-----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, IGWc9T5pIyTUca5aaNzA/iHJY0qWHZ4MpSKqnHerCIF1O4TDOZbJgoDOAe0hA4UJ w75LPiUKbw22UFO+4HvAMQ== 0001045969-01-000412.txt : 20010417 0001045969-01-000412.hdr.sgml : 20010417 ACCESSION NUMBER: 0001045969-01-000412 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010416 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-K405 SEC ACT: SEC FILE NUMBER: 333-53841 FILM NUMBER: 1603525 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-K405 1 0001.txt 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, 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 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 26, 2001, there were 12,193,019 shares of the Company's Common Stock outstanding. Documents Incorporated by Reference--Not applicable. ==================================================== FORM 10-K TABLE OF CONTENTS ITEM PAGE - ---- ---- PART I ITEM 1. BUSINESS................................................... 1 ITEM 2. PROPERTIES................................................. 20 ITEM 3. LEGAL PROCEEDINGS.......................................... 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................................... 21 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA....................... 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................. 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..................... 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 30 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............................................. 42 IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS................. 45 SIGNATURES - WAM!NET INC................................................. 46 FINANCIAL STATEMENT SCHEDULES............................................ F-1 ITEM 1. BUSINESS. Overview We own and operate a globally networked Information Technology (IT) platform that we market and sell as a utility to commercial and government customers who require a common digital computing and communications infrastructure to collaborate online with their communities of interest. Our IT platform tightly integrates a global high bandwidth network with highly capable data storage and hosting centers and vertically tailored software applications. Customers use our services to digitize mission-critical business processes and integrate these into their enterprise or supply chains. We offer our customers a suite of managed data services including 1) digital transport services 2) digital storage services 3) application hosting services 4) managed hosting services and 5) professional services. Customers purchase our services on an outsourced basis in which they pay a transactional charge per use, similar to a utility. Through our services customers gain access to leading-edge technology without the high cost and challenges of managing technology themselves. Customers apply our services to a wide range of business needs that includes the primary requirement of digital collaboration in the sharing, storage and management of large data volumes. A primary application of our IT platform includes the production, management and distribution of media. Examples of media include advertising, product packaging and general brand marketing materials; TV programming; films, video games, recorded music and other entertainment; news content and publications; video; web materials; and general graphical rich communications content. Our commercial customers are primarily brand-recognized companies in the entertainment, broadcast, advertising, publishing, printing, retail, financial services, and consumer goods industries. They use WAM!NET's services to digitize the process of collaborative workflow among their supply chains to produce, manage and distribute media content. Our services and our IT infrastructure provide these customers a common electronic platform to seamlessly integrate their production processes and digitally collaborate online. We enable these customers to achieve measurable operating efficiencies, productivity gains, cost savings, as well as improved time-to-market for media-based products and new revenue-generating opportunities. As government agencies are among of the largest producers and distributors of media content, we began offering our services to government agencies during 2000. Our government customers use WAM!NET services for media production and management. An example is our participation as a tier one subcontractor on the EDS-led consortium that is creating, delivering and managing the Navy Marine Corps Intranet (NMCI), a common computing and communications environment to link more than 300 Navy and Marine Corps bases located in the U.S., certain territories and possessions and Guantanamo Bay, Cuba. This Intranet is designed to enhance communication and the readiness of the U.S. Armed Forces for both war-fighting and business purposes. Our principle role for NMCI is to design, install and manage each of the base area networks and local area networks within each base; and use our experience and expertise in the creation and management of our global WAM!NET network. 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. The media production supply chain is made of small, medium and large companies. Our offering provides a range of services to meet customers' varying needs and also provides them 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. We specifically target companies that own the resulting media content. We call these firms "specifiers" as they decide the partners with whom they will work on a given media production project, as well as how they will all work together. Many of these specifiers actively encourage their partners to purchase our services and, in some cases, pay the fees incurred by their partners. As the number of influential, industry-leading firms that rely on our services grows, the value of our network and services to current and prospective customers increases. We believe businesses that gain the most cost savings by digitally integrating their supply chains via WAM!NET will become the strongest proponents of our services. As of December 31, 2000, we had over 2,100 sites consisting of dedicated customer points of presence (C-POP) devices and dedicated high-speed local access to our network. In addition, we had over 14,700 users who access our suite of services using the public Internet and dial-up services globally. Users of our services include: o Entertainment customers including Miramax, Turner Studios, Lyrick Studios, Universal Music, and Square, the world's largest animator serving the video game industry o Broadcast customers including the BBC and Nickelodeon 1 o Advertising customers including Young & Rubicam Inc., J. Walter Thompson, Inc, DDB Needham, Saatchi & Saatchi, Colle & McVoy, and Foote, Cone and Belding o Publishing customers including Time Inc., Forbes, The Economist, LA Times, Pearson Education, Trader Publishing, and USA Today o Printing/prepress customers including Colorhouse, Bowne Printing, AGT/Seven Worldwide, and American Color o Retail customers including Sears Roebuck & Co., Williams-Sonoma, Office Max, Victoria's Secret, and Jack-In-The-Box o Financial services customers including Bank of America, MetLife, and Merrill Lynch o Consumer goods/service customers including Delta Faucet, Avon, Caterpillar, Ford Motor Company, Tyson Foods, Fruit of the Loom, Frito Lay/Pepsico, Glaxo Wellcome, Carnival Cruise Lines, and Mandalay Bay. o Government users of our services include General Services Administration, Navy Marine Corps, and Immigration and Naturalization Services. Market Opportunity WAM!NET is addressing a significant market opportunity that is being driven by trends to outsourced IT services like transport, storage, hosting and application management. The following are what we see as key drivers of our market opportunity. o Global Media Production and Storage Spending is Significant: According to GISTICS, a leading media industry research firm, companies spent $850 billion producing and distributing media worldwide in 1999. Of this, $60 billion was spent on physical couriers in the transport of analog tapes, CDs, reels, and final output plus the final storage of this content on disks, tapes and local hard drives. o IT Outsourcing/Utility Trend: The market is increasing for broad IT services. According to Gartner, Forrester and IDC, by 2003, the markets for Network Infrastructure, Storage Infrastructure and Hosting Services are projected to be $100 billion, $48 billion, and $18 billion, respectively. o Media Assets Driving Outsourced Data Storage Requirements: Forrester Research estimates that online storage for the Global 2,500 alone will grow nearly 80% annually during the next two years. However, this research is primarily focused on traditional corporate data storage needs, not media management needs. For companies in media production, these estimates are expected to be much higher primarily because of the move to video and graphic-rich communication. These companies now create upwards of one Petabyte (one billion megabytes) of media per day - nearly all of which is on analog platforms that are in the process of converting to digital. For example, a typical full length digitized film is 2 million megabytes and a full-page photography advertisement is 75 megabytes, while a full page of text is only about 1 megabyte. This growth in data, combined with the trend toward outsourcing, has resulted in a significant demand by media-oriented firms and corporate marketing departments for outsourced storage services in the very near future, as well as a preference to work with a single full-service provider. We believe businesses that work online with their media production, management and distribution supply chain partners in a collaborative digital environment will enjoy considerable competitive advantages including: o increased operating efficiencies; o considerable cost-savings; o improved time-to-market for media-based materials and products; and o improved ability to more rapidly exploit market opportunities; We believe our government market opportunity is also very substantial and is being driven by similar trends. For example, the NMCI contract awarded to EDS has a five-year value of $4.6 billion and is one of the largest IT contracts ever awarded. Business Strategy Our objective is to create the global industry standard for online collaborative media production, management and distribution and for the provision of network design, management and infrastructure services for enterprise networks such as NMCI. We plan to achieve this objective through the following key strategies: o Capitalize in our first-to-market and leadership advantage with our existing influential customer base. o Leverage our large customer base by delivering new services that further integrate their workflow and media supply chains. o Continue significant momentum in gaining additional top-tier customers and penetrating their trading communities with multiple, highly profitable services o Continue our open IP infrastructure approach. Integrate public and private IP infrastructures to meet the global needs of our customers most effectively. And continue attracting and integrating software applications that are geared toward the needs of our chosen markets. 