Stock ("Class E Certificate of Designations") attached hereto as Exhibit A. Section 2. Closing. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned in accordance with this Agreement, the closing of the sale and purchase of the Shares and the other transactions contemplated hereby (the "Closing") shall be held at 10:00 a.m. on the date which is the third business day after the conditions in Section 9 have been satisfied or waived (other than those of such conditions which are customarily satisfied at a closing), at the office of Graubard Mollen & Miller, 600 Third Avenue, New York, New York 10016 (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." Section 3. Sale and Purchase of Shares. 3.1. Shares. At the Closing, the Corporation shall issue, sell and deliver to Winstar Sub, 50,000 Shares of Class E Preferred Stock and Winstar Sub shall deliver to the Corporation, as full payment therefor, a certificate, representing the number of shares of common stock of Winstar as set forth under Column C on Schedule I, registered in the name of the Corporation (the "Winstar Shares"). 3.2. Option. (a) Option Grant. The Corporation hereby grants to Winstar Sub an option ("Option") to purchase up to an additional 50,000 shares of Class E Preferred Stock from the 1 Corporation ("Option Shares") at a price equal to the Per Share Price per Option Share or, if Winstar Sub acquires Option Shares for its own account and elects to pay Winstar Shares therefor, at the rate of 14.285714 Winstar Shares per Option Share and otherwise on the same terms and conditions as pertain to the Shares. Subject to subsection (b) directly below, Winstar Sub may transfer such Option to a person or persons ("Designee") at any time, from time to time, prior to the Option Termination Date (as defined below). Winstar Sub and any Designee, individually and collectively, are sometimes herein referred to as "Purchaser" or "Purchasers." (b) Designee. Winstar Sub must furnish notice of its intended Designee(s) ("Designee Notice") at least 5 business days before transferring the Option or any portion thereof to such Designee(s). The Corporation has two (2) business days to notify Winstar Sub of its non-approval of such Designee, in which event any such approval shall not be unreasonably withheld. Designees and/or entities that invest in the telecommunications business, but are not primarily engaged in such business, however, are not subject to approval by the Corporation. (c) Exercise of Option. The Option may be exercised by the Purchaser as to all or any part of the Option at any time, from time to time, until 5:00 p.m. on March 6, 2000 or such other date as may be mutually agreed upon by the Corporation and Winstar Sub ("Option Termination Date"). The Purchaser will not be under any obligation to exercise the Option prior to the Option Termination Date. The Option may be exercised by the giving of oral notice to the Corporation from the Purchaser, which must be confirmed by a letter or telecopy setting forth the number of Options purchased, the Option Closing Date (as defined directly below) and the payment amount for the number of Series E Preferred Stock purchased upon exercise of the Options. If a Designee other than Winstar Sub exercises any portion of the Option, the Corporation agrees to sell the Class E Preferred Stock underlying the Option to such Designee at the Per Share Price payable either in immediately available funds or capital stock of such Designee, or a combination of both, as determined upon mutual consent between the Designee and the Corporation. (d) Option Closing. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned in accordance with this Agreement, the closing of the sale and purchase of the Option Shares ("Option Closing") shall be held on the date which is the earlier of (i) six business days from the furnishing of a Designee Notice to the Corporation and (ii) on the date and at the time mutually agreed upon between the Purchaser of the Option Shares and the Corporation, but in no event later than the earlier of (i) six business days from the furnishing of a Designee Notice to the Corporation and (ii) the Option Termination Date. The Option Closing shall occur at the offices of Graubard Mollen & Miller, 600 Third Avenue, New York, New York. The date on which the Option Closing actually occurs is hereinafter referred to as the "Option Closing Date." Subject to the terms and conditions of this Agreement, the Option Closing Date shall occur with respect to a Designee approved by the Corporation, within 10 business days of the Corporation's receipt of a Designee Notice. Subject to the terms and conditions set forth herein, on the Option Closing Date, the Designee(s) shall sign a copy of this Agreement, as amended to reflect the exercise of the Option, and shall deliver the exercise price for the Options to the Corporation in exchange for which the Corporation shall issue the Option Shares to such Designee(s). 2 Section 4. Representations and Warranties of the Corporation. The Corporation hereby represents and warrants to the Purchaser as of the date hereof, as of the Closing Date and as of the Option Closing Date, if any, that: 4.1. Organization; Subsidiaries. (a) Organization. The Corporation and each Subsidiary (as defined below) is a corporation duly organized and validly existing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate the assets used in its business, to carry on its business as presently conducted, to enter into the Documents (as hereinafter defined), to perform its obligations thereunder, and to consummate the transactions contemplated thereby. Attached as Schedule 4.1(a) are correct and complete copies of the Articles of Incorporation of the Corporation including all amendments and certificates of Designation, and the By-laws of the Corporation and each Subsidiary, each as in effect on the date hereof (collectively, the "Organizational Documents"). No amendments, revisions or waivers of any provisions of any Organizational Documents have occurred, are in the process of occurring or otherwise have been requested. For purposes of this Agreement, "Documents" collectively means (i) this Agreement, (ii) the Class E Certificate of Designations and (iii) the Lock-Up and Restricted Stock Agreement in the form of Exhibit B ("Lock-up Agreement"). (b) Subsidiaries. Set forth on Schedule 4.1(b) hereto is a complete list of all of the subsidiaries of the Corporation (each a "Subsidiary"). Except as set forth on Schedule 4.1(b) hereto, the Corporation does not own, directly or indirectly, any capital stock or other equity securities of any corporation, nor does the Corporation have any direct or indirect ownership interest, including interests in partnerships and joint ventures, in any other entity or business and there are no agreements to acquire such interests. Each Subsidiary has been duly organized, 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 upon the business, prospects, properties, liabilities, assets, operations, results of operations, condition (financial or otherwise), or affairs of the Corporation or result in the loss from employment of any Principal Executive Officer as such term is defined on Schedule II (a "Material Adverse Effect"). Each Subsidiary 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 on Schedule 4.1(b) hereto: (i) all of the outstanding shares of capital stock of each Subsidiary are owned beneficially and of record by the Corporation, another Subsidiary or any combination thereof, in each case free and clear of any liens, charges, restrictions, claims or encumbrances other than restrictions on transfer imposed by the Securities Act of 1933, as amended (the "Securities Act"); and (ii) there are no outstanding subscriptions, warrants, options, convertible securities or other rights (contingent or other) pursuant to which any Subsidiary is or may become obligated to issue any shares of its capital stock to any person other than the Corporation or a Subsidiary. 3 4.2. Qualification; Good Standing. Each of the Corporation and every Subsidiary is authorized to do business and is in good standing as a foreign corporation in each jurisdiction the laws of which require such respective entity to be so authorized, except where the failure to be so qualified or in good standing could not reasonably be expected to have a Material Adverse Effect. 4.3. Corporate Authorization; Enforceability. The Corporation has taken all corporate action necessary to authorize its execution and delivery of the Documents, the performance of its obligations thereunder, and its consummation of the transactions contemplated thereby. Each Document has been executed and delivered by an officer of the Corporation in accordance with such authorization. Each Document constitutes a valid and binding obligation of the Corporation, enforceable in accordance with its terms, subject to applicable bankruptcy, reorganization, fraudulent conveyance, insolvency, moratorium, and similar laws now or hereafter in effect affecting creditors' rights generally and to general principles of equity. 4.4. No Conflict. The execution and delivery by the Corporation of the Documents, its consummation of the transactions contemplated thereby, and its compliance with the provisions thereof, will not other than in instances which could not reasonably be expected to have a Material Adverse Effect, (i) violate or conflict with any of the Organizational Documents, (ii) violate, conflict with, result in a breach of, constitute a default under, or give rise to any right of termination, cancellation, or acceleration (with or without notice or lapse of time, or both) under any agreement, lease, security, license, permit, or instrument to which the Corporation or any Subsidiary is a party, or to which it or any of them or any of their respective assets or businesses are subject, (iii) result in the imposition of any Encumbrance (as hereinafter defined) on any asset of the Corporation, (iv) violate or conflict with any Laws applicable to the Corporation or its properties or assets, or (v) require any consent, approval or other action of, notice to, or filing with any entity or person (governmental or private), except for the filing of the Class E Certificate of Designations and those that have been obtained or made. For purposes of this Agreement, "Encumbrance" means any security interest, mortgage, lien, pledge, charge, easement, reservation, clouds, equities, rights of way, options, rights of first refusal and any other encumbrances, whether or not relating to the extension of credit or the borrowing of money. For purposes of this Agreement, "Laws" means all laws, statutes, rules, regulations, ordinances, bylaws, writs, Permits, Orders and other legislative, administrative or judicial restrictions. 4.5. Capitalization. (a) Capitalization. (i) As of the date hereof, the authorized capital stock of the Corporation consists of 500,000,000 shares, the Designation and classes of which are set 4 forth on Schedule 4.5(a) hereto. The Corporation does not hold any of its shares in treasury. (ii) As of the date hereof, 9,494,797 shares of the Corporation's common stock, par value $.01 per share ("Common Stock"), 115,206 shares of the Corporation's Class A Preferred Stock par value $10.00 per share (the "Class A Preferred Stock"), 5,710,425 shares of the Corporation's Class B Preferred Stock par value $.01 per share (the "Class B Preferred Stock"), 878,527 shares of the Corporation's Class C Preferred Stock, par value $.01 per share (the "Class C Preferred Stock"), and 2,196,317 shares of the Corporation's Class D Preferred Stock, par value $.01 per share (the "Class D Preferred Stock") are issued and outstanding and have been validly issued and are fully paid and nonassessable and are not subject to preemptive rights. Except as set forth above, there are no other shares of capital stock of the Corporation outstanding. As of the date hereof, the Class B Preferred Stock, Class C Preferred Stock and Class D Preferred Stock are convertible into 5,710,425, 878,527 and 2,196,317 shares of Common Stock, respectively. Upon issuance of the Common Stock underlying such preferred shares, in accordance with their respective Certificates of Designation, such Common Stock will be validly issued, fully paid and non-assessable. (b) Options, Warrants, Convertible Securities. Except as set forth on Schedule 4.5(a) hereto, as of the date hereof there are no outstanding subscriptions, options, warrants or other agreements or rights of any kind to acquire any additional shares of capital stock of the Corporation 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 Corporation committed to issue any such option, warrant, right or security. Except as set forth on Schedule 4.5(b) hereto, the Corporation 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. Schedule 4.5(a) additionally sets forth (i) all of the outstanding warrants of the Corporation, specifying the exercise prices and periods of such warrants and amount of Common Stock issuable upon exercise of such warrants; and (ii) stock options of the Corporation, specifying the exercise prices and periods of such options and the amount of Common Stock issuable upon exercise of the stock option held by each such holder. As of the date hereof, 73,621,344 shares of Common Stock are issuable upon exercise or conversion of all of the Corporation's outstanding options, warrants, and other rights of any kind to acquire shares of the Corporation's Common Stock (not including Class B Warrants issued in September 1997 to MCI WorldCom, Inc.). (c) Agreements. (i) Except as set forth in Schedule 4.5(c)(i), as of the date hereof, there are no agreements relating to the purchase or sale of capital stock between the Corporation and any of its shareholders or affiliates, and to the best of the Corporation's knowledge, there are no such agreements among any of its shareholders and other parties. (ii) Except as contemplated hereby and as set forth in Schedule 4.5(c)(ii), there are no agreements or understandings granting to any person or entity any 5 right to cause the Corporation or any Subsidiary to effect a registration under the Securities Act of 1933, as amended ("Securities Act"), of any shares of the Corporation's capital stock. (iii) Except as set forth on Schedule 4.5(c)(iii), there are no voting trusts, voting agreements, proxies or other agreements, instruments or understandings with respect to the voting of the capital stock of the Corporation between the Corporation and any of its shareholders or affiliates and to the best of the Corporation's knowledge, there are no such agreements among any of its shareholders and any other parties. (d) Due Authorization. The Shares and Option 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 and will have the rights, preferences and privileges specified in the Class E Certificate of Designations. The shares of the Corporation's Common Stock issuable upon conversion of the Shares and Option Shares ("Conversion Shares") are duly authorized and have been reserved for issuance and, when issued upon conversion in accordance with the terms of the Class E Certificate of Designations, will be validly issued, fully paid and nonassessable, and will be free and clear of all liens, encumbrances and restrictions (other than the 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 Shares or Option Shares nor the contemplated issuance or delivery of the Conversion Shares is subject to or will trigger any preemptive or other similar right of shareholders of the Corporation, any anti-dilution right or right of first refusal or other preemptive or similar right in favor of any person, in each case except for rights that have been listed on Schedule 4.5(d). (e) Securityholders. Schedule 4.5(a) sets forth the name and address of each record holder of more than five-percent of the outstanding shares of any of the Common Stock, the Class A Preferred Stock, the Class B Preferred Stock, the Class C Preferred Stock and the Class D Preferred Stock and the number of such shares of Common Stock or Preferred Stock held by each such holder. (f) Reservation of Shares. The Corporation has reserved, and at all times from and after the date hereof will keep reserved, free from preemptive rights, out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of all shares of Class A Preferred Stock, Class B Preferred Stock, Class C Preferred Stock, Class D Preferred Stock and Class E Preferred Stock, sufficient shares of Common Stock to provide for the conversion of all such shares of Preferred Stock. 4.6. Securities Laws; Applicable Corporation Laws. (a) The sale of the Shares and Option Shares contemplated hereby is exempt from registration under the Securities Act. The issuance of all other shares of capital stock of the Corporation on or before the date hereof has been made in compliance with the Securities Act and all applicable state securities or blue sky laws. 6 (b) The sale of the Shares and Option Shares contemplated hereby and the other transactions contemplated hereby are in compliance with all applicable laws, including the Minnesota Business Corporation Act, and any consents which are required to be obtained pursuant to such laws have either been obtained or waived in writing. 4.7. Financial Information. (a) Schedule 4.7 sets forth (i) the audited consolidated balance sheet of the Corporation at December 31, 1998 (the "Balance Sheet") and the related statements of operations, shareholders' equity and cash flows of the Corporation for the 12 months then ended and (ii) the unaudited consolidated balance sheet of the Corporation at September 30, 1999 (the "Interim Balance Sheet") and the related unaudited consolidated statements of operations, shareholders' equity and cash flows for the Corporation for the 9 months then ended (collectively, the "Financial Statements"). (b) The Financial Statements: (i) present fairly the financial position of the Corporation and the results of operations, shareholders' equity and cash flows of the Corporation at the dates and for the periods indicated, (ii) are in accordance with the books and records of the Corporation which books and records are complete and correct and fairly reflect all material transactions of the Corporation's business, and (iii) have been prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied (except as set forth in the notes thereto and subject, in the case of unaudited Financial Statements, to normal year-end adjustments, and the absence of notes thereto). Except as incurred under agreements on Schedule 4.10(a) or as set forth on Schedule 4.7, at the date of the Interim Balance Sheet, the Corporation did not have any material Liability of any nature or any loss contingency (as such term is used in the Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975) that was not adequately disclosed or provided for on the Interim Balance Sheet, including the notes thereto. For purposes of this Agreement, "Liability" means any liability or obligation, whether known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated and whether due or to become due, regardless of when asserted. 4.8. Absence of Changes; Review of Interim Financials. (a) Since the date of the Interim Balance Sheet there has not been: (i) any change in the assets, liabilities or financial condition of the Corporation (on a consolidated basis), except for changes (i) in the ordinary course of business or (ii) which in the aggregate have not resulted in and would not reasonably be expected to result in a Material Adverse Effect; (ii) 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; 7 (iii) to the best of the Corporation's knowledge, any damage, destruction or loss (whether or not covered by insurance) affecting any asset of the Corporation in excess of $100,000; (iv) any liability or loss contingency incurred by the Corporation that would have to be disclosed on financial statements (including the notes thereto) (on a consolidated basis) in accordance with GAAP, other than liabilities incurred in the ordinary course of business consistent with past practice; (v) to the best of the Corporation's knowledge, any commitment to borrow money from or provide financial support to any person or entity entered into by the Corporation; (vi) any payment or discharge of any Liability by the Corporation outside the ordinary course of business consistent with past practice to the best of the Corporation's knowledge; (vii) any sale, assignment, license, or other disposition of any asset or right of the Corporation or any Subsidiary outside the ordinary course of business consistent with past practice; (viii) any declaration or payment of any dividend or other distribution with respect to any shares of capital stock of the Corporation, or the direct or indirect acquisition of any equity securities by the Corporation; (ix) any labor trouble, problem or grievance affecting the business of the Corporation other than such matters which would not reasonably be expected to have a Material Adverse Effect; (x) any write-down of the value of any inventory of the Corporation, or any write-off as uncollectible of any accounts or notes receivable of the Corporation, which could reasonably be expected to result in a Material Adverse Effect; (xi) any increase in the direct or indirect compensation of senior officers of the Corporation or any Subsidiary (including, without limitation, any increase pursuant to any bonus, pension, profit-sharing, deferred compensation, or other plan or commitment), in excess of 20% above the prior year; (xii) any capital expenditure or commitment therefor by the Corporation or any Subsidiary for additions to property, plant or equipment in excess of $250,000; (xiii) any change in the accounting or tax methods, practices, or assumptions followed by the Corporation or any Subsidiary; or (xiv) any other transaction or event not in the ordinary course of business consistent with past practice. 8 (b) The Corporation's independent accountants have not advised the Corporation that the Interim Balance Sheet and the related unaudited financial statements (i) do not comply in all material respects with the applicable accounting requirements of the Securities Act and the related published rules and regulations thereunder and (ii) are not in conformity with GAAP. 4.9. Initial Budget. The Corporation has delivered to Winstar a copy of the Corporation's current budget for the year ended December 31, 2000 (the "Initial Budget"). The projections of future financial and operating performance contained in the Initial Budget, and the assumptions upon which such projections are based, are believed by the Corporation to be reasonable as of the date hereof. In addition, the Corporation is not aware of any facts or circumstances which would render such projections or assumptions unreasonable or unattainable. Without limiting the generality of the foregoing, the Purchasers acknowledge that no assurances can be given that the Corporation will achieve the projections set forth in the Initial Budget. 4.10. Agreements. (a) Schedule 4.10(a) sets forth a list of all material written and oral contracts, agreements, licenses, commitments, instruments and understandings ("Agreements"), and all Agreements of the following types regardless of materiality, to which the Corporation or any Subsidiary is a party ("Disclosed Agreements"): (i) individually provide for the future purchase by the Corporation or any Subsidiary of products or services in excess of $50,000 or call for expenditures of the Corporation or any Subsidiary in excess of $50,000, which expenditures or commitments have not been disclosed in the Initial Budget; (ii) provide for the employment by the Corporation or any Subsidiary of any director or officer or consultant (other than for legal or accounting services) earning $100,000 or more for any engagement or provide for any payments or benefits (including severance payments or benefits) to any director, officer or employee; (iii) provide for the borrowing of money or a line of credit by the Corporation or any Subsidiary, or a leasing transaction of a type required to be capitalized by the Corporation in accordance with GAAP; (iv) provide for a strategic relationship regarding the Corporation or any Subsidiary and a third party, including any joint venture, partnership or similar arrangement; (v) provide for the sale, assignment, license, or other disposition of any asset or any material right of the Corporation with a value in excess of $30,000; (vi) provide for the lease by the Corporation or any Subsidiary of any real property; 9 (vii) provide for the lease by the Corporation or any Subsidiary of any personal property with a value, or reflecting replacement costs, in excess of $30,000 or involving lease payments in excess of $30,000 per year; (viii) were entered into with any labor union; (ix) provide for a tax sharing; (x) provide for any distribution, agency, or licensing arrangement with the Corporation or any Subsidiary; (xi) require the Corporation to issue dividends or shares of its Common Stock upon exercise of warrants; (xii) restrict the Corporation or any Subsidiary, or any of the officers or employees listed on Schedule 4.10(a)(ii), from engaging in any business activity in any way related to the business of the Corporation anywhere in the world, restrict any such person in the performance of his or her obligations and responsibilities to the Corporation or any Subsidiary, or create any other obligation or liability of any such person, in any way related to the business of the Corporation, arising from his or her prior employment; (xiii) grant to any person or entity, other than the Corporation or any Subsidiary, any right, title, or interest in any invention or know-how conceived by employees of the Corporation or any Subsidiary and related to the business of the Corporation; (xiv) provide for a loan guaranty, surety, indemnity, or other financial support by the Corporation or any Subsidiary to any person or entity; or (xv) grant to any person or entity a security interest in any asset or right of the Corporation or any Subsidiary. (b) Each Disclosed Agreement or understanding required to be set forth on Schedule 4.10(a) is in full force and effect and constitutes a valid and binding obligation of all parties thereto. Except as set forth on Schedule 4.10(a), the Corporation and, to the extent a Subsidiary is a party, the Subsidiary has performed in all material respects the obligations required to be performed by it and is not in material default and has not received notice alleging it to be in default under any such Disclosed Agreement. To the knowledge of the Corporation, there exists no event or condition which, after notice or lapse of time, or both, would constitute such a material default under any Disclosed Agreement. To the knowledge of the Corporation, there are no material defaults by any other party to any such Disclosed Agreement. The Corporation has made available to the Purchaser correct and complete copies of all Disclosed Agreements set forth on Schedule 4.10(a). 10 4.11. Title to Assets. Except for properties leased by the Corporation or any Subsidiary, the Corporation and each Subsidiary has good and marketable title to all assets reflected on the Interim Balance Sheet as being owned by it, or acquired by it after the date of the Interim Balance Sheet (except for inventory sold or otherwise disposed of in the ordinary course of business, and accounts and notes receivable paid in full, since the date of the Interim Balance Sheet), free and clear of all Encumbrances, other than Permitted Liens and other than those which would not reasonably be expected to result in a Material Adverse Effect. Such assets are in good operating condition and repair, are adequate and suitable for their intended use in the business of the Corporation and are sufficient for the conduct of the business except as would not reasonably be expected to result in a Material Adverse Effect. There does not exist any condition which interferes with the economic value or use of such assets except as would not reasonably be expected to result in a Material Adverse Effect. The term "Permitted Liens" means (i) liens arising by operation of law in the ordinary course of business that, individually and in the aggregate, do not in any respect interfere with the use or value of any of the assets subject thereto, (ii) minor imperfections of title which do not detract from the value of the property affected or impair the operations of the Corporation, (iii) liens for taxes not yet due and payable, (iv) liens arising in connection with debt incurred pursuant to and in accordance with the covenant section, and (v) liens relating to monies borrowed by the Corporation or any Subsidiary. 4.12. Real Property. Except as disclosed on Schedule 4.12, neither the Corporation nor any Subsidiary owns or holds, directly or indirectly, any real property. Neither the Corporation nor any Subsidiary leases, directly or indirectly, any real property other than as listed on Schedule 4.12. 4.13. Intellectual Property Rights; Proprietary Information of Third Parties. (a) Each of the Corporation and each Subsidiary owns or is licensed to use all patents, trademarks, copyrights, service marks, and applications and registrations therefor, and all trade names (including WAM!NET, WAM!BASE and WAM!PROOF), domain names, URLs, customer lists, trade secrets, proprietary processes and formulae, inventions, know-how, other confidential and proprietary information, and other industrial and intellectual property rights necessary to permit such entities to carry on their respective business as presently conducted. Schedule 4.13 sets forth a list of all patents, trademarks, copyrights, service marks, and applications and registrations therefor, and all trade names, domain names or URLs held or owned by the Corporation and each Subsidiary and all other proprietary intellectual property rights of the Corporation and each Subsidiary. All registered patents, copyrights, trademarks, domain name and URL rights and service marks listed on Schedule 4.13 are in full force and effect and are not subject to any taxes or maintenance fees and the Corporation or a Subsidiary has the right to bring infringement Proceedings with respect thereto. Neither the Corporation nor any Subsidiary (i) licenses or grants to anyone other than to the Corporation or any Subsidiary rights of any nature to use any intellectual property right that is material to its business, other than certain software and equipment which is provided to the Corporation's clients which enable them to access the Corporation's network and avail themselves of the Corporation's services, (ii) 11 is not obligated to and does not pay royalties to anyone for use of its intellectual property rights, and (iii) does not market or sell any product or service that violates any intellectual property right of a third party. Except as set forth on such Schedule, there is no pending or, to the knowledge of the Corporation, threatened claim or litigation against the Corporation or any Subsidiary contesting the right to use its intellectual property rights, asserting the misuse of any thereof, or asserting the infringement or other violation of any intellectual property rights of a third party. (b) All inventions and know-how conceived by employees of the Corporation and each Subsidiary, while in the employ of the Corporation or such Subsidiary, and related to the business of the Corporation or any Subsidiary were "works for hire," and all right, title, and interest therein were transferred and assigned to the Corporation or a Subsidiary and the Corporation or a Subsidiary has maintained all right, title and interest therein without any Encumbrances thereon. The Corporation has taken all reasonable security measures to protect the secrecy, confidentiality, and value of its trade secrets, proprietary processes and formulae, inventions, know-how and other confidential and proprietary information. (c) No third party has claimed or, to the Company's knowledge, has reason to claim that the Corporation or any Subsidiary has (i) violated or may be violating any of the terms or conditions of any non-competition or non-disclosure agreement with such third party, (ii) disclosed or may be disclosing or utilized or may be utilizing any trade secret or proprietary information or documentation of such third party or (iii) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. Neither the Corporation or any Subsidiary has utilized nor proposes to utilize any trade secret or any information or documentation proprietary to any other person in violation of existing arrangements with such person, and neither the Corporation or any Subsidiary 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 Corporation or any Subsidiary. 4.14. Compliance with Laws; Governmental Authorizations. Each the Corporation and each Subsidiary is in compliance in all respects with all Laws, except for such instances where non-compliance would not result in a Material Adverse Effect. Each of the Corporation and each Subsidiary has all permits, licenses, authorizations, registrations, franchises, approvals, certificates or variances (collectively, "Permits") from each Governmental Authority that is necessary or advisable in the conduct of its business as presently conducted and as contemplated in the Initial Budget except in such cases which would not reasonably be expected to result in a Material Adverse Effect. For purposes of this Agreement, "Governmental Authority" means any federal, state, municipal, local or foreign government and any court, tribunal, administrative agency, commission, board, agency or other governmental or regulatory authority or agency, whether domestic or foreign. Neither the Corporation nor any Subsidiary is licensed to provide communication services under any state, federal or foreign laws nor is any one of them required to be so licensed. 12 4.15. Litigation. Except as set forth on Schedule 4.15, there are no (i) actions, suits, claims, investigations or other proceedings (collectively, "Proceedings") by or before any Governmental Authority or other arbitration or mediation body, pending or, to the knowledge of the Corporation, threatened against the Corporation or any Subsidiary, or (ii) judgments, writs, decrees, injunctions, compliance agreements, or orders of any Governmental Authority or other arbitration or mediation body, against the Corporation or any Subsidiary. 4.16. Environmental Matters. Each of the Corporation and each Subsidiary is in compliance with all Laws relating to the protection of the environment (the "Environmental Laws"). Except for the operation of machinery and equipment in the ordinary course of business in compliance with applicable Environmental Laws, neither the Corporation nor any Subsidiary has handled, stored or released, or exposed any person to, any hazardous substance, as defined in 42 U.S.C.A. Section 9601(14) or any other applicable Environmental Laws (a "Hazardous Substance"). Neither the Corporation nor any Subsidiary is liable or responsible for clean-up costs, remedial work or damages in connection with the handling, storage, release, or exposure by it of any Hazardous Substance except in cases which would not reasonably be expected to result in a Material Adverse Effect. No claims for clean-up costs, remedial work or damages have been made by any person or entity in connection with the handling, storage, release, or exposure by the Corporation and/or any Subsidiary of any Hazardous Substance. 4.17. Tax Matters. (a) (i) The Corporation has timely filed or been included in all required returns, declarations of estimated tax, reports, and statements relating to any Taxes due and payable by it (collectively, the "Returns"); (ii) all Returns were correct and complete as of the time of filing; (iii) the Corporation has timely paid all Taxes required to be paid by it through the date hereof; (iv) the Corporation has made provision on its most recent interim balance sheet for all Taxes payable by it for all periods prior to the date of such interim balance sheet for which no Returns have yet been filed; (v) the Corporation has made provision on its books for all Taxes payable by it for all periods beginning on or after the date of its most recent interim balance sheet for which no Returns have yet been filed; (vi) the Corporation has no knowledge of any pending tax audits of any Returns; (vii) the Corporation has no knowledge that any deficiency or addition to any Taxes has been proposed, asserted or assessed in writing against the Corporation; and (viii) the Corporation has not granted any extension of the statute of limitations applicable to any Return or other claim for Taxes. (b) "Taxes" means, with respect to any person or entity, (i) all material Federal, state, local, and foreign taxes, including, without limitation, all taxes on or based upon net income, gross income, income as specially defined, earnings, profits or selected items of income, earnings, or profits, and all gross receipts, sales, use, ad valorem, transfer, franchise, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, or windfall profits taxes, alternative or add-on minimum taxes, customs duties, or other 13 taxes, fees, assessments or charges of any kind, together with any interest, penalties, additions to tax or additional amounts imposed by any taxing authority on such person or entity, and (ii) any material liability for the payment of any amount of the type described in the preceding clause (i) as a result of being a "transferee" (within the meaning of Section 6901 of the Internal Revenue Code of 1986, as amended (the "Code"), or any other applicable Laws) of another person or entity. 4.18. Employee Benefit Plans. (a) Schedule 4.18 sets forth a list of all "employee pension benefit plans" and "employee benefit plans," as defined in Section 3(2) and (3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), and other written or formal plans or group arrangements involving direct or indirect compensation (not including any government-mandated programs) currently or previously maintained or contributed by the Corporation or any ERISA Affiliate for the benefit of any employee or former employee thereof under which the Corporation and/or any Subsidiary has or may have any present or future obligation or liability (collectively, the "Employee Plans"). "ERISA Affiliate" means any entity which is a member of (i) a "controlled group of corporations," as defined in Section 414(b) of the Code, (ii) a group of entities under "common control," as defined in Section 414(c) of the Code, or (iii) an "affiliated service group," as defined in Section 414(m) of the Code, any of which includes the Corporation. (b) Schedule 4.18 further sets forth a list of all plans, trusts, or arrangements (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' compensation, medical benefits, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock appreciation, or other forms of incentive compensation, insurance or benefits (collectively, the "Benefit Arrangements") that (i) are not Employee Plans, (ii) are maintained or contributed to by the Corporation or any Subsidiary, and (iii) cover any director, officer, employee, or former employee of the Corporation or any Subsidiary. (c) Each Employee Plan and Benefit Arrangement has been maintained in substantial compliance with its terms and with the requirements prescribed by applicable Laws. There has not been any "accumulated funding deficiency," as defined in Section 412 of the Code, with respect to any Employee Plan. There has not been any partial or complete withdrawal by the Corporation or any Subsidiary with respect to any Employee Plan which is a "multiemployer plan," as defined in Section 3(37) of ERISA, and the Corporation has any current plans to withdraw from any such Employee Plan. Except as set forth on Schedule 4.18, neither the Corporation or any Subsidiary is in default or alleged to be in default in the payment or other provision of any benefit under any Employee Plan or Benefit Arrangement. Except as set forth on Schedule 4.18, no actions have been taken or are currently planned with respect to any Employee Plan or Benefit Arrangement that would increase the expense of maintaining or the benefits provided under such Employee Plan or Benefit Arrangement above the level of the expense incurred or benefits provided in respect thereof for each of the years 1999 and 1998. (d) The execution and delivery by the Corporation of the Documents and its consummation of the transactions contemplated thereby will not constitute a triggering event 14 under any Employee Plan or Benefit Arrangement that will, or upon the occurrence of subsequent events would, accelerate the time of payment or vesting, or increase the amount of compensation or benefits, for any director, officer, employee, or former employee of the Corporation. 4.19. Insurance. The Corporation maintains valid and effective insurance policies, issued by financially sound and reputable insurers, to insure it against all risks usually insured against by persons or entities conducting businesses similar to that of the Corporation or such Subsidiary in the locality in which such businesses are conducted. The Corporation has paid all due premiums with respect to all policies of insurance currently maintained by the Corporation. 4.20. Related Transactions. (a) Except as set forth on Schedule 4.20, and except for compensation to regular employees, since January 1, 1998, no current director or executive officer of the Corporation or holder of at least 5% of the outstanding capital stock of the Corporation has been (i) a party to any transaction with the Corporation valued in excess of $60,000 during any twelve-month period, or (ii) the direct or indirect owner of an interest in any business organization that is or was a competitor, supplier or customer of the Corporation (other than interests in non-affiliated publicly held companies). (b) The Corporation represents and acknowledges that Winstar Sub, by reason of being a Purchaser or appointing a director to the Corporation's Board of Directors, is not prohibited from engaging, investing or otherwise being involved in the telecommunications business, including businesses or investments which may be competitive or in conflict with the Corporation. 4.21. Offering of the Shares. The Corporation has not, directly or indirectly, solicited any other offer to buy or offer 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 Shares or Option Shares in a manner that would require the Shares or Option Shares to be registered under the Securities Act. 4.22. Disclosure. The Corporation has filed all required registration statements, reports and proxy statements with the Securities and Exchange Commission ("SEC Reports") when due (or within permitted extension periods) in accordance with the Securities Act and the Securities Exchange Act of 1934, as amended ("Exchange Act"), as the case may be. As of their respective dates (or, in the case of any amended SEC Report, as of the date of the amendment), the SEC Reports complied in all material respects with all applicable requirements of the Securities Act or the Exchange Act, as the case may be. As of their respective dates (or, in the case of any amended SEC Report, as of the date of the amendment), none of the SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. This Agreement does not contain an untrue statement of a material fact nor does it omit to state a material fact necessary in order to make the statements contained herein or therein, in 15 light of the circumstances under which they were made, not misleading. None of the statements, documents, certificates or other items prepared by the Corporation and supplied to Winstar 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 Corporation'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 other than, however, that such representations are reasonable in light of existing or known facts or trends and were prepared in good faith) 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. 4.23. Investor Sophistication. The Corporation has sufficient knowledge and experience and is capable of evaluating the merits and risks of its investment in Winstar as contemplated by this Agreement and is able to bear the economic risk of such investment for an indefinite period of time . The Corporation has been given access to the registration statements, reports and proxy statements filed by Winstar with the Securities and Exchange Commission ("Winstar SEC Reports"). The Corporation has had the opportunity to ask questions of and receive answers from representatives of Winstar concerning the terms and conditions of this Agreement, to discuss Winstar's business, management and financial affairs with Winstar's management and to obtain any additional information the Corporation desires or deems relevant. 4.24. Investment Intent. The Corporation accepts the Winstar 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 Winstar Shares in violation of the Securities Act or any other applicable federal or state securities laws, and the rules and regulations promulgated thereunder. The Corporation understands and agrees that the Winstar Shares have not been registered under the Securities Act by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act. The Corporation further understands, that the Winstar Shares will bear a legend (and Winstar will make a notation on its transfer books) to such effect and the Winstar 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 subject to, the registration requirements thereof. The Corporation agrees that if it sells any Winstar 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 Winstar information to enable Winstar 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. The Corporation was not organized for the specific purpose of accepting the Winstar Shares and is an "accredited investor" within the meaning of Rule 501(a) of the Securities Act. 16 4.25. Brokers and Finders. No person or entity acting on behalf or under the authority of the Corporation is or will be entitled to any broker's, finder's, or similar fee or commission in connection with the sale of the Shares. 