-----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, BqGzeK7l+++Tsia9aRqk8f8POJImR7FwyUP/59st/Oo2TwcybBDp54kp1WR+XvE2 x7N/LskAs65HVMDKlZEcOg== 0001045969-00-000374.txt : 20000517 0001045969-00-000374.hdr.sgml : 20000517 ACCESSION NUMBER: 0001045969-00-000374 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WAM NET INC CENTRAL INDEX KEY: 0001060274 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 411795247 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-53841 FILM NUMBER: 636624 BUSINESS ADDRESS: STREET 1: 655 LOAN OAK DR CITY: EGAN STATE: MN ZIP: 55121 BUSINESS PHONE: 6512565100 MAIL ADDRESS: STREET 1: 6100 W 110TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55438 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ____________ Commission file number: 333-53841 WAM!NET Inc. (Exact name of registrant as specified in its charter) Minnesota 41-1795247 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 655 Lone Oak Dr Eagan, Minnesota 55121 (Address of principal executive offices) (Zip Code) (651) 256-5100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of March 31, 2000 there were 9,747,227 shares of the Corporation's Common Stock, par value $.01 per share, outstanding. Total number of pages in this report: 22 WAM!NET Inc. INDEX TO FORM 10-Q Part I--Financial Information
Page No. -------- Item 1--Financial Statements Consolidated Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999................................................................................... 3 Consolidated Statements of Operations for the three months in the period ended March 31, 2000 and 1999 (unaudited).............................................. 5 Consolidated Statements of Cash Flows for the three months in the periods ended March 31, 2000 and 1999 (unaudited).................................................... 6 Notes to Consolidated Financial Statements (unaudited)................................... 8 Item 2--Management's Discussion and Analysis of Results of Operations and Financial Condition.............................................................. 10 Item 3--Quantitative and Qualitative Disclosures About Market Risk........................... 16 Part II--Other Information Item 2--Changes in Sercurities and Use of Proceeds........................................... 17 Item 4--Submission of Matters to a Vote of Security Holders.................................. 17 Item 6--Exhibits and Reports on Form 8-K..................................................... 17 Signature --.......................................................................................... 18 Exhibit Index--....................................................................................... 19
-2- Part I--FINANCIAL INFORMATION Item 1--Financial Information WAM!NET Inc. Consolidated Balance Sheets (Dollars in thousands)
March 31, December 31, 2000 1999 ------------ ----------- (Unaudited) Assets Current assets: Cash and cash equivalents........................................................... $ 37,292 $ 27,180 Investment.......................................................................... 64,286 -- Accounts receivable, net of allowance of $1,225 and $1,570, respectively............ 3,685 3,982 Inventory........................................................................... 955 1,254 Prepaid expenses and other current assets........................................... 4,068 4,018 -------- -------- Total current assets.................................................................. 110,286 36,434 Property, plant, and equipment, net................................................... 356,511 358,336 Goodwill, net......................................................................... 20,101 21,421 Deferred financing charges, net....................................................... 16,544 18,300 Other assets.......................................................................... 912 764 -------- -------- Total assets.......................................................................... $504,354 $435,255 ======== ========
-3- WAM!NET Inc. Consolidated Balance Sheets (continued) (Dollars in thousands)
March 31, December 31, 2000 1999 ------------ -------------- (Unaudited) Liabilities and shareholders' deficit Current liabilities: Accounts payable................................................................... $ 5,911 $ 13,739 Accrued salaries and wages......................................................... 3,274 2,839 Accrued expenses................................................................... 8,002 6,450 Deferred Revenue................................................................... 2,500 2,500 Current portion of long-term debt.................................................. 37,175 55,950 --------- --------- Total current liabilities............................................................ 56,862 81,478 Deferred Revenue..................................................................... 10,000 10,000 Long-term debt, less current portion................................................. 490,489 490,450 Class A Redeemable Preferred Stock................................................... 1,239 1,212 Shareholders' deficit: Class B Convertible Preferred Stock................................................ 57 57 Class C Convertible Preferred Stock................................................ 9 9 Class D Convertible Preferred Stock................................................ 22 22 Class E Convertible Preferred Stock................................................ 1 -- Class F Convertible Preferred Stock................................................ -- -- Class G Convertible Preferred Stock................................................ -- -- Common Stock....................................................................... 97 95 Additional paid-in capital......................................................... 276,176 156,680 Accumulated deficit................................................................ (343,392) (303,614) Accumulated other comprehensive income (loss)...................................... 12,794 (1,134) --------- --------- Total shareholders' deficit.......................................................... (54,236) (147,885) --------- --------- Total liabilities and shareholders' deficit.......................................... $ 504,354 $ 435,255 ========= =========