2 o Leverage our involvement with the NMCI initiative and our success with other government customers to gain new business in the government marketplace worldwide. o Leverage our success in the media market to gain easier entry into and apply our business model to other "bandwidth hungry" community of interest vertical markets (such as health care, engineering, etc.) o Continue expansion into global markets such as Europe and Asia Pacific Rim o Leverage strategic relationships to expand distribution channels, integrate emerging technologies, develop new hosted applications and services, and reduce costs. Services We provide our commercial and some government customers with secure, seamless access to network and Industry Smart network services including managed transport, storage and hosting services. Our customers use our services to collaborate efficiently with their production supply chain for the creation, management and distribution of media. We offer our services on a utility model. Our customers pay for our services as used with a minimum purchase requirement. This allows our customers to gain access to current technologies without incurring themselves the high cost and the challenges of acquiring and managing technology infrastructures. We offer the following services: o Managed Digital Transport Services; o Managed Digital Storage Services; o Application Hosting and Complex Hosting Services; o Professional Services Managed Digital Transport Services: We offer managed digital transport services supporting static and motion media formats. We provide managed services with Service Level Agreements (SLAs) ranging from very high SLAs over WAM!NET's Private IP Network to lower SLAs over the public Internet. Our transport services allow customers to access our Private WAM!NET network, and all of our services, including storage and hosted media application services. By integrating WAM!NET's private IP Network with the public Internet, customers can quickly plug into a common workflow platform and choose the SLA that best fits their needs. o Direct Service. This is our fastest, most secure and most reliable transport service supporting static media formats. This service offers 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 C-POP device on our customers' premises, a dedicated leased line or wireless connection to our network, and access to our Industry Smart user interface, applications and tools, as well as training and support on a 24 hours per day, seven days per week basis. Customers may choose among various speeds and capacities to meet their individual requirements. Direct service prices include a monthly service fee and a use fee per transaction. Compressed Video Service. This service utilizes our Direct service and a desktop video appliance for the transport and viewing of compressed video material in MPEG 1 and MPEG 2 formats. The service is primarily used for digital transport of broadcast advertising, film, and special effects material supporting the iterative review process between the client and its supply chain partners doing the creative video work. We support the appliance for the different capability requirements. WAM!NET began commercially offering this service in the first half of 2000. Pricing for this service includes a monthly service fee and a transaction per megabyte pay-per-use fee. Tracked Service. Offered at a lower price point than our Direct Service, our Tracked Service does not require a dedicated on-site C-POP device or dedicated connection to our network. Our Tracked Service is geared toward static media formats and offers the security and predictability of dial-up connectivity to our network, at slower transmission speeds and without the performance level of Direct Service. Tracked service is designed for customers with confidential and time-sensitive work who do not exchange a sufficient volume of data to require a dedicated Direct service connection. With Tracked Service, we provide access to our network and Industry Smart users interface, applications and tools, a dial-up networking card, training and customer support on a 24 hours per day, seven days per week basis. Tracked Service is priced on a transactional, per megabyte, pay-per-use basis. We commercially released our 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 the service through our website at www.wamnet.com. Internet Gateway users have access to the same sophisticated Industry Smart tracking, reporting and directory applications and tools that are available with our Direct and Tracked Services. 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 Service is also priced on a 3 transactional basis by megabyte, pay-per-use basis. In addition to allowing subscribers to set up their own Internet Gateway accounts, we offer Direct Service subscribers the opportunity to create and host Internet Gateway accounts for their employees, customers and workflow partners to standardize their exchange of data. In this arrangement, hosts pay the transaction fees for their hosted participants. The host, for example, 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 and digitize their collaborative media supply chain workflow. Managed Digital Storage Services: Our storage services are accessible to our customers on our network. Customers choose price and performance levels, which include minimum storage volume requirements under an annual or multi-year contract. Our customers pay 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. 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 expenditure and simplified pay-per-use pricing plans. Our services permit efficient collaboration as the stored files are easily accessible via WAM!NET's Direct service by media supply chain partners. We commercially released our WAM!BASE storage services in the first half of 2000. The service is used primarily by customers for Collaborative Digital Asset Management -- the management of corporate brand assets through the digitization, cataloging and central storage of brand materials like logos and product images to enable efficient re-use and re-purposing of assets by supply chain partners. This service is accessible only through Direct service. It incorporates a 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, and later this year, 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. We intend to continue to enhance the WAM!BASE service by integrating a number of versatile applications and multiple storage options in the future. Applications Hosting and Complex Hosting Services: Media Applications Hosting - -------------------------- We provide hosting services to media-oriented software vendors in our data center/hosting facilities. We target application software vendors in the media production, management and distribution arena, although we have and continue to look to vendors that have strong applications aligned with our growth strategies. The services are accessible through the WAM!NET network and are similarly priced on a transactional basis. We currently offer hosted Rendering On Demand (ROD) services. The rendering process requires specialized software and extensive computing power. We host industry-leading rendering software 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 compute a rendering job. Firms that perform rendering services in-house typically incur significant expenses to purchase rendering software and high-performance computing hardware and employ trained personnel to conduct the rendering functions and maintain the technology platform. Our service allows customers to avoid investing in this technology. Firms that currently maintain their own servers also may require our service to serve as overflow capacity for peak project times. We price the ROD 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. We also host Industry Smart (vertically tailored) software applications and tools that are bundled with our Managed Transport Service that add significant value to the service, including: o Transmission Director. This application serves as the primary user interface for our Direct and Tracked Services. Transmission Director provides customers with the capacity to establish and maintain address books, specify workflow routing instructions, create and use job tickets and specify file and job ticket editing criteria. We have also developed Transmission Director 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. o Remote Proofing. WAM!PROOF is our remote proofing and printing solution that allows Direct customers to print automatically to a remote output device such as color proofers, color copiers, or laser printers manufactured by 15 major suppliers, including Kodak, Polaroid, Imation and DuPont. This application allows customers to rapidly distribute color 4 proof copies of printed media to supply chain partners for review and approval of production jobs, eliminating the delays and errors associated with messengers, overnight