4.26. Year 2000 Compliance. (a) The Corporation and each Subsidiary has used (or is in the process of using) appropriate procedures to verify that its software which is licensed or otherwise provided to its customers and the 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 the Corporation and each Subsidiary has used (or is in the process of using) reasonable efforts to ensure that 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). (b) The Corporation has (i) analyzed the operations of the Corporation and the Subsidiaries that could be adversely affected by failure to become Year 2000 compliant and (ii) developed a plan for becoming Year 2000 compliant in a timely manner, the implementation of which is on schedule in all material respects. The Corporation and the Subsidiaries will be Year 2000 compliant for its operations and those of its Affiliates by December 30, 1999 except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect. The disclosure in the Corporation's Exchange Act reports (e.g., Form 10-K, 10-Q, etc.) regarding the progress of the Year 2000 compliance program and Year 2000 remediation were accurate when made. (c) Based upon responses to its inquiries to its suppliers and vendors, the Corporation reasonably believes any suppliers and vendors that are material to the operations of the Corporation and the Subsidiaries will be Year 2000 compliant for their own computer applications except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect. 4.27. Minnesota Business Corporation Act. (a) A committee of all "disinterested members" of the Corporation's Board of Directors (as such term is defined for purposes of Section 302A.673 of the Minnesota Business Corporation Act ("MBCA")) has approved this Agreement and the transactions contemplated hereby and the Corporation has completed all other actions and satisfied all other conditions necessary and sufficient to negate any application of Section 302A.673 to any of the Purchaser(s). (b) Sections 302A.671 and 302A.673 of the MBCA do not and will not apply to the Corporation or any Purchaser as a result of the transactions contemplated by this Agreement. Both the Purchaser and the Corporation are excluded from such Sections, and accordingly, Purchaser may purchase more than 10% of the Corporation's voting stock pursuant 17 to this Agreement and will not further be restricted from purchasing additional capital stock of the Corporation thereafter by virtue of such provisions. In addition, an exception applies to Section 302A.671 of the MBCA such that Winstar Sub's (or any other Purchaser's) acquisition of twenty percent or more the outstanding voting stock of the Corporation may be accomplished without approval of the shareholders of the Corporation. Section 5. Representations and Warranties of the Purchasers. Each Purchaser represents and warrants to the Corporation on behalf of itself (and not any other Purchaser) as of the date hereof, the Closing Date and any Option Closing Date, that: 5.1. Due Authorization. The Purchaser has taken all action necessary to authorize its execution and delivery of the Documents to which it is a party, the performance of its obligations thereunder, and its consummation of the transactions contemplated thereby. Each Document to which the Purchaser is a party has been executed and delivered by an officer of the Purchaser in accordance with such authorization or by the Purchaser. Each Document to which the Purchaser is a party constitutes a valid and binding obligation of the Purchaser, enforceable in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium, and similar laws affecting creditors' rights generally and to general principles of equity. 5.2. Investment Representations. (a) The Purchaser is acquiring the Shares or Option Shares, as the case may be, for its own account, for investment and not with a view to the distribution thereof, nor with any present intention of distributing the same. (b) The Purchaser understands that the Shares or Option Shares, as the case may be, have not been, and the Conversion Shares will not be, registered under the Securities Act or applicable state securities laws, by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act, and such shares must be held indefinitely unless subsequent disposition thereof is registered under applicable securities laws or is exempt from registration. (c) The Purchaser understands that the exemption from registration afforded by Rule 144 (the provisions of which are known to the Purchaser) promulgated under the Securities Act depends on the satisfaction of various conditions and that, if applicable, Rule 144 may only afford the basis for sales under certain circumstances and only in limited amounts. (d) The Purchaser is an "accredited investor," as such term is defined in Rule 501 (the provisions of which are known to the Purchaser) promulgated under the Securities Act. (e) The Purchaser has such knowledge and experience in financial, tax and business matters so as to enable the Purchaser to utilize the information made available to the Purchaser in connection with the investment in the Shares or the Option Shares, as the case may be, to evaluate the merits and risks of an investment in the Shares or the Option Shares, as the 18 case may be, and to make an informed investment decision with respect thereto; provided, however, that the foregoing shall in no way affect, diminish or derogate from the representations and warranties made by the Corporation hereunder or the right of the Purchaser to rely thereon and to seek indemnification hereunder. (f) The Purchaser has not been formed for the specific purpose of acquiring the Shares or the Option Shares, as the case may be. (g) The Purchaser hereby acknowledges that the purchase and sale of the Shares and the Option Shares, if any, is intended to be exempt from registration under the Securities Act by virtue of Section 4(2) and/or Section 3(b) of the Securities Act and, if applicable, in the sole judgment of the Corporation, the provisions of Regulation D thereunder, which exemption is dependent upon the truth, completeness and accuracy of the statements made by the Purchaser herein and in any other documents furnished by the Purchaser to the Corporation. 5.3. Brokers and Finders. No person or entity acting on behalf or under the authority of the Purchasers is or will be entitled to any broker's, finder's, or similar fee or commission in connection with the transactions contemplated hereby. 5.4. Investor Sophistication. Purchaser has sufficient knowledge and experience and is capable of evaluating the merit and risks of its investment in the Corporation as contemplated by this Agreement and is able to bear the economic risk of such investment for an indefinite period of time. Purchaser has been given access to SEC Reports. Purchaser has had the opportunity to ask questions of and receive answers from representatives of the Corporation concerning the terms and conditions of this Agreement, to discuss the Corporation's business, management and financial affairs with the Corporation's management and to obtain any other additional information Purchaser desires or deems relevant. 5.5. Winstar Representation. Winstar represents to the Corporation as of the date hereof and as of the Closing Date, that since January 1, 1997, Winstar has filed all required Winstar SEC Reports when due (or within permitted extension periods) in accordance with the Exchange Act. As of their respective dates (or, in the case of any amended Winstar SEC Report, as of the date of the amendment), the Winstar SEC Reports complied in all material respects with all applicable requirements of the Exchange Act or the Securities Act, as the case may be. As of their respective dates (or, in the case of any amended Winstar SEC Report, as of the date of the amendment), none of the Winstar SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. 19 Section 6. Covenants of the Corporation and the Purchasers. 6.1. Regulatory Approvals; Reasonable Best Efforts; Further Assurances. The Corporation and the Purchaser acknowledge that certain regulatory or governmental approvals may be required to lawfully consummate the transactions contemplated by this Agreement. Subject to the terms and conditions of this Agreement, the Corporation and the Purchaser will, and will cause their Affiliates to, use their reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or desirable under applicable laws and regulations to consummate the transactions contemplated by this Agreement. The Corporation and the Purchaser agree to execute and deliver such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable in order to consummate or implement expeditiously the transactions contemplated by this Agreement. 6.2. Certain Filings. The Corporation and the Purchaser will, and will cause their Affiliates to, cooperate with one another (i) in determining whether any action by or in respect of, or filing with, any governmental body, agency, official or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions contemplated by this Agreement or the conversion by such Purchaser of such Purchaser's Shares or Option Shares, as the case may be, and (ii) in taking such actions or making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such actions, consents, approvals or waivers. Without limiting the generality of the foregoing, the Corporation and the Purchaser obligated to file a notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act") shall promptly after the date of this Agreement prepare and file the notifications required under the HSR Act in connection with the transactions contemplated by this Agreement. The Corporation and the Purchaser shall (A) give the other parties prompt notice of the commencement of any action, suit, litigation, arbitration, preceding or investigation by or before any governmental body with respect to the transactions contemplated by this Agreement, (B) keep the other parties informed as to the status of any such action, suit, litigation, arbitration, preceding or investigation, and (C) promptly inform the other parties of any communication to or from the Federal Trade Commission, the Department of Justice or any other governmental body regarding the transactions contemplated by this Agreement. 6.3. Confidentiality. Except as set forth in Section 6.4 below and as required by applicable securities laws upon the advice of counsel, without the consent of the other party, neither the Corporation nor any Purchaser 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 to strictly comply with the foregoing. 20 6.4. Public Announcements. Neither party to this Agreement may publicly disseminate a press release or file a public report (on Form 8-K or otherwise) with the Securities and Exchange Commission or otherwise publicly announce the transactions contemplated by this Agreement, unless the other parties consent. Such parties shall not unreasonably withhold or delay their approval to any such proposed announcements. Section 7. Covenants of the Corporation. Unless otherwise indicated, and as long as any of the Shares, Option Shares or Conversion Shares remain outstanding, the Corporation shall and shall cause each Subsidiary to abide and perform with respect to the following covenants: 7.1. Certificate of Designations. Immediately after the execution of this Agreement, the Corporation shall cause to be filed the Class E Certificate of Designations as required pursuant to the law of the State of Minnesota. 7.2. Restrictions Pending the Closing. After the date hereof and prior to the Closing Date, except as expressly provided for in this Agreement or as consented to in writing by the Purchaser, the Corporation will not: (i) amend its certificate of incorporation or bylaws, except to file the Class E Certificate of Designations; (ii) split, combine or reclassify any shares of its capital stock without appropriately adjusting the conversion price and/or ratio applicable to the Shares prior to their issuance at the Closing; (iii) declare or pay any dividend or distribution (whether in cash, stock or property) in respect of its Common Stock; (iv) take any action, or knowingly omit to take any action, that could reasonably be expected to result in (A) any of the representations and warranties of the Corporation set forth in Article 4 becoming untrue or (B) any of the conditions to the obligations of the Purchasers set forth in Section 8.1 or 8.2 not being satisfied; or (v) enter into any agreement or commitment to do any of the foregoing. 7.3. Reservation of Shares. For so long as any of the Shares or Option Shares are outstanding, the Corporation shall keep reserved for issuance a sufficient number of shares of Common Stock to satisfy its conversion obligations under the Class E Certificate of Designations. 21 7.4. Use of Proceeds. The Corporation shall use the cash proceeds received by it upon the sale of the Shares to repay all outstanding amounts due to Foothill Capital Corporation and for general working capital purposes. Additional proceeds from the sale of the Option Shares shall be used for general working capital purposes. 7.5. Access to Records. The Corporation shall, and shall cause each Subsidiary to, afford to the Purchaser and its authorized employees, counsel, accountants and other representatives, upon reasonable notice and during ordinary business hours, (i) full access to all books, records and properties of the Corporation and such Subsidiary, and (ii) the opportunity to interview any officer of the Corporation or such Subsidiary regarding its affairs; any investigation pursuant to this Section shall be conducted in a manner that does not interfere unreasonably with the conduct of the business of the Corporation and such Subsidiary. 7.6. Budget. Promptly following final preparation thereof, the Corporation shall deliver to the Purchaser all budgets and revisions thereof prepared by the Corporation, all of which shall be consistent with the Initial Budget in form, methodology, and level of detail. Each of the Initial Budget and the budgets referred to in this Section 7.6 is referred to herein as a "Budget." 7.7. Financial Reporting and other Information. (a) So long as a Purchaser beneficially owns Shares, Option Shares or Conversion Shares, the Corporation shall deliver to such Purchaser the following: (i) within 30 days after the end of each month, commencing with the month of December, (A) the unaudited balance sheet of the Corporation at the end of such month, (B) the unaudited statements of income and cash flows of the Corporation for such month, (C) comparative statements of income of the Corporation for the year to date, the comparable figures for the prior year, the current Budget for the year to date and projected figures for the year and (D) textual discussion describing changes from prior periods and describing operating trends; (ii) within 45 days after the end of each fiscal quarter, commencing with the quarterly period ending March 31, 2000, (A) the unaudited balance sheet of the Corporation at the end of such fiscal quarter, (B) the unaudited statements of income and cash flows of the Corporation for such fiscal quarter, and (C) comparative statements of income of the Corporation for such fiscal quarter and the year to date, the comparable figures for the corresponding fiscal quarter and the year to date period of the prior year and the current Budget for such fiscal quarter and for the year to date; and (iii) within 90 days after the end of each fiscal year commencing with the current fiscal year of the Corporation, (A) the audited balance sheet of the 22 Corporation at the end of such fiscal year, together with comparisons to the balance sheet of the Corporation at the end of the prior fiscal year and to the current Budget, (B) the audited statements of income and cash flows of the Corporation for such fiscal year, together with comparisons to the statements of income and cash flows of the Corporation for the prior fiscal year and to the current Budget, and (C) an audit report of Ernst & Young, independent certified public accountants, on such balance sheets and statements; and (iv) any other financial and operating data and other information relating to the Corporation and each Subsidiary as any Purchaser may reasonably request; (v) all information made available to the Corporation's shareholders or directors, at the same time as such information is delivered to such persons; and (vi) monthly management reports in a form reasonably acceptable to Purchasers. (b) All financial information to be delivered under this Section shall be in accordance with the books and records of the Corporation and shall have been prepared in accordance with GAAP, subject to year-end and audit adjustments. 7.8. Payment of Obligations. The Corporation shall, and shall cause each Subsidiary to, pay or discharge or cause to be paid or discharged all material claims or demands, and all Taxes levied or imposed upon the Corporation or its Subsidiaries or upon the income, profits or property of the Corporation or its Subsidiaries; provided, however, that the Corporation or such Subsidiary shall not be required to pay or discharge or cause to be paid or discharged any such claim, demand, or Tax the amount, applicability or validity of which is being contested in good faith by appropriate proceedings and for which adequate provision has been made. 7.9. Insurance. The Corporation shall, and shall cause each Subsidiary to, maintain with financially sound and reputable insurers such insurance as may be required by law and such other insurance, to such extent and against such hazards and liabilities, as is customarily maintained by companies similarly situated and exercising sound business practice. 7.10. Certain Notices. The Corporation shall promptly notify the Purchaser of (i) the commencement or notice of any threat of any Proceeding, dispute or grievance against or affecting the Corporation, which, if adversely determined, might reasonably be expected to have a Material Adverse Effect, (ii) any material default under any indebtedness of the Corporation and (iii) any material default or breach under any of the items required to be listed on Schedule 4.10(a) or any of the items which would have been required to be listed on Schedule 4.10(a) if such item were effective prior to the date hereof. 23 7.11. Conduct of Business. The Corporation shall (i) take all actions required to assure that the Corporation remains duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) take all actions required to assure that the Corporation maintains all Permits to conduct its business, and (iii) conduct its business in compliance with all Laws. 7.12. Related Transactions. Excluding any existing arrangements between Silicon Graphics, Inc. and MCI WorldCom, Inc., the Corporation shall not directly or indirectly enter into any transaction with any Related Party, other than any transaction entered into in the ordinary course of business and on terms and conditions not less favorable to the Corporation as the terms and conditions which would apply in a similar transaction negotiated on an arms-length basis with a party that is not a Related Party. "Related Party" means (a) each current or future director or executive officer of the Corporation, (b) each parent, sibling, spouse, or descendant of any of the foregoing, (c) each entity of which any of the foregoing is a director, officer, partner or holder of more than 10% of the outstanding voting power of any class of capital stock and (d) any person or entity which is the beneficial owner of 5% or more of the outstanding voting power of the Corporation. 7.13. Internal Controls; Accountants Review. (a) Internal Controls. The Corporation maintains and will continue to maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets and (iii) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (b) Accountants Review. The Corporation will cause its independent accountants to review the Corporation's unaudited financial statements on a quarterly basis and issue a certificate to the Corporation certifying that such accounting firm has read the unaudited financial statements of the Corporation and has made inquiries of certain officials of the Corporation who have responsibility for financial and accounting matters regarding the unaudited financial statements and that based upon the foregoing procedures, nothing has come to the accounting firm's attention that would lead them to believe that such unaudited financial statements (A) do not comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the related published rules and regulations thereunder and (B) are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the Corporation's audited financial statements. 24 7.14. Board Designees. The Corporation shall expand the number of members on its Board of Directors ("Board") by two. Each of the two Purchasers that purchase the largest number of Class E Preferred Stock pursuant to this Agreement shall be entitled to appoint one member to the Board for so long as such Purchaser continues to own Shares and/or Conversion Shares which together represent at least 40% of the number of shares of Common Stock issuable upon conversion or redemption of the Class E Preferred Stock initially purchased by such Purchaser (without giving effect to anti-dilution rights in the Class E Certificate of Designation). The persons so elected to be members of the Board shall be entitled to serve on each of the Audit, Compensation, Nominating and any other committee created by the Board; provided, however, that in the event any such committee fails to satisfy specific requirements under the rules and regulations of the Securities and Exchange Commission any exchange or trading system due to such persons affiliations, such person will agree to serve solely as an observer of such committee. Such appointed directors shall be entitled to receive the same compensation that is paid to other non-management Board members and committee members and shall be entitled to receive reimbursement for all reasonable costs incurred in attending such meetings, including, but not limited to, food, lodging and transportation. To the extent permitted by law, the Corporation will indemnify such persons and the Purchasers who elected such persons for the actions of such persons as members of the Board and/or any committee thereof, unless such actions are found by a court of law to have been grossly and intentionally negligent. As long as such persons remain as members of the Board, the Corporation will maintain director and officer insurance policies in amounts and on terms, which are reasonable for companies similarly situated to the Corporation and, reasonably acceptable to the Purchasers that appointed such designees. Any vacancy in the position of a director appointed pursuant to this Section 7.14 shall be filled by and only by the Purchaser that appointed the director whose position has become vacant. Each such director may, during his or her term of office, be removed at any time, with or without cause, by and only by the Purchaser who appointed such director. In addition, any Purchaser making an initial investment of $20 million or more of the Class E Preferred Stock who does not have a member of its organization serving on the Board at the time of such Board or Committee meeting, will have the right to appoint a non-voting Board observer with full information rights. This right shall continue for so long as such Purchaser continues to own Shares and/or Conversion Shares which together represent at least 20% of the number of shares of Common Stock issuable upon conversion or redemption of the Class E Preferred Stock initially purchased by such Purchaser (without giving effect to anti-dilution rights). Such observer shall be entitled to be reimbursed for all reasonable, customary expenses associated with attending the Board meetings, but shall not be entitled to any other form of compensation. The Corporation shall give written notice, to the Purchaser who nominated a person to be a Board member and/or observer and to such persons and observers, of each Board meeting and shall provide to such persons an agenda and minutes of such Board meeting no later than it gives such notice and provides such items to the other Board members. 25 7.15. Indenture. The Corporation will not amend, waive, or modify, or seek to amend, waive, or modify, any provision of the Indenture dated as of March 5, 1998, which regards the Corporation's 13 1/4% Senior Discount Notes due 2005, without the prior written consent of Winstar which consent will not be unreasonably withheld. 7.16. Tag-Along Agreements. Prior to the Closing the Corporation will use its commercially reasonable best efforts to cause the Purchasers to be joined as parties to the Tag-Along Rights Agreements entered into (i) among the Corporation, Silicon Graphics, Inc. and MCI WorldCom, Inc. dated March 4, 1999; (ii) two separate tag-along agreements regarding the Corporation, Silicon Graphics, Inc., MCI WorldCom, Inc., and CCPRE-Eagan LLC, each dated September 30, 1999; and (iii) the Right of First Refusal Agreement dated December 16, 1996 among Edward J. Driscoll, Allen Witters and MCI WorldCom, Inc. (collectively "Restricted Stock Agreements"). 7.17. [Reserved.] 7.18. Consents. Prior to the Closing, the Corporation shall use its commercially reasonable best efforts to obtain all consents and approvals of third parties, if any, required to consummate the transactions contemplated by this Agreement so that such consummation shall not conflict with or cause a breach of or default under any agreement or other obligation binding upon the Corporation, including without limitation all such consents and approvals required with respect to its obligations for borrowed money and under its Articles of Incorporation and Certificates of Designation. Section 8. Registration Rights of the Purchasers. 8.1. Demand Registration. (a) Grant of Right. The Corporation agrees to register on two occasions, upon written demand ("Initial Demand Notice") of any Purchaser, all or any portion of the Conversion Shares, regardless of whether the Shares or Option Shares have been converted (the "Registrable Securities"). The Corporation will file a registration statement covering the Registrable Securities within 60 days after receipt of the Initial Demand Notice and use its best efforts to have such registration statement declared effective promptly thereafter. The demand for registration may be made at any time during a period commencing on the earlier of (i) the six month anniversary of the consummation of the Corporation's initial public offering of its Common Stock, and (ii) the one year anniversary of the date Shares are first issued. The Corporation covenants and agrees to give written notice of its receipt of any Initial Demand Notice by any Purchaser to all other Purchasers within ten days from the date of the receipt of any such Initial Demand Notice. 26 (b) Terms. The Corporation shall bear all fees and expenses attendant to registering the Registrable Securities, including the expenses of one legal counsel selected by the Purchasers to represent them in connection with the sale of the Registrable Securities but not including any and all underwriting commissions and discounts which will be the responsibility of the Purchasers participating in the underwriting. The Corporation will qualify or register the Registrable Securities in such states as are reasonably requested by the Purchasers. The Corporation shall cause any registration statement filed pursuant to the demand rights granted under this Section to remain effective with respect to the Registrable Securities covered by such registration statement until all such securities have been sold. 8.2. "Piggy-Back" Registration. (a) Grant of Right. The Purchasers shall have the right at any time and from time to time to include the Registrable Securities as part of any other registration of securities filed by the Corporation (other than pursuant to Form S-4, Form S-8 or any equivalent forms or in connection with the Corporation's initial public offering to the extent that no other selling shareholder is included in the registration statement). Notwithstanding the foregoing, if, in the written opinion of the managing underwriter or underwriters of a public offering by the Corporation of its shares of Common Stock, the inclusion of the Registrable Securities, when added to the securities being registered by the Corporation, will exceed the maximum amount of the Corporation's securities that can be marketed without materially and adversely affecting the entire offering, then (i) the Corporation will include in such registration first, only those securities, the holders of which as of the date hereof have priority piggy-back registration rights (as listed on Schedule 8.2), second, the Registrable Securities allocated (if necessary) among the holders thereof on a pro rata basis based on the number of Registrable Securities requested to be included in such registration statement, and third, capital stock of the Corporation to be sold for the account of others with applicable piggy-back registration rights, with such priorities among them as the Corporation shall decide. If, subsequent to the exercise of all of the demand registration rights referred to in Section 8.1, any Registrable Securities requested to be included in an offering ("Other Offering") pursuant to the "piggy-back" rights described in this Section 8.2. are not so included because of the operation of the first proviso of the preceding sentence, then the holders of the Registrable Securities shall have the right to require the Corporation, at its expense, to prepare and file a registration statement under the Securities Act covering such Registrable Securities. (b) Terms. The Corporation shall bear all fees and expenses attendant to registering the Registrable Securities, including the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities, but the Purchasers participating in the registration shall pay any and all discounts and underwriting commissions. In the event of such a proposed registration, the Corporation shall furnish the owners of the Registrable Securities with not less than 30 days written notice prior to the proposed date of filing of such registration statement. Such notice shall continue to be given for each registration statement filed by the Corporation until such time as all of the Registrable Securities have been sold by the Purchaser. The owners of the Registrable Securities shall exercise the "piggy-back" rights provided for herein by giving written notice within 15 days of the receipt of the Corporation's notice of its intention to file a registration statement. The 27 Corporation shall cause any registration statement filed pursuant to the "piggyback" rights granted under this Section to remain effective with respect to the Registrable Securities covered by such registration statement until all of the such securities have been sold by the Purchasers. Notwithstanding the foregoing, in no event shall the Corporation be obligated to maintain the effectiveness of any registration statement filed pursuant to Sections 8.1 and 8.2 for a period in excess of seven years from the initial date of issuance of the Shares. 8.3. General Terms. (a) Indemnification. The Corporation shall indemnify the owner(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such person within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage, expense or liability (including all reasonable attorneys' fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement, except to the extent that any loss, claim, damage, expense or liability arises out of or relates to written information furnished by or on behalf of such Purchaser, for inclusion in such registration statement ("Purchaser Information"). The owner(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Corporation against all loss, claim, damage, expense or liability (including all reasonable attorneys' fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which it may become subject under the Securities Act, the Exchange Act or otherwise, arising from Purchaser Information furnished by or on behalf of such owner(s). (b) Exercise of Shares. Nothing contained in this Section 8 shall be construed as requiring the Purchaser(s) to convert their Shares or Option Shares, as the case may be, prior to or after the filing of any registration statement or the effectiveness thereof. (c) Documents Delivered to Holders. The Corporation shall deliver promptly to the Purchaser participating in any of the foregoing offerings who requests it, all correspondence between the Securities and Exchange Commission and the Corporation, its counsel or auditors and all memoranda relating to discussions with the Securities and Exchange Commission or its staff with respect to the registration statement. The Corporation also shall furnish to the Purchaser participating in any of the foregoing offerings that are underwritten, and to each underwriter of any such offering, a signed counterpart, addressed to such Purchaser and underwriter, of (i) an opinion of counsel to the Corporation, dated the effective date of such registration statement (and an opinion dated the date of the closing under the underwriting agreement relating to such offering), and (ii) a "cold comfort" letter dated the effective date of such registration statement (and a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Corporation's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel 28 and in accountants' letters delivered to underwriters in underwritten public offerings of securities. In the event that any Purchaser requests information pursuant to this Section (c), then, prior to furnishing such information, the Corporation shall have the right to require the Purchaser to enter into a confidentiality agreement with the Corporation with respect to any information to be provided to the Purchaser that the Corporation reasonably considers to be proprietary, non-public or otherwise confidential. 8.4. Underwriting Agreement. In the event that the demand registration filed by the Purchasers pursuant to Section 8.1(a) is for an underwritten offering, then the Purchasers participating in such registration shall have the right to select the underwriters of the offering, which underwriters shall be reasonably acceptable to the Corporation. The Corporation shall enter into an underwriting agreement with the managing underwriter selected by the Purchasers whose Registrable Securities are being registered pursuant to Section 8.1. Such agreement shall be reasonably satisfactory in form and substance to the Corporation, each such person and such managing underwriter, and shall contain such representations, warranties and covenants by the Corporation and such other terms as are customarily contained in agreements of that type used by the underwriter. Such persons shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all of the representations, warranties and covenants of the Corporation to or for the benefit of such underwriter shall also be made to and for the benefit of such persons. Such persons shall not be required to make any representations or warranties to or agreements with the Corporation or the underwriter except as they may relate to such persons, their shares and their intended methods of distribution. 8.5. Road Show. In connection with any underwritten public offering concerning a Purchaser, the Corporation will participate in road-shows regarding such offering. 8.6. Registration of Winstar Shares. The Corporation shall have "piggy back" registration rights to include the Winstar Shares as part of any registration of securities filed by Winstar in the same manner as the Purchasers have rights with respect to Registrable Securities pursuant to Sections 8.2 and 8.3. For the purposes of the rights granted to the Corporation pursuant to this Section 8.6, the provisions of Sections 8.2 and 8.3 shall apply with all references therein to the Purchasers, the Corporation and Registrable Securities being interpreted as being references to the Corporation, Winstar and the Winstar Shares, respectively. Section 9. Conditions to Each Closing. 9.1. Conditions of Each Party. The respective obligations of each of the Corporation and the Purchaser to consummate the transactions contemplated hereby are subject to the fulfillment, at or prior to each of the 29 Closing, and the Option Closing, if any, 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; (a) All filings required to be made, and all consents, approvals, permits and authorizations required to be obtained, prior to each of the Closing and the Option Closing, if any, from any Governmental Authorities in connection with the execution and delivery by the parties of the Documents and the consummation of the transactions contemplated thereby shall have been made or obtained; and (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. 9.2. Conditions to Obligations of the Purchasers. The obligations to be performed by the Purchasers under this Agreement at or after the Closing are subject to the satisfaction at or prior to each of the Closing and the Option Closing, if any, of the following conditions, unless waived by the Purchasers: (a) Material Adverse Effect. There shall not have been any event which has or is reasonably likely to have a Material Adverse Effect. (b) Accuracy of Representations and Warranties. Each of the representations and warranties of the Corporation contained in this Agreement and in any certificate or other writing delivered by the Corporation 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 and the Option Closing Date, if any, as if made at and as of such respective times (except to the extent it relates to a particular date). (c) Performance of Covenants. The Corporation shall have performed in all material respects all covenants and agreements required to be performed by it under this Agreement and each other Document. (d) Class E Certificate of Designations. Prior to the Closing, the Class E Certificate of Designations shall have been filed with and accepted by the Secretary of State of the State of Minnesota and shall have become effective. (e) Lock-Up Agreement. At the Closing, the Shareholders listed on Exhibit B hereto, each of whom beneficially own in excess of 10% of the Corporation's outstanding Common Stock, shall have executed and delivered to the Corporation, a Lock-Up Agreement in the form attached as Exhibit B hereto. 30 (f) Stock Certificates. At each of the Closing and the Option Closing, if any, Stock certificates representing the Class E Preferred Stock sold at such closing shall have been delivered by the Corporation to the Purchaser in accordance with Schedule I. (g) Use of Proceeds. At each of the Closing and the Option Closing, if any, the Purchaser shall have received a certificate of the Corporation describing in reasonable detail the proposed use of proceeds received by the Corporation upon the sale of the Shares and the Option Shares, if any, including the immediate repayment of all amounts due under the Foothill Capital Corporation loan. (h) Legal Opinion. Winstar shall have received an opinion dated as of the Closing Date and the Option Closing Date, if any, of Willkie Farr & Gallagher, in a form and substance attached hereto as Exhibit C. (i) Officer's Certificate. At each of the Closing and the Option Closing, if any, the Purchaser shall receive a certificate from an officer of the Corporation to the effect that all conditions set forth in this Section 92 shall have been satisfied. (j) Required Consents and Approvals. Prior to the Closing Date, the Corporation shall have received all consents and approvals of third parties, if any, required to consummate the transactions contemplated by this Agreement so that such consummation shall not conflict with or cause a breach of or default under any agreement or other obligation binding upon the Corporation, including without limitation all such consents and approvals required with respect to its obligations for borrowed money and under its Articles of Incorporation and Certificates of Designation. 9.3. Conditions to Obligations of the Corporation. The obligations to be performed by the Corporation under this Agreement at or after the Closing are subject to the satisfaction at or prior to the Closing and the Option Closing, if any, of the following conditions, unless waived by the Corporation: (a) Accuracy of Representations and Warranties. Each of the representations and warranties of the Purchaser contained in this Agreement and in any certificate or other writing delivered by the Purchaser 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 and the Option Closing Date, if any, as if made at and as of such respective times (except to the extent it relates to a particular date); (b) Performance of Covenants. The Purchaser shall have performed in all material respects all covenants and agreements required to be performed by it under this Agreement and each other Document to which it is a party. (c) Legal Opinion. The Corporation shall have received an opinion dated as of the Closing Date and the Option Closing, if any, of Graubard Mollen & Miller, in form and substance attached hereto as Exhibit D. 31 Section 10. 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 Corporation and the Purchaser; (b) by the Corporation, if any Purchaser 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 Winstar (provided that the Corporation 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); (c) by any Purchaser, if the Corporation 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 Corporation (provided that such Purchaser 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); (d) by any party, if the Closing has not occurred on or before March 31, 2000; provided, however, that a party may not terminate this Agreement pursuant to this Section if the failure of such party to fulfill any of its obligations hereunder shall have been the principal reason that the Closing shall not have occurred on or before said date; (e) by any party if there shall be a change of law or regulation that makes consummation of the transactions contemplated hereby illegal or otherwise prohibited or if consummation of the transactions contemplated hereby would violate any nonappealable, final order, decree or judgment of any court or governmental body having competent jurisdiction; or (f) by Winstar Sub if one or more of the other Purchasers defaults in its or their obligations to purchase the Shares or Option Shares set forth next to its name on Schedule I, provided, however, that Winstar Sub shall have a right, but not the obligation, to cure such default by finding an alternative Purchaser. The Closing Date or Option Closing Date, as the case may be, shall be delayed an additional five (5) business days to permit Winstar Sub sufficient time to conduct such search. ("Closing Failure"). The party desiring to terminate this Agreement pursuant to the above-referenced clauses shall give notice of such termination to the other parties hereto. 10.1. Effect of Termination. (a) If this Agreement is terminated, such termination shall be without liability of either party (or any shareholder, director, officer, employee, agent, consultant or representative of such party) to the other parties to this Agreement; provided that if such termination shall result from the (i) willful failure by any party to fulfill a condition to the performance of the obligations of the other parties, (ii) failure by any party to perform a covenant of this Agreement, (iii) breach by any party hereto of any representation, warranty, covenant or agreement contained herein, or 32 (iv) a Closing Failure by any party, such party shall be fully liable for any and all damages incurred or suffered by the other parties as a result of such failure or breach. (b) Several Obligations. The obligations of the Purchasers hereunder are several. No Purchaser shall be responsible for the obligations of, or any action taken or omitted by, any other Purchaser hereunder. Section 11. Miscellaneous 11.1. Survival. The representations, warranties, covenants and other agreements contained herein, shall survive the Closing, the Option Closing, if any, and the consummation of the transactions contemplated hereby. No right of the Purchasers for indemnification hereunder shall be affected by any examination made for or on behalf of the Purchasers, the knowledge of any of the Purchasers' officers, directors, shareholders, employees or agents, or the acceptance by the Purchasers of any certificate or opinion. 11.2. Indemnification. (a) The Corporation shall indemnify, defend and hold each Purchaser and its officers, directors, employees, shareholders, partners, members, affiliates and agents harmless against all Liability, loss or damage, together with all reasonable costs and expenses related thereto (including reasonable legal fees and expenses), relating to or arising from the untruth, inaccuracy or breach of any of the representations, warranties or agreements of the Corporation contained in this Agreement. (b) Each Purchaser shall indemnify, defend and hold the Corporation and the other Purchasers and their respective officers, directors, employees, shareholders, partners, members, affiliates and agents harmless against all Liability, loss or damage, together with all reasonable costs and expenses related thereto (including reasonable legal fees and expenses), relating to or arising from the untruth, inaccuracy or breach of any of the representations, warranties or agreements of such Purchaser contained in this Agreement. (c) Promptly after receipt by any party entitled to indemnification under either Section 11.2(a) or Section 11.2(b) (an "indemnified party") of notice of the commencement of any action involving a claim which may give rise to a claim for indemnity under the preceding paragraphs of this Section, the indemnified party will give written notice to the party against whom indemnification is sought (the "indemnifying party") of the commencement of such action. In case any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be responsible for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof; provided, however, that if any indemnified party shall have reasonably 33 concluded that there may be one or more legal or equitable defenses available to it which are additional to or conflict with those available to the indemnifying party, or that such claim or litigation involves or could have an effect upon matters beyond the scope of the indemnity agreement provided in this Section, the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party and the indemnifying party shall reimburse the indemnified party and any person controlling the indemnified party for that portion of the fees and expenses of any counsel retained by the indemnified party which is reasonably related to the matters covered by the indemnity agreement provided in this Section. (d) If the indemnification provided for in this Section is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, claim, damage, liability or action referred to herein, then the indemnifying party, in lieu of indemnifying the indemnified party hereunder, shall contribute to the amounts paid or payable by the indemnified party as a result of such loss, claim, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions which resulted in such loss, claim, damage or liability as well as any other relevant equitable considerations. The amount paid or payable to an indemnified party as a result of the losses, claims, damages, liabilities or expenses referred to above shall be deemed to include any legal or other expenses reasonably incurred in connection with investigating or defending the same. (e) The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of the indemnified party and will survive the transfer of securities. 11.3. Fees and Expenses. The Corporation shall pay or reimburse the Purchasers for all out-of-pocket fees and expenses incurred by them in connection with the transactions contemplated by this Agreement, including reasonable fees and charges of Winstar's legal counsel and accountants (which out-of-pocket fees and expenses shall be limited with respect to Winstar and Winstar Sub to a maximum of $30,000 through the Closing or any Option Closing). Such payment or reimbursement shall be made at the Closing. After the Closing, all out-of-pocket fees and expenses of any Purchaser in connection with this Agreement shall be paid at the Option Closing. 11.4. Assignment; Parties in Interest. This Agreement shall bind and inure to the benefit of the parties and each of their respective successors and permitted assigns (it being understood that this Agreement may be assigned by the Purchasers without the consent of any person solely in connection with the transfer of Shares). 34 11.5. Entire Agreement. This Agreement (including all Schedules and Exhibits hereby) together with the other Documents contain the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings among the parties with respect to such subject matter. 11.6. Notices. All notices, claims, certificates, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if sent by nationally-recognized overnight courier, by telecopy, or by registered or certified mail, return receipt requested and postage prepaid, addressed as follows: (a) if to the Corporation: WAM!NET INC. 655 Lone Oak Drive, Building A Eagan, Minnesota 55121 Attention: Edward J. Driscoll, III, President Telephone: (651) 256-2165 Facsimile: (651) 994-9591 with a copy to: Willkie Farr & Gallagher 787 Seventh Avenue New York, NY 10019-6099 Attention: Daniel D. Rubino, Esq. Telephone: (212) 728-8000 Facsimile: (212) 728-8111 (b) if to the Purchasers: Winstar Communications, Inc. Winstar Credit Corp. 685 Third Avenue New York, NY 10017 Telephone: (212) 792-9800 Telecopier: (212) 792-9348 Attention: Timothy R. Graham, Executive Vice President Or to the addresses of the other Purchasers set forth next to their name appearing on the signature page hereto. 35 In any case, with a copy to: Graubard, Mollen & Miller 600 Third Avenue New York, NY 10016 Telephone: (212) 818-8661 Telecopier: (212) 818-8881 Attention: David Alan Miller, Esq. or to such other address as the party to whom notice is to be given may have furnished to the other parties in writing in accordance herewith. Any such notice or communication shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of nationally-recognized overnight courier, on the next business day after the date when sent, (c) in the case of telecopy transmission, when received, and (d) in the case of mailing, on the date of receipt. 11.7. Amendments. The terms and provisions of this Agreement may only be modified or amended pursuant to an instrument signed by all of the parties hereto. 11.8. 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. 11.9. Headings. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 11.10. Governing Law. Except as to matters governed by the MBCA, this Agreement shall be governed by and construed in accordance with the domestic laws of the State of New York, without giving effect to any law or rule that would cause the laws of any jurisdiction other than the State of New York to be applied. 11.11. Jurisdiction. The parties hereto agree that any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby may only be brought in the United States District Court for the Southern District of New York or any New York State court sitting in New York City, and each of the parties hereby consents to the exclusive jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the 36 fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in the Section entitled "Notices" shall be deemed effective service of process on such party. 11.12. No Waiver. No delay by or on behalf of an Purchaser in exercising any rights conferred hereunder, and no course of dealing between an Purchaser and the Corporation shall operate as a waiver of any right granted hereunder, unless expressly waived in writing by the party whose waiver is alleged. 11.13. Binding Effect All covenants, representations, warranties and other stipulations in this Agreement and other documents referred to herein, given by or on behalf of any of the parties hereto, shall bind and inure to the benefit of the respective successors, heirs, personal representatives and assigns of the parties hereto. 11.14. Cumulative Powers. No remedy herein conferred upon the Purchasers or any holder of the Class E Preferred Stock is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and in addition to every other remedy given hereunder or now or hereafter existing at law, or in equity or by statue or otherwise. 37 IN WITNESS WHEREOF, the parties have executed and delivered this Stock Purchase Agreement on the date first above written. WAM!NET INC. By: /s/ Edward J. Driscoll, III ----------------------------------- Name: Edward J. Driscoll, III Title: President Address: 655 Lone Oak Drive Building A Eagen, Minnesota 55121 WINSTAR COMMUNICATIONS, INC. By: /s/ Timothy. R. Graham ----------------------------------- Name: T. R. Graham Title: Executive Vice President Address: 685 Third Avenue New York, New York 10017 WINSTAR CREDIT CORP. By: /s/ Timothy. R. Graham ----------------------------------- Name: T. R. Graham Title: President Address: 685 Third Avenue New York, New York 10017 38 Index ----- Exhibit A Statements of Rights and Preferences of Class E Preferred Stock Exhibit B Lock-Up Agreement Exhibit C Willkie Farr & Gallagher Legal Opinion Exhibit D Graubard Mollen & Miller Legal Opinion Schedule I Purchaser List Schedule II Certain Management Schedule 4.1(a) Articles of Incorporation and Bylaws Schedule 4.1(b) List of Subsidiaries Schedule 4.5(a) Designation and Classes of Capital Stock Schedule 4.5(a)(vi) Right of First Refusal Agreements Schedule 4.5(b) Options, Warrants and Convertible Securities Schedule 4.5(c)(i) Purchase Agreements Schedule 4.5(c)(ii) Registration Rights Agreements Schedule 4.5(e) Record Holders Schedule 4.7 Financial Statements Schedule 4.10(a) Material Contracts Schedule 4.12 Real Property Schedule 4.13 Intellectual Property Schedule 4.14 License to Provide Communications Services Schedule 4.15 Litigation Schedule 4.18 Employee Pension Benefit Plans Schedule 4.20 Related Transactions Schedule 8.2 Piggy-back Registration Rights SCHEDULE I ----------