See accompanying notes. -4- WAM!NET Inc. Consolidated Statements of Operations (Dollars in thousands, except per share amounts)
Three months ended March 31, ----------------------------- 2000 1999 ---------- ---------- (Unaudited) Revenues: Net service revenues............................................................ $ 6,183 $ 3,128 Software and hardware sales..................................................... 1,712 1,710 ---------- ---------- Total revenues.................................................................... 7,895 4,838 Operating expenses: Network communication fees...................................................... 7,172 6,477 Cost of software and hardware................................................... 546 823 Network operations and development.............................................. 5,421 5,983 Selling, general, and administrative............................................ 11,917 10,299 Depreciation and amortization................................................... 8,653 8,206 ---------- ---------- 33,709 31,788 ---------- ---------- Loss from operations.............................................................. (25,814) (26,950) Other income (expense): Interest income................................................................. 206 200 Interest (expense).............................................................. (15,261) (10,074) Other income.................................................................... 1,092 29 ---------- ---------- Net loss.......................................................................... (39,777) (36,795) Less preferred dividends........................................................ (2,244) (555) ---------- ---------- Net loss applicable to common stock............................................... $ (42,021) $ (37,350) ========== ========== Net loss applicable per common share - basic and diluted.......................... $ (4.41) $ (4.01) ========== ========== Weighted average number of common shares outstanding - basic and diluted.......... 9,524,227 9,294,127 ========== ==========
See accompanying notes. -5- WAM!NET Inc. Consolidated Statements of Cash Flows (Dollars in thousands)
Three months ended March 31, ----------------------------- 2000 1999 ---------- ---------- (Unaudited) Operating activities Net loss.......................................................................... $(39,777) $(36,795) Adjustments to reconcile net loss to net cash used in operating activities: Noncash interest expense, including related warrants values..................... 7,118 8,564 Value of stock options issued to employees and consultants...................... 161 87 Depreciation and amortization................................................... 8,653 8,206 Changes in operating assets and liabilities: Accounts receivable.......................................................... 296 (752) Prepaid expenses and other assets............................................ 100 (420) Accounts payable............................................................. (7,828) (5,467) Accrued expenses............................................................. 1,993 (962) -------- -------- Net cash used in operating activities............................................. (29,284) (27,539) Investing activities Purchases of property and equipment............................................... (5,091) (9,791) Investment in Winstar Communications, Inc......................................... (50,000) -- Business acquisitions (net of cash acquired)...................................... (353) -- -------- -------- Net cash used in investing activities............................................. (55,444) (9,791) Financing activities Proceeds from sale of preferred stock............................................. 119,098 59,514 Proceeds from borrowings (net of financing expenses).............................. 477 3,500 Proceeds from exercise of stock options........................................... 199 5 Payments on borrowings............................................................ (24,576) (1,472) -------- -------- Net cash provided by financing activities......................................... 95,198 61,547 Effect of foreign currencies on cash.............................................. (358) (318) -------- -------- Net increase in cash and cash equivalents......................................... 10,112 23,899 Cash and cash equivalents at beginning of period.................................. 27,180 6,272 -------- -------- Cash and cash equivalents at end of period........................................ $ 37,292 $ 30,171 ======== ========
See accompanying notes. -6- WAM!NET Inc. Consolidated Statements of Cash Flows (continued) (Dollars in thousands)
Three months ended March 31, ----------------------------- 2000 1999 ---------- ---------- (Unaudited) Supplemental schedule of noncash financing activities Conversion of accrued interest to subordinated debt......................... $ -- $ 458 Issuance of convertible preferred stock in exchange for land, building and furniture & fixtures...................................... -- 40,000 Dividends declared but unpaid............................................... 20 -- Change in Market Value of Investments....................................... 14,286 -- Issuance of common stock relating to acquisition............................ 62 -- Conversion of accrued dividends to preferred stock.......................... -- 152 Supplemental schedule of cash flow information Cash paid for interest...................................................... $ 7,577 $ 1,033