couriers or manual processes. o Info Center. This tool enables customers to manage their supply chain relationships on WAM!NET and to track their use of our services. Customers can search and view 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. They can also create, authorize, restrict and manage the exchange of data among their partners. o Electronic Job Tickets. This tool 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. Customers may choose between our standard job tickets or, for a fee, create customized job tickets to meet their specific needs. Managed Hosting Services - ------------------------ We provide fully managed hosting services for our customers where we integrate, own and operate a technology platform for a customers' specific needs. These services were first made available in third quarter 2000 and are designed to enable reliable, scalable, mission-critical e-commerce/e-business solutions. Managed hosting services are typically custom-oriented solutions and are priced according to the customers' equipment and capacity requirements. Professional Services: In the fourth quarter of 2000, we acquired a small professional services firm specializing in Internet-oriented process re-engineering. We intend to offer our customers fee-based consulting services that will facilitate more efficient use of our services. Our Network We own and operate a private, IP-based global network connecting major media centers around the world. Our network consists of high-speed, ATM backbone and leased dedicated high-bandwidth fiber optic capacity connecting our two strategically located storage and hosting centers with our 30 data aggregation hubs. Our network and services are designed to accommodate the workflow automation requirements of our subscribers including the need to transmit and store large media files with greater speed, predictability, reliability and efficiency than many other networks and storage services including those based on the public Internet. Our network and storage infrastructure 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 globally networked infrastructure includes the following: o Storage and hosting centers. We have established and deploy primary data centers in North America (Eagan, Minnesota) and Europe (Brussels, Belgium). We maintain a back-up data center facility in Las Vegas, Nevada. Our data centers serve as control centers for our network, housing specialized equipment to manage and monitor our network 24 hours per day, seven days per week. Each of our two centers is capable of managing all of our data transportation, hosting and storage operations, and the back up data center can be made operational overnight in the event of catastrophe. Automated network monitoring provides continuous monitoring capabilities, including a problem notification system that automatically alerts network engineers of problems. Key aspects of our network are continuously monitored, including data center equipment, distribution hub equipment, backbone lines, local customer connections and C-POP devices. We notify customers in the event of service disruptions or equipment failures, and manage the restoration of service. o Network Backbone. Our 30 distribution hubs are interconnected for speed and redundancy with a meshed ATM backbone provided by various carriers under operating agreements that permit us to increase backbone bandwidth as needed. Additional network redundancy is provided by a series of private lines leased from diverse carriers on different paths that 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 155Mb per second on various routes in the United States. o Network Local Loop. In North America, local loop connections linking distribution hubs and C-POP devices at customer sites are currently provided by MCI WorldCom, Winstar, Competitive Local Exchange Carriers, 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 Post Telegraph and Telephone ("PTT") providers to provide such services elsewhere in the world. Winstar has agreed to provide wireless local loops at speeds ranging from multiple 1.5Mb to 155Mb per second to some customers in major metro areas. This wireless technology eliminates the cost and time required to deploy fiber. o Network Points of Presence. Our hubs consist of large router configurations from Cisco Systems, Inc. that serve to route data 5 traffic across our network. Our hubs are co-located with MCI WorldCom, Winstar, or other providers. Each hub is interconnected over our meshed ATM backbone through at least two diverse routes. We have hubs in the following cities: North America Europe Asia/Pac Rim Atlanta Amsterdam Tokyo Boston Brussels Singapore Chicago Copenhagen Sydney Dallas Frankfurt Denver Hamburg Detroit London Las Vegas Manchester Los Angeles Paris Miami Stockholm Minneapolis New York City Newark Oakland Philadelphia Seattle St. Louis Toronto Washington D.C. * Direct Customer Points of Presence (C-POP) devices. A key differential of our network is our deployment of C-POP devices on our customers' premises. We have installed on customer premises over 2,100 C-POP devices of varying size and complexity based on customer requirements. These devices usually contain a UNIX-based system, a Cisco router, a CSU/DSU, an uninterruptible power supply and disk storage. Our C-POP devices directly connect our customers to our hubs using a dedicated, local loop fixed bandwidth circuit, to provide a secure, predictable and reliable connection to our private backbone network. We control all of our C-POP devices remotely, allowing us to fully manage the network end-to-end and rapidly provision new services. In addition, our C-POPs are scalable to allow for increase customer use. o Storage and Hosting 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 facility and includes over 40,000 square feet of environmentally controlled floor space suitable for housing large-scale computer, hosting and storage systems. A back-up facility is located in our Las Vegas data center and an additional data center, hosting and storage infrastructure is 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 Since inception, we have made significant investments in building a direct sales channel to serve the graphic communication segment of the media and entertainment industry. Our initial sales and marketing strategies were aimed at penetrating the segments of the media market that were already aware of the importance and benefits of online collaborative workflow. These initial targets required less education on the value of complete digital workflow. In addition, they included companies that influence others in the industry as they make technology purchasing decisions. These initial efforts obtained customers for our services from many of the leading advertising agencies, magazine and book publishing companies, commercial printers and pre-press firms. More recently, we added to our commercial market focus the motion media segment of media and entertainment including film studios broadcast companies and post-production and animation firms, as well as consumer goods/services and retail segments. Our current selling approach in the commercial market is based on a consultative selling model, which leverages our strategic partnerships and customer relationships. Our sales and marketing objectives include: o expanding a customer's online supply chain by leveraging relationships with the content owner who can influence and/or specify the sale of our services to its partners; o increasing utilization of services among existing customers by expanding their online supply chain, as well integrating additional services such as digital storage, rendering, hosting and professional services; o capturing additional multi-site customer opportunities; 6 o developing new channels to sell and support our services; and o marketing and selling to new vertical industries worldwide. Our commercial sales organization is structured to support our markets on a global basis. We currently have sales groups in North America, Europe, Japan and Australia. Our direct sales force includes coverage in cities such as: New York, Chicago, Boston, Los Angeles, Washington D.C., Dallas, San Francisco, Atlanta, Seattle, Minneapolis, London, Amsterdam, Frankfurt, Hamburg, Paris, Stockholm, Sydney, and Tokyo. Our sales group performs the following activities: o Account Management: We work with our existing customers to expand online workflow among the customers' supply 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 content owners and thus influential within their media production supply 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: 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. 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. 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. During the first half of 2000, we began marketing our services to agencies of the federal, state and local governments. We created a separate marketing and sales group with significant government experience to sell our services directly to the government, and we developed teaming relationships to package our services in multi-provider offerings to the government. In the second quarter of 2000, we obtained listing of our services on the General Services Administration (GSA) Schedule. GSA listing permits federal agencies to issue purchase orders for listed services. In January 2001, through contract with the GSA, we began hosting the GSA action site at which the GSA auctions surplus property. The site may be viewed at gsaauctions.gov. Through teaming arrangements and subcontracts, we provide the Immigration and Naturalization Services (INS) the ability to review at one central facility the required x-rays taken at eight border crossings in Texas, California and New York. Through a teaming agreement and subsequent subcontract with Electronic Data Systems, Inc. (EDS), we provide base area and local area network design, installation and management services for the Navy Marine Corps Intranet (NMCI). The NMCI contract awarded to EDS has a five-year value, subject to annual appropriations, of $4.6 billion and options for three additional years that bring the value in excess of $5.6 billion. The NMCI contact covers approximately 300 naval bases located throughout the U.S., certain territories and possessions, and Guantanamo Bay, Cuba. Naval bases in Europe and the Pacific will be covered by separate bid in which we also plan to participate under a separate teaming arrangement. For NMCI, we use the expertise and experience gained from operating our own network and delivering services under a utility model to perform our subcontractor role. While NMCI is the first instance we have offered our services for a dedicated, customer-owned network, we intend to provide similar services in the future. 