Column A Column B Column C -------- -------- -------- Names and Addresses Class E Preferred Purchase Price of Purchaser Stock Purchased Paid by Cash Purchase Price In Kind - ------------------- ----------------- --------------- ---------------------- Winstar Credit Corp. 50,000 - 0 - $50,000,000 of Winstar 685 Third Avenue Communications, Inc. common New York, New York 10017 stock (which consists of 714,286 shares of Winstar Communications, Inc. common stock)
EX-4.35 6 SECURITIES PURCHASE AGREEMENT - CERBERUS PARTNERS EXHIBIT 4.35 ================================================================================ SECURITIES PURCHASE AGREEMENT dated as of March 14, 2000 among WAM!NET INC. AND CERBERUS PARTNERS, L.P. ================================================================================ TABLE OF CONTENTS Page ---- Section 1. Authorization......................................................1 Section 2. Closing............................................................1 Section 3. Sale and Purchase of Shares........................................1 3.1. Shares.............................................................1 Section 4. Representations and Warranties of the Corporation..................2 4.1. Organization; Subsidiaries.........................................2 4.2. Qualification; Good Standing.......................................3 4.3. Corporate Authorization; Enforceability............................3 4.4. No Conflict........................................................3 4.5. Capitalization.....................................................3 4.6. Securities Laws; Applicable Corporation Laws.......................6 4.7. Financial Information..............................................6 4.8. Absence of Changes.................................................6 4.9. Reserved...........................................................8 4.10. Agreements.........................................................8 4.11. Title to Assets...................................................10 4.12. Real Property.....................................................10 4.13. Intellectual Property Rights; Proprietary Information of Third Parties.....................................................10 4.14. Compliance with Laws; Governmental Authorizations.................12 4.15. Litigation........................................................12 4.16. Environmental Matters.............................................12 4.17. Tax Matters.......................................................13 4.18. Employee Benefit Plans and Employment Matters.....................13 4.19. Insurance.........................................................15 4.20. Related Transactions..............................................15 4.21. Offering of the Shares............................................15 4.22. Disclosure........................................................15 4.23. Reserved..........................................................16 4.24. Reserved..........................................................16 4.25. Brokers and Finders...............................................16 4.26. Year 2000 Compliance..............................................16 4.27. Reserved..........................................................16 Section 5. Representations and Warranties of the Purchaser...................17 5.1. Due Authorization.................................................17 5.2. Investment Representations........................................17 5.3. Brokers and Finders...............................................18 5.4. Investor Sophistication...........................................18 5.5. Reserved..........................................................18 Section 6. Covenants of the Corporation and the Purchaser....................18 i 6.1. Regulatory Approvals; Reasonable Best Efforts; Further Assurances................................................18 6.2. Certain Filings...................................................18 6.3. Confidentiality...................................................19 6.4. Public Announcements..............................................19 Section 7. Covenants of the Corporation......................................19 7.1. Certificate of Designation........................................19 7.2. Restrictions Pending the Closing..................................20 7.3. Reservation of Shares.............................................20 7.4. Use of Proceeds...................................................20 7.5. Access to Records.................................................20 7.6. Reserved..........................................................20 7.7. Financial Reporting and other Information.........................20 7.8. Payment of Obligations............................................21 7.9. Insurance.........................................................22 7.10. Certain Notices...................................................22 7.11. Conduct of Business...............................................22 7.12. Related Transactions..............................................22 7.13. Internal Controls.................................................22 7.14. Board Designees...................................................23 7.15. Reserved..........................................................24 7.16. Purchaser Lock-Up.................................................24 7.17. Tag-Along Agreements..............................................24 7.18. Consents..........................................................24 Section 8. Registration Rights of the Purchaser..............................24 8.1. Demand Registration...............................................24 8.2. "Piggy-Back" Registration.........................................25 8.3. General Terms.....................................................26 8.4. Underwriting Agreement............................................27 8.5. Road Show.........................................................27 8.6. Reserved..........................................................27 Section 9. Conditions to Each Closing........................................27 9.1. Conditions of Each Party..........................................27 9.2. Conditions to Obligations of the Purchaser........................28 9.3. Conditions to Obligations of the Corporation......................29 Section 10. Termination......................................................29 10.1. Effect of Termination............................................30 Section 11. Miscellaneous....................................................30 11.1. Survival.........................................................30 11.2. Indemnification..................................................30 11.3. Nominee; Benefits................................................31 11.4. Assignment; Parties in Interest..................................32 11.5. Entire Agreement.................................................32 11.6. Notices..........................................................32 ii 11.7. Amendments.......................................................33 11.8. Counterparts.....................................................33 11.9. Headings.........................................................33 11.10. Governing Law....................................................33 11.11. Jurisdiction.....................................................33 11.12. No Waiver........................................................34 11.13. Binding Effect...................................................34 11.14. Cumulative Powers................................................34 INDEX........................................................................38 iii SECURITIES PURCHASE AGREEMENT, dated as of March 14, 2000, by and between WAM!NET INC., a Minnesota corporation (the "Corporation"), and Cerberus Partners, L.P., a Delaware Limited Partnership ("Purchaser"). WHEREAS, the Corporation desires to sell to Purchaser 15,000 shares (the "Shares") of its Class E Convertible Preferred Stock, $.01 par value (the "Class E Preferred Stock"), and Purchaser desires to purchase the Shares from the Corporation upon the terms and subject to the conditions set forth below. NOW THEREFORE, the parties hereto agree as follows: Section 1. Authorization. The Corporation has authorized the issuance and sale, upon the terms and subject to the conditions set forth in this Agreement, of the Shares for a purchase price of $1000.00 per Share ("Per Share Price") or $15,000,000 million in the aggregate (the "Purchase Price"). The powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations, and restrictions of the Class E Preferred Stock are set forth in the Statement of Rights and Preferences of Class E Preferred Stock ("Class E Certificate of Designation") attached hereto as Exhibit A. Section 2. Closing. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned in accordance with this Agreement, the closing of the sale and purchase of the Shares and the other transactions contemplated hereby (the "Closing") shall be held at 10:00 a.m. on the date which is the third business day after the conditions in Section 9 have been satisfied or waived (other than those of such conditions which are customarily satisfied at a closing), at the office of Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019 (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." Section 3. Sale and Purchase of Shares. 3.1. Shares. At the Closing, the Corporation shall issue, sell and deliver to Purchaser 15,000 Shares of Class E Preferred Stock and Purchaser shall deliver to the Corporation, as full payment therefor, the Purchase Price in cash by wire transfer of immediately available funds to such bank account or bank accounts designated by the Corporation. 1 Section 4. Representations and Warranties of the Corporation. The Corporation hereby represents and warrants to the Purchaser as of the date hereof and as of the Closing Date that: 4.1. Organization; Subsidiaries. (a) Organization. The Corporation and each Subsidiary (as defined below) is a corporation duly organized and validly existing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate the assets used in its business, to carry on its business as presently conducted, to enter into the Documents (as hereinafter defined), to perform its obligations thereunder, and to consummate the transactions contemplated thereby. Attached as Schedule 4.1(a) are correct and complete copies of the Articles of Incorporation of the Corporation including all amendments and certificates of Designation, and the By-laws of the Corporation and each Subsidiary, each as in effect on the date hereof (collectively, the "Organizational Documents"). No amendments, revisions or waivers of any provisions of any Organizational Documents have occurred, are in the process of occurring or otherwise have been requested. For purposes of this Agreement, "Documents" collectively means (i) this Agreement and (ii) the Class E Certificate of Designation. (b) Subsidiaries. Set forth on Schedule 4.1(b) hereto is a complete list of all of the subsidiaries of the Corporation (each a "Subsidiary"). Except as set forth on Schedule 4.1(b) hereto, the Corporation does not own, directly or indirectly, any capital stock or other equity securities of any corporation, nor does the Corporation have any direct or indirect ownership interest, including interests in partnerships and joint ventures, in any other entity or business and there are no agreements to acquire such interests. Each Subsidiary has been duly organized, 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 upon the business, prospects, properties, liabilities, assets, operations, results of operations, condition (financial or otherwise), or affairs of the Corporation or result in the loss from employment of any Principal Executive Officer as such term is defined on Schedule I (a "Material Adverse Effect"). Each Subsidiary 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 on Schedule 4.1(b) hereto: (i) all of the outstanding shares of capital stock of each Subsidiary are owned beneficially and of record by the Corporation, another Subsidiary or any combination thereof, in each case free and clear of any liens, charges, restrictions, claims or encumbrances other than restrictions on transfer imposed by the Securities Act of 1933, as amended (the "Securities Act"); and (ii) there are no outstanding subscriptions, warrants, options, convertible securities or other rights (contingent or other) pursuant to which any Subsidiary is or may become obligated to issue any shares of its capital stock to any person other than the Corporation or a Subsidiary. 2 4.2. Qualification; Good Standing. Each of the Corporation and every Subsidiary is authorized to do business and is in good standing as a foreign corporation in each jurisdiction the laws of which require such respective entity to be so authorized, except where the failure to be so qualified or in good standing could not reasonably be expected to have a Material Adverse Effect. 4.3. Corporate Authorization; Enforceability. The Corporation has taken all corporate action necessary to authorize its execution and delivery of the Documents, the performance of its obligations thereunder, and its consummation of the transactions contemplated thereby. Each Document has been executed and delivered by an officer of the Corporation in accordance with such authorization. Each Document constitutes a valid and binding obligation of the Corporation, enforceable in accordance with its terms, subject to applicable bankruptcy, reorganization, fraudulent conveyance, insolvency, moratorium, and similar laws now or hereafter in effect affecting creditors' rights generally and to general principles of equity. 4.4. No Conflict. The execution and delivery by the Corporation of the Documents, its consummation of the transactions contemplated thereby, and its compliance with the provisions thereof, will not other than in instances which could not reasonably be expected to have a Material Adverse Effect, (i) violate or conflict with any of the Organizational Documents, (ii) violate, conflict with, result in a breach of, constitute a default under, or give rise to any right of termination, cancellation, or acceleration (with or without notice or lapse of time, or both) under any agreement, lease, security, license, permit, or instrument to which the Corporation or any Subsidiary is a party, or to which it or any of them or any of their respective assets or businesses are subject, (iii) result in the imposition of any Encumbrance (as hereinafter defined) on any asset of the Corporation, (iv) violate or conflict with any Laws applicable to the Corporation or its properties or assets, or (v) require any consent, approval or other action of, notice to, or filing with any entity or person (governmental or private), except for the filing of the Class E Certificate of Designations and those that have been obtained or made. For purposes of this Agreement, "Encumbrance" means any security interest, mortgage, lien, pledge, charge, easement, reservation, clouds, equities, rights of way, options, rights of first refusal and any other encumbrances, whether or not relating to the extension of credit or the borrowing of money. For purposes of this Agreement, "Laws" means all laws, statutes, rules, regulations, ordinances, bylaws, writs, Permits, Orders and other legislative, administrative or judicial restrictions. 4.5. Capitalization. (a) Capitalization. (i) As of the date hereof, the authorized capital stock of the Corporation consists of 500,000,000 shares, the Designation and classes of which are set 3 forth on Schedule 4.5(a) hereto. The Corporation does not hold any of its shares in treasury. (ii) As of the date hereof, 9,494,797 shares of the Corporation's common stock, par value $.01 per share ("Common Stock"), 115,206 shares of the Corporation's Class A Preferred Stock par value $10.00 per share (the "Class A Preferred Stock"), 5,710,425 shares of the Corporation's Class B Preferred Stock par value $.01 per share (the "Class B Preferred Stock"), 878,527 shares of the Corporation's Class C Preferred Stock, par value $.01 per share (the "Class C Preferred Stock"), and 2,196,317 shares of the Corporation's Class D Preferred Stock, par value $.01 per share (the "Class D Preferred Stock") are issued and outstanding and have been validly issued and are fully paid and nonassessable and are not subject to preemptive rights. Except as set forth herein, there are no other shares of capital stock of the Corporation outstanding. As of the date hereof, the Class B Preferred Stock, Class C Preferred Stock and Class D Preferred Stock are convertible into 5,710,425, 878,527 and 2,196,317 shares of Common Stock, respectively. The Corporation has also entered into an agreement, dated as of December 31, 1999, with Winstar Communications, Inc. with respect to the sale of 50,000 shares of the Class E Preferred Stock, and an option to acquire an additional 50,000 shares of the Class E Preferred Stock. The Shares of Class E Preferred Stock to be sold pursuant to this Agreement constitute 15,000 of the shares underlying the option. The 100,000 shares of Class E Preferred Stock subject to sale are convertible into 19,379,844 shares of Common Stock, representing an initial conversion price of $5.16 per share of Common Stock (or 143.8 shares of Common Stock per share of Class E Preferred Stock). Upon issuance of the Common Stock underlying such preferred shares, in accordance with their respective Certificates of Designation, such Common Stock will be validly issued, fully paid and non-assessable. (b) Options, Warrants, Convertible Securities. Except as set forth on Schedule 4.5(a) hereto, as of the date hereof there are no outstanding subscriptions, options, warrants or other agreements or rights of any kind to acquire any additional shares of capital stock of the Corporation 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 Corporation or any Subsidiary committed to issue any such option, warrant, right or security. Except as set forth on Schedule 4.5(b) hereto, the Corporation 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. Schedule 4.5(a) additionally sets forth (i) all of the outstanding warrants of the Corporation, specifying the exercise prices and periods of such warrants and amount of Common Stock issuable upon exercise of such warrants; and (ii) stock options of the Corporation, specifying the exercise prices and periods of such options and the amount of Common Stock issuable upon exercise of the stock option held by each such holder. As of the date hereof, 73,621,344 shares of Common Stock are issuable upon exercise or conversion of all of the Corporation's outstanding options, warrants, and other rights of any kind to acquire shares of the Corporation's Common Stock (not including Class B Warrants issued in September 1997 to MCI WorldCom, Inc.). 4 (c) Agreements. (i) Except as set forth in Schedule 4.5(c)(i), as of the date hereof, there are no agreements relating to the purchase or sale of capital stock between the Corporation and any of its shareholders or affiliates, and to the best of the Corporation's knowledge, there are no such agreements among any of its shareholders and other parties. (ii) Except as contemplated hereby and as set forth in Schedule 4.5(c)(ii), there are no agreements or understandings granting to any person or entity any right to cause the Corporation or any Subsidiary to effect a registration under the Securities Act of 1933, as amended ("Securities Act"), of any shares of the Corporation's capital stock. (iii) Except as set forth on Schedule 4.5(c)(iii), there are no voting trusts, voting agreements, proxies or other agreements, instruments or understandings with respect to the voting of the capital stock of the Corporation between the Corporation and any of its shareholders or affiliates and to the best of the Corporation's knowledge, there are no such agreements among any of its shareholders and any other parties. (d) Due Authorization. The 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 and will have the rights, preferences and privileges specified in the Class E Certificate of Designation. The shares of the Corporation's Common Stock issuable upon conversion of the Shares ("Conversion Shares") are duly authorized and have been reserved for issuance and, when issued upon conversion in accordance with the terms of the Class E 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 the 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 Shares nor the contemplated issuance or delivery of the Conversion Shares is subject to or will trigger any preemptive or other similar right of shareholders of the Corporation, any anti-dilution right or right of first refusal or other preemptive or similar right in favor of any person, in each case except for rights that have been listed on Schedule 4.5(d). (e) Securityholders. Schedule 4.5(a) sets forth the name and address of each record holder of more than five-percent of the outstanding shares of any of the Common Stock, the Class A Preferred Stock, the Class B Preferred Stock, the Class C Preferred Stock, the Class D Preferred Stock and the Class E Preferred Stock and the number of such shares of Common Stock or Preferred Stock held by each such holder. (f) Reservation of Shares. The Corporation has reserved, and at all times from and after the date hereof will keep reserved, free from preemptive rights, out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of all shares of Class A Preferred Stock, Class B Preferred Stock, Class C Preferred Stock, Class D Preferred Stock, Class E Preferred Stock and Class F Preferred Stock, sufficient shares of Common Stock to provide for the conversion of all such shares of Preferred Stock. 5 4.6. Securities Laws; Applicable Corporation Laws. (a) The sale of the Shares contemplated hereby is exempt from registration under the Securities Act. The issuance of all other shares of capital stock of the Corporation on or before the date hereof has been made in compliance with the Securities Act and all applicable state securities or blue sky laws. (b) The sale of the Shares contemplated hereby and the other transactions contemplated hereby are in compliance with all applicable laws, including the Minnesota Business Corporation Act, and any consents which are required to be obtained pursuant to such laws have either been obtained or waived in writing. 4.7. Financial Information. (a) Schedule 4.7 sets forth (i) the audited consolidated balance sheet of the Corporation at December 31, 1998 (the "Balance Sheet") and the related statements of operations, shareholders' equity and cash flows of the Corporation for the 12 months then ended and (ii) the unaudited consolidated balance sheet of the Corporation at September 30, 1999 (the "Interim Balance Sheet") and the related unaudited consolidated statements of operations, shareholders' equity and cash flows for the Corporation for the 9 months then ended (collectively, the "Financial Statements"). (b) The Financial Statements: (i) present fairly the financial position of the Corporation and the results of operations, shareholders' equity and cash flows of the Corporation at the dates and for the periods indicated, (ii) are in accordance with the books and records of the Corporation which books and records are complete and correct and fairly reflect all material transactions of the Corporation's business, and (iii) have been prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied (except as set forth in the notes thereto and subject, in the case of unaudited Financial Statements, to normal year-end adjustments, and the absence of notes thereto). Except as incurred under agreements on Schedule 4.10(a) or as set forth on Schedule 4.7, at the date of the Interim Balance Sheet, the Corporation did not have any material Liability of any nature or any loss contingency (as such term is used in the Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975) that was not adequately disclosed or provided for on the Interim Balance Sheet, including the notes thereto. For purposes of this Agreement, "Liability" means any liability or obligation, whether known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated and whether due or to become due, regardless of when asserted. 4.8. Absence of Changes. (a) Since the date of the Interim Balance Sheet there has not been: (i) any change in the assets, liabilities or financial condition of the Corporation (on a consolidated basis), except for changes (i) in the ordinary course of 6 business or (ii) which in the aggregate have not resulted in and would not reasonably be expected to result in a Material Adverse Effect; (ii) 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; (iii) to the best of the Corporation's knowledge, any damage, destruction or loss (whether or not covered by insurance) affecting any asset of the Corporation in excess of $100,000; (iv) any liability or loss contingency incurred by the Corporation that would have to be disclosed on financial statements (including the notes thereto) (on a consolidated basis) in accordance with GAAP, other than liabilities incurred in the ordinary course of business consistent with past practice; (v) to the best of the Corporation's knowledge, any commitment to borrow money from or provide financial support to any person or entity entered into by the Corporation; (vi) any payment or discharge of any Liability by the Corporation outside the ordinary course of business consistent with past practice to the best of the Corporation's knowledge; (vii) any sale, assignment, license, or other disposition of any asset or right of the Corporation or any Subsidiary outside the ordinary course of business consistent with past practice; (viii) any declaration or payment of any dividend or other distribution with respect to any shares of capital stock of the Corporation, or the direct or indirect acquisition of any equity securities by the Corporation; (ix) any labor trouble, problem or grievance affecting the business of the Corporation other than such matters which would not reasonably be expected to have a Material Adverse Effect; (x) any write-down of the value of any inventory of the Corporation, or any write-off as uncollectible of any accounts or notes receivable of the Corporation, which could reasonably be expected to result in a Material Adverse Effect; (xi) any increase in the direct or indirect compensation of senior officers of the Corporation or any Subsidiary (including, without limitation, any increase pursuant to any bonus, pension, profit-sharing, deferred compensation, or other plan or commitment), in excess of 20% above the prior year; (xii) any capital expenditure or commitment therefor by the Corporation or any Subsidiary for additions to property, plant or equipment in excess of $250,000; 7 (xiii) any change in the accounting or tax methods, practices, or assumptions followed by the Corporation or any Subsidiary; or (xiv) any other transaction or event not in the ordinary course of business consistent with past practice. (b) The Corporation's independent accountants have not advised the Corporation that the Interim Balance Sheet and the related unaudited financial statements (i) do not comply in all material respects with the applicable accounting requirements of the Securities Act and the related published rules and regulations thereunder and (ii) are not in conformity with GAAP. 4.9. Reserved. 4.10. Agreements. (a) Schedule 4.10(a) sets forth a list of all material written and oral contracts, agreements, licenses, commitments, instruments and understandings ("Agreements"), and all Agreements of the following types regardless of materiality, to which the Corporation or any Subsidiary is a party ("Disclosed Agreements"): (i) individually provide for the future purchase by the Corporation or any Subsidiary of products or services in excess of $50,000 or call for expenditures of the Corporation or any Subsidiary in excess of $50,000, which expenditures or commitments have not been disclosed in the Initial Budget; (ii) provide for the employment by the Corporation or any Subsidiary of any director or officer or consultant (other than for legal or accounting services) earning $100,000 or more for any engagement or provide for any payments or benefits (including severance payments or benefits) to any director, officer or employee; (iii) provide for the borrowing of money or a line of credit by the Corporation or any Subsidiary, or a leasing transaction of a type required to be capitalized by the Corporation in accordance with GAAP; (iv) provide for a strategic relationship regarding the Corporation or any Subsidiary and a third party, including any joint venture, partnership or similar arrangement; (v) provide for the sale, assignment, license, or other disposition of any asset or any material right of the Corporation with a value in excess of $30,000; (vi) provide for the lease by the Corporation or any Subsidiary of any real property; 8 (vii) provide for the lease by the Corporation or any Subsidiary of any personal property with a value, or reflecting replacement costs, in excess of $30,000 or involving lease payments in excess of $30,000 per year; (viii) were entered into with any labor union; (ix) provide for a tax sharing; (x) provide for any distribution, agency, or licensing arrangement with the Corporation or any Subsidiary; (xi) require the Corporation to issue dividends or shares of its Common Stock upon exercise of warrants; (xii) restrict the Corporation or any Subsidiary, or any of the officers or employees listed on Schedule 4.10(a)(ii), from engaging in any business activity in any way related to the business of the Corporation anywhere in the world, restrict any such person in the performance of his or her obligations and responsibilities to the Corporation or any Subsidiary, or create any other obligation or liability of any such person, in any way related to the business of the Corporation, arising from his or her prior employment; (xiii) grant to any person or entity, other than the Corporation or any Subsidiary, any right, title, or interest in any invention or know-how conceived by employees of the Corporation or any Subsidiary and related to the business of the Corporation; (xiv) provide for a loan guaranty, surety, indemnity, or other financial support by the Corporation or any Subsidiary to any person or entity; or (xv) grant to any person or entity a security interest in any asset or right of the Corporation or any Subsidiary. (b) Each Disclosed Agreement or understanding required to be set forth on Schedule 4.10(a) is in full force and effect and constitutes a valid and binding obligation of all parties thereto. Except as set forth on Schedule 4.10(a), the Corporation and, to the extent a Subsidiary is a party, the Subsidiary has performed in all material respects the obligations required to be performed by it and is not in material default and has not received notice alleging it to be in default under any such Disclosed Agreement. To the knowledge of the Corporation, there exists no event or condition which, after notice or lapse of time, or both, would constitute such a material default under any Disclosed Agreement. To the knowledge of the Corporation, there are no material defaults by any other party to any such Disclosed Agreement. The Corporation has made available to the Purchaser correct and complete copies of all Disclosed Agreements set forth on Schedule 4.10(a). 9 4.11. Title to Assets. Except for properties leased by the Corporation or any Subsidiary, the Corporation and each Subsidiary has good and marketable title to all assets reflected on the Interim Balance Sheet as being owned by it, or acquired by it after the date of the Interim Balance Sheet (except for inventory sold or otherwise disposed of in the ordinary course of business, and accounts and notes receivable paid in full, since the date of the Interim Balance Sheet), free and clear of all Encumbrances, other than Permitted Liens and other than those which would not reasonably be expected to result in a Material Adverse Effect. Such assets are in good operating condition and repair, are adequate and suitable for their intended use in the business of the Corporation and are sufficient for the conduct of the business except as would not reasonably be expected to result in a Material Adverse Effect. There does not exist any condition which interferes with the economic value or use of such assets except as would not reasonably be expected to result in a Material Adverse Effect. The term "Permitted Liens" means (i) liens arising by operation of law in the ordinary course of business that, individually and in the aggregate, do not in any respect interfere with the use or value of any of the assets subject thereto, (ii) minor imperfections of title which do not detract from the value of the property affected or impair the operations of the Corporation, (iii) liens for taxes not yet due and payable, (iv) liens arising in connection with debt incurred pursuant to and in accordance with the covenant section, and (v) liens relating to monies borrowed by the Corporation or any Subsidiary. Any property held under lease by the Corporation and each Subsidiary is held by them under a valid, subsisting and enforceable lease with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property by the Corporation and each Subsidiary. 4.12. Real Property. Except as disclosed on Schedule 4.12, neither the Corporation nor any Subsidiary owns or holds, directly or indirectly, any real property. Neither the Corporation nor any Subsidiary leases, directly or indirectly, any real property other than as listed on Schedule 4.12. Any real property or facility held under lease by the Corporation and each Subsidiary is held by them under a valid, subsisting and enforceable lease with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Corporation and each Subsidiary. 4.13. Intellectual Property Rights; Proprietary Information of Third Parties. (a) Each of the Corporation and each Subsidiary owns or is licensed to use all patents, trademarks, copyrights, service marks, and applications and registrations therefor, and all trade names (including WAM!NET, WAM!BASE and WAM!PROOF), domain names, URLs, customer lists, trade secrets, proprietary processes and formulae, inventions, know-how, other confidential and proprietary information, and other industrial, intellectual property and/or proprietary rights and all goodwill of the business associated therewith and represented thereby (collectively "Intellectual Property") necessary to permit such entities to carry on their respective business as presently conducted and as currently contemplated to be conducted. All such rights are free of all Encumbrances and are fully assignable by the Corporation and each Subsidiary to any third party, without payment, consent of any third party or other condition or restriction. 10 Schedule 4.13 sets forth a list of all patents, trademarks, copyrights, service marks, and applications and registrations therefor, and all trade names, domain names or URLs held or owned by the Corporation and each Subsidiary and all other Intellectual Property rights of the Corporation and each Subsidiary. All registered and/or material patents, copyrights, trademarks, domain name and URL rights and service marks listed on Schedule 4.13 are valid, in full force and effect and are not subject to any taxes or maintenance fees and the Corporation or a Subsidiary has the right and standing to bring infringement Proceedings with respect thereto. Neither the Corporation nor any Subsidiary (i) licenses or grants to anyone other than to the Corporation or any Subsidiary rights of any nature to use any Intellectual Property right that is material to its business, other than certain software and equipment which is provided to the Corporation's clients which enable them to access the Corporation's network solely in order to avail themselves of the Corporation's services, (ii) is not obligated to and does not pay royalties to anyone for use of its Intellectual Property rights, and (iii) does not market or sell any product or service that violates any Intellectual Property right of a third party. Except as set forth on such Schedule, there is no pending or, to the knowledge of the Corporation and each Subsidiary threatened claim or litigation against the Corporation or any Subsidiary contesting the right to use its Intellectual Property rights, asserting the misuse of any thereof, or asserting the infringement or other violation of any Intellectual Property rights of a third party. (b) All Intellectual Property conceived or developed by employees of the Corporation and each Subsidiary, while in the employ of the Corporation or such Subsidiary, and related to the business of the Corporation or any Subsidiary were either "works for hire," owned exclusively by the Corporation or a Subsidiary and/or all right, title, and interest therein was transferred and assigned to the Corporation or a Subsidiary and the Corporation or a Subsidiary has maintained all exclusive right, title and interest therein without any Encumbrances thereon. The Corporation has taken all reasonable security measures to protect the secrecy, confidentiality, and value of its trade secrets, proprietary processes and formulae, inventions, know-how and other confidential and proprietary information (including without limitation entering into appropriate non-disclosure and non-use agreements with all officer, directors, employees, independent contractors and other person with access to such information). (c) No third party has claimed or, to the Company's knowledge, has reason to claim that the Corporation or any Subsidiary has (i) violated or may be violating any of the terms or conditions of any non-competition or non-disclosure agreement with such third party, (ii) disclosed or may be disclosing or utilized or may be utilizing any trade secret or proprietary information or documentation of such third party or (iii) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. Neither the Corporation or any Subsidiary has utilized nor proposes to utilize any trade secret or any information or documentation proprietary to any other person in violation of existing arrangements with such person, and neither the Corporation or any Subsidiary has violated any confidential relationship which any such person may have had with any third party, in connection with the development, manufacture, or sale or other use or exploitation of any product of any service of the Corporation or any Subsidiary. (d) There exists no event, condition or occurrence which, with the giving of notice or lapse of time, or both, would constitute a breach or default by the Corporation or a 11 Subsidiary under any Agreement concerning Intellectual Property. No party to any Agreement concerning Intellectual Property has given the Corporation or any Subsidiary notice of its intention to cancel, terminate or fail to renew any such Agreement. (e) To the knowledge of the Corporation and the Subsidiaries, no third party is violating any material Intellectual Property right of the Corporation or a Subsidiary. 4.14. Compliance with Laws; Governmental Authorizations. The Corporation and each Subsidiary is in compliance in all respects with all Laws, except for such instances where non-compliance would not result in a Material Adverse Effect. Each of the Corporation and each Subsidiary has all permits, licenses, authorizations, registrations, franchises, approvals, certificates or variances (collectively, "Permits") from each Governmental Authority that is necessary or advisable in the conduct of its business as presently conducted except in such cases which would not reasonably be expected to result in a Material Adverse Effect. For purposes of this Agreement, "Governmental Authority" means any federal, state, municipal, local or foreign government and any court, tribunal, administrative agency, commission, board, agency or other governmental or regulatory authority or agency, whether domestic or foreign. Neither the Corporation nor any Subsidiary is licensed to provide communication services under any state, federal or foreign laws nor is any one of them required to be so licensed. 4.15. Litigation. Except as set forth on Schedule 4.15, there are no (i) actions, suits, claims, investigations or other proceedings (collectively, "Proceedings") by or before any Governmental Authority or other arbitration or mediation body, pending or, to the knowledge of the Corporation, threatened against the Corporation or any Subsidiary, or (ii) judgments, writs, decrees, injunctions, compliance agreements, or orders of any Governmental Authority or other arbitration or mediation body, against the Corporation or any Subsidiary. 