See accompanying notes. -7- WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Consolidated Financial Statements The accompanying consolidated financial statements have been prepared by WAM!NET Inc. (the "Company") without audit and reflect all adjustments (consisting only of normal and recurring adjustments and accruals) which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. The statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of regulation S-X, but omit certain information and footnote disclosures necessary to present the statements in accordance with generally accepted accounting principles. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company's audited Consolidated Financial Statements for the year ended December 31, 1999. The December 31, 1999 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Certain amounts for the prior year have been reclassified to conform to current year presentation. 2. Consolidation Policy and Foreign Currency Translations The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its 60% 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. 3. Short-Term Investments The short-term investment consists of Winstar Communications, Inc. common stock which we received as proceeds from the sale of preferred stock. This investment is classified as an available for sale security and is recorded at its fair value at March 31, 2000. The unrealized gains and losses are reflected as a component of accumulated other comprehensive income (loss). 4. Preferred Stock In March, 2000, the Company entered into a transaction whereby Winstar Communications, Inc. 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 rate of $5.16 per share of common stock, subject to -8- 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. (beginning after the later to occur of (i) the closing of an underwritten public offering of common stock raising at least $50,000,000 of gross proceeds or (ii) the third anniversary of the date of issuance of the Class E convertible preferred stock) at the then applicable conversion rate, subject to adjustment for certain anti-dilution provisions, on the last trading day of the first period of 20 consecutive trading days during which the average (weighted by trading volume) closing price per share of common stock during such 20 consecutive trading day period is at least 155% of the then applicable conversion price. 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 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. 5. Comprehensive Income Comprehensive income for the Company includes net loss, the effects of currency translation which are charged or credited to the cumulative translation adjustment account within stockholders' equity, and the unrealized gain/loss on investments available for sale which is recorded within stockholders equity. Comprehensive income for the three months ended March 31, 2000 and 1999 was as follows:
- -------------------------------------------------------------------------------------------------------------------- For the three months ended March 31, - -------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 ----- ---- - -------------------------------------------------------------------------------------------------------------------- Net loss $(39,777) $(36,795) - -------------------------------------------------------------------------------------------------------------------- Changes in cumulative translation adjustments (358) (318) - -------------------------------------------------------------------------------------------------------------------- Unrealized gain/loss on investments 14,286 -- -------- -------- - -------------------------------------------------------------------------------------------------------------------- Comprehensive loss $(25,849) $(37,113) - --------------------------------------------------------------------------------------------------------------------
-9- Item 2--Management's Discussion and Analysis of Results of Operations and Financial Condition MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is based on the historical results of WAM!NET Inc. (the ''Company'') and should be read in conjunction with the Company's Financial Statements included 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. 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 capacity 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 -10- third quarter of 1999. Internet Gateway Service allows connection to our network over the Internet. We provide hosted media applications with our managed data services 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 March 31, 2000, we had over 11,400 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 unit 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 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 -11- 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 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. -12- Results of Operations Three Month Period Ended March 31, 2000 Compared with Three Month Period Ended March 31, 1999 Revenues Total revenue for the three months ended March 31, 2000 was $7.9 million compared to $4.8 million for the three months ended March 31, 1999, an increase of $3.1 million or 63.2%. This increase in revenues was due to a greater demand for managed data and application services. Net service revenue was $6.2 million for the three months ended March 31, 2000 compared to $3.1 million for the three months ended March 31, 1999, an increase of $3.1 million or 97.7%. This increase in net service revenue was primarily due to growth in the number of subscribers purchasing our services and increased utilization by subscribers. Revenues from software and hardware sales for the three months ended March 31, 2000 and 1999 remained flat at $1.7 million. We expect that sales of 4-Sight software and hardware products will continue shifting to sales of service contracts. Operating Expenses Network communication Network communication expense for the three months ended March 31, 2000 was $7.2 million compared to $6.5 million for the three months ended March 31, 1999, an increase of $0.7 million or 10.7%. 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 three months ended March 31, 2000 was $0.5 million compared to $0.8 million for the three months ended March 31, 1999. This decrease reflects the mix of hardware and software sold as stand alone products or in association with ISDN Tracked Service agreements. Network operations and development Network operations and development expense for the three months ended March 31, 2000 was $5.4 million compared to $6.0 million for the three months ended March 31, 1999, a decrease of $0.6 million or 9.4%. The decrease was primarily due to completion of several development projects during 1999, 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 -13- Belgium and deploying our network in Europe. 