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 global 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. 7 In addition, we also offer Web-based customer support capabilities through our InfoCenter online tool. Using this tool, customers can log service requests, submit questions and access service documentation on-line. 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. These competitors include: o Overland and air courier service providers. The majority of our competition continues to come from traditional overland and air courier services. o Digital courier and digital file transfer service providers. o Large telecommunications and Internet-oriented service providers. o Application infrastructure providers and applications service providers. o Disk and tape storage equipment companies. o Storage service providers. o System integrators which design and build infrastructure that is typically managed inhouse by a customer. o Government contractors. 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 data transport services between 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 50 governments have agreed to permit the competitive provision of enhanced services (i.e., value-added) by nationals of WTO member countries. Nevertheless, certain countries in Europe, Asia and elsewhere in the world may 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. Our participation in government contracts subject us to a variety of law, regulations and ordinances that establish affirmative duties in the operations of our business, as well as extensive record keeping and reporting requirements. Failure to comply with these duties and requirements could affect the individual contract and the ability to obtain future contracts. 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. 8 We have designed most of the proprietary software necessary for the management of our services and applications, including C-POP device operations and a graphic user interface, InfoCenter, WAM!PROOF and WAM!BASE services, applications and tools. 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 and storage 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 $10 million per occurrence. We also presently maintain $10 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, 2000: Number of employees Marketing and Sales........................................... 151 Technical Operations (Development, Customer Service & Operations) ................................................ 221 Administration................................................ 91 Professional Services....................................... 54 --- Total................................................. 517 === The Company's executive and technical personnel have significant experience in the design, programming, implementation, marketing, sales and support of complex data networks, storage services 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. Risk factors The risks and uncertainties described below are not the only ones facing our company. 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 $475.8 million as of December 31, 2000. Management expects to continue to operate at a net loss and experience negative cash flow from operating activities through the foreseeable future. At December 31, 2000, our cash resources and available borrowings are insufficient to fund operations for the next 12 months without raising additional debt and/or equity capital. These factors raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of reported asset amounts or the amount or classification of liabilities, which might result from the outcome of this uncertainty. 9 Management currently is exploring available options for additional capital including borrowings secured by otherwise unencumbered assets, private issuances of secured borrowings or preferred or common stock, or strategic alliances or partnerships. However, there is no assurance that such funds will be available or available on terms acceptable to the Company. If the Company is not successful in obtaining additional funding, it may not be able to continue as a going concern. The report of our independent auditors on our consolidated financial statements includes an explanatory paragraph, which states that the recurring losses from operations, working capital deficiency, net capital deficiency and limited liquid resources raise substantial doubt about our ability to continue as a going concern. Our limited operating history makes it difficult for you to evaluate our performance. Although we commenced operations in March 1995, we only recently began offering several services from which we expect to generate a substantial portion of our revenues in the future. Our prospects must be considered in light of the recent release of these services, and the uncertainties, expenses and difficulties frequently encountered by companies at a comparable stage of development. To address these risks and uncertainties, we must, among other things: o increase the size of our customer base and utilization of our network and services; o successfully perform our NMCI subcontract; o raise additional capital; o successfully manage our relationships and activities with our strategic partners and distributors, including EDS, SGI, Winstar, Sumitomo and 3M, and develop new relationships and activities with influential suppliers and channel distributors in our target markets; o successfully market our branded services; o expand the capacity and geographic coverage of our network infrastructure to meet industry and customer requirements; o continue to attract and retain qualified personnel; o accurately assess potential markets and effectively respond to competitive developments; o continue to maintain and upgrade our operational, support and business systems; o comply with evolving governmental regulatory requirements and obtain any required governmental authorizations; o continue to upgrade our services and applications to address new technologies; o provide acceptable customer service; and o effectively manage our expanding operations. We cannot assure you that we will be successful in accomplishing any or all of the above, and our failure to do so could have an adverse effect on our business. We have experienced substantial negative cash flow from operating activities, operating losses and net losses and may not be able to achieve profitability. We have incurred substantial losses. Our substantial operating costs have resulted in our cash flow being insufficient to pay our operating expenses or fund our capital expenditures. There can be no assurance that we will be able to increase our revenue in an amount sufficient to generate positive cash flow or to achieve and maintain profitability. We had negative cash flow from operating activities, operating losses and net losses of approximately, $55.9 million, $102.4 million and $121.9 million in 1998, $65.7 million, $104.9 million and $145.1 million in 1999 and $73.1 million, $105.1 million and $186.6 million in 2000. As of December 31, 2000, we had an accumulated deficit of approximately $475.8 million. We expect to continue to experience negative cash flow and substantial operating and net losses for the foreseeable future due to the significant costs involved at this stage of our development, including the following: o costs relating to performance of our NMCI subcontract with EDS; 10 o costs relating to the sales and marketing of our branded services; o costs to be incurred in expanding the geographic coverage and capacity of our network, hosting and storage infrastructure; o telephony, hardware and installation costs and recurring telephony charges resulting from the addition of new subscribers to our Direct Service; o costs relating to the development and deployment of new services and applications; and o costs relating to significant recurring operating and general administrative expenses. To fund our operating losses, pay our operating costs and meet our capital needs we will need additional financing, which may not be available to us. As a result of our lack of positive cash flow, our ability to continue to fund our operating losses, to upgrade our technology, network and infrastructure, to develop new services and applications and to successfully market our services on a worldwide scale depends largely on our ability to obtain cash from our financing activities. There can be no assurance that we will be able to raise the additional working capital necessary for us to continue to implement our business plan or fund our operations. We have historically derived substantially all of our cash from the issuance of short-term and long-term debt instruments and equity securities. Our future financing activities will most likely consist of equipment financings, borrowings in the bank and capital markets and private or public sales of our capital stock. We are already highly leveraged, and to the extent that we incur additional debt, the risks described under "-- Our substantial leverage creates financial and operating risks" below will increase. However, our ability to incur indebtedness is subject to restrictions contained in our financing agreements. See "-- We may not be able to incur sufficient debt to finance our future operations or capital needs due to restrictions in our financing agreements" below. To the extent that we raise funds through the sale of a significant number of shares of common stock or other equity securities, the trading price