4.16. Environmental Matters. Each of the Corporation and each Subsidiary is in compliance with all Laws relating to the protection of the environment (the "Environmental Laws"). Except for the operation of machinery and equipment in the ordinary course of business in compliance with applicable Environmental Laws, neither the Corporation nor any Subsidiary has handled, stored or released, or exposed any person to, any hazardous substance, as defined in 42 U.S.C.A. Section 9601(14) or any other applicable Environmental Laws (a "Hazardous Substance"). Neither the Corporation nor any Subsidiary is liable or responsible for clean-up costs, remedial work or damages in connection with the handling, storage, release, or exposure by it of any Hazardous Substance except in cases which would not reasonably be expected to result in a Material Adverse Effect. No claims for clean-up costs, remedial work or damages have been made by any person or entity in connection with the handling, storage, release, or exposure by the Corporation and/or any Subsidiary of any Hazardous Substance. 12 4.17. Tax Matters. (a) (i) The Corporation has timely filed or been included in all required returns, declarations of estimated tax, reports, and statements relating to any Taxes due and payable by it (collectively, the "Returns"); (ii) all Returns were correct and complete as of the time of filing; (iii) the Corporation has timely paid all Taxes required to be paid by it through the date hereof; (iv) the Corporation has made provision on its most recent interim balance sheet for all Taxes payable by it for all periods prior to the date of such interim balance sheet for which no Returns have yet been filed; (v) the Corporation has made provision on its books for all Taxes payable by it for all periods beginning on or after the date of its most recent interim balance sheet for which no Returns have yet been filed; (vi) the Corporation has no knowledge of any pending tax audits of any Returns; (vii) the Corporation has no knowledge that any deficiency or addition to any Taxes has been proposed, asserted or assessed in writing against the Corporation; and (viii) the Corporation has not granted any extension of the statute of limitations applicable to any Return or other claim for Taxes. (b) "Taxes" means, with respect to any person or entity, (i) all material Federal, state, local, and foreign taxes, including, without limitation, all taxes on or based upon net income, gross income, income as specially defined, earnings, profits or selected items of income, earnings, or profits, and all gross receipts, sales, use, ad valorem, transfer, franchise, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, or windfall profits taxes, alternative or add-on minimum taxes, customs duties, or other taxes, fees, assessments or charges of any kind, together with any interest, penalties, additions to tax or additional amounts imposed by any taxing authority on such person or entity, and (ii) any material liability for the payment of any amount of the type described in the preceding clause (i) as a result of being a "transferee" (within the meaning of Section 6901 of the Internal Revenue Code of 1986, as amended (the "Code"), or any other applicable Laws) of another person or entity. 4.18. Employee Benefit Plans and Employment Matters. (a) Schedule 4.18 sets forth a list of all "employee pension benefit plans" and "employee benefit plans," as defined in Section 3(2) and (3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), and other written or formal plans or group arrangements involving direct or indirect compensation (not including any government-mandated programs) currently or previously maintained or contributed by the Corporation or any ERISA Affiliate for the benefit of any employee or former employee thereof under which the Corporation and/or any Subsidiary has or may have any present or future obligation or liability (collectively, the "Employee Plans"). "ERISA Affiliate" means any entity which is a member of (i) a "controlled group of corporations," as defined in Section 414(b) of the Code, (ii) a group of entities under "common control," as defined in Section 414(c) of the Code, or (iii) an "affiliated service group," as defined in Section 414(m) of the Code, any of which includes the Corporation. (b) Schedule 4.18 further sets forth a list of all plans, trusts, or arrangements (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' compensation, medical benefits, disability benefits, supplemental unemployment 13 benefits, vacation benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock appreciation, or other forms of incentive compensation, insurance or benefits (collectively, the "Benefit Arrangements") that (i) are not Employee Plans, (ii) are maintained or contributed to by the Corporation or any Subsidiary, and (iii) cover any director, officer, employee, consultant, or former employee of the Corporation or any Subsidiary. (c) Each Employee Plan and Benefit Arrangement has been maintained in substantial compliance with its terms and with the requirements prescribed by applicable Laws. There has not been any "accumulated funding deficiency," as defined in Section 412 of the Code, with respect to any Employee Plan. There has not been any partial or complete withdrawal by the Corporation or any Subsidiary with respect to any Employee Plan which is a "multiemployer plan," as defined in Section 3(37) of ERISA, and the Corporation does not have any current plans to withdraw from any such Employee Plan. There has been no "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Code involving any Employee Plan. There are no pending or threatened investigations or claims by the Internal Revenue Service, Department of Labor, Pension Benefit Guaranty Corporation or any other governmental agency or any individual relating to any of the Employee Plans or Benefit Arrangements. Except as required under Section 4980B of the Code, the Company has no obligation to provide post-retirement health or life benefits. Except as set forth on Schedule 4.18, neither the Corporation or any Subsidiary is in default or alleged to be in default in the payment or other provision of any benefit under any Employee Plan or Benefit Arrangement. Except as set forth on Schedule 4.18, no actions have been taken or are currently planned with respect to any Employee Plan or Benefit Arrangement that would increase the expense of maintaining or the benefits provided under such Employee Plan or Benefit Arrangement above the level of the expense incurred or benefits provided in respect thereof for each of the years 1999 and 1998. (d) The execution and delivery by the Corporation of the Documents and its consummation of the transactions contemplated thereby will not constitute a triggering event under any Employee Plan or Benefit Arrangement that will, or upon the occurrence of subsequent events would, accelerate the time of payment or vesting, or increase the amount of compensation or benefits, for any director, officer, employee, or former employee of the Corporation. (e) Neither the Corporation nor any Subsidiary is a party to any employment, labor or collective bargaining agreement and there are no employee, labor or collective bargaining agreements which pertain to employees, consultants, officers or directors of the Corporation or any Subsidiary and no labor union or employee organization has been certified or recognized as the collective bargaining representative of any employees of the Corporation or any Subsidiary and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or threatened to be brought or filed with the National Labor Relations Board. There are no existing or threatened labor strikes, work stoppages, slowdowns, disputes, grievances, unfair labor practice charges, labor arbitration proceedings or other disturbances affecting any employee of the Corporation or and Subsidiary. There are no complaints, charges, or claims against the Corporation or any Subsidiary pending or threatened in writing to be brought or filed with any governmental entity or arbitrator based on, arising out of, in connection with, or otherwise relating to the employment or termination of employment of any individual by the Corporation or any Subsidiary. The Corporation and its 14 Subsidiaries are in compliance with all laws governing the employment of labor, including, but not limited to, all such laws relating to wages, hours, collective bargaining, discrimination, civil rights, safety and health, workers' compensation and the collection and payment of withholding and/or Social Security taxes and similar taxes. 4.19. Insurance. The Corporation maintains valid and effective insurance policies, issued by financially sound and reputable insurers, to insure it against all risks usually insured against by persons or entities conducting businesses similar to that of the Corporation or such Subsidiary in the locality in which such businesses are conducted. The Corporation has paid all due premiums with respect to all policies of insurance currently maintained by the Corporation. 4.20. Related Transactions. (a) Except as set forth on Schedule 4.20, and except for compensation to regular employees, since January 1, 1998, no current director or executive officer of the Corporation or holder of at least 5% of the outstanding capital stock of the Corporation has been (i) a party to any transaction with the Corporation valued in excess of $60,000 during any twelve-month period, or (ii) the direct or indirect owner of an interest in any business organization that is or was a competitor, supplier or customer of the Corporation (other than interests in non-affiliated publicly held companies). 4.21. Offering of the Shares. The Corporation has not, directly or indirectly, solicited any other offer to buy or offer 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 Shares in a manner that would require the Shares to be registered under the Securities Act. 4.22. Disclosure. The Corporation has filed all required registration statements, reports and proxy statements with the Securities and Exchange Commission ("SEC Reports") when due (or within permitted extension periods) in accordance with the Securities Act and the Securities Exchange Act of 1934, as amended ("Exchange Act"), as the case may be. As of their respective dates (or, in the case of any amended SEC Report, as of the date of the amendment), the SEC Reports complied in all material respects with all applicable requirements of the Securities Act or the Exchange Act, as the case may be. As of their respective dates (or, in the case of any amended SEC Report, as of the date of the amendment), none of the SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. This Agreement does not contain an untrue statement of a material fact nor does it omit 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, 15 certificates or other items prepared by the Corporation and supplied to Purchaser 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 Corporation'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 other than, however, that such representations are reasonable in light of existing or known facts or trends and were prepared in good faith) 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. 4.23. Reserved. 4.24. Reserved. 4.25. Brokers and Finders. No person or entity acting on behalf or under the authority of the Corporation is or will be entitled to any broker's, finder's, or similar fee or commission in connection with the sale of the Shares. 4.26. Year 2000 Compliance. (a) The Corporation and each Subsidiary has used (or is in the process of using) appropriate procedures to verify that its software which is licensed or otherwise provided to its customers and the 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 the Corporation and each Subsidiary has used (or is in the process of using) reasonable efforts to ensure that 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). (b) The Corporation has (i) analyzed the operations of the Corporation and the Subsidiaries that could be adversely affected by failure to become Year 2000 compliant and (ii) developed a plan for becoming Year 2000 compliant in a timely manner, the implementation of which is on schedule in all material respects. The disclosure in the Corporation's Exchange Act reports (e.g., Form 10-K, 10-Q, etc.) regarding the progress of the Year 2000 compliance program and Year 2000 remediation were accurate when made. (c) Based upon responses to its inquiries to its suppliers and vendors, the Corporation reasonably believes any suppliers and vendors that are material to the operations of the Corporation and the Subsidiaries will be Year 2000 compliant for their own computer applications except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect. 4.27. Reserved. 16 Section 5. Representations and Warranties of the Purchaser. Each Purchaser represents and warrants to the Corporation on behalf of itself (and not any other Purchaser) as of the date hereof and the Closing Date that: 5.1. Due Authorization. The Purchaser has taken all action necessary to authorize its execution and delivery of the Documents to which it is a party, the performance of its obligations thereunder, and its consummation of the transactions contemplated thereby. Each Document to which the Purchaser is a party has been executed and delivered by an officer of the Purchaser in accordance with such authorization or by the Purchaser. Each Document to which the Purchaser is a party constitutes a valid and binding obligation of the Purchaser, enforceable in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium, and similar laws affecting creditors' rights generally and to general principles of equity. 5.2. Investment Representations. (a) The Purchaser is acquiring the Shares for its own account, for investment and not with a view to the distribution thereof, nor with any present intention of distributing the same. (b) The Purchaser understands that the Shares have not been, and the Conversion Shares will not be, registered under the Securities Act or applicable state securities laws, by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act, and such shares must be held indefinitely unless subsequent disposition thereof is registered under applicable securities laws or is exempt from registration. (c) The Purchaser understands that the exemption from registration afforded by Rule 144 (the provisions of which are known to the Purchaser) promulgated under the Securities Act depends on the satisfaction of various conditions and that, if applicable, Rule 144 may only afford the basis for sales under certain circumstances and only in limited amounts. (d) The Purchaser is an "accredited investor," as such term is defined in Rule 501 (the provisions of which are known to the Purchaser) promulgated under the Securities Act. (e) The Purchaser has such knowledge and experience in financial, tax and business matters so as to enable the Purchaser to utilize the information made available to the Purchaser in connection with the investment in the Shares to evaluate the merits and risks of an investment in the Shares and to make an informed investment decision with respect thereto; provided, however, that the foregoing shall in no way affect, diminish or derogate from the representations and warranties made by the Corporation hereunder or the right of the Purchaser to rely thereon and to seek indemnification hereunder. (f) The Purchaser has not been formed for the specific purpose of acquiring the Shares. 17 (g) The Purchaser hereby acknowledges that the purchase and sale of the Shares is intended to be exempt from registration under the Securities Act by virtue of Section 4(2) and/or Section 3(b) of the Securities Act and, if applicable, in the sole judgment of the Corporation, the provisions of Regulation D thereunder, which exemption is dependent upon the truth, completeness and accuracy of the statements made by the Purchaser herein and in any other documents furnished by the Purchaser to the Corporation. 5.3. Brokers and Finders. No person or entity acting on behalf or under the authority of the Purchaser is or will be entitled to any broker's, finder's, or similar fee or commission in connection with the transactions contemplated hereby. 5.4. Investor Sophistication. Purchaser has sufficient knowledge and experience and is capable of evaluating the merit and risks of its investment in the Corporation as contemplated by this Agreement and is able to bear the economic risk of such investment for an indefinite period of time. Purchaser has been given access to SEC Reports. Purchaser has had the opportunity to ask questions of and receive answers from representatives of the Corporation concerning the terms and conditions of this Agreement, to discuss the Corporation's business, management and financial affairs with the Corporation's management and to obtain any other additional information Purchaser desires or deems relevant. 5.5. Reserved. Section 6. Covenants of the Corporation and the Purchaser. 6.1. Regulatory Approvals; Reasonable Best Efforts; Further Assurances. The Corporation and the Purchaser acknowledge that certain regulatory or governmental approvals may be required to lawfully consummate the transactions contemplated by this Agreement. Subject to the terms and conditions of this Agreement, the Corporation and the Purchaser will, and will cause their Affiliates to, use their reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or desirable under applicable laws and regulations to consummate the transactions contemplated by this Agreement. The Corporation and the Purchaser agree to execute and deliver such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable in order to consummate or implement expeditiously the transactions contemplated by this Agreement. 6.2. Certain Filings. The Corporation and the Purchaser will, and will cause their Affiliates to, cooperate with one another (i) in determining whether any action by or in respect of, or filing with, any governmental body, agency, official or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with 18 the consummation of the transactions contemplated by this Agreement or the conversion by such Purchaser of such Purchaser's Shares and (ii) in taking such actions or making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such actions, consents, approvals or waivers. Without limiting the generality of the foregoing, the Corporation and the Purchaser obligated to file a notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act") shall promptly after the date of this Agreement prepare and file the notifications required under the HSR Act in connection with the transactions contemplated by this Agreement. The Corporation and the Purchaser shall (A) give the other parties prompt notice of the commencement of any action, suit, litigation, arbitration, preceding or investigation by or before any governmental body with respect to the transactions contemplated by this Agreement, (B) keep the other parties informed as to the status of any such action, suit, litigation, arbitration, preceding or investigation, and (C) promptly inform the other parties of any communication to or from the Federal Trade Commission, the Department of Justice or any other governmental body regarding the transactions contemplated by this Agreement. 6.3. Confidentiality. Except as set forth in Section 6.4 below and as required by applicable securities laws upon the advice of counsel, without the consent of the other party, neither the Corporation nor any Purchaser 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 to strictly comply with the foregoing. 6.4. Public Announcements. Neither party to this Agreement may publicly disseminate a press release or file a public report (on Form 8-K or otherwise) with the Securities and Exchange Commission or otherwise publicly announce the transactions contemplated by this Agreement, unless the other parties consent. Such parties shall not unreasonably withhold or delay their approval to any such proposed announcements. Section 7. Covenants of the Corporation. Unless otherwise indicated, and as long as any of the Shares or Conversion Shares remain outstanding, the Corporation shall and shall cause each Subsidiary to abide and perform with respect to the following covenants: 7.1. Certificate of Designation. Following the execution of this Agreement, the Corporation shall cause to be filed the Class E Certificate of Designation as required pursuant to the law of the State of Minnesota. 19 7.2. Restrictions Pending the Closing. After the date hereof and prior to the Closing Date, except as expressly provided for in this Agreement or as consented to in writing by the Purchaser, the Corporation will not: (i) amend its certificate of incorporation or bylaws, except to file the Class E Certificate of Designation; (ii) split, combine or reclassify any shares of its capital stock without appropriately adjusting the conversion price and/or ratio applicable to the Shares prior to their issuance at the Closing; (iii) declare or pay any dividend or distribution (whether in cash, stock or property) in respect of its Common Stock; (iv) take any action, or knowingly omit to take any action, that could reasonably be expected to result in (A) any of the representations and warranties of the Corporation set forth in Article 4 becoming untrue or (B) any of the conditions to the obligations of the Purchaser set forth in Section 8.1 or 8.2 not being satisfied; or (v) enter into any agreement or commitment to do any of the foregoing. 7.3. Reservation of Shares. For so long as any of the Shares are outstanding, the Corporation shall keep reserved for issuance a sufficient number of shares of Common Stock to satisfy its conversion obligations under the Class E Certificate of Designation. 7.4. Use of Proceeds. The Corporation shall use the cash proceeds received by it upon the sale of the Shares for general working capital purposes. 7.5. Access to Records. The Corporation shall, and shall cause each Subsidiary to, afford to the Purchaser and its authorized employees, counsel, accountants and other representatives, upon reasonable notice and during ordinary business hours, (i) full access to all books, records and properties of the Corporation and such Subsidiary, and (ii) the opportunity to interview any officer of the Corporation or such Subsidiary regarding its affairs; any investigation pursuant to this Section shall be conducted in a manner that does not interfere unreasonably with the conduct of the business of the Corporation and such Subsidiary. 7.6. Reserved. 7.7. Financial Reporting and other Information. 20 (a) So long as the Purchaser beneficially owns Shares or Conversion Shares, the Corporation shall deliver to such Purchaser the following: (i) within 30 days after the end of each month, commencing with the month of December, (A) the unaudited balance sheet of the Corporation at the end of such month, (B) the unaudited statements of income and cash flows of the Corporation for such month, (C) comparative statements of income of the Corporation for the year to date, the comparable figures for the prior year, the current Budget for the year to date and projected figures for the year and (D) textual discussion describing changes from prior periods and describing operating trends; (ii) within 45 days after the end of each fiscal quarter, commencing with the quarterly period ending March 31, 2000, (A) the unaudited balance sheet of the Corporation at the end of such fiscal quarter, (B) the unaudited statements of income and cash flows of the Corporation for such fiscal quarter, and (C) comparative statements of income of the Corporation for such fiscal quarter and the year to date, the comparable figures for the corresponding fiscal quarter and the year to date period of the prior year and the current Budget for such fiscal quarter and for the year to date; and (iii) within 90 days after the end of each fiscal year commencing with the current fiscal year of the Corporation, (A) the audited balance sheet of the Corporation at the end of such fiscal year, together with comparisons to the balance sheet of the Corporation at the end of the prior fiscal year and to the current Budget, (B) the audited statements of income and cash flows of the Corporation for such fiscal year, together with comparisons to the statements of income and cash flows of the Corporation for the prior fiscal year and to the current Budget, and (C) an audit report of Ernst & Young, independent certified public accountants, on such balance sheets and statements; and (iv) any other financial and operating data and other information relating to the Corporation and each Subsidiary as the Purchaser may reasonably request; (v) all information made available to the Corporation's shareholders or directors, at the same time as such information is delivered to such persons; and (vi) monthly management reports in a form reasonably acceptable to the Purchaser. (b) All financial information to be delivered under this Section shall be in accordance with the books and records of the Corporation and shall have been prepared in accordance with GAAP, subject to year-end and audit adjustments. 7.8. Payment of Obligations. The Corporation shall, and shall cause each Subsidiary to, pay or discharge or cause to be paid or discharged all material claims or demands, and all Taxes levied or imposed upon the Corporation or its Subsidiaries or upon the income, profits or property of the Corporation or its 21 Subsidiaries; provided, however, that the Corporation or such Subsidiary shall not be required to pay or discharge or cause to be paid or discharged any such claim, demand, or Tax the amount, applicability or validity of which is being contested in good faith by appropriate proceedings and for which adequate provision has been made. 7.9. Insurance. The Corporation shall, and shall cause each Subsidiary to, maintain with financially sound and reputable insurers such insurance as may be required by law and such other insurance, to such extent and against such hazards and liabilities, as is customarily maintained by companies similarly situated and exercising sound business practice. 7.10. Certain Notices. The Corporation shall promptly notify the Purchaser of (i) the commencement or notice of any threat of any Proceeding, dispute or grievance against or affecting the Corporation, which, if adversely determined, might reasonably be expected to have a Material Adverse Effect, (ii) any material default under any indebtedness of the Corporation and (iii) any material default or breach under any of the items required to be listed on Schedule 4.10(a) or any of the items which would have been required to be listed on Schedule 4.10(a) if such item were effective prior to the date hereof. 7.11. Conduct of Business. The Corporation shall (i) take all actions required to assure that the Corporation remains duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) take all actions required to assure that the Corporation maintains all Permits to conduct its business, and (iii) conduct its business in compliance with all Laws. 7.12. Related Transactions. Excluding any existing arrangements between Winstar Communications, Inc. and MCI WorldCom, Inc., the Corporation shall not directly or indirectly enter into any transaction with any Related Party, other than any transaction entered into in the ordinary course of business and on terms and conditions not less favorable to the Corporation as the terms and conditions which would apply in a similar transaction negotiated on an arms-length basis with a party that is not a Related Party. "Related Party" means (a) each current or future director or executive officer of the Corporation, (b) each parent, sibling, spouse, or descendant of any of the foregoing, (c) each entity of which any of the foregoing is a director, officer, partner or holder of more than 10% of the outstanding voting power of any class of capital stock and (d) any person or entity which is the beneficial owner of 5% or more of the outstanding voting power of the Corporation. 7.13. Internal Controls. (a) Internal Controls. 22 The Corporation maintains and will continue to maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets and (iii) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 7.14. Board Designees. The Corporation shall expand the number of members on its Board of Directors ("Board") by two. Each of the two Purchasers that purchase the largest number of Class E Preferred Stock pursuant to this Agreement shall be entitled to appoint one member to the Board for so long as such Purchaser continues to own Shares and/or Conversion Shares which together represent at least 40% of the number of shares of Common Stock issuable upon conversion or redemption of the Class E Preferred Stock initially purchased by such Purchaser (without giving effect to anti-dilution rights in the Class E Certificate of Designation). The persons so elected to be members of the Board shall be entitled to serve on each of the Audit, Compensation, Nominating and any other committee created by the Board; provided, however, that in the event any such committee fails to satisfy specific requirements under the rules and regulations of the Securities and Exchange Commission any exchange or trading system due to such persons affiliations, such person will agree to serve solely as an observer of such committee. Such appointed directors shall be entitled to receive the same compensation that is paid to other non-management Board members and committee members and shall be entitled to receive reimbursement for all reasonable costs incurred in attending such meetings, including, but not limited to, food, lodging and transportation. To the extent permitted by law, the Corporation will indemnify such persons and the Purchasers who elected such persons for the actions of such persons as members of the Board and/or any committee thereof, unless such actions are found by a court of law to have been grossly and intentionally negligent. As long as such persons remain as members of the Board, the Corporation will maintain director and officer insurance policies in amounts and on terms, which are reasonable for companies similarly situated to the Corporation and, reasonably acceptable to the Purchasers that appointed such designees. Any vacancy in the position of a director appointed pursuant to this Section 7.14 shall be filled by and only by the Purchaser that appointed the director whose position has become vacant. Each such director may, during his or her term of office, be removed at any time, with or without cause, by and only by the Purchaser who appointed such director. In addition, any Purchaser making an initial investment of $20 million or more of the Class E Preferred Stock who does not have a member of its organization serving on the Board at the time of such Board or Committee meeting, will have the right to appoint a non-voting Board observer with full information rights. This right shall continue for so long as such Purchaser continues to own Shares and/or Conversion Shares which together represent at least 20% of the number of shares of Common Stock issuable upon conversion or redemption of the Class E Preferred Stock initially purchased by such Purchaser (without giving effect to anti-dilution rights). Such observer shall be entitled to be reimbursed for all reasonable, customary expenses 23 associated with attending the Board meetings, but shall not be entitled to any other form of compensation. The Corporation shall give written notice, to the Purchaser who nominated a person to be a Board member and/or observer and to such persons and observers, of each Board meeting and shall provide to such persons an agenda and minutes of such Board meeting no later than it gives such notice and provides such items to the other Board members. 7.15. Reserved. 7.16. Purchaser Lock-Up. The Purchaser agrees that, without the consent of the Corporation, it will not directly or indirectly offer, sell, dispose of, pledge, encumber or otherwise transfer any of the Shares or the Conversion Shares until six months after the consummation of the Company's initial public offering of Common Stock. 7.17. Tag-Along Agreements. Prior to the Closing the Corporation will use its commercially reasonable best efforts to cause the Purchasers to be joined as parties to the Tag-Along Rights Agreements entered into (i) among the Corporation, Silicon Graphics, Inc. and MCI WorldCom, Inc. dated March 4, 1999; (ii) two separate tag-along agreements regarding the Corporation, Silicon Graphics, Inc., MCI WorldCom, Inc., and CCPRE-Eagan LLC, each dated September 30, 1999; and (iii) the Right of First Refusal Agreement dated December 16, 1996 among Edward J. Driscoll, Allen Witters and MCI WorldCom, Inc. (collectively "Restricted Stock Agreements"). 7.18. Consents. Prior to the Closing, the Corporation shall use its commercially reasonable best efforts to obtain all consents and approvals of third parties, if any, required to consummate the transactions contemplated by this Agreement so that such consummation shall not conflict with or cause a breach of or default under any agreement or other obligation binding upon the Corporation, including without limitation all such consents and approvals required with respect to its obligations for borrowed money and under its Articles of Incorporation and Certificates of Designation. Section 8. Registration Rights of the Purchaser. 8.1. Demand Registration. (a) Grant of Right. The Corporation agrees to register on two occasions, upon written demand ("Initial Demand Notice") of the Purchaser, all of the Conversion Shares, regardless of whether the Shares have been converted (the "Registrable Securities"). The Corporation will file a registration statement covering the Registrable Securities within 60 days after receipt of the Initial Demand Notice and use its best efforts to have such registration statement declared effective promptly thereafter. The demand for registration may be made at 24 any time during a period commencing on the earlier of (i) the six month anniversary of the consummation of the Corporation's initial public offering of its Common Stock, and (ii) the one year anniversary of the date Shares are first issued. (b) Terms. The Corporation shall bear all fees and expenses attendant to registering the Registrable Securities, including the expenses of one legal counsel selected by the Purchaser to represent them in connection with the sale of the Registrable Securities but not including any and all underwriting commissions and discounts which will be the responsibility of the Purchaser participating in the underwriting. The Corporation will qualify or register the Registrable Securities in such states as are reasonably requested by the Purchaser. The Corporation shall cause any registration statement filed pursuant to the demand rights granted under this Section to remain effective with respect to the Registrable Securities covered by such registration statement until all such securities have been sold. 8.2. "Piggy-Back" Registration. (a) Grant of Right. The Purchaser shall have the right at any time and from time to time to include the Registrable Securities as part of any other registration of securities filed by the Corporation (other than pursuant to Form S-4, Form S-8 or any equivalent forms or in connection with the Corporation's initial public offering to the extent that no other selling shareholder is included in the registration statement). Notwithstanding the foregoing, if, in the written opinion of the managing underwriter or underwriters of a public offering by the Corporation of its shares of Common Stock, the inclusion of the Registrable Securities, when added to the securities being registered by the Corporation, will exceed the maximum amount of the Corporation's securities that can be marketed without materially and adversely affecting the entire offering, then (i) the Corporation will include in such registration first, only those securities, the holders of which as of the date hereof have piggy-back registration rights (as listed on Schedule 8.2), second, the Registrable Securities allocated (if necessary) among the holders thereof on a pro rata basis based on the number of Registrable Securities requested to be included in such registration statement, and third, capital stock of the Corporation to be sold for the account of others with applicable piggy-back registration rights, with such priorities among them as the Corporation shall decide. If, subsequent to the exercise of all of the demand registration rights referred to in Section 8.1, any Registrable Securities requested to be included in an offering ("Other Offering") pursuant to the "piggy-back" rights described in this Section 8.2. are not so included because of the operation of the first proviso of the preceding sentence, then the holders of the Registrable Securities shall have the right to require the Corporation, at its expense, to prepare and file a registration statement under the Securities Act covering such Registrable Securities. (b) Terms. The Corporation shall bear all fees and expenses attendant to registering the Registrable Securities, including the reasonable expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities, but the Purchaser participating in the registration shall pay any and all discounts and underwriting commissions. In the event of such a proposed registration, the Corporation shall furnish the owners of the Registrable Securities with not less than 30 days written notice prior to the proposed date of filing of such registration statement. Such notice shall continue to be given 25 for each registration statement filed by the Corporation until such time as all of the Registrable Securities have been sold by the Purchaser. The owners of the Registrable Securities shall exercise the "piggy-back" rights provided for herein by giving written notice within 15 days of the receipt of the Corporation's notice of its intention to file a registration statement. The Corporation shall cause any registration statement filed pursuant to the "piggyback" rights granted under this Section to remain effective with respect to the Registrable Securities covered by such registration statement until all of the such securities have been sold by the Purchaser. Notwithstanding the foregoing, in no event shall the Corporation be obligated to maintain the effectiveness of any registration statement filed pursuant to Sections 8.1 and 8.2 for a period in excess of three years from the initial date of issuance of the Shares. 8.3. General Terms. (a) Indemnification. The Corporation shall indemnify the owner(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such person within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage, expense or liability (including all reasonable attorneys' fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement, except to the extent that any loss, claim, damage, expense or liability arises out of or relates to written information furnished by or on behalf of the Purchaser, for inclusion in such registration statement ("Purchaser Information"). The owner(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Corporation against all loss, claim, damage, expense or liability (including all reasonable attorneys' fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which it may become subject under the Securities Act, the Exchange Act or otherwise, arising from Purchaser Information furnished by or on behalf of such owner(s). (b) Exercise of Shares. Nothing contained in this Section 8 shall be construed as requiring the Purchaser to convert the Shares prior to or after the filing of any registration statement or the effectiveness thereof. (c) Documents Delivered to Holders. The Corporation shall deliver promptly to the Purchaser participating in any of the foregoing offerings who requests it, all correspondence between the Securities and Exchange Commission and the Corporation, its counsel or auditors and all memoranda relating to discussions with the Securities and Exchange Commission or its staff with respect to the registration statement. The Corporation also shall furnish to the Purchaser participating in any of the foregoing offerings that are underwritten, and to each underwriter of any such offering, a signed counterpart, addressed to the Purchaser and underwriter, of (i) an opinion of counsel to the Corporation, dated the effective date of such registration statement (and an opinion dated the date of the closing under the underwriting agreement relating to such offering), and (ii) a "cold comfort" letter dated the effective date of such registration statement (and a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the 26 Corporation's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. In the event that the Purchaser requests information pursuant to this Section (c), then, prior to furnishing such information, the Corporation shall have the right to require the Purchaser to enter into a confidentiality agreement with the Corporation with respect to any information to be provided to the Purchaser that the Corporation reasonably considers to be proprietary, non-public or otherwise confidential. 8.4. Underwriting Agreement. In the event that the demand registration filed by the Purchaser pursuant to Section 8.1(a) is for an underwritten offering, then the Purchaser shall have the right to select the underwriters of the offering, which underwriters shall be reasonably acceptable to the Corporation. The Corporation shall enter into an underwriting agreement with the managing underwriter selected by the Purchaser whose Registrable Securities are being registered pursuant to Section 8.1. Such agreement shall be reasonably satisfactory in form and substance to the Corporation, each such person and such managing underwriter, and shall contain such representations, warranties and covenants by the Corporation and such other terms as are customarily contained in agreements of that type used by the underwriter. Such persons shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all of the representations, warranties and covenants of the Corporation to or for the benefit of such underwriter shall also be made to and for the benefit of such persons. Such persons shall not be required to make any representations or warranties to or agreements with the Corporation or the underwriter except as they may relate to such persons, their shares and their intended methods of distribution. 8.5. Road Show. In connection with any underwritten public offering concerning the Purchaser, the Corporation will participate in road-shows regarding such offering. 8.6. Reserved. Section 9. Conditions to Each Closing. 9.1. Conditions of Each Party. The respective obligations of each of the Corporation and the Purchaser 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; (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 Authorities 27 in connection with the execution and delivery by the parties of the Documents and the consummation of the transactions contemplated thereby shall have been made or obtained; and (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. 9.2. Conditions to Obligations of the Purchaser. The obligations to be performed by the Purchaser under this Agreement at or after the Closing are subject to the satisfaction at or prior to each of the Closing of the following conditions, unless waived by the Purchaser: (a) Material Adverse Effect. There shall not have been any event which has or is reasonably likely to have a Material Adverse Effect. (b) Accuracy of Representations and Warranties. Each of the representations and warranties of the Corporation contained in this Agreement and in any certificate or other writing delivered by the Corporation 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 respective times (except to the extent it relates to a particular date). (c) Performance of Covenants. The Corporation shall have performed in all material respects all covenants and agreements required to be performed by it under this Agreement and each other Document. (d) Class E Certificate of Designation. Prior to the Closing, the Class E Certificate of Designation shall have been filed with and accepted by the Secretary of State of the State of Minnesota and shall have become effective. (e) Stock Certificates. At the Closing Stock certificates representing the Class E Preferred Stock sold at such closing shall have been delivered by the Corporation to the Purchaser. (f) Use of Proceeds. At the Closing the Purchaser shall have received a certificate of the Corporation describing in reasonable detail the proposed use of proceeds received by the Corporation upon the sale of the Shares. (g) Legal Opinion. Purchaser shall have received an opinion dated as of the Closing Date of Willkie Farr & Gallagher, in a form and substance attached hereto as Exhibit C. 28 (h) Officer's Certificate. At the Closing the Purchaser shall receive a certificate from an officer of the Corporation to the effect that all conditions set forth in this Section 9.2 shall have been satisfied. (i) Required Consents and Approvals. Prior to the Closing Date, the Corporation shall have received all consents and approvals of third parties, if any, required to consummate the transactions contemplated by this Agreement so that such consummation shall not conflict with or cause a breach of or default under any agreement or other obligation binding upon the Corporation, including without limitation all such consents and approvals required with respect to its obligations for borrowed money and under its Articles of Incorporation and Certificates of Designation. 9.3. Conditions to Obligations of the Corporation. The obligations to be performed by the Corporation under this Agreement at or after the Closing are subject to the satisfaction at or prior to the Closing and the Option Closing, if any, of the following conditions, unless waived by the Corporation: (a) Accuracy of Representations and Warranties. Each of the representations and warranties of the Purchaser contained in this Agreement and in any certificate or other writing delivered by the Purchaser 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 respective times (except to the extent it relates to a particular date); (b) Performance of Covenants. The Purchaser shall have performed in all material respects all covenants and agreements required to be performed by it under this Agreement and each other Document to which it is a party. Section 10. 