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 three months ended March 31, 2000 was $11.9 million compared to $10.3 million, an increase of $1.6 million or 15.7%. The increase reflects increases in marketing expenses, for introduction of new services and tradeshows, and increases to support the growth of the company. 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 three months ended March 31, 2000 was $8.7 million compared to $8.2 million for the three months ended March 31, 1999, an increase of $0.5 million or 5.5%. This increase was primarily due to depreciation of additional network and related equipment purchased for network expansion. Included in these totals for 2000 and 1999 was $1.7 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 both of the three months ended March 31, 2000 and March 31, 1999 was $0.2 million. Interest expense Interest expense for the three months ended March 31, 2000 was $15.3 million compared to $10.1 million for the three months ended March 31, 1999, an increase of $5.2 million or 51.5%. The increase is related to the increase in long-term debt necessary to fund operations including network facilities. Included in interest expense for the three months ended March 31, 2000 and 1999, are non- cash charges of $7.1 million, and $8.6 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 for the three months ended March 31, 2000 was $1.1 million compared to $.03 million for the three months ended March 31, 1999, an increase of $1.1 million. Other income 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 March 31, 2000, we had approximately $211.5 million of net operating loss carryforwards. These carryforwards are available to offset future taxable income through the year 2020 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. -14- 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 $346.6 million as of March 31, 2000. We expect to continue to operate at a net loss and experience negative cash flow from operating activities for the foreseeable future. Through March 31, 2000, we have issued equity and debt securities and incurred other borrowings resulting in cash received by us of $432.0 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. 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 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, which 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. In March, 2000, the Company entered into a transaction whereby Winstar Communications, Inc. 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, provided that no holder (based solely on its ownership of Class E convertible preferred stock) shall be entitled to more than the number of votes equal 17.5% of the voting power outstanding on the record date for the vote being taken (and therefore to the extent that its ownership of Class E convertible 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 convertible preferred stock, the maximum voting percentage any such holder may have is equal to 17.5% multiplied by a ratio, the numerator of which is the number of shares of Class E convertible preferred stock held by such stockholder and the denominator of which is 50,000, 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. -15- 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 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 this offering. We believe the capital resources obtained from the foregoing transactions, together with other financing resources available to the Company, will be sufficient to fund our business plan through the current fiscal year. 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 3--Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Exchange Rates During the three month period ended March 31, 2000, our revenue originating outside the U.S. was 36.1% 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 three months ended March 31, 2000, a 100 basis point change in interest rates would not change interest expense by a -16- 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. Cash Equivalents and Investments We account for cash equivalents and our investment in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Cash equivalents are short- term, highly liquid investments with original maturity dates of three months or less. Cash equivalents are carried at cost, which approximates fair market value. Our investment is classified as available-for-sale and is recorded at fair value with any unrealized gain or loss recorded as an element of stockholders' equity. Part II--OTHER INFORMATION Item 2 - Changes in Securities and Use of Proceeds (c) The information required by this Item 2 of Part II has been previously reported in Item 2 of Part I of this Form 10-Q, and is incorporated herein by reference. For a complete discussion of the transactions involving recent sales of unregistered securities of the Company please see "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." The sale of the Class E Preferred Stock, Class F Preferred Stock and Class G Preferred Stock were exempt from the registration requirements of Section 5 of the Securities Act of 1933 (the "Securities Act") pursuant to the provisions of Section 4(2) of the Securities Act. Item 4 - Submission of Matters to Vote of Security Holders. On March 29, 2000, the shareholders at a Special Meeting amended the Company's Articles of Incorporation to eliminate certain anti-takeover provisions otherwise applicable under Minnesota law and to require the affirmative vote of at least three-fourths (3/4ths) of the total voting power of the Company to reinstitute the applicability of such provisions. The anti- takeover provisions that were eliminated generally limit the voting rights of securities held by a shareholder representing more than 20% of the voting stock and permit the Company to reacquire such securities from such holder. The shareholders also amended the Articles to eliminate reference to an outdated class of preferred stock and to change the authorized capital of the Company, and also authorized the filing of the Restated Articles of Incorporation incorporating the actions approved at the Special Meeting. The votes cast in connection with each such action were as follows: 1. Providing that Section 302A.671 of Minnesota Statutes ("Control Share Acquisitions") shall not apply to the Company: For: 6,207,520 Against: 2,500 Withhold Authority: 55,833 Abstain 18,710,271. 