of our common stock may be adversely affected. Any equity securities we sell could have rights senior to those of our common stock. We cannot, in any event, assure you that we will be able to obtain sufficient funding from our future financing activities. If we are unable to obtain sufficient funding, we may be required to, among other things: o slow the expansion of our network, hosting and storage infrastructure; o scale back or delay the development of new services and applications; o reduce our marketing efforts; and o reduce the number of our employees. If any of the actions listed above are taken, the rate at which we are able to add customers to our network and increase network utilization could be slowed, and we could suffer some erosion in our subscriber base. A decrease in the rate at which we add subscribers and increase network utilization may delay or preclude our ability to generate positive cash flow and achieve profitability. Because our market is new and evolving, we cannot predict its future evolution, growth or ultimate size. We believe that we are the first company to offer business-to-business e-services to the media industry that enable businesses to digitally collaborate on-line with their workflow chains. Because this market is relatively new, we cannot accurately predict the ultimate size of the market or the rate at which we will be able to add customers or otherwise increase the utilization of our network and services. Furthermore, we cannot be certain that this market will evolve in the manner we predicted when we designed our network and services or that a demand for our services will exist in the future. If the market for our services grows more slowly or evolves differently than anticipated or fails to materialize at all, our business could be adversely affected. Our ability to increase our customer base depends in part on the active participation of existing customers and channel distributors in our marketing efforts. Part of the marketing efforts for our services involves collaborating with existing customers to promote the use of our service by their workflow partners. This can often involve customers participating in joint presentations and implementing suitable workflow solutions. In addition to our direct sales force, our marketing efforts utilize authorized channel partners who are responsible for ascertaining potential customers' requirements and who may work with our software developers to create attractive and cost-effective solutions. These authorized channel partners may also be responsible for ongoing support of our customers. The failure of our 11 customers to remain actively involved in our marketing efforts or the inability of our channel distributors to properly manage customer accounts could adversely impact our business. Because our authorized channel partners may use our WAM!NET and WAM!BASE brands, if these agents are not successful, they could damage our brand and reputation. Our operating results in one or more future periods may fluctuate significantly or fail to meet or exceed the expectations of securities analysts or investors. Our annual and quarterly operating results may fluctuate significantly in the future due to numerous factors, many of which are outside of our control. These factors include: o the rate of customer acquisition and turnover; o the amount and timing of expenditures relating to the expansion of our infrastructure and the introduction of new services; o the amount and timing of expenditures relating to the performance of our NMCI subcontract with EDS; o introduction of new services or technologies by our competitors; o price competition; o the ability of our equipment and service suppliers to meet our needs; o regulatory developments, including interpretations of the 1996 Telecommunications Act; o technical difficulties or network downtime; o the success of our strategic alliances; and o the condition of the telecommunications and network service industries in general. Because of these factors, our operating results in one or more future periods may fail to meet the expectations of securities analysts or investors. In that event, the trading price of our common stock could decline. Our substantial leverage creates financial and operating risks. We are highly leveraged. As of December 31, 2000, we had approximately $677.3 million of outstanding debt, including redeemable preferred stock. The most significant portion of the debt relates to the purchase of a 20-year indefeasible right of use for backbone capacity and the purchase of wireless local loop facilities from Winstar. As of December 31, 2000, the outstanding balance of this network facility financing was $239.6 million, which is to be paid over a seven-year period ending December 15, 2006. Another significant portion of our debt is attributable to our 13.25% senior discount notes due 2005, which have a principal amount at maturity of $208.5 million. The 13.25% senior discount notes had an accreted principal amount of $179.6 million at December 31, 2000, and will begin to accrue interest, payable in cash, on March 1, 2002. We are committed to make principal payments in the total amount of $27.9 million in 2001. We have recorded as quasi-equity on our balance sheet as of December 31, 2000, redeemable and convertible preferred stock of $149.2 million. We are not currently generating sufficient cash flow with which to repay our substantial indebtedness, fund our operating losses or meet our capital requirements. Hence, we expect to seek additional financing in the future. Our substantial indebtedness could have important consequences. For example, it could: o impair our ability to obtain additional financing to fund our operating losses or meet our working capital and capital expenditure requirements; o require that we devote a significant portion of the cash we receive from our operating and financing activities to make debt service payments, thereby reducing the amount we can use for other purposes; o hinder our ability to adjust rapidly to changes in market conditions, including changes in technology that might affect our competitive position; and o make us more vulnerable in the event of a downturn in our business or in general economic conditions. 12 We may not be able to raise sufficient capital to finance our future operations or capital needs due to restrictions in our financing agreements. The operating and financial restrictions and covenants in the indenture governing our 13.25% senior discount notes may adversely affect our ability to finance our future operations and capital needs. We may also enter into credit arrangements in the future that have the same effect. The indenture governing our 13.25% senior discount notes contains financial and operating covenants that may limit our ability to: o borrow more funds (other than equipment financing); o incur liens; o make minority investments; o sell assets; o engage in transactions with stockholders and affiliates; and o engage in mergers, including mergers that result in a change of control. In the case of borrowing funds, we are generally prohibited from obtaining additional indebtedness other than equipment financing unless, after giving effect thereto, the ratio of our consolidated indebtedness to our consolidated operating cash flow for the four preceding fiscal quarters is less than or equal to 5 to 1. We incurred negative cash flow from operating activities for the four fiscal quarters ended December 31, 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The restrictions contained in the indenture for our 13.25% senior discount notes could have the following adverse effects, among others: o we could be unable to obtain additional financing in the future to: -- fund our operating losses; -- meet our capital expenditure requirements; -- further develop or deploy services and applications; or -- allow us to conduct necessary corporate activities; o we could be unable to obtain lower borrowing costs than are available from secured lenders; o we could be unable to engage in strategic joint ventures in which we are a minority partner; or o we could be unable to engage in some mergers, including mergers that could provide a substantial premium to our shareholders for their stock. The success of our business depends upon our ability to prevent system failure. Our commercial business depends on the efficient and uninterrupted operation of our network and service offerings. We believe that our reputation for providing reliable service to our customers is critical to our future success. Despite our efforts to protect our network infrastructure against damage, the occurrence of a natural disaster or other unanticipated problem may cause an interruption in our services. We have structured our network backbone with redundant circuits obtained from telecommunications providers to minimize interruption of our services; however, we generally do not obtain redundant circuits for local loop connections between our network and our customers. As a result, we have experienced occasional interruption of service to individual customer sites due to loss of service in these local loop circuits. To date, we believe these interruptions have not had a significant effect on our business. Our commercial services use a combination of telecommunications equipment, computer hardware and software, operating protocols and proprietary applications for high-speed transportation and storage of large quantities of digital data. Given the complexity of our services, it is possible that data files may be lost or distorted. Moreover, most of our customers' needs are extremely time-sensitive, and delays in data delivery may cause significant losses to a customer using our services. Despite our testing efforts, our network and services, including future enhancements and adaptations, may contain undetected design faults and software "bugs" that are 13 discovered only after use by our customers. The failure of any equipment or facility on our network could result in the interruption of service to the customers serviced by that equipment or facility until necessary repairs are effected or replacement equipment is installed. Such failures, faults or errors could cause delays or require modifications that could have a material adverse effect on our business. Our commercial service is vulnerable to unauthorized access, computer viruses and other disruptive problems. Despite our security systems, our network, hosting and storage infrastructure and commercial services may be vulnerable to unauthorized access, computer viruses and other disruptive problems. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service to our customers, which could have an adverse effect on our business. We depend in part on the Internet for the quality of our Internet Gateway Service. Our Internet Gateway Service customers are dependent on the Internet to transport their data to our network and to receive files from other customers on our network. The recent growth in the Internet has placed strains on its infrastructure and has required the upgrade of routers, switches, telecommunications links and other components forming this infrastructure. The benefits of our Internet Gateway Service and its commercial acceptance are therefore dependent in part on the activities of Internet service providers and other third-parties, over whom we have no control, to ensure the continued upgrading of the Internet to avoid any degradation in its performance. If the security, reliability or performance of the Internet is compromised or degraded, the success of our Internet-based services, and the pricing of those services, could be materially and adversely impacted. We are exposed to liability for damages resulting from failure of data transportation or loss of data. Our contracts with customers generally contain provisions limiting our liability for failure of data transportation or loss of stored data to $100 per occurrence, with a maximum liability equal to the subscriber's cumulative monthly payments for a year and, in the case of rendering services, to replacement service. Nevertheless, we may be subject to significant claims and potential liabilities for data losses or delays in the transportation, storage or rendering of data through our network. In addition to general business liability insurance, we maintain $10 million of errors and omissions insurance coverage for our services, $10 million of business interruption insurance coverage for losses from fire and natural disasters, and $10 million of insurance coverage for losses of data due to physical damage to our data archive. We also maintain $25 million of umbrella coverage for loss or liability above our other policies. We cannot be certain that this amount of insurance coverage will be adequate to cover all data loss claims or that additional insurance will be available on affordable terms. We may not be able to adapt our network, hosting and storage infrastructure to our customers' evolving requirements. Our ability to generate revenues will depend on our ability to add customers, which is a function, in part, of our ability to expand our infrastructure and support services and to provide our services at prices our customers are willing to pay. The continued development and expansion of our network will require that we enter into additional agreements with equipment and service providers. We cannot be certain that any or all of the required agreements can be obtained on satisfactory terms and conditions. Future expansion and adaptation of our network infrastructure may be necessary in order to respond to: o more customers; o demands for transmission and storage of larger amounts of data; and o changes to our customers' service requirements. The expansion and adaptation of our network, hosting and storage infrastructure will require substantial financial, operational and managerial resources. We cannot be certain that we will be able to expand or adapt our infrastructure and manage it to meet the evolving requirements of our targeted industries and customers on a timely basis or at a commercially reasonable cost. We face uncertain and changing regulatory restrictions which could limit our operating flexibility or increase our costs. We purchase telephone equipment, computer hardware, routers and relays for use in 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, the services that we offer to our customers are interstate information (enhanced) services. Consequently, we are not required to obtain licenses or other approvals from the FCC 14 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 spend substantial time and money to acquire the appropriate licenses and to comply with state regulations. We 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 that encourage unimpeded cross-border provision of enhanced services like the ones we offer. Pursuant to the World Trade Organization's General Agreement on Trade and Services, over 50 governments have agreed to permit the competitive provision of value-added services by nationals of WTO member countries. Nevertheless, certain other countries in Europe, Asia and elsewhere might seek to license and regulate our services. Any such license or regulation may limit, delay or increase the costs of operations associated with additional international locations to which we may desire 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 could result in economic burdens or technical or legal constraints that could adversely affect our business. If we are unable to retain our key personnel, our business may suffer. Our successful operation depends on the services of key executives and significant employees, some of whom we have only recently employed. The loss of the services of any of these persons could have a material adverse effect on us. We have entered into employment agreements with substantially all of our officers and significant employees, and have purchased life insurance policies on certain employees. See "Management." We believe our future success will depend on our ability to retain the services of these personnel and to attract and retain qualified technical and marketing personnel. We cannot be certain that we will be able to continue to attract and retain the personnel necessary for the successful conduct of our business. Our failure to manage growth could adversely affect us. We have rapidly and significantly expanded our operations. We are expanding the geographic coverage and capacity of our network, providing new services and media workflow applications as we seek to expand our customer base and achieve our business objectives. Moreover, we have rapidly expanded our workforce in recent months in order to perform our NMCI subcontract with EDS. To manage the growth of our operations, we must: o effectively manage our operational, managerial, financial and accounting resources; o hire, train and manage additional qualified personnel; o continue to expand our sales force, external installation capacity, customer service teams and information systems; o continue to expand our NMCI implementation work force; o expand and upgrade our core technologies; and o effectively manage multiple relationships with our customers, suppliers, strategic partners and other third-parties. We may not be able to install management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. Failure to manage our future growth effectively could adversely affect the expansion of our customer base and service offerings. Any failure to successfully address these issues could have a material adverse effect on our business. We depend on third-party suppliers for equipment and services, and our business could be adversely affected if these relationships are disrupted. Our business depends on third-party local and long distance carriers and on third-party suppliers of the computers, software, routers and related components used on our network and the disk drives, software systems and controllers used in our hosting and storage infrastructure. Many of these supplier arrangements are for terms of less than one year and are terminable by the other party in specified circumstances. We also depend on the services of third-parties for Direct Service customer site installations, routine maintenance and on-call repair services. We may experience delays and additional costs if any of these relationships are terminated and we are unable to reach suitable agreements with alternate vendors, suppliers or carriers in a timely manner. Furthermore, to the 15 extent that we are unable to secure suitable installation, maintenance or on-call repair services from third-party vendors, we may be required to substantially increase our own workforce to perform these services, and our growth may be constrained while we build and train our workforce. There can be no assurances that we will be able to maintain our relationships with third-party suppliers for equipment and services or that we will be able to find suitable alternative products and services at a commercially reasonable price, or at all. The loss of our affiliation with SGI, Winstar or MCI WorldCom could adversely impact our ability to operate our business. We have significant investment, supply and/or distribution relationships with each of SGI, Winstar and MCI WorldCom. SGI currently holds convertible preferred stock that entitles it to elect one director to our board. If SGI were to convert all of its convertible preferred stock, it would own 11,782,134 shares of our common stock, or 49.1% of our outstanding shares of common stock as of March 26, 2001, assuming none of the other holders of our options, warrants or convertible securities exercised their conversion rights. Because of its holdings and representation on our board, SGI may be able to exercise significant influence over our affairs. SGI is currently a primary supplier of components for network access devices, which we use to connect customers directly to our network. A loss of our strategic relationship with SGI could have a material adverse effect on our business. Winstar currently holds convertible preferred stock that entitles it to elect one director to our board. If Winstar were to convert all of its convertible preferred stock and exercisable warrants, it