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 Corporation and the Purchaser; (b) by the Corporation, if any Purchaser 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 Purchaser (provided that the Corporation 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); (c) by the Purchaser, if the Corporation 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 Corporation (provided that the Purchaser 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); 29 (d) by any party, if the Closing has not occurred on or before March 31, 2000; provided, however, that a party may not terminate this Agreement pursuant to this Section if the failure of such party to fulfill any of its obligations hereunder shall have been the principal reason that the Closing shall not have occurred on or before said date; (e) by any party if there shall be a change of law or regulation that makes consummation of the transactions contemplated hereby illegal or otherwise prohibited or if consummation of the transactions contemplated hereby would violate any nonappealable, final order, decree or judgment of any court or governmental body having competent jurisdiction; or The party desiring to terminate this Agreement pursuant to the above-referenced clauses shall give notice of such termination to the other parties hereto. 10.1. Effect of Termination. (a) If this Agreement is terminated, such termination shall be without liability of either party (or any shareholder, director, officer, employee, agent, consultant or representative of such party) to the other parties to this Agreement; provided that if such termination shall result from the (i) willful failure by any party to fulfill a condition to the performance of the obligations of the other parties, (ii) failure by any party to perform a covenant of this Agreement, (iii) breach by any party hereto of any representation, warranty, covenant or agreement contained herein, or (iv) a Closing Failure by any party, such party shall be fully liable for any and all damages incurred or suffered by the other parties as a result of such failure or breach. Section 11. Miscellaneous 11.1. Survival. The representations, warranties, covenants and other agreements contained herein, shall survive the Closing and the consummation of the transactions contemplated hereby. No right of the Purchaser for indemnification hereunder shall be affected by any examination made for or on behalf of the Purchaser, the knowledge of any of the Purchaser's officers, directors, shareholders, employees or agents, or the acceptance by the Purchaser of any certificate or opinion. 11.2. Indemnification. (a) The Corporation shall indemnify, defend and hold the Purchaser and its officers, directors, employees, shareholders, partners, members, affiliates and agents harmless against all Liability, loss or damage, together with all reasonable costs and expenses related thereto (including reasonable legal fees and expenses), relating to or arising from the untruth, inaccuracy or breach of any of the representations, warranties or agreements of the Corporation contained in this Agreement. (b) The Purchaser shall indemnify, defend and hold the Corporation and its respective officers, directors, employees, shareholders, partners, members, affiliates and agents harmless against all Liability, loss or damage, together with all reasonable costs and expenses related thereto (including reasonable legal fees and expenses), relating to or arising from the 30 untruth, inaccuracy or breach of any of the representations, warranties or agreements of the Purchaser contained in this Agreement. (c) Promptly after receipt by any party entitled to indemnification under either Section 11.2(a) or Section 11.2(b) (an "indemnified party") of notice of the commencement of any action involving a claim which may give rise to a claim for indemnity under the preceding paragraphs of this Section, the indemnified party will give written notice to the party against whom indemnification is sought (the "indemnifying party") of the commencement of such action. In case any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be responsible for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof; provided, however, that if any indemnified party shall have reasonably concluded that there may be one or more legal or equitable defenses available to it which are additional to or conflict with those available to the indemnifying party, or that such claim or litigation involves or could have an effect upon matters beyond the scope of the indemnity agreement provided in this Section, the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party and the indemnifying party shall reimburse the indemnified party and any person controlling the indemnified party for that portion of the fees and expenses of any counsel retained by the indemnified party which is reasonably related to the matters covered by the indemnity agreement provided in this Section. (d) If the indemnification provided for in this Section is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, claim, damage, liability or action referred to herein, then the indemnifying party, in lieu of indemnifying the indemnified party hereunder, shall contribute to the amounts paid or payable by the indemnified party as a result of such loss, claim, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions which resulted in such loss, claim, damage or liability as well as any other relevant equitable considerations. The amount paid or payable to an indemnified party as a result of the losses, claims, damages, liabilities or expenses referred to above shall be deemed to include any legal or other expenses reasonably incurred in connection with investigating or defending the same. (e) The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of the indemnified party and will survive the transfer of securities. 11.3. Nominee; Benefits. All references to Purchaser in this Agreement shall include the person or persons for whom the Purchaser is a nominee, and the benefits of and rights and obligations under the Agreement shall accrue to such person or persons which have a beneficial interest in the Class E 31 Preferred Stock being acquired hereunder and for whom the Purchaser is a nominee. Upon request, the Corporation shall provide separate stock certificates for each person or persons which have a beneficial interest in the Class E Preferred Stock being acquired hereunder and for whom the Purchaser is a nominee. The Purchaser makes the representations in Section 5 for all such persons for whom the Purchaser is a nominee. 11.4. Assignment; Parties in Interest. This Agreement shall bind and inure to the benefit of the parties and each of their respective successors and permitted assigns (it being understood that this Agreement may be assigned by the Purchaser without the consent of any person solely in connection with the transfer of Shares). 11.5. Entire Agreement. This Agreement (including all Schedules and Exhibits hereby) together with the other Documents contain the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings among the parties with respect to such subject matter. 11.6. Notices. All notices, claims, certificates, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if sent by nationally-recognized overnight courier, by telecopy, or by registered or certified mail, return receipt requested and postage prepaid, addressed as follows: (a) if to the Corporation: WAM!NET INC. 655 Lone Oak Drive, Building A Eagan, Minnesota 55121 Attention: Edward J. Driscoll, III, President Telephone: (651) 256-2165 Facsimile: (651) 994-9591 with a copy to: Willkie Farr & Gallagher 787 Seventh Avenue New York, NY 10019-6099 Attention: Daniel D. Rubino, Esq. Telephone: (212) 728-8000 Facsimile: (212) 728-8111 (b) if to the Purchaser: 32 Cerberus Partners, L.P. 450 Park Avenue New York, NY 10022 Attention: General Partner Telephone: (212) 891-2100 Telecopier: (212) 750-5212 In any case, with a copy to: Schulte Roth & Zabel LLP 900 Third Avenue New York, NY 10022 Attention: Peter Halasz Telephone: (212) 756-2238 Telecopier: (212) 593-5955 or to such other address as the party to whom notice is to be given may have furnished to the other parties in writing in accordance herewith. Any such notice or communication shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of nationally-recognized overnight courier, on the next business day after the date when sent, (c) in the case of telecopy transmission, when received, and (d) in the case of mailing, on the date of receipt. 11.7. Amendments. The terms and provisions of this Agreement may only be modified or amended pursuant to an instrument signed by all of the parties hereto. 11.8. 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. 11.9. Headings. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 11.10. Governing Law. Except as to matters governed by the MBCA, this Agreement shall be governed by and construed in accordance with the domestic laws of the State of New York, without giving effect to any law or rule that would cause the laws of any jurisdiction other than the State of New York to be applied. 11.11. Jurisdiction. 33 The parties hereto agree that any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby may only be brought in the United States District Court for the Southern District of New York or any New York State court sitting in New York City, and each of the parties hereby consents to the exclusive jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in the Section entitled "Notices" shall be deemed effective service of process on such party. 11.12. No Waiver. No delay by or on behalf of an Purchaser in exercising any rights conferred hereunder, and no course of dealing between an Purchaser and the Corporation shall operate as a waiver of any right granted hereunder, unless expressly waived in writing by the party whose waiver is alleged. 11.13. Binding Effect All covenants, representations, warranties and other stipulations in this Agreement and other documents referred to herein, given by or on behalf of any of the parties hereto, shall bind and inure to the benefit of the respective successors, heirs, personal representatives and assigns of the parties hereto. 11.14. Cumulative Powers. No remedy herein conferred upon the Purchaser or any holder of the Class E Preferred Stock is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and in addition to every other remedy given hereunder or now or hereafter existing at law, or in equity or by statue or otherwise. 34 IN WITNESS WHEREOF, the parties have executed and delivered this Stock Purchase Agreement on the date first above written. WAM!NET INC. By: /s/ Edward J. Driscoll III ----------------------------------- Name: Title: Address: 655 Lane Oak Drive Building A Eagan, Minnesota 55121 CERBERUS PARTNERS, L.P. by its General Partner CERBERUS ASSOCIATES, L.L.C. By: /s/ Stephen A. Feinberg ----------------------------------- Name: Stephen A. Feinberg Title: Managing Member Address: 450 Park Avenue New York, NY 10022 35 Index ----- Exhibit A Statements of Rights and Preferences of Class E Preferred Stock Exhibit C Willkie Farr & Gallagher Legal Opinion Schedule I Certain Management Schedule 4.1(a) Articles of Incorporation and Bylaws Schedule 4.1(b) List of Subsidiaries Schedule 4.5(a) Designation and Classes of Capital Stock Schedule 4.5(a)(vi) Right of First Refusal Agreements Schedule 4.5(b) Options, Warrants and Convertible Securities Schedule 4.5(c)(i) Purchase Agreements Schedule 4.5(c)(ii) Registration Rights Agreements Schedule 4.5(e) Record Holders Schedule 4.7 Financial Statements Schedule 4.10(a) Material Contracts Schedule 4.12 Real Property Schedule 4.13 Intellectual Property Schedule 4.14 License to Provide Communications Services Schedule 4.15 Litigation Schedule 4.18 Employee Pension Benefit Plans Schedule 4.20 Related Transactions Schedule 8.2 Piggy-back Registration Rights EX-4.36 7 SECURITIES PURCHASE AGREEMENT - SILICON GRAPHICS EXHIBIT 4.36 ================================================================================ SECURITIES PURCHASE AGREEMENT dated as of February 3, 2000, among WAM!NET INC. and SILICON GRAPHICS, INC. ================================================================================ TABLE OF CONTENTS Page ---- SECTION 1. AUTHORIZATION....................................................1 SECTION 2. CLOSING..........................................................1 SECTION 3. SALE AND PURCHASE OF SHARES......................................1 3.1. Shares...........................................................1 SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION................2 4.1. Organization; Subsidiaries.......................................2 4.2. Qualification; Good Standing.....................................2 4.3. Corporate Authorization; Enforceability..........................3 4.4. No Conflict......................................................3 4.5. Capitalization...................................................3 4.6. Securities Laws; Applicable Corporation Laws.....................6 4.7. Financial Information............................................6 4.8. Absence of Changes...............................................6 4.9. Reserved.........................................................8 4.10. Agreements.......................................................8 4.11. Title to Assets.................................................10 4.12. Real Property...................................................10 4.13. Intellectual Property Rights; Proprietary Information of Third Parties..............................................10 4.14. Compliance with Laws; Governmental Authorizations...............11 4.15. Litigation......................................................12 4.16. Environmental Matters...........................................12 4.17. Tax Matters.....................................................12 4.18. Employee Benefit Plans..........................................13 4.19. Insurance.......................................................14 4.20. Related Transactions............................................14 4.21. Offering of the Shares..........................................14 4.22. Disclosure......................................................14 4.23. Reserved........................................................15 4.24. Reserved........................................................15 4.25. Brokers and Finders.............................................15 4.26. Year 2000 Compliance............................................15 4.27. Reserved........................................................15 SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.................16 5.1. Due Authorization...............................................16 5.2. Investment Representations......................................16 5.3. Brokers and Finders.............................................17 5.4. Investor Sophistication.........................................17 5.5. Reserved........................................................17 SECTION 6. COVENANTS OF THE CORPORATION AND THE PURCHASER..................17 i 6.1. Regulatory Approvals; Reasonable Best Efforts; Further Assurances............................................17 6.2. Certain Filings.................................................17 6.3. Confidentiality.................................................18 6.4. Public Announcements............................................18 SECTION 7. COVENANTS OF THE CORPORATION....................................18 7.1. Certificate of Designation......................................18 7.2. Restrictions Pending the Closing................................19 7.3. Reservation of Shares...........................................19 7.4. Use of Proceeds.................................................19 7.5. Access to Records...............................................19 7.6. Reserved........................................................19 7.7. Financial Reporting and other Information.......................19 7.8. Payment of Obligations..........................................20 7.9. Insurance.......................................................21 7.10. Certain Notices.................................................21 7.11. Conduct of Business.............................................21 7.12. Related Transactions............................................21 7.13. Internal Controls...............................................21 7.14. Reserved........................................................22 7.15. Reserved........................................................22 7.16. Purchaser Lock-Up...............................................22 7.17. Reserved........................................................22 7.18. Consents........................................................22 SECTION 8. REGISTRATION RIGHTS OF THE PURCHASER............................22 8.1. Demand Registration.............................................22 8.2. "Piggy-Back" Registration.......................................23 8.3. General Terms...................................................24 8.4. Underwriting Agreement..........................................25 8.5. Road Show.......................................................25 8.6. Reserved........................................................25 SECTION 9. CONDITIONS TO EACH CLOSING......................................25 9.1. Conditions of Each Party........................................25 9.2. Conditions to Obligations of the Purchaser......................26 9.3. Conditions to Obligations of the Corporation....................27 SECTION 10. TERMINATION....................................................27 10.1. Effect of Termination..........................................28 SECTION 11. MISCELLANEOUS..................................................28 11.1. Survival.......................................................28 11.2. Indemnification................................................28 11.3. Reserved.......................................................29 11.4. Assignment; Parties in Interest................................29 11.5. Entire Agreement...............................................30 11.6. Notices........................................................30 ii 11.7. Amendments.....................................................31 11.8. Counterparts...................................................31 11.9. Headings.......................................................31 11.10. Governing Law..................................................31 11.11. Jurisdiction...................................................31 11.12. No Waiver......................................................32 11.13. Binding Effect.................................................32 11.14. Cumulative Powers..............................................32 INDEX......................................................................38 iii SECURITIES PURCHASE AGREEMENT, dated as of February 3, 2000, among WAM!NET INC., a Minnesota corporation (the "Corporation"), and Silicon Graphics, Inc., a Delaware corporation ("SGI"). WHEREAS, the Corporation desires to sell to SGI 10,000 shares (the "Shares") of its Class F Convertible Preferred Stock, $.01 par value (the "Class F Preferred Stock"), and SGI desires to purchase the Shares from the Corporation upon the terms and subject to the conditions set forth below. NOW THEREFORE, the parties hereto agree as follows: Section 1. Authorization. The Corporation has authorized the issuance and sale, upon the terms and subject to the conditions set forth in this Agreement, of the Shares for a purchase price of $1000.00 per Share (the "Per Share Price") or $10.0 million in the aggregate (the "Purchase Price"). The powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations, and restrictions of the Class F Preferred Stock are set forth in the Statement of Rights and Preferences of Class F Preferred Stock ("Class F Certificate of Designation") attached hereto as Exhibit A. Section 2. Closing. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned in accordance with this Agreement, the closing of the sale and purchase of the Shares and the other transactions contemplated hereby (the "Closing") shall be held at 10:00 a.m. on the date which is the third business day after the conditions in Section 9 have been satisfied or waived (other than those of such conditions which are customarily satisfied at a closing), at the office of Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019 (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." Section 3. Sale and Purchase of Shares. 3.1. Shares. At the Closing, the Corporation shall issue, sell and deliver to SGI 10,000 Shares of Class F Preferred Stock and SGI shall deliver to the Corporation, as full payment therefor, the Purchase Price in cash by wire transfer of immediately available funds to such bank account or bank accounts designated by the Corporation. Section 4. Representations and Warranties of the Corporation. The Corporation hereby represents and warrants to the Purchaser as of the date hereof and as of the Closing Date that: 4.1. Organization; Subsidiaries. (a) Organization. The Corporation and each Subsidiary (as defined below) is a corporation duly organized and validly existing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate the assets used in its business, to carry on its business as presently conducted, to enter into the Documents (as hereinafter defined), to perform its obligations thereunder, and to consummate the transactions contemplated thereby. Attached as Schedule 4.1(a) are correct and complete copies of the Articles of Incorporation of the Corporation including all amendments and certificates of Designation, and the By-laws of the Corporation and each Subsidiary, each as in effect on the date hereof (collectively, the "Organizational Documents"). No amendments, revisions or waivers of any provisions of any Organizational Documents have occurred, are in the process of occurring or otherwise have been requested. For purposes of this Agreement, "Documents" collectively means (i) this Agreement and (ii) the Class F Certificate of Designation. (b) Subsidiaries. Set forth on Schedule 4.1(b) hereto is a complete list of all of the subsidiaries of the Corporation (each a "Subsidiary"). Except as set forth on Schedule 4.1(b) hereto, the Corporation does not own, directly or indirectly, any capital stock or other equity securities of any corporation, nor does the Corporation have any direct or indirect ownership interest, including interests in partnerships and joint ventures, in any other entity or business and there are no agreements to acquire such interests. Each Subsidiary has been duly organized, 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 upon the business, prospects, properties, liabilities, assets, operations, results of operations, condition (financial or otherwise), or affairs of the Corporation or result in the loss from employment of any Principal Executive Officer as such term is defined on Schedule I (a "Material Adverse Effect"). Each Subsidiary 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 on Schedule 4.1(b) hereto: (i) all of the outstanding shares of capital stock of each Subsidiary are owned beneficially and of record by the Corporation, another Subsidiary or any combination thereof, in each case free and clear of any liens, charges, restrictions, claims or encumbrances other than restrictions on transfer imposed by the Securities Act of 1933, as amended (the "Securities Act"); and (ii) there are no outstanding subscriptions, warrants, options, convertible securities or other rights (contingent or other) pursuant to which any Subsidiary is or may become obligated to issue any shares of its capital stock to any person other than the Corporation or a Subsidiary. 4.2. Qualification; Good Standing. -2- Each of the Corporation and every Subsidiary is authorized to do business and is in good standing as a foreign corporation in each jurisdiction the laws of which require such respective entity to be so authorized, except where the failure to be so qualified or in good standing could not reasonably be expected to have a Material Adverse Effect. 4.3. Corporate Authorization; Enforceability. The Corporation has taken all corporate action necessary to authorize its execution and delivery of the Documents, the performance of its obligations thereunder, and its consummation of the transactions contemplated thereby. Each Document has been executed and delivered by an officer of the Corporation in accordance with such authorization. Each Document constitutes a valid and binding obligation of the Corporation, enforceable in accordance with its terms, subject to applicable bankruptcy, reorganization, fraudulent conveyance, insolvency, moratorium, and similar laws now or hereafter in effect affecting creditors' rights generally and to general principles of equity. 4.4. No Conflict. The execution and delivery by the Corporation of the Documents, its consummation of the transactions contemplated thereby, and its compliance with the provisions thereof, will not other than in instances which could not reasonably be expected to have a Material Adverse Effect, (i) violate or conflict with any of the Organizational Documents, (ii) violate, conflict with, result in a breach of, constitute a default under, or give rise to any right of termination, cancellation, or acceleration (with or without notice or lapse of time, or both) under any agreement, lease, security, license, permit, or instrument to which the Corporation or any Subsidiary is a party, or to which it or any of them or any of their respective assets or businesses are subject, (iii) result in the imposition of any Encumbrance (as hereinafter defined) on any asset of the Corporation, (iv) violate or conflict with any Laws applicable to the Corporation or its properties or assets, or (v) require any consent, approval or other action of, notice to, or filing with any entity or person (governmental or private), except for the filing of the Class F Certificate of Designations and those that have been obtained or made. For purposes of this Agreement, "Encumbrance" means any security interest, mortgage, lien, pledge, charge, easement, reservation, clouds, equities, rights of way, options, rights of first refusal and any other encumbrances, whether or not relating to the extension of credit or the borrowing of money. For purposes of this Agreement, "Laws" means all laws, statutes, rules, regulations, ordinances, bylaws, writs, Permits, Orders and other legislative, administrative or judicial restrictions. 4.5. Capitalization. (a) Capitalization. (i) As of the date hereof, the authorized capital stock of the Corporation consists of 500,000,000 shares, the Designation and classes of which are set forth on Schedule 4.5(a) hereto. The Corporation does not hold any of its shares in treasury. -3- (ii) As of January 31, 2000, 9,494,797 shares of the Corporation's common stock, par value $.01 per share ("Common Stock"), 115,206 shares of the Corporation's Class A Preferred Stock par value $10.00 per share (the "Class A Preferred Stock"), 5,710,425 shares of the Corporation's Class B Preferred Stock par value $.01 per share (the "Class B Preferred Stock"), 878,527 shares of the Corporation's Class C Preferred Stock, par value $.01 per share (the "Class C Preferred Stock"), and 2,196,317 shares of the Corporation's Class D Preferred Stock, par value $.01 per share (the "Class D Preferred Stock") are issued and outstanding and have been validly issued and are fully paid and nonassessable and are not subject to preemptive rights. Except as set forth herein, there are no other shares of capital stock of the Corporation outstanding. As of the date hereof, the Class B Preferred Stock, Class C Preferred Stock and Class D Preferred Stock are convertible into 5,710,425, 878,527 and 2,196,317 shares of Common Stock, respectively. The Corporation has also entered into an agreement, dated as of December 31, 1999, with Winstar Communications, Inc. with respect to the sale of 50,000 shares of the Corporation's Class E Convertible Preferred Stock, $.01 par value (the "Class E Preferred Stock"), and an option to acquire an additional 50,000 shares of the Corporation's Class E Convertible Preferred Stock. The 50,000 shares of Class E Preferred Stock subject to sale are convertible into 9,689,922 shares of Common Stock, representing an initial conversion price of $5.16 per share of Common Stock. Upon issuance of the Common Stock underlying such preferred shares, in accordance with their respective Certificates of Designation, such Common Stock will be validly issued, fully paid and non-assessable. (b) Options, Warrants, Convertible Securities. Except as set forth on Schedule 4.5(a) hereto, as of the date hereof there are no outstanding subscriptions, options, warrants or other agreements or rights of any kind to acquire any additional shares of capital stock of the Corporation 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 Corporation committed to issue any such option, warrant, right or security. Except as set forth on Schedule 4.5(b) hereto, the Corporation 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. Schedule 4.5(a) additionally sets forth (i) all of the outstanding warrants of the Corporation, specifying the exercise prices and periods of such warrants and amount of Common Stock issuable upon exercise of such warrants; and (ii) stock options of the Corporation, specifying the exercise prices and periods of such options and the amount of Common Stock issuable upon exercise of the stock option held by each such holder. As of January 31, 2000, 96,605,853 shares of Common Stock are issuable upon exercise or conversion of all of the Corporation's outstanding options, warrants, and other rights of any kind to acquire shares of the Corporation's Common Stock (which number includes the number of shares of Common Stock underlying the shares of preferred stock to be issued to Winstar Communications, Inc. in connection with its equity investment in the Company but does not include the Class B Warrants issued in September 1997 to MCI WorldCom, Inc.). (c) Agreements. -4- (i) Except as set forth in Schedule 4.5(c)(i), as of the date hereof, there are no agreements relating to the purchase or sale of capital stock between the Corporation and any of its shareholders or affiliates, and to the best of the Corporation's knowledge, there are no such agreements among any of its shareholders and other parties. (ii) Except as contemplated hereby and as set forth in Schedule 4.5(c)(ii), there are no agreements or understandings granting to any person or entity any right to cause the Corporation or any Subsidiary to effect a registration under the Securities Act of 1933, as amended ("Securities Act"), of any shares of the Corporation's capital stock. (iii) Except as set forth on Schedule 4.5(c)(iii), there are no voting trusts, voting agreements, proxies or other agreements, instruments or understandings with respect to the voting of the capital stock of the Corporation between the Corporation and any of its shareholders or affiliates and to the best of the Corporation's knowledge, there are no such agreements among any of its shareholders and any other parties. (d) Due Authorization. The 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 and will have the rights, preferences and privileges specified in the Class F Certificate of Designation. The shares of the Corporation's Common Stock issuable upon conversion of the Shares ("Conversion Shares") are duly authorized and have been reserved for issuance and, when issued upon conversion in accordance with the terms of the Class F 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 the 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 Shares nor the contemplated issuance or delivery of the Conversion Shares is subject to or will trigger any preemptive or other similar right of shareholders of the Corporation, any anti-dilution right or right of first refusal or other preemptive or similar right in favor of any person, in each case except for rights that have been listed on Schedule 4.5(d). (e) Securityholders. Schedule 4.5(a) sets forth the name and address of each record holder of more than five-percent of the outstanding shares of any of the Common Stock, the Class A Preferred Stock, the Class B Preferred Stock, the Class C Preferred Stock, the Class D Preferred Stock and the Class E Preferred Stock and the number of such shares of Common Stock or Preferred Stock held by each such holder. (f) Reservation of Shares. The Corporation has reserved, and at all times from and after the date hereof will keep reserved, free from preemptive rights, out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of all shares of Class A Preferred Stock, Class B Preferred Stock, Class C Preferred Stock, Class D Preferred Stock, Class E Preferred Stock and Class F Preferred Stock, sufficient shares of Common Stock to provide for the conversion of all such shares of Preferred Stock. -5- 4.6. Securities Laws; Applicable Corporation Laws. (a) The sale of the Shares contemplated hereby is exempt from registration under the Securities Act. The issuance of all other shares of capital stock of the Corporation on or before the date hereof has been made in compliance with the Securities Act and all applicable state securities or blue sky laws. (b) The sale of the Shares contemplated hereby and the other transactions contemplated hereby are in compliance with all applicable laws, including the Minnesota Business Corporation Act, and any consents which are required to be obtained pursuant to such laws have either been obtained or waived in writing. 4.7. Financial Information. (a) Schedule 4.7 sets forth (i) the audited consolidated balance sheet of the Corporation at December 31, 1998 (the "Balance Sheet") and the related statements of operations, shareholders' equity and cash flows of the Corporation for the 12 months then ended and (ii) the unaudited consolidated balance sheet of the Corporation at September 30, 1999 (the "Interim Balance Sheet") and the related unaudited consolidated statements of operations, shareholders' equity and cash flows for the Corporation for the 9 months then ended (collectively, the "Financial Statements"). (b) The Financial Statements: (i) present fairly the financial position of the Corporation and the results of operations, shareholders' equity and cash flows of the Corporation at the dates and for the periods indicated, (ii) are in accordance with the books and records of the Corporation which books and records are complete and correct and fairly reflect all material transactions of the Corporation's business, and (iii) have been prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied (except as set forth in the notes thereto and subject, in the case of unaudited Financial Statements, to normal year-end adjustments, and the absence of notes thereto). Except as incurred under agreements on Schedule 4.10(a) or as set forth on Schedule 4.7, at the date of the Interim Balance Sheet, the Corporation did not have any material Liability of any nature or any loss contingency (as such term is used in the Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975) that was not adequately disclosed or provided for on the Interim Balance Sheet, including the notes thereto. For purposes of this Agreement, "Liability" means any liability or obligation, whether known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated and whether due or to become due, regardless of when asserted. 4.8. Absence of Changes. (a) Since the date of the Interim Balance Sheet there has not been: (i) any change in the assets, liabilities or financial condition of the Corporation (on a consolidated basis), except for changes (i) in the ordinary course of -6- business or (ii) which in the aggregate have not resulted in and would not reasonably be expected to result in a Material Adverse Effect; (ii) 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; (iii) to the best of the Corporation's knowledge, any damage, destruction or loss (whether or not covered by insurance) affecting any asset of the Corporation in excess of $100,000; (iv) any liability or loss contingency incurred by the Corporation that would have to be disclosed on financial statements (including the notes thereto) (on a consolidated basis) in accordance with GAAP, other than liabilities incurred in the ordinary course of business consistent with past practice; (v) to the best of the Corporation's knowledge, any commitment to borrow money from or provide financial support to any person or entity entered into by the Corporation; (vi) any payment or discharge of any Liability by the Corporation outside the ordinary course of business consistent with past practice to the best of the Corporation's knowledge; (vii) any sale, assignment, license, or other disposition of any asset or right of the Corporation or any Subsidiary outside the ordinary course of business consistent with past practice; (viii) any declaration or payment of any dividend or other distribution with respect to any shares of capital stock of the Corporation, or the direct or indirect acquisition of any equity securities by the Corporation; (ix) any labor trouble, problem or grievance affecting the business of the Corporation other than such matters which would not reasonably be expected to have a Material Adverse Effect; (x) any write-down of the value of any inventory of the Corporation, or any write-off as uncollectible of any accounts or notes receivable of the Corporation, which could reasonably be expected to result in a Material Adverse Effect; (xi) any increase in the direct or indirect compensation of senior officers of the Corporation or any Subsidiary (including, without limitation, any increase pursuant to any bonus, pension, profit-sharing, deferred compensation, or other plan or commitment), in excess of 20% above the prior year; (xii) any capital expenditure or commitment therefor by the Corporation or any Subsidiary for additions to property, plant or equipment in excess of $250,000; -7- (xiii) any change in the accounting or tax methods, practices, or assumptions followed by the Corporation or any Subsidiary; or (xiv) any other transaction or event not in the ordinary course of business consistent with past practice. (b) The Corporation's independent accountants have not advised the Corporation that the Interim Balance Sheet and the related unaudited financial statements (i) do not comply in all material respects with the applicable accounting requirements of the Securities Act and the related published rules and regulations thereunder and (ii) are not in conformity with GAAP. 4.9. Reserved. 4.10. Agreements. (a) Schedule 4.10(a) sets forth a list of all material written and oral contracts, agreements, licenses, commitments, instruments and understandings ("Agreements"), and all Agreements of the following types regardless of materiality, to which the Corporation or any Subsidiary is a party ("Disclosed Agreements"): (i) individually provide for the future purchase by the Corporation or any Subsidiary of products or services in excess of $50,000 or call for expenditures of the Corporation or any Subsidiary in excess of $50,000, which expenditures or commitments have not been disclosed in the Initial Budget annexed to Schedule 4.10(a) hereto; (ii) provide for the employment by the Corporation or any Subsidiary of any director or officer or consultant (other than for legal or accounting services) earning $100,000 or more for any engagement or provide for any payments or benefits (including severance payments or benefits) to any director, officer or employee; (iii) provide for the borrowing of money or a line of credit by the Corporation or any Subsidiary, or a leasing transaction of a type required to be capitalized by the Corporation in accordance with GAAP; (iv) provide for a strategic relationship regarding the Corporation or any Subsidiary and a third party, including any joint venture, partnership or similar arrangement; (v) provide for the sale, assignment, license, or other disposition of any asset or any material right of the Corporation with a value in excess of $30,000; (vi) provide for the lease by the Corporation or any Subsidiary of any real property; -8- (vii) provide for the lease by the Corporation or any Subsidiary of any personal property with a value, or reflecting replacement costs, in excess of $30,000 or involving lease payments in excess of $30,000 per year; (viii) were entered into with any labor union; (ix) provide for a tax sharing; (x) provide for any distribution, agency, or licensing arrangement with the Corporation or any Subsidiary; (xi) require the Corporation to issue dividends or shares of its Common Stock upon exercise of warrants; (xii) restrict the Corporation or any Subsidiary, or any of the officers or employees listed on Schedule 4.10(a)(ii), from engaging in any business activity in any way related to the business of the Corporation anywhere in the world, restrict any such person in the performance of his or her obligations and responsibilities to the Corporation or any Subsidiary, or create any other obligation or liability of any such person, in any way related to the business of the Corporation, arising from his or her prior employment; (xiii) grant to any person or entity, other than the Corporation or any Subsidiary, any right, title, or interest in any invention or know-how conceived by employees of the Corporation or any Subsidiary and related to the business of the Corporation; (xiv) provide for a loan guaranty, surety, indemnity, or other financial support by the Corporation or any Subsidiary to any person or entity; or (xv) grant to any person or entity a security interest in any asset or right of the Corporation or any Subsidiary. (b) Each Disclosed Agreement or understanding required to be set forth on Schedule 4.10(a) is in full force and effect and constitutes a valid and binding obligation of all parties thereto. Except as set forth on Schedule 4.10(a), the Corporation and, to the extent a Subsidiary is a party, the Subsidiary has performed in all material respects the obligations required to be performed by it and is not in material default and has not received notice alleging it to be in default under any such Disclosed Agreement. To the knowledge of the Corporation, there exists no event or condition which, after notice or lapse of time, or both, would constitute such a material default under any Disclosed Agreement. To the knowledge of the Corporation, there are no material defaults by any other party to any such Disclosed Agreement. The Corporation has made available to the Purchaser correct and complete copies of all Disclosed Agreements set forth on Schedule 4.10(a). -9- 4.11. Title to Assets. Except for properties leased by the Corporation or any Subsidiary, the Corporation and each Subsidiary has good and marketable title to all assets reflected on the Interim Balance Sheet as being owned by it, or acquired by it after the date of the Interim Balance Sheet (except for inventory sold or otherwise disposed of in the ordinary course of business, and accounts and notes receivable paid in full, since the date of the Interim Balance Sheet), free and clear of all Encumbrances, other than Permitted Liens and other than those which would not reasonably be expected to result in a Material Adverse Effect. Such assets are in good operating condition and repair, are adequate and suitable for their intended use in the business of the Corporation and are sufficient for the conduct of the business except as would not reasonably be expected to result in a Material Adverse Effect. There does not exist any condition which interferes with the economic value or use of such assets except as would not reasonably be expected to result in a Material Adverse Effect. The term "Permitted Liens" means (i) liens arising by operation of law in the ordinary course of business that, individually and in the aggregate, do not in any respect interfere with the use or value of any of the assets subject thereto, (ii) minor imperfections of title which do not detract from the value of the property affected or impair the operations of the Corporation, (iii) liens for taxes not yet due and payable, (iv) liens arising in connection with debt incurred pursuant to and in accordance with the covenant section, and (v) liens relating to monies borrowed by the Corporation or any Subsidiary. 4.12. Real Property. Except as disclosed on Schedule 4.12, neither the Corporation nor any Subsidiary owns or holds, directly or indirectly, any real property. Neither the Corporation nor any Subsidiary leases, directly or indirectly, any real property other than as listed on Schedule 4.12. 4.13. Intellectual Property Rights; Proprietary Information of Third Parties. (a) Each of the Corporation and each Subsidiary owns or is licensed to use all patents, trademarks, copyrights, service marks, and applications and registrations therefor, and all trade names (including WAM!NET, WAM!BASE and WAM!PROOF), domain names, URLs, customer lists, trade secrets, proprietary processes and formulae, inventions, know-how, other confidential and proprietary information, and other industrial and intellectual property rights necessary to permit such entities to carry on their respective business as presently conducted. Schedule 4.13 sets forth a list of all patents, trademarks, copyrights, service marks, and applications and registrations therefor, and all trade names, domain names or URLs held or owned by the Corporation and each Subsidiary and all other proprietary intellectual property rights of the Corporation and each Subsidiary. All registered patents, copyrights, trademarks, domain name and URL rights and service marks listed on Schedule 4.13 are in full force and effect and are not subject to any taxes or maintenance fees and the Corporation or a Subsidiary has the right to bring infringement Proceedings with respect thereto. Neither the Corporation nor any Subsidiary (i) licenses or grants to anyone other than to the Corporation or any Subsidiary rights of any nature to use any intellectual property right that is material to its business, other than certain software and equipment which is provided to the Corporation's clients which enable them to access the Corporation's network and avail themselves of the Corporation's services, (ii) -10- is not obligated to and does not pay royalties to anyone for use of its intellectual property rights, and (iii) does not market or sell any product or service that violates any intellectual property right of a third party. Except as set forth on such Schedule, there is no pending or, to the knowledge of the Corporation, threatened claim or litigation against the Corporation or any Subsidiary contesting the right to use its intellectual property rights, asserting the misuse of any thereof, or asserting the infringement or other violation of any intellectual property rights of a third party. (b) All inventions and know-how conceived by employees of the Corporation and each Subsidiary, while in the employ of the Corporation or such Subsidiary, and related to the business of the Corporation or any Subsidiary were "works for hire," and all right, title, and interest therein were transferred and assigned to the Corporation or a Subsidiary and the Corporation or a Subsidiary has maintained all right, title and interest therein without any Encumbrances thereon. The Corporation has taken all reasonable security measures to protect the secrecy, confidentiality, and value of its trade secrets, proprietary processes and formulae, inventions, know-how and other confidential and proprietary information. (c) No third party has claimed or, to the Company's knowledge, has reason to claim that the Corporation or any Subsidiary has (i) violated or may be violating any of the terms or conditions of any non-competition or non-disclosure agreement with such third party, (ii) disclosed or may be disclosing or utilized or may be utilizing any trade secret or proprietary information or documentation of such third party or (iii) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. Neither the Corporation or any Subsidiary has utilized nor proposes to utilize any trade secret or any information or documentation proprietary to any other person in violation of existing arrangements with such person, and neither the Corporation or any Subsidiary 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 Corporation or any Subsidiary. 