2. Requiring 3/4ths affirmative vote of the total voting power of the Company to make Section 302A.671 of Minnesota Statutes applicable to the Company in the future: For: 6,206,687 Against: 3,333 Withhold Authority: 55,833 Abstain 18,710,271. 3. Eliminating reference to outdated Class A Preferred stock: For: 6,262,520 Against: 2,500 Withhold Authority: 833 Abstain 18,710,271. 4. Changing authorized capital stock from 490,000,000 common shares and 10,000,000 undesignated shares to 480,000,000 common shares and 20,000,000 undesignated shares: For: 6,262,520 Against: 2,500 Withhold Authority: 833 Abstain 18,710,271. 5. Adopting Restated Articles of Incorporation reflecting actions taken at Special Meeting: For: 6,264,187 Against: 833 Withhold Authority: 833 Abstain 18,710,271. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index (b) Reports on Form 8-K None -17- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. WAM!NET Inc. Date: May 11, 2000 By: /s/ Terri F. Zimmerman ------------------------ Terri F. Zimmerman Chief Financial Officer -18- EXHIBIT INDEX
Item Number Description - ------ ----------- 2.1 (1) Agreement for the Sale and Purchase of the entire issued share capital of WAM!NET U.K. Limited dated February 11, 1998, among the Company, WAM!NET (UK) Limited and the Selling Shareholders listed therein. 2.2 (1) Agreement and Plan of Reorganization dated December 17, 1997 by and among NetCo Communications Corporation, NetCo Acquiring Corporation, FreeMail, Inc. and the shareholders listed therein. 2.3 (4) June 1, 1999 Amendment to the Agreement and Plan of Reorganization, dated December 17, 1997, by and among the Company, NetCo Acquisition Corporation, FreeMail, Inc. and the shareholders listed therin. 3.1 * 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 ($200.0 million). 4.2b (1) Certificate for the Rule 144A Original Notes ($8.0 million). 4.3 (1) Certificate for the Regulation S Original Notes. 4.4 (1) Certificate for the Rule 144A Warrants. 4.5 (1) Certificate for the Regulation S Warrants. 4.6a (1) Rule 144A Unit Certificate. (200,000 Units) 4.6b (1) Rule 144A Unit Certificate. (8,030 Units) 4.7 (1) Certificate for the Regulation S Units. 4.8 (1) Form of Certificate for the Exchange Notes (incorporated herein by reference and included in Exhibit 4.1 to the Company's Registration Statement on Form S-4 filed with Securities and Exchange Commission on May 28, 1998). 4.9 (1) Common Stock Certificate. 4.10 (1) Registration Rights Agreement, dated March 5, 1998, among the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. 4.11 (1) Common Stock Registration Rights Agreement, dated as of March 5, 1998, among the Company, MCI 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 MCI 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, ($25.0 million 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 MCI WorldCom Inc. on September 26, 1997 (Incorporated herein by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-4 (File No. 333-53841) filed with the Securities and Exchange Commission on May 28, 1998). 4.17 (2) Subordinate Unsecured Convertible Note and Warrant Purchase Agreement between the Company and MCI WorldCom, Inc. dated January 13, 1999.
-19- 4.18 (2) Preferred Stock Purchase Agreement by and between the Company and Silicon Graphics, Inc. dated as of March 3, 1999. 4.19 (2) Certificate for 150,000 Warrants to purchase shares of Common Stock for the purchase price of $.01 per share dated January 13, 1999. 4.20 (2) Certificate of Designation of Rights and Preferences of Class A Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999, as corrected and filed with the Secretary of State of the State of Minnesota on March 5, 1999. 4.21 (2) Certificate of Designation of Rights and Preferences of Class B Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999. 4.22 (2) Certificate of Designation of Rights and Preferences of Class C Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999. 4.23 (2) Certificate of Designation of Rights and Preferences of Class D Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on March 4, 1999. 4.24 (2) Certificate representing 115,206 shares of Class A Preferred Stock of the Company issued to MCI WorldCom. Inc. on March 4, 1999. 4.25 (2) Certificate representing 5,710,425 shares of Class B Convertible Preferred Stock of the Company issued to Silicon Graphics, Inc. on March 4, 1999. 4.26 (2) Certificate representing 878,527 shares of Class C Convertible Preferred Stock of the Company issued to Silicon Graphics, Inc. on March 4, 1999. 4.27 (2) Certificate representing 2,196,317 shares of Class D Convertible Preferred Stock of the Company issued to MCI WorldCom. Inc. on March 4, 1999. 4.28 (2) Stockholders Agreement by and among the Company, Silicon Graphics, Inc. and MCI WorldCom, Inc. dated as of March 4, 1999. 4.29 (2) Class A Preferred Stock Exchange Agreement by and between the Company and MCI WorldCom, Inc. dated as of March 4, 1999. 4.30 (2) Class D Preferred Stock Conversion Agreement by and between the Company and MCI WorldCom, Inc. dated as of March 4, 1999. 4.31 (6) 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, 2000, as corrected and filed with the Secretary of State of the State of Minnesota on March 1 and March 8, 2000. 4.32 (6) 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, 2000, as corrected and filed with the Secretary of State of the State of Minnesota on March 1 and March 9, 2000. 4.33 (6) Certificates 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 February 6, 2000. 4.34 (6) Securities Purchase Agreement, dated as of December 31, 1999, by and between the Company and Winstar Communications, Inc. 4.35 (6) Securities Purchase Agreement, dated as March 14, 2000, by and between the Company and Cerebrus Partners, L.P. 4.36 (6) Securities Purchase Agreement, dated February 3, 2000, by and between the Company and Silicon Graphics, Inc. 4.37 (6) 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 (6) Form of Certificate for Shares of Class E Convertible Preferred Stock of the Company. 4.39 (6) Form of Certificate for shares of Class F Convertible Preferred Stock of the Company. 4.40 (6) Form of Certificate for shares of Class G Convertible Preferred Stock of the Company. 4.41 (6) 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.