would own 32,836,913 shares of our common stock, or 72.9% of our outstanding shares of common stock as of March 26, 2001, assuming none of the other holders of our options, warrants or convertible securities exercised their conversion rights. Because of its holdings and right to representation on our board, Winstar may also be able to exercise significant influence over our affairs. Winstar is currently our sole supplier of wireless communication equipment and facilities, which we intend to use for high capacity bandwidth connections between our network and customers. We have purchased a 20- year indefeasible right of use for backbone capacity and purchased wireless local loop facilities from Winstar at an agreed-upon fair value of $260.3 million, which will be paid over a seven-year period ending December 15, 2006. We will be dependent on Winstar to adequately perform certain installation, maintenance and repair functions for the equipment and facilities in order to establish and maintain connectivity between our customers that use such equipment and our network. A loss of our strategic relationship with Winstar could have a material adverse effect on our business. MCI WorldCom currently holds convertible debt and preferred stock and exercisable warrants, which, if converted or exercised in full, would result in MCI WorldCom owning at least 11,577,382 shares of our common stock, or 48.7% of our outstanding shares of common stock, as of March 26, 2001, assuming that none of our other holders of options, warrants or convertible securities exercised their conversion rights See "Use of Proceeds." MCI WorldCom previously had three designees on our Board of Directors. In August 1999, MCI WorldCom agreed to become a passive investor and maintain a strategic relationship with us. Accordingly, its three designees resigned from our Board and MCI WorldCom relinquished its right to elect directors to our Board. Because of its significant holdings, however, MCI WorldCom continues to be able to exercise significant influence over our affairs. MCI WorldCom and its affiliates are our largest supplier of meshed DS3, ATM backbone which interconnects our distribution hubs, and of local loop connections between our distribution hubs and network access devices on our customers' premises. We also co-locate a significant portion of the routers and switches for our distribution hubs at MCI WorldCom's points of presence on a month-to-month basis. A loss of our strategic relationship with MCI WorldCom could have a material adverse effect on our business. Our business may be affected by competition. We face competition from a variety of companies in the provision of data transport, hosting, storage and workflow management services to the media industry as well in the provision of services to the government. Many of our competitors have an established market presence and substantially greater financial, technological, marketing and research and development resources than we do, and may offer competitive services and applications. Our competitors and potential competitors for our commercial services include overland and air carrier service providers, digital courier and digital file transfer service providers, large telecommunication carriers and service providers, data network and application service providers, and disk and tape storage equipment companies; and for our government services include many of the same competitors as well as others specializing in the provision of services to the government. Technological changes could render our services obsolete or non-competitive. We are at risk from fundamental technological changes in the development of digital data delivery and archiving solutions. Evolving industry standards, new product and service introductions, demand and market acceptance for recently introduced products and services are subject to uncertainty of customer acceptance. There can be no assurance that we will be able to adapt to future technological changes or that developments by competitors will not render our services and related applications obsolete or noncompetitive. 16 We may not be able to maintain proprietary rights in our intellectual property. Our ability to maintain our proprietary rights in our technology will affect the success of our business. We have applications for four U.S. patents pending for certain aspects of our technology. We rely on a combination of trade secrets and copyright protection, as well as patents to protect our proprietary rights in our technology. We also rely on trademark protection concerning various names, marks, logos and other devices that serve to identify us as the source for and originator of our services and applications. We offer our services and applications in foreign countries. Some of these countries lack intellectual property protection comparable to that afforded by the intellectual property laws of the U.S. Our proprietary rights in the technology underlying our network, hosting and storage infrastructure and related services and applications will be protected only to the extent that patent, trade secret, copyright or other protection is available in countries in which we market our services and applications, and only to the extent we are able to obtain such protection and enforce such rights. We cannot be certain that the steps taken by us to protect our intellectual property and proprietary rights will be adequate to deter misappropriation of our technology or development of technologies that are substantially equivalent to our technology. Misappropriation of our technology or development of competitive technologies could have a material adverse effect on our business. We could incur substantial expense in protecting and enforcing our intellectual property rights. Intellectual property litigation is complex, and we cannot be certain of its outcome. We have conducted a limited inquiry regarding the possibility of infringement on patents and intellectual property rights of others. We are not aware of any infringements nor have we received any claims for such infringements. Any future intellectual property litigation, regardless of outcome, could result in substantial expense to us and significant diversion of the efforts of our technical and management personnel. An adverse determination in any such proceeding could subject us to significant liabilities to third-parties, require disputed rights to be licensed from such parties or require us to cease using disputed technology. Loss of significant customers and their workflow chains could have a significant effect on our business. During the year ended December 31, 2000, EDS, Time and Quebecor World, Inc. were our largest customers, representing 8.4%, 1.8% and 2.5%, respectively, of our total revenue. Although Time and Quebecor World do not individually represent a significant percentage of our revenue, both companies have developed important workflow chains of vendors, suppliers and customers who use our network. If either Time or Quebecor World were to significantly reduce or terminate (at the end of their current service contract or otherwise) their use of our network and services, their workflow partners might do the same, and our business, financial condition and results of operations could be materially adversely affected. The loss of EDS as a customer would have a significant adverse effect on future revenues. We are subject to the risks associated with foreign investment and international operations. Our operations extend outside of the U.S. During 1999 and 2000, a significant portion of our revenue was generated in Europe, and, to a lesser extent, Asia. We are exposed to the risk of changes to laws and policies that govern foreign investment in countries where we have operations, as well as changes in U.S. laws and regulations relating to investing in or trading with countries in which we may have investments. Certain countries in which we operate or may operate are subject to a substantially greater degree of social, political and economic instability than in the U.S. Risks associated with social, political and economic instability in a particular country could materially adversely affect our business and could result in the loss of our assets in that country. In addition, some markets in which we have undertaken or may in the future undertake international expansion have technology and communications industries that are less developed than in the U.S. Risks inherent in doing business in international markets include the following: o uncertainty of acceptance of our services by different cultures; o unforeseen changes in regulatory requirements; o differing technology standards; o difficulties in staffing and managing multinational operations; o government-imposed restrictions on the repatriation of funds; o difficulties imposed by language barriers; o difficulties in finding appropriate distribution channels; and 17 o potentially adverse tax consequences. These factors could harm our ability to successfully operate internationally and could have a material adverse effect on our business. We are subject to risks related to foreign currency exchange rates and repatriation. As we expand our operations outside of the U.S., our results of operations and the value of our assets will be affected by the currency exchange rates between the U.S. dollar and the functional currency of countries in which we transact business. During the years ended December 31, 2000 and 1999, 28.1% and 35.7%, respectively, of our revenue was generated outside of the U.S. We typically sell our services and applications in foreign countries in the local functional currency. As a result, we may experience an economic loss solely as a result of foreign currency exchange rate fluctuations. Currently, we do not employ currency hedging strategies to reduce the risks associated with the fluctuation of foreign currency exchange rates. We may acquire interests in companies that operate in countries where the removal or conversion of currency is restricted. We cannot be certain that countries that do not have such restrictions at the time we establish operations will not subsequently impose them, especially in situations where there is a deterioration in a country's balance of payments or where the local currency is being heavily converted into other currencies. 