4.14. Compliance with Laws; Governmental Authorizations. Each of the Corporation and each Subsidiary is in compliance in all respects with all Laws, except for such instances where non-compliance would not result in a Material Adverse Effect. Each of the Corporation and each Subsidiary has all permits, licenses, authorizations, registrations, franchises, approvals, certificates or variances (collectively, "Permits") from each Governmental Authority that is necessary or advisable in the conduct of its business as presently conducted except in such cases which would not reasonably be expected to result in a Material Adverse Effect. For purposes of this Agreement, "Governmental Authority" means any federal, state, municipal, local or foreign government and any court, tribunal, administrative agency, commission, board, agency or other governmental or regulatory authority or agency, whether domestic or foreign. Neither the Corporation nor any Subsidiary is licensed to provide communication services under any state, federal or foreign laws nor is any one of them required to be so licensed. -11- 4.15. Litigation. Except as set forth on Schedule 4.15, there are no (i) actions, suits, claims, investigations or other proceedings (collectively, "Proceedings") by or before any Governmental Authority or other arbitration or mediation body, pending or, to the knowledge of the Corporation, threatened against the Corporation or any Subsidiary, or (ii) judgments, writs, decrees, injunctions, compliance agreements, or orders of any Governmental Authority or other arbitration or mediation body, against the Corporation or any Subsidiary. 4.16. Environmental Matters. Each of the Corporation and each Subsidiary is in compliance with all Laws relating to the protection of the environment (the "Environmental Laws"). Except for the operation of machinery and equipment in the ordinary course of business in compliance with applicable Environmental Laws, neither the Corporation nor any Subsidiary has handled, stored or released, or exposed any person to, any hazardous substance, as defined in 42 U.S.C.A. Section 9601(14) or any other applicable Environmental Laws (a "Hazardous Substance"). Neither the Corporation nor any Subsidiary is liable or responsible for clean-up costs, remedial work or damages in connection with the handling, storage, release, or exposure by it of any Hazardous Substance except in cases which would not reasonably be expected to result in a Material Adverse Effect. No claims for clean-up costs, remedial work or damages have been made by any person or entity in connection with the handling, storage, release, or exposure by the Corporation and/or any Subsidiary of any Hazardous Substance. 4.17. Tax Matters. (a) (i) The Corporation has timely filed or been included in all required returns, declarations of estimated tax, reports, and statements relating to any Taxes due and payable by it (collectively, the "Returns"); (ii) all Returns were correct and complete as of the time of filing; (iii) the Corporation has timely paid all Taxes required to be paid by it through the date hereof; (iv) the Corporation has made provision on its most recent interim balance sheet for all Taxes payable by it for all periods prior to the date of such interim balance sheet for which no Returns have yet been filed; (v) the Corporation has made provision on its books for all Taxes payable by it for all periods beginning on or after the date of its most recent interim balance sheet for which no Returns have yet been filed; (vi) the Corporation has no knowledge of any pending tax audits of any Returns; (vii) the Corporation has no knowledge that any deficiency or addition to any Taxes has been proposed, asserted or assessed in writing against the Corporation; and (viii) the Corporation has not granted any extension of the statute of limitations applicable to any Return or other claim for Taxes. (b) "Taxes" means, with respect to any person or entity, (i) all material Federal, state, local, and foreign taxes, including, without limitation, all taxes on or based upon net income, gross income, income as specially defined, earnings, profits or selected items of income, earnings, or profits, and all gross receipts, sales, use, ad valorem, transfer, franchise, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, or windfall profits taxes, alternative or add-on minimum taxes, customs duties, or other -12- taxes, fees, assessments or charges of any kind, together with any interest, penalties, additions to tax or additional amounts imposed by any taxing authority on such person or entity, and (ii) any material liability for the payment of any amount of the type described in the preceding clause (i) as a result of being a "transferee" (within the meaning of Section 6901 of the Internal Revenue Code of 1986, as amended (the "Code"), or any other applicable Laws) of another person or entity. 4.18. Employee Benefit Plans. (a) Schedule 4.18 sets forth a list of all "employee pension benefit plans" and "employee benefit plans," as defined in Section 3(2) and (3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), and other written or formal plans or group arrangements involving direct or indirect compensation (not including any government-mandated programs) currently or previously maintained or contributed by the Corporation or any ERISA Affiliate for the benefit of any employee or former employee thereof under which the Corporation and/or any Subsidiary has or may have any present or future obligation or liability (collectively, the "Employee Plans"). "ERISA Affiliate" means any entity which is a member of (i) a "controlled group of corporations," as defined in Section 414(b) of the Code, (ii) a group of entities under "common control," as defined in Section 414(c) of the Code, or (iii) an "affiliated service group," as defined in Section 414(m) of the Code, any of which includes the Corporation. (b) Schedule 4.18 further sets forth a list of all plans, trusts, or arrangements (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' compensation, medical benefits, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock appreciation, or other forms of incentive compensation, insurance or benefits (collectively, the "Benefit Arrangements") that (i) are not Employee Plans, (ii) are maintained or contributed to by the Corporation or any Subsidiary, and (iii) cover any director, officer, employee, or former employee of the Corporation or any Subsidiary. (c) Each Employee Plan and Benefit Arrangement has been maintained in substantial compliance with its terms and with the requirements prescribed by applicable Laws. There has not been any "accumulated funding deficiency," as defined in Section 412 of the Code, with respect to any Employee Plan. There has not been any partial or complete withdrawal by the Corporation or any Subsidiary with respect to any Employee Plan which is a "multiemployer plan," as defined in Section 3(37) of ERISA, and the Corporation has no current plans to withdraw from any such Employee Plan. Except as set forth on Schedule 4.18, neither the Corporation or any Subsidiary is in default or alleged to be in default in the payment or other provision of any benefit under any Employee Plan or Benefit Arrangement. Except as set forth on Schedule 4.18, no actions have been taken or are currently planned with respect to any Employee Plan or Benefit Arrangement that would increase the expense of maintaining or the benefits provided under such Employee Plan or Benefit Arrangement above the level of the expense incurred or benefits provided in respect thereof for each of the years 1999 and 1998. (d) The execution and delivery by the Corporation of the Documents and its consummation of the transactions contemplated thereby will not constitute a triggering event -13- under any Employee Plan or Benefit Arrangement that will, or upon the occurrence of subsequent events would, accelerate the time of payment or vesting, or increase the amount of compensation or benefits, for any director, officer, employee, or former employee of the Corporation. 4.19. Insurance. The Corporation maintains valid and effective insurance policies, issued by financially sound and reputable insurers, to insure it against all risks usually insured against by persons or entities conducting businesses similar to that of the Corporation or such Subsidiary in the locality in which such businesses are conducted. The Corporation has paid all due premiums with respect to all policies of insurance currently maintained by the Corporation. 4.20. Related Transactions. (a) Except as set forth on Schedule 4.20, and except for compensation to regular employees, since January 1, 1998, no current director or executive officer of the Corporation or holder of at least 5% of the outstanding capital stock of the Corporation has been (i) a party to any transaction with the Corporation valued in excess of $60,000 during any twelve-month period, or (ii) the direct or indirect owner of an interest in any business organization that is or was a competitor, supplier or customer of the Corporation (other than interests in non-affiliated publicly held companies). 4.21. Offering of the Shares. The Corporation has not, directly or indirectly, solicited any other offer to buy or offer 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 Shares in a manner that would require the Shares to be registered under the Securities Act. 4.22. Disclosure. The Corporation has filed all required registration statements, reports and proxy statements with the Securities and Exchange Commission ("SEC Reports") when due (or within permitted extension periods) in accordance with the Securities Act and the Securities Exchange Act of 1934, as amended ("Exchange Act"), as the case may be. As of their respective dates (or, in the case of any amended SEC Report, as of the date of the amendment), the SEC Reports complied in all material respects with all applicable requirements of the Securities Act or the Exchange Act, as the case may be. As of their respective dates (or, in the case of any amended SEC Report, as of the date of the amendment), none of the SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. This Agreement does not contain an untrue statement of a material fact nor does it omit 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 Corporation and supplied to SGI or its counsel in -14- connection with the transactions contemplated hereby (other than those relating to (i) projected financial information, (ii) plans and objectives regarding the Corporation'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 other than, however, that such representations are reasonable in light of existing or known facts or trends and were prepared in good faith) 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. 4.23. Reserved. 4.24. Reserved. 4.25. Brokers and Finders. No person or entity acting on behalf or under the authority of the Corporation is or will be entitled to any broker's, finder's, or similar fee or commission in connection with the sale of the Shares. 4.26. Year 2000 Compliance. (a) The Corporation and each Subsidiary has used (or is in the process of using) appropriate procedures to verify that its software which is licensed or otherwise provided to its customers and the 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 the Corporation and each Subsidiary has used (or is in the process of using) reasonable efforts to ensure that 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). (b) The Corporation has (i) analyzed the operations of the Corporation and the Subsidiaries that could be adversely affected by failure to become Year 2000 compliant and (ii) developed a plan for becoming Year 2000 compliant in a timely manner, the implementation of which is on schedule in all material respects. The disclosure in the Corporation's Exchange Act reports (e.g., Form 10-K, 10-Q, etc.) regarding the progress of the Year 2000 compliance program and Year 2000 remediation were accurate when made. (c) Based upon responses to its inquiries to its suppliers and vendors, the Corporation reasonably believes any suppliers and vendors that are material to the operations of the Corporation and the Subsidiaries will be Year 2000 compliant for their own computer applications except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect. 4.27. Reserved. -15- Section 5. Representations and Warranties of the Purchaser. Each Purchaser represents and warrants to the Corporation on behalf of itself (and not any other Purchaser) as of the date hereof and the Closing Date that: 5.1. Due Authorization. The Purchaser has taken all action necessary to authorize its execution and delivery of the Documents to which it is a party, the performance of its obligations thereunder, and its consummation of the transactions contemplated thereby. Each Document to which the Purchaser is a party has been executed and delivered by an officer of the Purchaser in accordance with such authorization or by the Purchaser. Each Document to which the Purchaser is a party constitutes a valid and binding obligation of the Purchaser, enforceable in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium, and similar laws affecting creditors' rights generally and to general principles of equity. 5.2. Investment Representations. (a) The Purchaser is acquiring the Shares for its own account, for investment and not with a view to the distribution thereof, nor with any present intention of distributing the same. (b) The Purchaser understands that the Shares have not been, and the Conversion Shares will not be, registered under the Securities Act or applicable state securities laws, by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act, and such shares must be held indefinitely unless subsequent disposition thereof is registered under applicable securities laws or is exempt from registration. (c) The Purchaser understands that the exemption from registration afforded by Rule 144 (the provisions of which are known to the Purchaser) promulgated under the Securities Act depends on the satisfaction of various conditions and that, if applicable, Rule 144 may only afford the basis for sales under certain circumstances and only in limited amounts. (d) The Purchaser is an "accredited investor," as such term is defined in Rule 501 (the provisions of which are known to the Purchaser) promulgated under the Securities Act. (e) The Purchaser has such knowledge and experience in financial, tax and business matters so as to enable the Purchaser to utilize the information made available to the Purchaser in connection with the investment in the Shares to evaluate the merits and risks of an investment in the Shares and to make an informed investment decision with respect thereto; provided, however, that the foregoing shall in no way affect, diminish or derogate from the representations and warranties made by the Corporation hereunder or the right of the Purchaser to rely thereon and to seek indemnification hereunder. (f) The Purchaser has not been formed for the specific purpose of acquiring the Shares. -16- (g) The Purchaser hereby acknowledges that the purchase and sale of the Shares is intended to be exempt from registration under the Securities Act by virtue of Section 4(2) and/or Section 3(b) of the Securities Act and, if applicable, in the sole judgment of the Corporation, the provisions of Regulation D thereunder, which exemption is dependent upon the truth, completeness and accuracy of the statements made by the Purchaser herein and in any other documents furnished by the Purchaser to the Corporation. 5.3. Brokers and Finders. No person or entity acting on behalf or under the authority of the Purchaser is or will be entitled to any broker's, finder's, or similar fee or commission in connection with the transactions contemplated hereby. 5.4. Investor Sophistication. Purchaser has sufficient knowledge and experience and is capable of evaluating the merit and risks of its investment in the Corporation as contemplated by this Agreement and is able to bear the economic risk of such investment for an indefinite period of time. Purchaser has been given access to SEC Reports. Purchaser has had the opportunity to ask questions of and receive answers from representatives of the Corporation concerning the terms and conditions of this Agreement, to discuss the Corporation's business, management and financial affairs with the Corporation's management and to obtain any other additional information Purchaser desires or deems relevant. 5.5. Reserved. Section 6. Covenants of the Corporation and the Purchaser. 6.1. Regulatory Approvals; Reasonable Best Efforts; Further Assurances. The Corporation and the Purchaser acknowledge that certain regulatory or governmental approvals may be required to lawfully consummate the transactions contemplated by this Agreement. Subject to the terms and conditions of this Agreement, the Corporation and the Purchaser will, and will cause their Affiliates to, use their reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or desirable under applicable laws and regulations to consummate the transactions contemplated by this Agreement. The Corporation and the Purchaser agree to execute and deliver such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable in order to consummate or implement expeditiously the transactions contemplated by this Agreement. 6.2. Certain Filings. The Corporation and the Purchaser will, and will cause their Affiliates to, cooperate with one another (i) in determining whether any action by or in respect of, or filing with, any governmental body, agency, official or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with -17- the consummation of the transactions contemplated by this Agreement or the conversion by such Purchaser of such Purchaser's Shares and (ii) in taking such actions or making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such actions, consents, approvals or waivers. Without limiting the generality of the foregoing, the Corporation and the Purchaser obligated to file a notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act") shall promptly after the date of this Agreement prepare and file the notifications required under the HSR Act in connection with the transactions contemplated by this Agreement. The Corporation and the Purchaser shall (A) give the other parties prompt notice of the commencement of any action, suit, litigation, arbitration, preceding or investigation by or before any governmental body with respect to the transactions contemplated by this Agreement, (B) keep the other parties informed as to the status of any such action, suit, litigation, arbitration, preceding or investigation, and (C) promptly inform the other parties of any communication to or from the Federal Trade Commission, the Department of Justice or any other governmental body regarding the transactions contemplated by this Agreement. 6.3. Confidentiality. Except as set forth in Section 6.4 below and as required by applicable securities laws upon the advice of counsel, without the consent of the other party, neither the Corporation nor any Purchaser 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 to strictly comply with the foregoing. 6.4. Public Announcements. Neither party to this Agreement may publicly disseminate a press release or file a public report (on Form 8-K or otherwise) with the Securities and Exchange Commission or otherwise publicly announce the transactions contemplated by this Agreement, unless the other parties consent. Such parties shall not unreasonably withhold or delay their approval to any such proposed announcements. Section 7. Covenants of the Corporation. Unless otherwise indicated, and as long as any of the Shares or Conversion Shares remain outstanding, the Corporation shall and shall cause each Subsidiary to abide and perform with respect to the following covenants: 7.1. Certificate of Designation. Following the execution of this Agreement, the Corporation shall cause to be filed the Class F Certificate of Designation as required pursuant to the law of the State of Minnesota. -18- 7.2. Restrictions Pending the Closing. After the date hereof and prior to the Closing Date, except as expressly provided for in this Agreement or as consented to in writing by the Purchaser, the Corporation will not: (i) amend its certificate of incorporation or bylaws, except to file the Class F Certificate of Designation; (ii) split, combine or reclassify any shares of its capital stock without appropriately adjusting the conversion price and/or ratio applicable to the Shares prior to their issuance at the Closing; (iii) declare or pay any dividend or distribution (whether in cash, stock or property) in respect of its Common Stock; (iv) take any action, or knowingly omit to take any action, that could reasonably be expected to result in (A) any of the representations and warranties of the Corporation set forth in Article 4 becoming untrue or (B) any of the conditions to the obligations of the Purchaser set forth in Section 8.1 or 8.2 not being satisfied; or (v) enter into any agreement or commitment to do any of the foregoing. 7.3. Reservation of Shares. For so long as any of the Shares are outstanding, the Corporation shall keep reserved for issuance a sufficient number of shares of Common Stock to satisfy its conversion obligations under the Class F Certificate of Designation. 7.4. Use of Proceeds. The Corporation shall use the cash proceeds received by it upon the sale of the Shares for general working capital purposes. 7.5. Access to Records. The Corporation shall, and shall cause each Subsidiary to, afford to the Purchaser and its authorized employees, counsel, accountants and other representatives, upon reasonable notice and during ordinary business hours, (i) full access to all books, records and properties of the Corporation and such Subsidiary, and (ii) the opportunity to interview any officer of the Corporation or such Subsidiary regarding its affairs; any investigation pursuant to this Section shall be conducted in a manner that does not interfere unreasonably with the conduct of the business of the Corporation and such Subsidiary. 7.6. Reserved. 7.7. Financial Reporting and other Information. -19- (a) So long as the Purchaser beneficially owns Shares or Conversion Shares, the Corporation shall deliver to such Purchaser the following: (i) within 30 days after the end of each month, commencing with the month of December, (A) the unaudited balance sheet of the Corporation at the end of such month, (B) the unaudited statements of income and cash flows of the Corporation for such month, (C) comparative statements of income of the Corporation for the year to date, the comparable figures for the prior year, the current Budget for the year to date and projected figures for the year and (D) textual discussion describing changes from prior periods and describing operating trends; (ii) within 45 days after the end of each fiscal quarter, commencing with the quarterly period ending March 31, 2000, (A) the unaudited balance sheet of the Corporation at the end of such fiscal quarter, (B) the unaudited statements of income and cash flows of the Corporation for such fiscal quarter, and (C) comparative statements of income of the Corporation for such fiscal quarter and the year to date, the comparable figures for the corresponding fiscal quarter and the year to date period of the prior year and the current Budget for such fiscal quarter and for the year to date; and (iii) within 90 days after the end of each fiscal year commencing with the current fiscal year of the Corporation, (A) the audited balance sheet of the Corporation at the end of such fiscal year, together with comparisons to the balance sheet of the Corporation at the end of the prior fiscal year and to the current Budget, (B) the audited statements of income and cash flows of the Corporation for such fiscal year, together with comparisons to the statements of income and cash flows of the Corporation for the prior fiscal year and to the current Budget, and (C) an audit report of Ernst & Young, independent certified public accountants, on such balance sheets and statements; and (iv) any other financial and operating data and other information relating to the Corporation and each Subsidiary as the Purchaser may reasonably request; (v) all information made available to the Corporation's shareholders or directors, at the same time as such information is delivered to such persons; and (vi) monthly management reports in a form reasonably acceptable to the Purchaser. (b) All financial information to be delivered under this Section shall be in accordance with the books and records of the Corporation and shall have been prepared in accordance with GAAP, subject to year-end and audit adjustments. 7.8. Payment of Obligations. The Corporation shall, and shall cause each Subsidiary to, pay or discharge or cause to be paid or discharged all material claims or demands, and all Taxes levied or imposed upon the Corporation or its Subsidiaries or upon the income, profits or property of the Corporation or its -20- Subsidiaries; provided, however, that the Corporation or such Subsidiary shall not be required to pay or discharge or cause to be paid or discharged any such claim, demand, or Tax the amount, applicability or validity of which is being contested in good faith by appropriate proceedings and for which adequate provision has been made. 7.9. Insurance. The Corporation shall, and shall cause each Subsidiary to, maintain with financially sound and reputable insurers such insurance as may be required by law and such other insurance, to such extent and against such hazards and liabilities, as is customarily maintained by companies similarly situated and exercising sound business practice. 7.10. Certain Notices. The Corporation shall promptly notify the Purchaser of (i) the commencement or notice of any threat of any Proceeding, dispute or grievance against or affecting the Corporation, which, if adversely determined, might reasonably be expected to have a Material Adverse Effect, (ii) any material default under any indebtedness of the Corporation and (iii) any material default or breach under any of the items required to be listed on Schedule 4.10(a) or any of the items which would have been required to be listed on Schedule 4.10(a) if such item were effective prior to the date hereof. 7.11. Conduct of Business. The Corporation shall (i) take all actions required to assure that the Corporation remains duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) take all actions required to assure that the Corporation maintains all Permits to conduct its business, and (iii) conduct its business in compliance with all Laws. 7.12. Related Transactions. Excluding any existing arrangements between Winstar Communications, Inc. and MCI WorldCom, Inc., the Corporation shall not directly or indirectly enter into any transaction with any Related Party, other than any transaction entered into in the ordinary course of business and on terms and conditions not less favorable to the Corporation as the terms and conditions which would apply in a similar transaction negotiated on an arms-length basis with a party that is not a Related Party. "Related Party" means (a) each current or future director or executive officer of the Corporation, (b) each parent, sibling, spouse, or descendant of any of the foregoing, (c) each entity of which any of the foregoing is a director, officer, partner or holder of more than 10% of the outstanding voting power of any class of capital stock and (d) any person or entity which is the beneficial owner of 5% or more of the outstanding voting power of the Corporation. 7.13. Internal Controls. (a) Internal Controls. -21- The Corporation maintains and will continue to maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets and (iii) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 7.14. Reserved. 7.15. Reserved. 7.16. Purchaser Lock-Up. The Purchaser agrees that, without the consent of the Corporation, it will not directly or indirectly offer, sell, dispose of, pledge, encumber or otherwise transfer any of the Shares or the Conversion Shares until six months after the consummation of the Company's initial public offering of Common Stock. 7.17. Reserved. 7.18. Consents. Prior to the Closing, the Corporation shall use its commercially reasonable best efforts to obtain all consents and approvals of third parties, if any, required to consummate the transactions contemplated by this Agreement so that such consummation shall not conflict with or cause a breach of or default under any agreement or other obligation binding upon the Corporation, including without limitation all such consents and approvals required with respect to its obligations for borrowed money and under its Articles of Incorporation and Certificates of Designation. Section 8. Registration Rights of the Purchaser. 8.1. Demand Registration. (a) Grant of Right. The Corporation agrees to register on two occasions, upon written demand ("Initial Demand Notice") of the Purchaser, all of the Conversion Shares, regardless of whether the Shares have been converted (the "Registrable Securities"). The Corporation will file a registration statement covering the Registrable Securities within 60 days after receipt of the Initial Demand Notice and use its best efforts to have such registration statement declared effective promptly thereafter. The demand for registration may be made at any time during a period commencing on the earlier of (i) the six month anniversary of the consummation of the Corporation's initial public offering of its Common Stock, and (ii) the one year anniversary of the date Shares are first issued. (b) Terms. The Corporation shall bear all fees and expenses attendant to registering the Registrable Securities, including the expenses of one legal counsel selected by the -22- Purchaser to represent them in connection with the sale of the Registrable Securities but not including any and all underwriting commissions and discounts which will be the responsibility of the Purchaser participating in the underwriting. The Corporation will qualify or register the Registrable Securities in such states as are reasonably requested by the Purchaser. The Corporation shall cause any registration statement filed pursuant to the demand rights granted under this Section to remain effective with respect to the Registrable Securities covered by such registration statement until all such securities have been sold. 8.2. "Piggy-Back" Registration. (a) Grant of Right. The Purchaser shall have the right at any time and from time to time to include the Registrable Securities as part of any other registration of securities filed by the Corporation (other than pursuant to Form S-4, Form S-8 or any equivalent forms or in connection with the Corporation's initial public offering to the extent that no other selling shareholder is included in the registration statement). Notwithstanding the foregoing, if, in the written opinion of the managing underwriter or underwriters of a public offering by the Corporation of its shares of Common Stock, the inclusion of the Registrable Securities, when added to the securities being registered by the Corporation, will exceed the maximum amount of the Corporation's securities that can be marketed without materially and adversely affecting the entire offering, then (i) the Corporation will include in such registration first, only those securities, the holders of which as of the date hereof have piggy-back registration rights (as listed on Schedule 8.2), second, the Registrable Securities allocated (if necessary) among the holders thereof on a pro rata basis based on the number of Registrable Securities requested to be included in such registration statement, and third, capital stock of the Corporation to be sold for the account of others with applicable piggy-back registration rights, with such priorities among them as the Corporation shall decide. If, subsequent to the exercise of all of the demand registration rights referred to in Section 8.1, any Registrable Securities requested to be included in an offering ("Other Offering") pursuant to the "piggy-back" rights described in this Section 8.2. are not so included because of the operation of the first proviso of the preceding sentence, then the holders of the Registrable Securities shall have the right to require the Corporation, at its expense, to prepare and file a registration statement under the Securities Act covering such Registrable Securities. (b) Terms. The Corporation shall bear all fees and expenses attendant to registering the Registrable Securities, including the reasonable expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities, but the Purchaser participating in the registration shall pay any and all discounts and underwriting commissions. In the event of such a proposed registration, the Corporation shall furnish the owners of the Registrable Securities with not less than 30 days written notice prior to the proposed date of filing of such registration statement. Such notice shall continue to be given for each registration statement filed by the Corporation until such time as all of the Registrable Securities have been sold by the Purchaser. The owners of the Registrable Securities shall exercise the "piggy-back" rights provided for herein by giving written notice within 15 days of the receipt of the Corporation's notice of its intention to file a registration statement. The Corporation shall cause any registration statement filed pursuant to the "piggyback" rights granted under this Section to remain effective with respect to the Registrable Securities covered -23- by such registration statement until all of the such securities have been sold by the Purchaser. Notwithstanding the foregoing, in no event shall the Corporation be obligated to maintain the effectiveness of any registration statement filed pursuant to Sections 8.1 and 8.2 for a period in excess of three years from the initial date of issuance of the Shares. 8.3. General Terms. (a) Indemnification. The Corporation shall indemnify the owner(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such person within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage, expense or liability (including all reasonable attorneys' fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement, except to the extent that any loss, claim, damage, expense or liability arises out of or relates to written information furnished by or on behalf of the Purchaser, for inclusion in such registration statement ("Purchaser Information"). The owner(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Corporation against all loss, claim, damage, expense or liability (including all reasonable attorneys' fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which it may become subject under the Securities Act, the Exchange Act or otherwise, arising from Purchaser Information furnished by or on behalf of such owner(s). (b) Exercise of Shares. Nothing contained in this Section 8 shall be construed as requiring the Purchaser to convert the Shares prior to or after the filing of any registration statement or the effectiveness thereof. (c) Documents Delivered to Holders. The Corporation shall deliver promptly to the Purchaser participating in any of the foregoing offerings who requests it, all correspondence between the Securities and Exchange Commission and the Corporation, its counsel or auditors and all memoranda relating to discussions with the Securities and Exchange Commission or its staff with respect to the registration statement. The Corporation also shall furnish to the Purchaser participating in any of the foregoing offerings that are underwritten, and to each underwriter of any such offering, a signed counterpart, addressed to the Purchaser and underwriter, of (i) an opinion of counsel to the Corporation, dated the effective date of such registration statement (and an opinion dated the date of the closing under the underwriting agreement relating to such offering), and (ii) a "cold comfort" letter dated the effective date of such registration statement (and a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Corporation's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. In the event that the Purchaser requests information pursuant to this Section (c), then, prior to -24- furnishing such information, the Corporation shall have the right to require the Purchaser to enter into a confidentiality agreement with the Corporation with respect to any information to be provided to the Purchaser that the Corporation reasonably considers to be proprietary, non-public or otherwise confidential. 8.4. Underwriting Agreement. In the event that the demand registration filed by the Purchaser pursuant to Section 8.1(a) is for an underwritten offering, then the Purchaser shall have the right to select the underwriters of the offering, which underwriters shall be reasonably acceptable to the Corporation. The Corporation shall enter into an underwriting agreement with the managing underwriter selected by the Purchaser whose Registrable Securities are being registered pursuant to Section 8.1. Such agreement shall be reasonably satisfactory in form and substance to the Corporation, each such person and such managing underwriter, and shall contain such representations, warranties and covenants by the Corporation and such other terms as are customarily contained in agreements of that type used by the underwriter. Such persons shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all of the representations, warranties and covenants of the Corporation to or for the benefit of such underwriter shall also be made to and for the benefit of such persons. Such persons shall not be required to make any representations or warranties to or agreements with the Corporation or the underwriter except as they may relate to such persons, their shares and their intended methods of distribution. 8.5. Road Show. In connection with any underwritten public offering concerning the Purchaser, the Corporation will participate in road-shows regarding such offering. 8.6. Reserved. Section 9. Conditions to Each Closing. 9.1. Conditions of Each Party. The respective obligations of each of the Corporation and the Purchaser 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; (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 Authorities in connection with the execution and delivery by the parties of the Documents and the consummation of the transactions contemplated thereby shall have been made or obtained; and (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 -25- 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. 9.2. Conditions to Obligations of the Purchaser. The obligations to be performed by the Purchaser under this Agreement at or after the Closing are subject to the satisfaction at or prior to each of the Closing of the following conditions, unless waived by the Purchaser: (a) Material Adverse Effect. There shall not have been any event which has or is reasonably likely to have a Material Adverse Effect. (b) Accuracy of Representations and Warranties. Each of the representations and warranties of the Corporation contained in this Agreement and in any certificate or other writing delivered by the Corporation 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 respective times (except to the extent it relates to a particular date). (c) Performance of Covenants. The Corporation shall have performed in all material respects all covenants and agreements required to be performed by it under this Agreement and each other Document. (d) Class F Certificate of Designation. Prior to the Closing, the Class F Certificate of Designation shall have been filed with and accepted by the Secretary of State of the State of Minnesota and shall have become effective. (e) Stock Certificates. At the Closing stock certificates representing the Class F Preferred Stock sold at such closing shall have been delivered by the Corporation to the Purchaser. (f) Use of Proceeds. At the Closing the Purchaser shall have received a certificate of the Corporation describing in reasonable detail the proposed use of proceeds received by the Corporation upon the sale of the Shares. (g) Legal Opinion. SGI shall have received an opinion dated as of the Closing Date of Willkie Farr & Gallagher, in a form and substance attached hereto as Exhibit C. (h) Officer's Certificate. At the Closing the Purchaser shall receive a certificate from an officer of the Corporation to the effect that all conditions set forth in this Section 9.2 shall have been satisfied. (i) Required Consents and Approvals. Prior to the Closing Date, the Corporation shall have received all consents and approvals of third parties, if any, required to consummate the transactions contemplated by this Agreement so that such consummation shall not conflict with or cause a breach of or default under any agreement or other obligation binding -26- upon the Corporation, including without limitation all such consents and approvals required with respect to its obligations for borrowed money and under its Articles of Incorporation and Certificates of Designation. 9.3. Conditions to Obligations of the Corporation. The obligations to be performed by the Corporation under this Agreement at or after the Closing are subject to the satisfaction at or prior to the Closing and the Option Closing, if any, of the following conditions, unless waived by the Corporation: (a) Accuracy of Representations and Warranties. Each of the representations and warranties of the Purchaser contained in this Agreement and in any certificate or other writing delivered by the Purchaser 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 respective times (except to the extent it relates to a particular date); (b) Performance of Covenants. The Purchaser shall have performed in all material respects all covenants and agreements required to be performed by it under this Agreement and each other Document to which it is a party. Section 10. 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 Corporation and the Purchaser; (b) by the Corporation, if any Purchaser 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 SGI (provided that the Corporation 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); (c) by the Purchaser, if the Corporation 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 Corporation (provided that the Purchaser 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); (d) by any party, if the Closing has not occurred on or before March 31, 2000; provided, however, that a party may not terminate this Agreement pursuant to this Section if the failure of such party to fulfill any of its obligations hereunder shall have been the principal reason that the Closing shall not have occurred on or before said date; (e) by any party if there shall be a change of law or regulation that makes consummation of the transactions contemplated hereby illegal or otherwise prohibited or if -27- consummation of the transactions contemplated hereby would violate any nonappealable, final order, decree or judgment of any court or governmental body having competent jurisdiction; or The party desiring to terminate this Agreement pursuant to the above-referenced clauses shall give notice of such termination to the other parties hereto. 10.1. Effect of Termination. (a) If this Agreement is terminated, such termination shall be without liability of either party (or any shareholder, director, officer, employee, agent, consultant or representative of such party) to the other parties to this Agreement; provided that if such termination shall result from the (i) willful failure by any party to fulfill a condition to the performance of the obligations of the other parties, (ii) failure by any party to perform a covenant of this Agreement, (iii) breach by any party hereto of any representation, warranty, covenant or agreement contained herein, or (iv) a Closing Failure by any party, such party shall be fully liable for any and all damages incurred or suffered by the other parties as a result of such failure or breach. Section 11. Miscellaneous 11.1. Survival. The representations, warranties, covenants and other agreements contained herein, shall survive the Closing and the consummation of the transactions contemplated hereby. No right of the Purchaser for indemnification hereunder shall be affected by any examination made for or on behalf of the Purchaser, the knowledge of any of the Purchaser's officers, directors, shareholders, employees or agents, or the acceptance by the Purchaser of any certificate or opinion. 11.2. Indemnification. (a) The Corporation shall indemnify, defend and hold the Purchaser and its officers, directors, employees, shareholders, partners, members, affiliates and agents harmless against all Liability, loss or damage, together with all reasonable costs and expenses related thereto (including reasonable legal fees and expenses), relating to or arising from the untruth, inaccuracy or breach of any of the representations, warranties or agreements of the Corporation contained in this Agreement. (b) The Purchaser shall indemnify, defend and hold the Corporation and its respective officers, directors, employees, shareholders, partners, members, affiliates and agents harmless against all Liability, loss or damage, together with all reasonable costs and expenses related thereto (including reasonable legal fees and expenses), relating to or arising from the untruth, inaccuracy or breach of any of the representations, warranties or agreements of the Purchaser contained in this Agreement. (c) Promptly after receipt by any party entitled to indemnification under either Section 11.2(a) or Section 11.2(b) (an "indemnified party") of notice of the commencement of any action involving a claim which may give rise to a claim for indemnity under the preceding paragraphs of this Section, the indemnified party will give written notice to the party against -28- whom indemnification is sought (the "indemnifying party") of the commencement of such action. In case any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be responsible for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof; provided, however, that if any indemnified party shall have reasonably concluded that there may be one or more legal or equitable defenses available to it which are additional to or conflict with those available to the indemnifying party, or that such claim or litigation involves or could have an effect upon matters beyond the scope of the indemnity agreement provided in this Section, the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party and the indemnifying party shall reimburse the indemnified party and any person controlling the indemnified party for that portion of the fees and expenses of any counsel retained by the indemnified party which is reasonably related to the matters covered by the indemnity agreement provided in this Section. (d) If the indemnification provided for in this Section is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, claim, damage, liability or action referred to herein, then the indemnifying party, in lieu of indemnifying the indemnified party hereunder, shall contribute to the amounts paid or payable by the indemnified party as a result of such loss, claim, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions which resulted in such loss, claim, damage or liability as well as any other relevant equitable considerations. The amount paid or payable to an indemnified party as a result of the losses, claims, damages, liabilities or expenses referred to above shall be deemed to include any legal or other expenses reasonably incurred in connection with investigating or defending the same. (e) The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of the indemnified party and will survive the transfer of securities. 