-20- 10.2 (1) Ten Percent Convertible Note Purchase Agreement between the Company and MCI WorldCom, Inc., dated September 12, 1996 ($5.0 million Note). 10.3 (1) Preferred Stock, Subordinated Note and Warrant Purchase Agreement between the Company and MCI WorldCom, Inc., dated November 14, 1996. 10.4 (1) $28.5 million Seven Percent Subordinated Note due December 31, 2003, payable to MCI WorldCom, Inc. 10.5 Intentionally omitted. 10.6 Intentionally omitted. 10.7 (1) Right of Refusal Agreement Among WorldCom Inc., Edward Driscoll III and Alan L. Witters dated December 16, 1996. 10.8 (1) Guaranty Agreement dated September 26, 1997, by and between the Company and MCI 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 MCI 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 MCI WorldCom, Inc. modifying certain terms of the (i) 10% Convertible Subordinated Note, due September 30, 1999, (ii) 7% Subordinated Note, due December 31, 2003, and (iii) 100,000 shares of Series A Preferred Stock, all of which are held by MCI WorldCom, Inc. (incorporated herein by reference to exhibit No. 4.17 to the Company's Registration Statement on Form S-4 (File No. 333-53841) filed with the Securities and Exchange Commission on May 28, 1998) 10.18 (1) 1994 Stock Option Plan 10.19 (1) Amended and Restated 1994 Stock Option Plan 10.20 (1) 1998 Combined Stock Option Plan. 10.21 (1) Agreement dated June 5, 1997 between the Company and WorldCom, Inc. regarding data services provided by MCI 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 ommitted pursuant to a request for confidential treatment and have been filed with the Securities Commission under separate cover). 10.23 (2) Sale and Purchase Agreement by and between Silicon Graphics, Inc., on behalf of itself and its wholly-owned subsidiary, Cray Research, L.L.C., and the Company dated as of March 4, 1999. 10.24 (2) Lease by and between the Company and Silicon Graphics, Inc. on behalf of itself and its wholly-owned subsidiary, Cray Research, L.L.C., with respect to the Company's corporate campus facility located in Eagan, Minnesota dated as of March 4, 1999. 10.25 Intentionally omitted. 10.26 Intentionally omitted. 10.27 (4) Loan and Security Agreement, dated July 16, 199, 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 No. 1 to the 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 (6) Master Agreement by and between Winstar Wireless, Inc. and the Company, dated December 31, 1999. 27.1 Financial Data Schedule.
________________ -21- (1) Incorporated herein by reference to our Registration Statement on Form S-4 (File No. 333-53841), filed with the SEC on May 28, 1998. (2) Incorporated herein by reference to our Annual Report on Form 10-K, filed with the SEC on March 31, 1999. (3) Incorporated herein by reference to our Quarterly Report on Form 10-Q, filed with the SEC on May 17, 1999. (4) Incorporated herein by reference to our Quarterly Report on Form 10-Q, filed with the SEC on August 4, 1999. (5) Incorporated herein by reference to our Quarterly Report on Form 10-Q, filed with the SEC on November 12, 1999. (6) Incorporated herein by reference to our Annual Report on Form 10-K, filed with the SEC on March 15, 2000. * Filed herein. -22- EX-3.1 2 AMENDED AND RESTATED ARTICLES OF INCORPORATION Exhibit 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION of WAM!NET INC. ARTICLE 1.1. NAME The name of the corporation is WAM!NET Inc., which shall be referred to in these Amended and Restated Articles of Incorporation as the "Corporation." ARTICLE 2.2. REGISTERED OFFICE The address of the registered office of the Corporation in Minnesota is 655 Lone Oak Drive, Eagan, Minnesota 55121. ARTICLE 3.3. DURATION The duration of the Corporation shall be perpetual. ARTICLE 4.4. PURPOSE The Corporation is organized for general business purposes. ARTICLE 5.5. POWERS The Corporation shall have the unlimited power to engage in and to do any act necessary or incidental to the carrying out of its purposes, together with the power to do or perform any acts consistent with or which may be implied from the powers expressly conferred upon corporations by Minnesota Statutes, Chapter 302A. ARTICLE 6.6. STOCK 6.1) Capitalization. The aggregate number of shares of stock that the Corporation has authority to issue shall be five hundred million (500,000,000) shares, which shall consist of (a) four hundred eighty million (480,000,000) shares of common stock, with a par value of One Cent ($.01) per share ("Common Stock"); and (b) twenty million (20,000,000) shares of undesignated stock ("Undesignated Stock"). The Board of Directors of the Corporation is authorized to establish from the Undesignated Stock, by resolution adopted and filed in the manner provided by law, one or more classes or series of shares, to designate each such class or series (which may include but is not limited to designation as additional Common Stock), and to fix the relative rights and preferences of each such class or series. 6.2) Prior Certificates of Designation. A number of shares of Undesignated Stock have already been designated by the Board of the Directors of the Corporation pursuant to those certain Certificates of Designation, and amendments and corrections thereto, previously adopted by the Board of Directors of the Corporation and filed with the Minnesota Secretary of State as further described on Schedule 1 attached hereto (collectively, the "Certificates). The Certificates shall remain in full force and effect in accordance with their respective terms after the effective date of these Amended and Restated Articles of Incorporation. Any other Certificates of Designation filed by the Company prior to the effective date of these Amended and Restated Articles of Incorporation and not described on Schedule 1 attached hereto are hereby canceled. Any shares currently issued and outstanding pursuant to the Certificates, as amended and identified on Schedule 1, shall remain issued and outstanding shares after the Effective Date subject to the same designations, rights and preferences stated in the Certificates, as amended, and these Amended and Restated Articles of Incorporation. Any such shares that are hereafter converted into shares of Common Stock pursuant to the terms of the Certificates, as amended, or redeemed, purchased or otherwise acquired by the Company shall be retired and canceled promptly after such conversion, redemption, purchase or acquisition and shall become authorized but unissued shares of Undesignated Stock and may be reissued subject to the conditions and restrictions on issuance in these Amended and Restated 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. 6.3) Preemptive Rights. Shareholders shall not have any preemptive or preferential rights for or to shares of this Corporation, whether now or hereafter authorized, or to any obligations convertible into shares of this Corporation, or to any options, warrants or other rights to acquire shares of this Corporation, or to any subscription or right of subscription therefor, except such, if any, as may be provided in any Certificate or as the Board of Directors in its sole discretion may determine from time to time, and at such price or terms as the Board of Directors may fix. The Board of Directors may, at any time and from time to time, issue and sell for such consideration as may be permitted by law and these Amended and Restated Articles of Incorporation, any or all of the authorized shares of the Corporation not then issued and any and all of any stock of any class or series that may hereafter be authorized. 6.4) Issuance of Shares. Subject to this Article 6, the Board of Directors may issue any or all shares of the Corporation 2 authorized by these Amended and Restated Articles of Incorporation and not already issued, including any shares previously issued and reacquired by the Corporation. Upon approval by the Board of Directors, shares may be issued (i) for any consideration determined appropriate by the Board of Directors, or (ii) for no consideration in order to effectuate share conversions, dividends or splits, including reverse splits. 6.5) Issuance of Rights to Acquire Shares. Subject to Section 6.4, the Board of Directors may issue rights to purchase shares of the Corporation, and shall fix the terms, provisions and conditions of such rights to purchase, including the conversion basis and the price at which shares may be purchased or subscribed for. Shares to be issuable upon the exercise of all outstanding rights to purchase, including such rights to be issued, must be authorized by these Amended and Restated Articles of Incorporation and not already issued. ARTICLE 7.7. SHAREHOLDERS Unless otherwise provided in these Amended and Restated Articles of Incorporation or in any Certificate of Designation, all shareholder actions shall require an affirmative vote of the holders of a majority of the voting power of the shares represented and entitled to vote at a duly held meeting, except where the law requires a vote with respect to all outstanding shares of the Corporation, in which case the affirmative vote of a majority of the shares entitled to vote (by class or series if more than one class or series of shares is outstanding and entitled to vote separately as a class or series on such matter) shall be sufficient to authorize the action. ARTICLE 8.8. NON-CUMULATIVE VOTING Unless otherwise provided in these Amended and Restated Articles of Incorporation or in a Certificate of Designation, cumulative voting for directors shall not be permitted. ARTICLE 9.9. DIRECTORS 9.1) Power; Voting. The Board of Directors shall have the power and authority to take any action required or permitted by law or by these Amended and Restated Articles of Incorporation. The Board of Directors shall take action by the affirmative vote of a majority of directors present at a duly held meeting, except where law requires the affirmative vote of a larger proportion or number. 