11.3. Reserved. 11.4. Assignment; Parties in Interest. This Agreement shall bind and inure to the benefit of the parties and each of their respective successors and permitted assigns (it being understood that this Agreement may be assigned by the Purchaser without the consent of any person solely in connection with the transfer of Shares). -29- 11.5. Entire Agreement. This Agreement (including all Schedules and Exhibits hereby) together with the other Documents contain the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings among the parties with respect to such subject matter. 11.6. Notices. All notices, claims, certificates, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if sent by nationally-recognized overnight courier, by telecopy, or by registered or certified mail, return receipt requested and postage prepaid, addressed as follows: (a) if to the Corporation: WAM!NET INC. 655 Lone Oak Drive, Building A Eagan, Minnesota 55121 Attention: Edward J. Driscoll, III, President Telephone: (651) 256-2165 Facsimile: (651) 994-9591 with a copy to: Willkie Farr & Gallagher 787 Seventh Avenue New York, NY 10019-6099 Attention: Daniel D. Rubino, Esq. Telephone: (212) 728-8000 Facsimile: (212) 728-8111 (b) if to the Purchaser: Silicon Graphics, Inc. 2011 N. Shoreline Boulevard Mountain View, CA 94043-1389 New York, NY 10017 Attention: Telephone: (650) _________ Telecopier: (650) 932-0908 -30- In any case, with a copy to: Testa, Hurwitz & Thibeault, LLP High Street Tower 125 High Street Boston, MA 02116 Attention: William B. Asher, Jr. Telephone: (617) 248-7518 Telecopier: (617) 248-7100 or to such other address as the party to whom notice is to be given may have furnished to the other parties in writing in accordance herewith. Any such notice or communication shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of nationally-recognized overnight courier, on the next business day after the date when sent, (c) in the case of telecopy transmission, when received, and (d) in the case of mailing, on the date of receipt. 11.7. Amendments. The terms and provisions of this Agreement may only be modified or amended pursuant to an instrument signed by all of the parties hereto. 11.8. 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. 11.9. Headings. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 11.10. Governing Law. Except as to matters governed by the MBCA, this Agreement shall be governed by and construed in accordance with the domestic laws of the State of New York, without giving effect to any law or rule that would cause the laws of any jurisdiction other than the State of New York to be applied. 11.11. Jurisdiction. The parties hereto agree that any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby may only be brought in the United States District Court for the Southern District of New York or any New York State court sitting in New York City, and each of the parties hereby consents to the exclusive jurisdiction of such courts (and of the appropriate -31- appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in the Section entitled "Notices" shall be deemed effective service of process on such party. 11.12. No Waiver. No delay by or on behalf of an Purchaser in exercising any rights conferred hereunder, and no course of dealing between an Purchaser and the Corporation shall operate as a waiver of any right granted hereunder, unless expressly waived in writing by the party whose waiver is alleged. 11.13. Binding Effect All covenants, representations, warranties and other stipulations in this Agreement and other documents referred to herein, given by or on behalf of any of the parties hereto, shall bind and inure to the benefit of the respective successors, heirs, personal representatives and assigns of the parties hereto. 11.14. Cumulative Powers. No remedy herein conferred upon the Purchaser or any holder of the Class F Preferred Stock is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and in addition to every other remedy given hereunder or now or hereafter existing at law, or in equity or by statue or otherwise. -32- IN WITNESS WHEREOF, the parties have executed and delivered this Stock Purchase Agreement on the date first above written. WAM!NET INC. By: /s/ Gary L. Hokkanen --------------------------------------- Name: Title: SILICON GRAPHICS, INC. By: /s/ Sandra Escher --------------------------------------- Name: Title: -33- Index ----- Exhibit A Statements of Rights and Preferences of Class F Preferred Stock Exhibit B Willkie Farr & Gallagher Legal Opinion Schedule I Certain Management Schedule 4.1(a) Articles of Incorporation and Bylaws Schedule 4.1(b) List of Subsidiaries Schedule 4.5(a) Designation and Classes of Capital Stock Schedule 4.5(a)(vi) Right of First Refusal Agreements Schedule 4.5(b) Options, Warrants and Convertible Securities Schedule 4.5(c)(i) Purchase Agreements Schedule 4.5(c)(ii) Registration Rights Agreements Schedule 4.5(e) Record Holders Schedule 4.7 Financial Statements Schedule 4.10(a) Material Contracts Schedule 4.12 Real Property Schedule 4.13 Intellectual Property Schedule 4.14 License to Provide Communications Services Schedule 4.15 Litigation Schedule 4.18 Employee Pension Benefit Plans Schedule 4.20 Related Transactions Schedule 8.2 Piggy-back Registration Rights EX-4.37 8 PREFERRED STOCK PURCHASE AGREEMENT DATED 2-18-2000 EXHIBIT 4.37 ================================================================================ PREFERRED STOCK PURCHASE AGREEMENT BY AND BETWEEN WAM!NET INC. AND BUYERS LISTED ON SCHEDULE 1.1 ------------------------------ Dated as of February 18, 2000 ------------------------------ ================================================================================ PREFERRED STOCK PURCHASE AGREEMENT Preferred Stock Purchase Agreement, dated as of February 17, 2000 (this "Agreement"), by and between WAM!NET INC., a Minnesota corporation (the "Company"), and each several purchaser identified on Schedule 1 (individually, a "Buyer" and collectively "Buyers"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company has designated an additional series of its preferred stock, consisting of 10,000 shares, par value $0.01 per share, designated as its "Class G Convertible Preferred Stock" (the "Preferred Shares"), and has caused a Certificate of Designation (the "Certificate of Designation") to be filed with the Minnesota Secretary of State designating the terms, limitations and relative rights and preferences of the Preferred Shares. WHEREAS, the Certificate of Designation sets forth terms, limitations and relative rights and preferences of the Preferred Shares (the "Statement of Rights and Preferences") a copy of which is attached hereto as Exhibit I. 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 Statement of Rights and Preferences. WHEREAS, Buyers desires to severally subscribe for and severally purchase the Preferred Shares from the Company in the amounts set forth on Schedule 1.1, and the Company desires to issue and sell the Preferred Shares to Buyers, 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: ARTICLE I. PURCHASE AND SALE OF PREFERRED STOCK Section 1.1. 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), each Buyer shall severally subscribe for and purchase from the Company, and the Company shall severally issue and sell to each Buyer that number of the Preferred Shares set forth on Schedule 1.1 for the aggregate purchase price set forth on Schedule 1.1 payable in cash (the "Purchase Price"). Each Buyer shall execute a separate signature page to this Agreement. A Buyer shall not be obligated for the Purchase Price of the Preferred Shares beyond the amount of the Buyer's several subscription. Section 1.2. Duration, Rights and Preferences of the Preferred Stock. The Preferred Shares shall have and enjoy the rights and preferences as are set forth in the Statement of Rights and Preferences. Section 1.3. 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 (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, 655 Lone Oak Drive, Eagan, Minnesota (or at such other time, date and place as each Buyer and the Company may mutually agree). The date on which the Closing actually occurs for a Buyer is hereinafter referred to as the "Closing Date." (b) At the Closing, the Company shall deliver to each Buyer stock certificates registered in the name of such Buyer representing the Preferred Shares being purchased by such Buyer, against payment and delivery by such Buyer to the Company of the Purchase Price by wire transfer of immediately available funds to such bank account or bank accounts designated by the Company. (c) Following all Closing Dates, the Company shall furnish to each Buyer a final and complete Schedule 1.1(the "Definitive Schedule 1.1") showing the name and number of shares purchased by each Buyer. The Definitive Schedule 1.1 shall be made part of this Agreement. ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY Section 2.1. The Company hereby represents, warrants and covenants to Buyers 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"). (b) Subsidiaries. Set forth on Schedule 2.1(b) hereto is a complete list of all of the subsidiaries of the Company. Except as set forth on Schedule 2.1(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 -2- 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 2.1(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 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. 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 contemplated by Section 6.2 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. -3- (e) Litigation; Compliance with Laws. Except as disclosed in the SEC Reports, disclosed in the Financial Statements or set forth on Schedule 2.1(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, 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. (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 2.1(g) hereto. The Company does not hold any of its shares in treasury. (ii) As of the date hereof, 9,297,427 shares of Common Stock, par value $0.01 per share, 115,206 shares of the Company's 1999 Class A Preferred Stock, par value $10.00 per share (the "Class A Preferred Stock"), 5,710,425 shares of the Company's Class B Convertible Preferred Stock, par value $0.01 per share (the "Class B Preferred Stock"), 878,527 shares of the Company's Class C Convertible Preferred Stock, par value $0.01 per share (the "Class C Preferred Stock"), 2,196,317 shares of the Company's Class D Convertible Preferred Stock, par value $0.01 per share (the "Class D Preferred Stock") [64,900] shares of the Company's Class E Convertible Preferred Stock, par value $.01 per share (the "Class E Preferred Stock") and 10,000 shares of the Company's Class F Convertible Preferred Stock, per value $.01 per share (the "Class F Preferred Stock") are issued and outstanding and have been validly issued and are fully paid and nonassessable. The Class A Preferred Stock, the Class B Preferred Stock, -4- the Class C Preferred Stock, the Class D Preferred Stock and the Class F Preferred Stock are not subject to preemptive rights. The Class E Preferred stock is subject to preemptive rights for the balance of the authorized and unissued shares of Class E Preferred Stock. (iii) Except as contemplated by this Agreement, disclosed in the SEC Reports, disclosed in the Financial Statements or set forth on Schedule 2.1(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 2.1(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. (iv) 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). (v) 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. (vi) 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 Statement of Rights and Preferences. The Conversion Shares are duly authorized and have been reserved for issuance and, when issued upon conversion in accordance with the terms of Statement of Rights and Preferences, 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 , 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 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 Buyers 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, and for the fiscal quarters ended March 31, June 30 and September 30, 1999 (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 -5- 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 2.1(i) hereto, since September 30, 1999, (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 September 30, 1999, 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, except Merrill Lynch & Co. (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 2.1(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 property (collectively, "Intellectual Property") necessary to carry on its business as presently conducted. Except as set -6- forth on Schedule 2.1(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) 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. (n) Agreements. Except as set forth in Schedule 2.1(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. (o) 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. (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. -7- (q) 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 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 Buyers or their respective 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. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF BUYERS Section 3.1. Each 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 its incorporation or organization and has all corporate power and authority to own its properties and to carry on its businesses as now being conducted, or (ii) Buyer is an individual with legal capacity to enter into this Agreement. (b) Power and Authority; Authorization; Enforceability. Buyer has all requisite corporate or other 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 or other action on the part of Buyer and no other corporate proceedings or other action on the part of Buyer are necessary to authorize this Agreement and to consummate the transactions contemplated hereby. 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 6.2 may be limited by applicable federal and state securities laws and public policy considerations. (c) 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 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 -8- in full force and effect, except for such 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 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 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. -9- ARTICLE IV. CONDITIONS Section 4.1. Conditions of Each Party. 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. Section 4.2. Conditions of the Company. The obligations of the Company to consummate the transactions contemplated hereby with each Buyer are subject to the fulfillment, at or prior to the Closing, of each of the following conditions by such Buyer, 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 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 each Buyer, signed by an executive officer of such Buyer, to the effect set forth in clauses (a) and (b) of this Section 4.2; Section 4.3. Conditions of Buyer. The obligation of each 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 such 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) Buyers 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 4.3; (d) 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 -10- 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, 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 (C) that the Charter has not been amended since the date of the last amendment referred to in the certificate delivered pursuant to Section 4.3(f)(i)(B). (e) Buyers shall have received from Willkie Farr & Gallagher an opinion, dated the Closing Date, covering the matters set forth in Exhibit II hereto, subject to customary qualifications, limitations and assumptions for opinions given in transactions of the kind contemplated hereby. Section 4.4. 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 Buyers 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. ARTICLE V. TERMINATION Section 5.1. 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 Buyers; (b) by the Company, if a 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 such 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 breach which by its nature cannot be cured) such that the conditions set forth in Section 4.1 or 4.2 hereof, as the case may be, will not be satisfied; (c) by a 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 such Buyer is not then in material breach of the terms of this Agreement; and provided further that no cure period shall be -11- required for a breach which by its nature cannot be cured) such that the conditions set forth in Section 4.1 or 4.3 hereof, as the case may be, will not be satisfied; or (d) by any party if the Closing applicable to such party has not occurred on or before February 24, 2000; provided, however, that a party may not terminate this Agreement pursuant to this Section 5.1(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. Section 5.2. 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 2.1(j), 3.1(f), 5.2, 6.2, 7.1, 7.2, 7.4, 7.7 and 7.10 shall survive the termination of this Agreement. ARTICLE VI. OTHER AGREEMENTS Section 6.1. Registration Rights. (a) Piggy-back Registration. If, commencing upon the later of one (1) year after the date hereof and the date that is six months after an IPO, 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 each Buyer of its intention to do so and, upon the written request of a 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 such 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 such 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 6.1 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 such 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 6.1 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. -12- 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(s) and brokers' commissions or underwriting discounts payable by Buyer(s), 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 nine months after an IPO, upon request to register the Conversion Shares by the holders of a majority of voting rights represented by the Class G Preferred Stock and the Conversion Shares, the Company will promptly use its reasonable best efforts to register the Conversion 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 6.1(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 6.1(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 Buyers are the only persons whose shares are included in the registration pursuant to this Section 6.1(b), Buyers shall bear on a pro rata basis 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 6.1(b) for such period as may be necessary for Buyers to dispose of the Conversion Shares so registered, and from time to time shall amend or supplement, at Buyers' 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 6.1(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 6.1(a) rather than this Section 6.1(b), and the rights of Buyers shall be governed by Section 6.1(a) hereof (c) Registration Procedures. If and whenever the Company is required by the provisions of Sections 6.1(a) or 6.1(b) hereof to effect the registration of Conversion Shares under the Securities Act, the Company will: -13- (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 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 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 -14- 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 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 each Buyer, its officers, directors, employees and agents, and any person who controls such 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 a Buyer expressly for use therein, and each 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 such Buyer expressly for use therein. (e) Contribution. In addition, in connection with any such registration, the Company and Buyers agree that if the indemnification to be provided for pursuant to Section 6.1(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 a 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 Buyers, 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 a Buyer, on -15- 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 a 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 Buyers agree that it would not be just and equitable if contribution pursuant to this Section 6.1(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 this Section 6.1(e). Notwithstanding the provisions of this Section 6.1(e), a Buyer shall not be required to contribute any amount in excess of the amount by which the total price which the 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 6.1 shall terminate on the earliest to occur of: (i) the date that is three (3) 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). Section 6.2. Confidentiality. (a) Without the consent of the other party, neither Buyers 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 persons other than its Representatives who have a need to know such information or to have access to such material in connection with Buyers' investment in the Company and who have agreed to keep such information and material confidential. For purposes of this Section 6.2(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 6.2(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 -16- 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, Buyers shall return to the Company all material previously furnished to it or its Representatives in connection with this transaction. Section 6.3. 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 a 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 each 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 a Buyer ARTICLE VII. MISCELLANEOUS Section 7.1. 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 for a Buyer or for the Company, except by an instrument in writing duly executed by such 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. Section 7.2. 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 a Buyer, to the name and address for notice appearing on the Signature Page to this Agreement for such Buyer (b) If to the Company: WAM!NET INC. 655 Lone Oak Drive Eagan, MN 55121 Attention: Edward J. Driscoll, III, President Telephone: 651-256-5100 Facsimile: 651-994-9591 -17- with a copy to: Willkie Farr & Gallagher 787 Seventh Avenue New York, NY 10019-6099 Attention: Daniel D. Rubino, Esq. 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. Section 7.3. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the Company and Buyers. 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. Section 7.4. 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. Section 7.5. 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. Section 7.6. 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. Section 7.7. 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. Section 7.8. 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. Section 7.9. 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 -18- 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. Section 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. Section 7.11. Exhibits and Schedules. The following Exhibits and Schedules are attached and made part of this Agreement. -19- EXHIBITS I. Rights and Preferences of Class G Convertible Preferred Stock II. Opinion of Willkie Farr & Gallagher SCHEDULES 1.1 Buyers and Purchase Price 2.1(b) WAM!NET Inc. Subsidiaries 2.1(e) Litigation, Compliance with Laws 2.1(g) Capital Structure as of January 31, 2000 2.1(i) None 2.1(l) Trademarks 2.1(o) - 1 Master Agreement by and between Winstar Wireless, Inc. 2.1(o) - 2 Securities Purchase Agreement dated as of December 31, 1999, among WAM!NET Inc., Winstar Communications, Inc. and Winstar Credit Corp. 2.1(o) - 3 Certificate of Designation of Rights and Preferences of Class E Convertible Preferred Stock of WAM!NET Inc. 2.1(o) - 4 Securities Purchase Agreement dated as of February 3, 2000, among WAM!NET Inc. and Silicon Graphics, Inc. 2.1(o) - 5 Certificate of Designation of Rights and Preferences of Class F Convertible Preferred Stock of WAM!NET Inc. -20- IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. WAM!NET INC. ------------------------------------ By: Its: Assistant Secretary and General Counsel Buyer --------------------------------- (printed name) By: ------------------------------ --------------------------------- (printed name) Its: ----------------------------- Address for Notice ------------------------------------------ ------------------------------------------ ------------------------------------------ Attention: ----------------------------------- Telephone ----------------------------------- Facsimile: ----------------------------------- with a copy to: ------------------------------------------ ------------------------------------------ ------------------------------------------ Attention: ----------------------------------- Telephone ----------------------------------- Facsimile: ----------------------------------- -21- Schedule 1.1 Buyers and Purchase Price Number of Shares Buyer Severally Purchased Purchase Price - ----- ------------------- -------------- Sumitomo Corporation 5,000 $ 5,000,000 NEC Corporation 1,000 $ 1,000,000 Dentsu Tec Inc. 500 $ 500,000 Dainippon Ink & Chemicals, Inc. 500 $ 500,000 KDD Technology Corp. 100 $ 100,000 KDD Corp. 500 $ 500,000 Kyoritsu Printing Co., Ltd. 300 $ 300,000 Creek & River Co., Ltd. 200 $ 200,000 Craig W. Funk 250 $ 250,000 Others* 1,650 $ 1,650,000 ----------- ------------- Totals: 10,000 $ 10,000,000 *Estimated Maximum EX-4.38 9 FORM OF CERTIFICATE FOR CLASS E EXHIBIT 4.38 [Form of Certificate] WAM!NET INC. A Minnesota Corporation No. __ ______ Shares of Class E Convertible Preferred Stock This certifies that ____________________ is the registered holder of Shares of Class E 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 ___ day of March, 2000. ----------------------------------------- Gary L. Hokkanen, President ----------------------------------------- Edward J. Driscoll, Jr., Secretary [REVERSE SIDE OF CERTIFICATE] The Class E Convertible Preferred Stock has the rights and preferences as set forth in the Certificate of Designation of Class E Preferred Stock as filed of record with the Minnesota Secretary of State on February 16, 2000, as amended, a copy of which may be obtained from the Company with no charge. The securities evidenced hereby are subject to the terms of that certain Stockholder's Agreement, dated as of March 4, 1999 as amended on March 14, 2000, by and among the Company, Silicon Graphics, Inc., MCI WorldCom, Inc., Winstar Communications, Inc., Winstar Credit Corp. and Cerberus Partners, L.P. A copy of the Stockholders' 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-4.39 10 FORM OF CERTIFICATE FOR CLASS F EXHIBIT 4.39 [Form of Certificate] WAM!NET INC. A Minnesota Corporation No. __ ______ Shares of Class F Convertible Preferred Stock This certifies that ______________________ is the registered holder of _________ Shares of Class F 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 ___ day of February, 2000. ----------------------------------------- Gary L. Hokkanen, President ----------------------------------------- Edward J. Driscoll, Jr., Secretary The Class F Convertible Preferred Stock has the rights and preferences as set forth in the Certificate of Designation of Class F Preferred Stock as filed of record with the Minnesota Secretary of State on February 3, 2000. The securities evidenced hereby are subject to the terms of that certain stockholders agreement, dated as of March 4, 1999 as amended on March 14, 2000; by and among the Company, Silicon Graphics, Inc., MCI Worldcom, Inc., Winstar Communications, Inc., Winstar Credit Corp. and Cerberus Partners, L.P. A copy of the Stockholder's 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-4.40 11 FORM OF CERTIFICATE FOR CLASS G EXHIBIT 4.40 [Form of Certificate] WAM!NET INC. A Minnesota Corporation No. __ _____ Shares of Class G Convertible Preferred Stock This certifies that _____________ is the registered holder of Shares of Class G 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 _____ day of March, 2000. ----------------------------------------- Gary L. Hokkanen, President ----------------------------------------- Edward J. Driscoll, Jr., Secretary The Class G Convertible Preferred Stock has the rights and preferences as set forth in the Certificate of Designation of Class G Preferred Stock as filed of record with the Minnesota Secretary of State on March 6, 2000. The securities evidenced hereby are subject to the terms of that certain Stockholders Agreement, dated as of February 18, 2000, by and among the Corporation and Buyers listed on Schedule 1.1, 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-4.41 12 WARRANTS TO PURCHASE COMMON STOCK EXHIBIT 4.41 EXERCISABLE ON OR BEFORE, AND VOID AFTER 5:00 P.M. MINNEAPOLIS TIME APRIL 30, 2004 Certificate for 200,000 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 1999 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 _______ __, 1999. WAM!NET Inc. By: /s/ Edward J. Driscoll ----------------------------- Name: Edward J. Driscoll Title: Chief Executive Officer -6- EX-10.31 13 MASTER WINSTAR AGREEMENT EXHIBIT 10.31 MASTER AGREEMENT BY AND BETWEEN WINSTAR WIRELESS, INC. AND WAM!NET INC. This Master Agreement is entered into as of the 31st day of December, 1999 (the "Effective Date") by and between WINSTAR WIRELESS, INC., a Delaware corporation, with offices located at 7799 Leesburg Pike, Suite 700 South, Tysons Corner, VA 22043 ("Winstar"), and WAM!NET INC., a corporation organized under the laws of Minnesota, with offices located at 655 Lone Oak Drive, Eagan, MN 55121 ("Wam!Net"). EXPLANATORY STATEMENT --------------------- Wam!Net desires to acquire from Winstar certain network facilities, connectivity and Capacity. Winstar is willing to provide Wam!Net with such network facilities, connectivity and Capacity, on the terms and conditions set forth herein. 1. Definitions 1.1 Certain Definitions. (a) "Affiliate" shall mean, with respect to any entity, any other entity Controlling, Controlled by or under common Control with such entity, whether directly or indirectly through one or more intermediaries. (b) "Agreement" means this Master Agreement. (c) "Business Day" means any day on which Citibank, N.A. is open for the transaction of banking business. (d) "Capacity" shall mean the digital transmission capability of a given portion of the Winstar Network designed to transmit digital signals at a stated rate. Capacity is designated in industry standard measurements such as OC-3, DS-3, T-1 etc. (e) "Confidential Information" means all information, in any form, furnished or made available directly or indirectly by one Party (the "Disclosing Party") to the other (the "Receiving Party") that (i) concerns the operations, affairs or businesses of the Disclosing Party, the financial affairs of the Disclosing Party, or the relations of 1 the Disclosing Party with its customers, employees or service providers, and (ii) is marked confidential, restricted, proprietary, or with a similar designation or (iii) is provided during or created for the Build-out Process. "Confidential Information" excludes any particular information that the Receiving Party can demonstrate: (i) at the time of disclosure, was in the public domain or in the possession of the Receiving Party; (ii) is published or otherwise becomes part of the public domain other than by the unauthorized disclosure by the Receiving Party; (iii) was received after disclosure from a third party who had a lawful right to disclose such information to the Receiving Party without any obligation to restrict its further use or disclosure; or (iv) was independently developed by the Receiving Party without reference to Confidential Information of the Disclosing Party. (f) "Control" and its derivatives shall mean legal, beneficial or equitable ownership, directly or indirectly, of more than fifty percent (50%) of the outstanding voting capital stock (or other ownership interest, if not a corporation) of an entity, or actual managerial or operational control over such entity. (g) "Days" or "days" shall mean calendar days unless otherwise specified. (h) "Deferred Payments" shall have the meaning set forth in Schedule 1. (i) "Down Payment" shall mean Twenty Million and 00/100 Dollars ($20,000,000.00). (j) "DS-3" shall mean a quantity of Capacity comprising a digital circuit (fiber or spectrum) capable of transporting signals at a speed of approximately 45 Mbps. (k) "Effective Date" has the meaning set forth in the preamble to this Agreement. (l) "Eligible Location" shall mean a building designated by Wam!Net at which a Wam!Net customer is located that meets all of the following criteria: (i) it is within the reliable radio range of a then-existing Winstar hub; (ii) it has verified (or creatable, with good faith efforts by Winstar), line of sight without frequency interference; (iii) the site has been visited by Winstar personnel or otherwise verified as, in Winstar's reasonable opinion, able to be built-out utilizing outdoor unit space, power, security, verified riser and any other necessary build-out elements; and (iv) Winstar has or may acquire all necessary roof rights. 2 (m) "Equipment" shall mean the equipment provided by Winstar to Wam!Net pursuant to Schedule B. (n) "Events of Default" shall mean each of the following: (i) any representation or warranty made by a Party in the Transaction Documents shall prove to have been incorrect when made in any respect which could reasonably be expected to have a material adverse effect upon the other Party's ability to realize the benefits of the Transaction Documents; (ii) a Party commits a material breach of the Transaction Documents that is capable of being cured on commercially reasonable terms within thirty (30) days, which breach is not cured within thirty (30) days after notice of breach to the breaching Party, or (iii) a Party commits a material breach of the Transaction Documents that is not capable of being cured within thirty (30) days and the breaching Party fails to (a) proceed promptly and diligently after written notice to correct the breach, (b) develop within fifteen (15) days following written notice of breach a complete plan for curing the breach, and (c) cure the breach within sixty (60) days of notice thereof. (o) "FCC Licenses" shall have the meaning set forth in Section 5.1(b). (p) "Installed Equipment" shall mean equipment owned by Wam!Net used on the Winstar Network. (q) "Intercity Backbone" shall mean the long haul backbone network used by Winstar to provide Capacity pursuant to Schedule A. (r) "Indefeasible Right of Use" or "IRU" shall mean an exclusive indefeasible right to use a specified amount of Capacity for a specified period. (s) "Link" shall mean local access links, composed of radio pairs and backhaul facilities connecting an Eligible Location to a Winstar switch center. (t) "Losses" shall mean all liabilities, damages and related costs and expenses (including fines, levies, assessments, reasonable legal fees and disbursements and costs of investigations, litigation, settlement, judgment, interest and penalties) directly incurred by a Party. (u) "Network Control" shall mean (i) the unfettered use of all Network Facilities; (ii) day to day operation and control of the Network Facilities; (iii) determination and the carrying out of policy decisions, including the preparation and filing of applications with the Federal Communications Commission ("FCC") relating to the Network Facilities; (iv) employment, supervision, and dismissal of personnel 3 involved with the Network Facilities; (v) payment of financial obligations, including expenses arising out of operation involved with the Network Facilities; and (vi) the receipt of monies and profits derived from the operation of the Network Facilities. (v) "Network Facilities" shall mean the Intercity Backbone, the Installed Equipment, and any other equipment and facilities used in providing Capacity and local connectivity on the Winstar Network pursuant to this Agreement, over which Winstar, as a FCC licensee, must retain control as that term is defined in the Communications Act of 1934, as amended, and/or any applicable FCC rules or case law. (w) "Notice of Election" shall have the meaning set forth in Section 12.4. (x) "OC-3" shall mean a quantity of Capacity comprising a digital circuit (fiber or spectrum) capable of transporting signals at a speed of approximately 155 Mbps. (y) "Party" shall mean Wam!Net or Winstar, individually, as appropriate. (z) "Parties" shall mean Wam!Net and Winstar, collectively. (aa) "Purchase Price" shall mean the sum of the Down Payment and the total principal amount of the Deferred Payments to be paid by Wam!Net to Winstar pursuant to Schedule 1. (bb) "Security Interest" shall have the meaning set forth in Schedule 2. (cc) "T-1" shall mean a quantity of Capacity comprising a digital circuit (fiber or spectrum) capable of transporting signals at a speed of approximately 1.544 Mbps. (dd) "Term" shall have the meaning set forth in Section 3. (ee) "Transaction Documents" shall mean the Agreement and all Schedules and Exhibits. (ff) "Wam!Net" shall mean Wam!Net Inc. (gg) "Winstar" shall mean Winstar Wireless, Inc. (hh) "Winstar Network" shall mean the facilities-based telecommunications system over which Winstar offers telecommunications services to its subscribers to the extent that Winstar has an obligation to use the system to meet its obligations hereunder. 4 1.2 Other Definitions. Other terms used in this Agreement are defined in the context in which they are used and have the meanings there stated. 2. Quarterly Meetings During the Term, Wam!Net and Winstar shall meet on a quarterly basis to discuss their joint plans and objectives with respect to the development and deployment of new e-business solutions and any issues which may arise related to the performance of the Parties' obligations under the Transaction Documents. Each Party will designate representatives from its areas of technical, marketing, and senior management, to participate in each of the quarterly meetings. The Parties shall develop a process for creating the quarterly agenda for the quarterly meetings. 3. Term. Except as may otherwise be provided in a Schedule, the term of the Transaction Documents shall begin upon the Effective Date and shall end on the twentieth (20th) anniversary of the Acceptance Date of the first System Segment that is Accepted pursuant to Schedule A (the "Term"), unless terminated earlier in accordance with this Agreement. 4. Obligations of the Parties 4.1 Intercity Backbone Capacity. Winstar shall sell to Wam!Net and Wam!Net shall purchase from Winstar IRUs with respect to specified Capacity on the Intercity Backbone pursuant to the terms and conditions in Schedule A. 4.2 Equipment Sale. Winstar shall sell to Wam!Net and Wam!Net shall purchase from Winstar the Equipment, pursuant to the terms and conditions in Schedule B. 4.3 Installation and Maintenance. Winstar shall sell and Wam!Net will purchase certain local access connectivity, and certain support services, pursuant to the terms and conditions in Schedule C. 4.4 Collocation. Winstar shall sell and Wam!Net shall purchase collocation and associated services, pursuant to the terms and conditions in Schedule D. 4.5 Joint Marketing. The Parties shall engage in joint marketing activities, pursuant to the terms and conditions in Schedule E. 5. Covenants of the Parties 5.1 Control. (a) Winstar shall secure, at its own expense, all licenses, permits, agreements, consents, rights-of-way, and other arrangements necessary for: (i) the installation and operation of the Network Facilities, (ii) any other element of the Winstar 5 Network utilized by Winstar in meeting its obligations under the Transaction Documents, and (iii) Network Control of the Network Facilities. Winstar shall not be responsible (x) for such costs to the extent that Winstar, in its reasonable discretion, determines that such costs would exceed its standard cost guidelines for the geographic area involved by more than 20% or (y) for Wam!Net's internal costs incurred to make initial contact with building owners or managers to assist Winstar in acquiring the necessary roof rights. (b) During the Term, each of the Parties shall at all times comply with FCC rules and regulations as well as all state and local regulations or requirements governing spectrum licenses owned by Winstar and used by Winstar to provide all connectivity pursuant to this Agreement ("FCC Licenses"), and the provision of telecommunications services hereunder, as all such rules, regulations, and requirements are applicable to such Parties' obligations under the Transaction Documents. (c) Winstar shall retain Network Control and control over its FCC Licenses at all times during the Term of the Transaction Documents, and shall have, at all times therein unfettered access to all of the facilities where transmissions and receptions under its FCC Licenses are being conducted or controlled. (d) Winstar will take all reasonable precautions not to disturb or interfere with Wam!Net's use of the Installed Equipment, Capacity, collocation, and local connectivity provided by Winstar under the Transaction Documents, unless such disturbance is deemed by Winstar to be necessary for Network Control and control over its FCC Licenses. (e) During the Term, Wam!Net shall not represent itself as the holder of any of the FCC Licenses, nor as the representative of Winstar before the FCC, any state regulatory body or any other third party. (f) Except as otherwise required by law, all filings made during the Term before regulatory bodies with respect to Winstar's FCC Licenses, including filings with respect to obtaining any licenses or approvals needed in connection with Winstar's obligations hereunder, shall be made by and in the name of Winstar. Wam!Net, at Winstar's expense, shall cooperate fully with Winstar in the making of such filings that are applicable to any Winstar obligations under the Transaction Documents. (g) Wam!Net shall not take a position or issue a public statement with respect to regulatory or legislative issues that could be reasonably expected to adversely impact Winstar's business without first consulting with Winstar. Wam!Net will, at Winstar's expense, reasonably support Winstar's legislative and regulatory efforts with respect to ensuring nondiscriminatory access to buildings by telecommunications carriers, and, in no event, will take any position adverse to Winstar's positions on this matter. 6 (h) Nothing in the Transaction Documents is intended to diminish or restrict Winstar's obligations as an FCC licensee and Winstar and Wam!Net desire that the Transaction Documents be in full compliance with (i) the terms and conditions of Winstar's FCC Licenses; (ii) all applicable rules and policies of the FCC; (iii) the Communications Act of 1934, as amended, and (iv) any other applicable federal, state and local law or regulation It is expressly understood by Winstar and Wam!Net that nothing in the Transaction Documents is intended to give Wam!Net any right which would be deemed to constitute a transfer of control (as `control' is defined in the Communications Act of 1934, as amended, and/or any applicable FCC rules or case law) of Winstar or of one or more of the FCC Licenses from Winstar to Wam!Net. 5.2 Network Integrity. (a) Subject to Section 5.1(d), neither Party may improperly restrict or interfere with the other Party's network or use of services by the other Party, its Affiliates, any other customer of either Party or any third party. Upon notice by a Party, the other Party shall promptly remove any hazard, interference or service obstruction that may be caused by hardware, software or connectivity that the notifying Party does not provide. Nothing stated herein shall be construed to interfere with a Party's ability to comply with the rules, regulations or directives of any governmental or jurisdictional authority. (b) Winstar may, after giving Wam!Net notice, immediately suspend services under the Transaction Documents to Wam!Net in whole or part, without incurring any liability for such suspension, if Winstar in the exercise of reasonable discretion, determines that Wam!Net is or may utilize such services in a manner not contemplated by this Agreement that results in, or could result in (i) interference with the use of the Winstar Network, or any component thereof, by other parties; (ii) damage, interference, degradation or other adverse effects with respect to the proper functioning of the Winstar Network, or any component thereof, equipment or service; (iii) the fraudulent procurement of (1) any Network Facilities or other support services provided hereunder, or (2) of any other services utilizing the Winstar Network, or any component thereof; or (iv) a violation of the Communications Act of 1934, as amended, and/or any applicable FCC rules or case law. In the case of a suspension of service under Section 5.2(b)(iii), Winstar shall give Wam!Net not less than twelve (12) hours notice. To the extent that any of the events set forth above are the result of any action by a Wam!Net customer, Wam!Net will, following notice from Winstar, suspend the service of the Wam!Net customer. 5.3 Designation of Eligible Locations. (a) Within fifteen (15) days of Wam!Net identifying a desired site to Winstar, Winstar shall provide Wam!Net with a determination as to whether the site is an Eligible Location. During such 15-day period, Winstar and Wam!Net will work together to allow Wam!Net to provide Winstar with a fully completed service request form in the event, and after, the site identified by Wam!Net is classified by Winstar as 7 an Eligible Location. Upon receipt of such service request form, Winstar will provide Wam!Net with a firm order committment, and will install the necessary equipment at the Eligible Location as promptly as practicable, but in no event more than sixty (60) days after receipt of such service request form. (b) In determining whether a desired site is an Eligible Location, if Winstar reasonably determines that the cost of rooftop access and/or equipment installation will exceed its standard cost guidelines for the geographic area involved by not more than 20%, Winstar must offer Wam!Net the option to pay one-half of the amount in excess of Winstar's standard cost guidelines, and if Wam!Net so chooses, and subject to the site satisfying all other required criteria used in determining whether the site is an Eligible Location, the site shall be deemed an Eligible Location. If the costs would exceed such guidelines by more than 20%, Winstar may, in its sole discretion, choose not to designate such site as an Eligible Location. 5.4 Access to Facilities. Both Parties shall provide the other Party's personnel with access to its facilities to the extent reasonably required for such Party to perform its obligations hereunder. Any such access permitted hereunder shall be in accordance with each Party's applicable internal security procedures, and any applicable FCC requirements. 5.5 Future Winstar Network Build-out. (a) Pursuant to Schedule C, during calendar year 2000, Winstar will, at Wam!Net's request, install and provide connectivity with at least 700 Links to Eligible Locations designated by Wam!Net. (b) In determining whether a location is an Eligible Location or whether Winstar will build its network to certain geographic areas, Wam!Net shall be entitled to participate in the process by which Winstar determines its ultimate network build-out map ("Build-out Process"). (c) As part of the Build-out Process, Winstar will provide Wam!Net with existing and planned hub addresses, city identifications, switch addresses, delivery time frames, and construction status of already planned hub and central office addresses. Wam!Net will provide Winstar such information as Winstar reasonably requires to complete the Build-out Process. The information provided hereunder will be used to assess: (i) existing and planned overlay coverage; (ii) potential bandwidth required by Wam!Net's customers across all applications; (iii) bandwidth segmentation requirement required by Wam!Net's customers across all applications; (iv) strategy outcome planning; and (v) new product application deployment. Notwithstanding Wam!Net's participation in the Build-out Process, Winstar shall have the final determination with respect to identifying a building as an Eligible Location or extending its network to a certain geographic area. 8 (d) Future Purchases. During the Term, for any additional purchases Wam!Net desires to make from Winstar, Winstar will provide Wam!Net with price and terms at least as favorable with regard to Winstar's percentage of profit over Winstar's costs for the purchase being priced as Wam!Net is receiving hereunder. (e) In the event a Wam!Net designated node in one of the markets listed in Exhibit 1 of Schedule D has not been collocated with a Winstar switch center pursuant to Schedule D on the date a System Segment terminating in that market is ready for Acceptance (as defined in Schedule A), Winstar shall, at Winstar's expense, provide high capacity links between the Wam!Net node and the Winstar Terminal Facility that are engineered to Wam!Net's satisfaction to carry Wam!Net's customer traffic. Such high capacity links shall be maintained by Winstar until Wam!Net's node has been collocated with a Winstar switch center. Notwithstanding the foregoing, this obligation shall not become effective until the Parties have agreed upon a delivery schedule pursuant to Exhibit 3 of Schedule D. (f) Winstar will be obligated to meet certain additional performance obligations related to the delivery and operations of the Intercity Backbone and the availability of the Capacity, all of which are contained in Exhibit 3 of Schedule C, which are incorporated herein by reference. 6. Purchase Price; Payment Terms 6.1 Purchase of Capacity, Connectivity and Equipment. As of the Effective Date, Wam!Net agrees to purchase the Capacity, connectivity, collocation, and Equipment pursuant to the Transaction Documents and Winstar agrees to provide the Capacity, connectivity, collocation, and Equipment pursuant to the Transaction Documents for the Purchase Price. Except as expressly provided in a Schedule, the Purchase Price will be the sole consideration due to Winstar for the performance of any and all of its obligations due under the Transaction Documents. 6.2 Payment of Purchase Price. The Purchase Price shall be payable as follows: (i) the Down Payment shall be paid upon execution of this Agreement; and (ii) Two Hundred Forty Million Two Hundred Seventy-Nine Thousand Five Hundred Ninety-Three Dollars and 00/100 ($240,279,593.00) shall be paid on the terms and conditions set forth in Schedule 1, which shall be secured pursuant to Schedule 2. 6.3 Allocation. The Parties agree to allocate the Purchase Price (and all other capitalizable costs) among the Network Facilities acquired and Winstar's other obligations undertaken hereunder for all purposes (including accounting and tax purposes) in accordance with the allocation table attached as Schedule 3. Winstar and Wam!Net agree to report the allocation as provided in the applicable sections of the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder, in accordance with such allocation and agree to prepare and file all income tax returns in a manner consistent with such allocation. 9 6.4 Form of Payment. Wam!Net shall make payments under this Agreement by wire transfer of immediately available funds to the United States bank account or accounts designated by Winstar. At Winstar's discretion, payments to be made pursuant to this Agreement may be made by check or draft of immediately available funds delivered to the address designated in writing by Winstar or, failing such designation, to the address for notice to Winstar pursuant to Section 14.2. 6.5 Taxes. The Parties' respective responsibilities for taxes arising under or in connection with the Transaction Documents shall be as follows: (a) Each Party shall be responsible for personal property taxes on property it owns or leases, for franchise and privilege taxes on its business, for taxes based on its net income or gross receipts, and for any third-party imposed fees. (b) Each Party shall timely report and pay any and all sales, use, income, gross receipts, excise, transfer, ad valorem or other taxes, and any and all franchise fees or similar fees assessed against it due to the implementation of any facilities or equipment in connection with the Network Facilities. (c) If a sales, use, excise, value-added, services, consumption, or other tax is assessed on the provision of the connectivity, maintenance or any other services, each Party shall timely report and pay any such tax assessed against it and the Parties shall work together to segregate the payments under this Agreement into two (2) payment streams: (i) Payments for taxable items; and (ii) Payments for other nontaxable items. (d) The Parties agree to cooperate with each other to enable each to determine more accurately its own tax liability and to minimize such liability to the extent legally permissible. Each Party shall provide and make available to the other any resale certificates and other exemption certificates or information reasonably requested by either Party that is applicable to the subject matter of this Agreement. (e) Each Party shall within thirty (30) business days notify the other of, and coordinate the response to and settlement of, any claim for taxes asserted by applicable taxing authorities for which the other Party is responsible hereunder. With respect to any claim arising out of a form or return signed by a Party to this Agreement, such Party shall have the right to elect to control the response to and settlement of the claim. 7. Confidentiality 7.1 Confidential Information. Winstar and Wam!Net acknowledge that they may be furnished with, receive, or otherwise have access to information of or 10 concerning the other Party that such Party considers to be confidential, proprietary, a trade secret or otherwise restricted. The terms and conditions of the Transaction Documents shall be deemed Confidential Information. 7.2 Obligations. The following obligations with respect to Confidential Information shall survive the expiration or termination of this Agreement for a period of seven (7) years or such longer period as required by regulation, law or court order. (a) Ongoing Obligation. Each Party's Confidential Information shall remain the property of that Party except as expressly provided otherwise by the other provisions of the Transaction Documents. Each Party shall each use at least the same degree of care, but in any event no less than a reasonable degree of care, to prevent unauthorized disclosure of Confidential Information as it employs to avoid unauthorized disclosure of its own information of a similar nature. The Parties may disclose such information to entities performing services required hereunder where: (i) use of such entity is authorized under the Transaction Documents, (ii) such disclosure is necessary or otherwise naturally occurs in that entity's scope of responsibility, and (iii) the entity agrees in writing to assume the obligations described in this Section 7.2 Any disclosure to such entity shall be under the terms and conditions of this Section 7.2. (b) Unauthorized Disclosure. Each Party shall take reasonable steps to ensure that its employees or agents comply with this Section. In the event of any disclosure or loss of, or inability to account for, any Confidential Information of the Disclosing Party, the Receiving Party shall promptly, at its own expense: (i) notify the Disclosing Party in writing, and (ii) take such actions as may be necessary and cooperate in all reasonable respects with the Disclosing Party to minimize the violation and any damage resulting therefrom. (c) Permitted Disclosures. (i) Either Party may disclose the terms and conditions of the Transaction Documents to third parties that (1) have expressed a bona fide interest in consummating a significant financing, merger, acquisition, or strategic commercial transaction between such third parties and such Party, (2) have a reasonable ability (financial and otherwise) to consummate such transaction, and (3) have executed a nondisclosure agreement that includes within its scope the terms and conditions of this Agreement and also includes a procedure to limit the extent of copying and distribution of this Agreement. Each Party shall endeavor to delay the disclosure of the terms and conditions of the Transaction Documents until the status of discussions concerning such transaction warrants such disclosure. (ii) If the Receiving Party becomes legally obligated to disclose Confidential Information by any governmental entity with jurisdiction over it, the Receiving Party will give the Disclosing Party prompt written notice sufficient to allow the Disclosing Party to seek a protective order or other appropriate remedy. The Receiving Party will disclose only such Confidential Information as is legally required 11 and will use its reasonable best efforts to obtain confidential treatment for any Confidential Information that is so disclosed. 7.3 No Implied Rights. Nothing contained in this Section shall be construed as obligating a Party to disclose its Confidential Information to the other Party, or as granting to or conferring on a Party, expressly or impliedly, any rights or license to the Confidential Information of the other Party. 8. Termination. 8.1 Termination. (a) In the event that either Party commits an Event of Default, then the other Party may, by giving written notice (i) terminate this Agreement including any Schedule or Exhibit as set forth in Section 8.1(c) for cause as of a date specified in the notice of termination, and (ii) subject to the terms of this Article, pursue any legal remedies it may have under applicable law or principles of equity relating to such breach. Additional events which shall constitute Events of Default under this Agreement are detailed in Schedule 1. Any Event of Default may be waived in writing at the non-defaulting Party's option. (b) Termination may also occur under the condition set forth in Section 11.6(d). (c) If an Event of Default by Winstar exists under any one of Schedule A (Intercity Backbone), Schedule B (Equipment Sale), Schedule C (Installation and Maintenance), Schedule D (Terminal Facility Collocation Space) or Schedule E (Joint Marketing), Wam!Net, at its option, may elect to terminate the Transaction Documents in their entirety or only the affected Schedule. In the event that an Event of Default by Winstar exists under two or more of the schedules referenced in the previous sentence, Wam!Net may only elect to terminate all of the Transaction Documents in their entirety. 8.2 Effect of Termination. Termination of this Agreement refers to the termination of the Parties' respective commitments and obligations from and after the date of termination, but does not relieve the Parties of their payment and other obligations incurred prior to the date of termination and their continuing obligations under Articles 7 and 12 or as may be specifically provided in a Schedule. 9. Inducements. Each Party represents, warrants and covenants that it has not offered or provided any inducements in violation of law or the other Party's policies, of which it has been given notice, in connection with this Agreement. 10. Representations; Disclaimer 10.1 Representations. Each Party represents and warrants to the other that: 12 (a) It has the requisite corporate power and authority to enter into the Transaction Documents and to carry out the transactions contemplated by the Transaction Documents; and (b) The execution, delivery and performance of the Transaction Documents and the consummation of the transactions contemplated by the Transaction Documents have been duly authorized by the requisite corporate action on the part of such Party. (c) Each Party represents that the Transaction Documents have been duly executed and delivered, and create lawful, valid and legally binding obligations, in accordance with their respective terms. The execution and delivery of the Transaction Documents and the consummation of the transactions contemplated hereby are not prohibited by, do not violate or conflict with any provision of, and do not constitute a default under or a breach of: (a) any contract, agreement or other instrument to which it is a party or by which any of the assets that are the subject hereof are bound; or (b) to the Party's knowledge, any order, writ, injunction, decree or judgment of any court or governmental agency. 10.2 Winstar represents that the Network Facilites will function in accordance with the terms of the Transaction Documents for the Term. 10.3 Winstar covenants and agrees that it has or shall obtain any and all rights, licenses, permits, authorizations, consents and approvals (including, without limitation, any necessary local, state, federal or tribal authorizations and environmental permits) as are reasonably necessary in order to permit Winstar to perform all of its obligations under the Transaction Documents, and to permit Wam!Net to use the Capacity and the connectivity as provided and permitted hereunder. 10.4 Manufacturers' Equipment Warranty. Winstar will pass through to Wam!Net all warranties from the manufacturers of the Equipment to the extent Winstar is able pursuant to any agreements between Winstar and such manufacturers. Notwithstanding the foregoing, the existence of such manufacturers' warranties does not diminish or limit Winstar's obligations under Schedule C. 10.5 Disclaimer. EXCEPT AS SPECIFICALLY SET FORTH IN THE TRANSACTION DOCUMENTS, THE PARTIES MAKE NO WARRANTY TO EACH OTHER OR ANY OTHER ENTITY, WHETHER EXPRESS, IMPLIED OR STATUTORY, AS TO THE MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF THE EQUIPMENT, NETWORK FACILITIES, ANY CAPACITY, IRUs, CONNECTIVITY, MAINTENANCE, MANAGEMENT, ANCILLARY SERVICES OR ANY OTHER EQUIPMENT, FACILITIES OR SERVICES PROVIDED OR USED HEREUNDER OR DESCRIBED HEREIN, OR AS TO ANY OTHER MATTER, ALL OF WHICH WARRANTIES ARE HEREBY EXPRESSLY EXCLUDED AND DISCLAIMED. IN NO EVENT, WHETHER IN CONTRACT OR IN TORT (INCLUDING BREACH OF WARRANTY, NEGLIGENCE AND STRICT LIABILITY IN TORT), SHALL 13 A PARTY BE LIABLE FOR INDIRECT OR CONSEQUENTIAL, EXEMPLARY, PUNITIVE OR SPECIAL DAMAGES EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES IN ADVANCE. 11. Liability 11.1 General Intent. Subject to the specific provisions of this Article 11, it is the intent of the Parties that each Party shall be liable to the other Party only for any direct damages incurred by the non-breaching Party as a result of the breaching Party's failure to perform its obligations in the manner required by the Transaction Documents. 11.2 Liability Restrictions. (a) Winstar's liability to Wam!Net whether in contract or in tort (including breach of warranty, negligence and strict liability in tort) shall be limited to the amounts actually paid (including both principal and interest) to Winstar by Wam!Net at the time the event resulting in liablity occurs. (b) The limitation set forth in Subsection (a), above, shall not apply with respect to: (i) third-party claims subject to indemnification pursuant to the Agreement; or (ii) fees due and owing under this Agreement at the time of the claim. (c) For the purposes of this Section 11.2, all amounts payable or paid to third parties in connection with claims that are eligible for indemnification pursuant to this Agreement shall be deemed direct damages. 11.3 Insurance Requirements. (a) During the Term each Party shall obtain and maintain, at its expense, an appropriate insurance policy with terms and coverage thresholds equal to the amounts below and provide the other Party with a certificate of such coverage upon request. Winstar will assist Wam!Net to the extent reasonably requested in the coordination of all insurance claims against Wam!Net's own insurer for any event of loss. Wam!Net shall be responsible for all of Winstar's third-party costs reasonably incurred as a result of such coordination other than Winstar's internal costs. During the Term, each Party shall have and maintain in force the following insurance coverages: (i) Worker's Compensation and Employer's Liability. Worker's Compensation Insurance in amounts required by applicable law and Employers Liability Insurance with limits not less than $1,000,000 each accident. (ii) Commercial General Liability. Each Party shall carry broadform general liability insurance coverage for property damage, bodily injury, personal injury, and contractual liability with coverage of at least $10,000,000 per occurrence and in the aggregate. Total limits can be attained by the inclusion of an Umbrella/Excess Liability policy. 14 (b) Each Party shall cause its insurers to issue certificates of insurance evidencing that the coverages required under this Agreement are maintained in force. The minimum limits of coverage specified herein are not intended, and shall not be construed, to limit any liability or indemnity of either Party under this Agreement. (c) Nothing in this Agreement shall be construed to prevent either Party satisfying its insurance obligations pursuant to this Agreement under a blanket policy or policies of insurance that meet or exceed the requirements of this Article. 11.4 Risk of Loss. (a) For the Network Facilities and any support services provided under the Transaction Documents, each Party shall take all reasonable precautions against, and shall assume liability for, subject to the terms of the Transaction Documents, any damage caused by it to the property of the other Party. Winstar shall bear the risk of loss with regard to the equipment and facilities owned by Winstar that it uses to meet its obligations to Wam!Net under the Transaction Documents; provided, however, that Wam!Net shall be responsible for all damage and loss to such equipment and facilities caused by Wam!Net's gross negligence or willful misconduct. (b) Except as otherwise contemplated herein, for the duration of the Security Interest granted pursuant to Schedule 2, Wam!Net shall not cause or permit any part of the Network Facilities to become subject to any lien, security interests, or encumbrances whether by operation of law or otherwise. 11.5 Performance Obligations Limitation. In the event that Winstar commits a breach of a performance obligation imposed in any of the Exhibits to the Schedules, then Winstar shall provide Wam!Net with a Performance Enhancement credit towards future purchases of Intercity Backbone IRUs, Equipment, connectivity, any support services obtained from Winstar pursuant to a Transaction Document, or any third party carrier's backhaul services for the Wam!Net network, in the amount(s) set forth in the applicable Exhibit. 11.6 Force Majeure. (a) Subject to Section 11.6(d), neither Party shall be liable for any default or delay in the performance of its obligations under the Transaction Documents if and to the extent such default or delay is caused, directly or indirectly, by fire, flood, lightning, earthquake, elements of nature or acts of God, war, riots, civil disorders, rebellions or revolutions, provided that such default or delay could not have been prevented by reasonable precautions and cannot be reasonably circumvented by the non-performing Party through the use of alternate sources, workaround plans or other means, including to the extent contemplated by applicable disaster recovery processes or procedures. 15 (b) In such event, the non-performing Party shall be excused from further performance or observance of the obligation(s) so affected for as long as such circumstances prevail and such Party continues to use commercially reasonable efforts to recommence performance or observance whenever and to whatever extend possible without delay. (c) The term of a Party's performance of any obligation(s) excused by a force majeure event shall be extended by any period(s) of force majeure. (d) If any period of force majeure affecting Winstar's obligations under any Transaction Documents extends for more than thirty (30) days, and (i) if the force majeure event affects all or substantially all of the Network Facilities (a "Major Force Majeure Event"), then either Party may, at its option, terminate this Agreement upon twenty (20) days prior written notice to the other, and in that event, Winstar's failure to perform its obligation shall be considered a non-excused breach; or (ii) for any force majeure event that is not a Major Force Majeure Event (a "Minor Force Majeure Event"), then for a period of one hundred eighty days (180) thereafter, Winstar will provide Wam!Net with a Performance Enhancement credit towards future purchases of Intercity Backbone IRUs, Equipment, connectivity, any support services obtained from Winstar pursuant to a Transaction Document, or any third party carrier's backhaul services for the Wam!Net network, in the amount set forth in Exhibit 3 of Schedule C. If after such one hundred eighty (180) day period, Winstar is unable to perform its obligations with respect to the portion of the Network Facilities affected by such Minor Force Majeure Event, Wam!Net may terminate the portion of the Transaction Documents applicable to such obligation, and in such event, Winstar's inability to perform such obligation shall be considered a non-excused breach. 12. Indemnification 12.1 Indemnities by Winstar. Winstar agrees to indemnify, defend and hold harmless Wam!Net and its Affiliates and their respective officers, directors, employees, agents, successors, and assigns, from any and all Losses and threatened Losses arising from, in connection with, or based on allegations of, any of the following: (a) Winstar's failure to observe or perform any duties or obligations to third parties (e.g., duties or obligations to subcontractors); (b) Any claims of infringement of any patent, trade secret, copyright or other proprietary rights, alleged to have occurred based upon the provision of the Network Facilities by Winstar, except to the extent that such claims arise from (i) modification of the Network Facilities or any component thereof by Wam!Net that is not recommended or otherwise approved by Winstar, (ii) maintenance of the Network Facilities by Wam!Net other than in accordance with the provisions set forth in the Transaction Documents that is not recommended or otherwise approved by Winstar, or (iii) use of the Network Facilities by Wam!Net in combination with deliverables furnished by third parties that is not recommended or otherwise approved by Winstar; 16 (c) The death or bodily injury of any agent, employee, customer, business invitee or any other person caused by the tortious conduct of Winstar; (d) The damage, loss or destruction of any real or tangible personal property caused by the tortious conduct of Winstar; or (e) Any claim, demand, charge, action, cause of action, or other proceeding asserted against Wam!Net but resulting from an act or omission of Winstar in its capacity as an employer of a person. 12.2 Indemnities by Wam!Net. Wam!Net agrees to indemnify, defend and hold harmless Winstar and its Affiliates and their respective officers, directors, employees, agents, successors, and assigns, from any and all Losses and threatened Losses arising from, in connection with, or based on allegations of, any of the following: (a) Wam!Net's failure to observe or perform any duties or obligations to third parties (e.g., duties or obligations to subcontractors); (b) Any claims of infringement of any patent, trade secret, copyright or other proprietary rights, alleged to have occurred based upon misuse of the Network Facilities by Wam!Net, including (i) modification of the Network Facilities or any component thereof by Wam!Net that is not recommended or otherwise approved by Winstar, (ii) maintenance of the Network Facilities other than by Winstar or Winstar's designees in accordance with the provisions set forth in the Transaction Documents that is not recommended or otherwise approved by Winstar, or (iii) use of the Network Facilities by Wam!Net in combination with deliverables furnished by third parties that is not contemplated by the Transaction Documents, recommended or otherwise approved by Winstar; (c) The death or bodily injury of any agent, employee, customer, business invitee or any other person caused by the tortious conduct of Wam!Net; (d) The damage, loss or destruction of any real or tangible personal property caused by the tortious conduct of Wam!Net; or (e) Any claim, demand, charge, action, cause of action, or other proceeding asserted against Winstar but resulting from an act or omission of Wam!Net in its capacity as an employer of a person. 12.3 Infringement. If any item used by Winstar to provide the Network Facilities becomes, or in Winstar's reasonable opinion is likely to become, the subject of an infringement or misappropriation claim or proceeding, in addition to indemnifying Wam!Net as provided in this Article 12 by Winstar and to the other rights Wam!Net may have under the Transaction Documents, Winstar shall, promptly at Winstar's expense: 17 (a) secure the right to continue using the item, or (b) if the action described in Subsection (a) cannot be accomplished by Winstar, replace or modify the item to make it non-infringing, provided that any such replacement or modification will not degrade the fit, form or function of the affected Network Facilities. 12.4 Indemnification Procedures. With respect to third-party claims, the following procedures shall apply: (a) Promptly after receipt of notice of the commencement or threatened commencement of any civil, criminal, administrative, or investigative action or proceeding involving a claim in respect of which Indemnitee will seek indemnification pursuant to this Article, Indemnitee will notify Indemnitor of such claim in writing. No failure to so notify Indemnitor will relieve Indemnitor of its obligations under this Agreement except to the extent that it can demonstrate damages attributable to such failure. Within fifteen (15) Days following receipt of written notice from Indemnitee relating to any claim, but no later than ten (10) Days before the date on which any response to a complaint or summons is due, Indemnitor will notify Indemnitee in writing if Indemnitor elects to assume control of the defense and settlement of that claim (a "Notice of Election"). (b) If Indemnitor delivers a Notice of Election relating to any claim within the required notice period, Indemnitor shall be entitled to have sole control over the defense and settlement of such claim; provided that (i) Indemnitee shall be entitled to participate in the defense of such claim and to employ counsel at its own expense to assist in the handling of such claim, and (ii) Indemnitor shall obtain the prior written approval of Indemnitee before entering into any settlement of such claim or ceasing to defend against such claim. After Indemnitor has delivered a Notice of Election relating to any claim in accordance with the preceding paragraph, Indemnitor shall not be liable to Indemnitee for any legal expenses incurred by Indemnitee in connection with the defense of that claim. In addition, Indemnitor shall not be required to indemnify Indemnitee for any amount paid or payable by the Indemnitee in the settlement of any claim for which the Indemnitor has delivered a timely Notice of Election if such amount was agreed to without the written consent of the Indemnitor. (c) If Indemnitor does not deliver a Notice of Election relating to any claim within the required notice period, Indemnitee shall have the right to defend the claim in such manner as it may in its reasonable judgement deem appropriate, at the cost and expense of Indemnitor. Indemnitor shall promptly reimburse Indemnitee for all such costs and expenses. 13. Dispute Resolution Any dispute between the Parties arising out of or relating to the Transaction Documents, shall be resolved as provided in this Section. 13.1 Informal Dispute Resolution. 18 (a) Prior to the initiation of formal dispute resolution procedures, the Parties shall first attempt to resolve their dispute informally pursuant to this Section. Upon the written request of a Party, each Party shall appoint a representative from its senior management who does not devote substantially all of his or her time to performance under the Transaction Documents, whose task it will be to meet for the purpose of endeavoring to resolve such dispute. If, after thirty (30) days from the written request the representatives from senior management have not resolved such dispute, each Party shall appoint a representative from its executive management whose task it will be to meet for the purpose of endeavoring to resolve such dispute. If, after sixty (60) days from the appointment of such representatives from executive management, the representatives have not resolved such dispute, then the provisions of Section 13.2 shall apply. (i) The designated representatives shall meet as often as the Parties reasonably deem necessary in order to gather and furnish to the other all information with respect to the matter in issue which the Parties believe to be appropriate and germane in connection with its resolution. The representatives shall discuss the problem and attempt to resolve the dispute without the necessity of any formal proceeding. (ii) During the course of discussion, all reasonable requests made by one Party to another for non-privileged information, reasonably related to this Agreement, shall be honored in order that each of the Parties may be fully advised of the other's position. (iii) The specific format for the discussions shall be left to the discretion of the designated representatives. (b) The Parties agree that disputes, controversies or claims between them shall not be subject to the provisions of this Section where: (i) A Party makes a good faith determination that a breach of the terms of the Transaction Documents by the other Party is such that a temporary restraining order or other injunctive relief is the only appropriate and adequate remedy; or (ii) Institution of formal proceedings earlier than as set forth in this Section 13.1 for the resolution of a dispute may be commenced after the earlier of (x) a good faith determination that such proceedings are necessary to avoid the expiration of any applicable limitations period or (y) to preserve a superior position with respect to other creditors. (c) If a Party files a pleading with a court seeking immediate injunctive relief and this pleading is challenged by the other Party and the injunctive relief sought is not awarded in substantial part, the Party filing the pleading seeking immediate injunctive relief shall pay all of the costs and attorneys' fees of the Party successfully challenging the pleading. 19 13.2 Arbitration. Except as providided in Section 13.1(b) any dispute, controversy or claim arising out of or relating to the Transaction Documents or the breach, termination or validity thereof, shall be finally settled in accordance with the commercial arbitration rules of the American Arbitration Association (the "AAA") then obtaining, by a panel of three arbitrators. Each party shall have the right to appoint one arbitrator from the list of arbitrators supplied to the parties by the AAA, and the two arbitrators so appointed shall appoint the third. The place of arbitration shall be the City of New York, New York, U.S.A. The language of the arbitration shall be in English. The arbitrators shall determine the matters in dispute in accordance with the internal law of the State of New York, without reference to the Convention on Contracts for the International Sale of Goods. Except as precluded by the United Nations Convention on the Recognition and Enforcements of Foreign Arbitral Awards, the internal procedural and substantive laws of New York and the United States Federal Arbitration Act shall govern all questions of arbitral procedure, arbitral review, scope of arbitral authority, and arbitral enforcement. The parties agree that the award of the arbitrators shall be the sole and exclusive remedy between them regarding any claims, counterclaims, issues or accountings presented or pled to the arbitrators, that the award shall be made and shall be promptly payable in U.S. dollars, free of any tax, deduction or offset, and that any costs, fees or taxes instant to enforcing the award shall, to the maximum extent permitted by law, be charged against the party resisting such enforcement. The award shall include interest from the date of damages incurred for breach or other violation of the Transaction Documents, and from the date of the award until paid in full, at a rate to be fixed by the arbitrators. No claim may be submitted by a party to arbitration in accordance with this Article 13 unless notified to the other party within one (1) year of the date on which the submitting party first knew or should have known of the existence of the facts indicating the existence of such dispute. 13.3 Continued Performance. Each Party agrees to continue performing its obligations under the Transaction Documents while any dispute is being resolved except to the extent the issue in dispute precludes performance (dispute over payment shall not be deemed to preclude performance). 13.4 Governing Law. The Transaction Documents and performance under them shall be governed by and construed in accordance with the laws of the State of New York without regard to its choice of law principles and the Convention or Contracts for the International Sale of Goods. 14. General 20 14.1 Binding Nature and Assignment. (a) The Transaction Documents shall accrue to the benefit of and be binding upon the Parties hereto and any purchaser or any successor entity into which either Party has been merged or consolidated or to which either Party has sold or transferred all or substantially all of its assets. (b) Except as expressly provided in a Transaction Document, neither Party may, or shall have the power to, assign the Transaction Documents or delegate such Party's obligations hereunder without the prior written consent of the other, except that either Party may assign its rights and obligations under the Transaction Documents without the approval of the other Party to (i) an entity which acquires all or substantially all of the assets of the assigning party, (ii) to any Affiliate, in which event the assignor shall remain liable as a guarantor of the assignee/Affiliate's performance of such Party's obligations hereunder, or (iii) to a successor in a merger or acquisition. 14.2 Notices. Any notices, requests, demands, and determinations under this Agreement (other than routine operational communications), shall be in writing and shall be deemed duly given (i) when delivered by hand, (ii) one (1) business day after being given to an express, overnight courier with a reliable system for tracking delivery, (iii) when sent by confirmed facsimile with a copy delivered by another means specified in this Section, or (iv) four (4) business days after the day of mailing, when mailed by United States mail, registered or certified mail, return receipt requested, postage prepaid, and addressed as follows: If to Wam!Net: If to Winstar: Wam!Net Inc. Winstar Wireless, Inc. 655 Lone Oak Drive 7799 Leesburg Pike Eagan, MN 55121 Suite 700 South Attn: Gary Hokkanen, President Tysons Corner, VA 22043 Facsimile: (651) 994-9591 Attn: Robert K. McGuire, President and Chief Operating Officer Winstar Large Accounts Facsimile: (703) 226-7649 With a copy to: With a copy to: Wam!Net Inc. Winstar Wireless, Inc. 655 Lone Oak Drive 7799 Leesburg Pike 21 Eagan, MN 55121 Suite 700 South Attn: Lisa Gray Tysons Corner, VA 22043 General Counsel Attn: Colleen R. Jones Facsimile: (651) 256-5176 Chief Counsel Winstar Large Accounts Facsimile: (703) 226-7649 A Party may from time to time change its address or designee for notification purposes by giving the other prior written notice of the new address or designee and the date upon which it will become effective. 14.3 Counterparts. The Transaction Documents may be executed in several counterparts, all of which taken together shall constitute one single agreement between the Parties hereto. 14.4 Relationship of Parties. Winstar, in furnishing the Network Facilities and other services hereunder, is acting as an independent contractor, and Winstar personnel (including, without limitation, and any subcontractors) shall not be considered or represented as employees or agents of Wam!Net. Winstar is not otherwise an agent of Wam!Net and has no authority to represent Wam!Net as to any matters, except as expressly authorized in the Transaction Document. Winstar is solely responsible for: (a) performing its responsibilities under the Transaction Documents, (b) management and control of its personnel; (c) the payment of all compensation owed to its personnel, including payment of employment-related taxes, benefits, and worker's compensation insurance; (d) the filing of all required employment returns and reports; and (e) the withholding and payment of all applicable federal, state, and local taxes and other wage or employment assessments, including but not limited to income tax, social security tax, and unemployment insurance premiums for its personnel. 14.5 Severability. (a) In the event that any provision of the Transaction Documents conflicts with the law under which the Transaction Documents are to be construed or if any such provision is held invalid by an arbitrator or a court with jurisdiction over the Parties, such provision shall be deemed to be modified to reflect as nearly as possible the original intentions of the Parties in accordance with applicable law. The remainder of the Transaction Documents shall remain in full force and effect. (b) If such modification would substantially deprive either party of the economic benefit of the Transaction Documents as originally executed, then that Party may terminate the Transaction Documents. Any disputes over whether a modification under this Section should allow a termination of the Transaction Documents shall be resolved in accordance with Section 13. 22 (c) If the FCC or any state body of competent jurisdiction determines that any provision of the Transaction Documents violates any applicable rules, policies, or regulations, both Parties shall make reasonable efforts to immediately bring the Transaction Documents into compliance and shall endeavor in those efforts to preserve for both Parties the economic benefits as reflected in the Transaction Documents to the maximum extent possible. If it is impossible to preserve the economic benefits, then Section 14.5(b) will apply. 14.6 Consents and Approval. Except where expressly provided as being in the sole discretion of a Party, where agreement, approval, acceptance, consent, or similar action by either Party is required under this Agreement, such action shall not be unreasonably delayed or withheld. An approval or consent given by a Party under this Agreement shall not relieve the other Party from responsibility for complying with the requirements of the Transaction Documents, nor shall it be construed as a waiver of any rights under the Transasction Documents, except as and to the extent otherwise expressly provided in such approval or consent. 14.7 Waiver of Default. No waiver or discharge hereof shall be valid unless in writing and signed by an authorized representative of the Party against which such amendment, waiver, or discharge is sought to be enforced. A delay or omission by either Party hereto to exercise any right or power under the Transaction Documents shall not be construed to be a waiver thereof. A waiver by either of the Parties of any of the covenants to be performed by the other or any breach thereof shall not be construed to be a waiver of any succeeding breach thereof or of any other covenant. 14.8 Cumulative Remedies. Except as otherwise expressly provided, all remedies provided for in the Transaction Documents shall be cumulative and in addition to and not in lieu of any other remedies available to either Party at law, in equity or otherwise. 14.9 Survival. Any provision of the Transaction Documents which contemplates performance or observance subsequent to any termination or expiration of the Transaction Documents (in whole or in part) shall survive any termination or expiration of the Transaction Documents (in whole or in part, as applicable) and continue in full force and effect. 14.10 Public Disclosures. All media releases, public announcements, and public disclosures relating to this Agreement or the subject matter of this Agreement, including promotional or marketing material, but not including announcements intended solely for internal distribution or disclosures to the extent required to meet legal or regulatory requirements beyond the reasonable control of the disclosing Party, shall be coordinated with and shall be subject to approval by each Party prior to release. 14.11 Third Party Beneficiaries. Except as otherwise provided in the Transaction Documents, the Transaction Documents shall not be deemed to create any 23 rights in third parties, including suppliers and customers of a Party, or to create any obligations of a Party to any such third parties. 14.12 Amendment. The Transaction Documents shall not be modified, amended or in any way altered except by an instrument in writing signed by both Parties. 14.13 Interpretation. (a) Terms other than those defined in the Transaction Documents shall be given their plain English meaning, and those terms, acronyms and phrases known in the telecommunications and information technology services industries shall be interpreted in accordance with their generally known meanings. Unless the context otherwise requires, words importing the singular include the plural and vice-versa. (b) References to "Article," "Section," "Subsection" and "Schedule" mean references to an article, section, subsection or schedule of the Transaction Documents, as appropriate, unless otherwise specifically stated. (c) The article and section headings in the Transaction Documents are intended to be for reference purposes only and shall in no way be construed to modify or restrict any of the terms or provisions of the Transaction Documents. (d) The words "include," "includes," and "including," when following a general statement or term, are not to be construed as limiting the general statement or term to any specific item or matter set forth or to similar items or matters, but rather as permitting the general statement or term to refer also to all other items or matters that could reasonably fall within its broadest scope. (e) All dollar amounts referred to in the Transaction Documents are in United States dollars. 14.14 Incorporation by Reference and Order of Precedence. (a) Any conflict among or between the documents making up the Transaction Documents will be resolved in accordance with the following order of precedence (in descending order of precedence): (i) The Exhibits; (ii) The Schedules, and (iii) The Agreement. (b) In the event of conflict between the documents making up the Transaction Documents and the terms and conditions of any purchase order issued by either Party, the terms of the Transaction Documents shall supersede any such purchase order. 24 14.15 Entire Agreement. The Transaction Documents, constitute the entire agreement between the Parties with respect to the subject matter in this Agreement, and supersede all prior agreements, whether written or oral, with respect to the subject matter contained in this Agreement. 25 IN WITNESS WHEREOF, this Agreement has been executed and delivered by the undersigned officers, thereunto, duly authorized, as of the date first written above. WAM!NET INC. WINSTAR WIRELESS, INC. By: /s/ Edward J. Driscoll By: /s/ Ken Patterson ------------------------- ---------------------------- Name: Name: ----------------------- -------------------------- Title: Title: ---------------------- ------------------------- Date: Date: ----------------------- -------------------------- 26 EX-23.1 14 CONSENT OF ERNST & YOUNG LLP 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 2, 2000, with respect to the consolidated financial statements and schedule of WAM!NET Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young LLP Minneapolis, Minnesota March 14, 2000 EX-27 15 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 27,180 0 5,552 1,570 1,254 435,255 398,009 39,673 435,255 81,478 490,450 1,212 88 95 (148,068) 435,255 7,476 24,795 2,905 29,223 101,195 1,570 35,693 (139,227) 0 (139,227) 0 0 0 (145,117) (15.58) (15.58)
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