3 9.2) Written Action. Any action required or permitted to be taken at a board meeting may be taken by written action signed by a majority of directors. If the action must also be approved by the shareholders, then the action must be taken by written action of all the directors. 9.3) Indemnification. A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for (i) liability based on a breach of the duty of loyalty to the Corporation or the shareholders (ii) liability for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) liability under Minnesota Statutes Section 302A.559 or 80A.23; or (iv) liability for any transaction from which the director derived an improper personal benefit. If Chapter 302A of the Minnesota Statutes is hereafter amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by Chapter 302A of the Minnesota Statutes, as amended. Any repeal or modification of this Section 9.3 by the shareholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation at the time of such repeal or modification. ARTICLE 10.10. BYLAWS The Board of Directors may adopt bylaws which may contain any provision relating to the management of the business or the regulation of the affairs of the Corporation not inconsistent with law or these Amended and Restated Articles of Incorporation. The power to adopt, amend or repeal the bylaws shall be vested in the Board of Directors. ARTICLE 11.11. INAPPLICABILITY OF MINNESOTA CONTROL SHARE ACQUISITION ACT Section 302A.671 of the Minnesota Statutes shall not apply to the Corporation, and these Amended and Restated Articles of Incorporation may not be amended to make Section 302A.671 of the Minnesota Statutes applicable to the Corporation without the affirmative vote of at least three-quarters (3/4) of the voting power of the shares outstanding and entitled to vote. 4 SCHEDULE 1 Certificates of Designation ---------------------------
Date Filed With Number of Shares Minnesota Secretary Certificate and Amendments and Corrections Designated of State - -------------------------------------------------------------- ---------------- ------------------- Certificate of Designation of Rights and Preferences of 115,206 March 7, 2000 Class A Preferred Stock March 17, 2000 As corrected by Articles of Correction of Certificate of Designation of Rights and Preferences of Class A Preferred Stock Certificate of Designation of Rights and Preferences of 5,710,425 March 4, 1999 Class B Convertible Preferred Stock As corrected by Articles of Correction of Certificate of August 17, 1999 Designation of Rights and Preferences of Class A Preferred Stock, Class B Convertible Preferred Stock, Class C Convertible Preferred Stock and Class D Convertible Preferred Stock Certificate of Designation of Rights and Preferences of 878,527 March 4, 1999 Class C Convertible Preferred Stock As corrected by Articles of Correction of Certificate of August 17, 1999 Designation of Rights and Preferences of Class A Preferred Stock, Class B Convertible Preferred Stock, Class C Convertible Preferred Stock and Class D Convertible Preferred Stock
SCHEDULE 1 (Continued)
Date Filed With Number of Shares Minnesota Secretary Certificate and Amendments and Corrections Designated of State - -------------------------------------------------------------- ---------------- ------------------- Certificate of Designation of Rights and Preferences of 2,196,317 March 4, 1999 Class D Convertible Preferred Stock As corrected by Articles of Correction of Certificate of August 17, 1999 Designation of Rights and Preferences of Class A Preferred Stock, Class B Convertible Preferred Stock, Class C Convertible Preferred Stock and Class D Convertible Preferred Stock Amendment to Certificate of Designation of Rights and 116,725 March 8, 2000 Preferences of Class E Convertible Preferred Stock As corrected by Articles of Correction of Certificate of Designation of Rights and Preferences of Class E March 17, 2000 Convertible Preferred Stock Certificate of Designation of Rights and Preferences of 50,000 February 11, 2000 Class F Convertible Preferred Stock As corrected by Articles of Correction of Certificate of March 1, 2000 Designation of Rights and Preferences of Class E Convertible Preferred Stock and Class F Convertible Preferred Stock As further corrected by Articles of Correction of March 9, 2000 Certificate of Designation of Rights and Preferences of Class F Convertible Preferred Stock
2 SCHEDULE 1 (Continued)
Date Filed With Number of Shares Minnesota Secretary Certificate and Amendments and Corrections Designated of State - -------------------------------------------------------------- ---------------- ------------------- Certificate of Designation of Rights and Preferences of 10,000 March 6, 2000 Class G Convertible Preferred Stock
3 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 37,292 64,286 4,910 1,225 955 110,286 402,704 46,193 504,354 56,862 490,489 1,239 89 97 (154,422) 504,354 1,712 7,895 546 7,718 17,338 1,225 15,260 (39,777) 0 (39,777) 0 0 0 (42,021) (4.41) (4.41)
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