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 239,000 square feet of this facility. SGI subleases 242,000 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 September 30, 2002. SGI has the option to extend the sublease for a ninety day term with written notice. 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 18,540 square foot office facility located in Bloomington, Minnesota which we currently sublease; 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 approzimately 8,000 square foot manufacturing and warehouse facility located in Eagan; o small offices in Des Moines , Iowa; Missoula, Montana; Plano, Texas; San Jose, California; Los Angeles, California; 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 a 16,000 square foot office space located in Bournemouth, Dorset, England. ITEM 3. LEGAL PROCEEDINGS. We are engaged in certain legal proceedings and claims arising in the ordinary course of our business. The ultimate liabilities, if any, 18 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. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. In February 2000, we 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 our common stock, subject to anti-dilution adjustments, and is mandatorily convertible in the event of an underwritten public offering our common stock 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, we 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 our 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, we sold to Winstar Communications, Inc. 85,000 shares of our 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, we 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 our common stock, subject to anti-dilution adjustments, and is mandatorily convertible in the event of an underwritten public offering our common stock on the last trading day of the first 20 consecutive trading days during which the average (weighted by daily trading volume) closing price of the stock is at least $8.00. We will be required to redeem all of the outstanding shares of Class E Convertible Preferred Stock at a redemption price per share equal to the liquidation amount per share on such date, as adjusted pursuant to the term of the Certificate of Designation of the Class E Convertible Preferred Stock. Exemption from registration is claimed under Section 4(2) of the Act and Rule 506 of the Rules. In September 2000, we and Winstar entered into a Securities Purchase Agreement (the "Agreement"), pursuant to which we sold to Winstar up to 60,000 shares of Class H Convertible Preferred Stock, par value $.01 per share, at a purchase price of $1,000 per share, upon certain dates and in certain amounts pursuant to the terms of the Agreement. In connection with the execution of the Agreement, we issued an immediately exercisable warrant to Winstar to purchase up to 3,000,000 shares of common stock of the Company at a price of $.01 per share, which warrant shall expire on December 31, 2005. The rights and preferences of the Class H convertible preferred stock, including its conversion provisions, are substantially the same as the rights and preferences of the Class E convertible preferred stock. The Class H convertible preferred stock is convertible into shares of common stock at an initial conversion rate of $5.16 per share, subject to anti-dilution provision. As of December 31, 2000, the Company sold 40,000 shares of Class H convertible preferred stock for an aggregate of $40 million in cash and 1,550,000 shares of common stock are exercisable pursuant to the warrant. In January 2001, we sold 20,000 shares of Class H convertible preferred stock for an aggregate of $20 million in cash. On December 31, 2008, we will be required to redeem all of the outstanding shares of Class H Convertible Preferred Stock at a redemption price per share equal to the liquidation amount per share on such date, as adjusted pursuant to the term of the Certificate of Designation of the Class H Convertible Preferred Stock. 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, 2000. We derived our selected historical consolidated financial data as of and for each of the three years in the period ended December 31, 2000 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, 1996 and 1997 from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. 19
Years Ended December 31, -------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 ------------ ------------ ------------ ------------ ------------ (dollars in thousands, except per share data) Statement of Operations Data: Revenues: Net Service Revenue ..................... $ 279 $ 1,555 $ 6,799 $ 17,319 $ 34,107 Software and hardware sales ............. -- -- 10,791 7,476 6,334 ------------ ------------ ------------ ------------ ------------ Total revenues ............................ 279 1,555 17,590 24,795 40,441 Operating expenses: Network communication ................... 816 7,364 18,259 26,318 28,428 Cost of other service revenue costs ..... -- -- -- -- 2,199 Cost of software and hardware ........... -- -- 3,537 2,905 2,027 Technical operations .................... 1,109 7,478 35,095 22,928 22,259 Selling, general and administrative ..... 4,664 13,527 45,422 42,692 50,569 Depreciation and amortization ........... 447 2,668 17,668 34,875 40,035 ------------ ------------ ------------ ------------ ------------ Total operating expenses .................. 7,036 31,037 119,981 129,718 145,517 Loss from operations ...................... (6,757) (29,482) (102,391) (104,923) (105,076) Interest and other income (expense), net... (839) (4,154) (20,839) (34,304) (67,099) Income tax benefit ........................ -- -- 1,352 -- -- ------------ ------------ ------------ ------------ ------------ Net loss .................................. (7,596) (33,636) (121,878) (139,227) (172,175) Less preferred dividends .................. -- (70) (70) (5,890) (14,383) ------------ ------------ ------------ ------------ ------------ Net loss applicable to common stock ....... $ (7,596) $ (33,706) $ (121,948) $ (145,117) $ (186,558) ============ ============ ============ ============ ============ Net loss applicable per common share ...... $ (1.18) $ (5.19) $ (13.87) $ (15.58) $ (17.73) Weighted average number of common shares outstanding .............................. 6,445,785 6,496,345 8,793,961 9,315,900 10,523,789 Other Financial Data: Net cash used in operating activities ..... $ (6,218) $ (23,917) $ (55,878) $ (65,670) $ (80,121) Net cash used in investing activities ..... (5,244) (15,599) (71,304) (25,942) (10,696) Net cash provided by financing activities . 24,578 25,346 132,817 113,497 67,944 EBITDA(1) ................................. (6,310) (26,814) (84,684) (69,473) (62,374) Capital expenditures ...................... 4,244 16,599 54,584 25,208 43,467 Subscriber Contracts (end of period): Direct Service Contracts(2) ............... 33 496 1,479 1,918 2,117 ISDN Tracked Service Contracts(3) ......... -- -- -- 2,659 3,611 Internet Gateway Subscribers(4) ........... -- -- -- 4,167 11,103
Years Ended December 31, ------------------------ 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- (dollars in thousands) Balance Sheet Data (end of Period): Cash and cash equivalents............... $ 14,444 $ 274 $ 6,272 $ 27,180 $ 3,207 Total assets ........................... 20,070 29,134 125,459 435,255 417,771 Total debt(5) .......................... 21,473 54,826 210,378 547,612 677,259 Shareholders' deficit .................. (2,683) (30,671) (109,854) (147,885) (306,864)
(1) 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. (2) Represents the number of customer points of presence at which a network access device is installed. Does not include executed contracts for installations currently in process from which we have not begun to receive service fees. (3) 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. 20 (4) Represents the number of subscribers with accounts to use our Internet Gateway Service. (5) 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 We own and operate an integrated global Information Technology (IT) infrastructure that we market and sell as a utility to commercial and government customers. Customers use our services to digitize mission-critical business processes and integrate these into their enterprise or supply chains. We offer our customers a suite of managed data services including 1) digital transport services 2) digital storage services 3) application hosting services 4) managed hosting services and 5) professional services. Customers purchase our services on an outsourced basis in which they pay a transactional charge per use, similar to a utility. By using our services, customers gain access to leading-edge technology without the high cost and challenges of managing technology themselves. Our services and IP-based network, storage and hosting infrastructure provide businesses a common electronic platform to seamlessly integrate their production processes and accelerate the adoption of online digital collaboration. In the commercial marketplace our global customer base is primarily made up of companies in the entertainment, broadcast, advertising, publishing, printing, retail, financial services, and consumer goods industries. These customers use our services to collaborate on-line within their supply chains to produce, manage and distribute rich media content such as: advertising, product packaging and general brand marketing materials; TV programming; films, video games, recorded music and other entertainment; news content and publications; video; and web materials. Creating these materials is a highly collaborative process involving many firms. In July 2000, we initiated direct sales to the government with the receipt of approval to sell on the General Services Administration (GSA) Schedule for Electronic Commerce Services. The GSA listing permits government entities to purchase our service without the need for lengthy and time-consuming bidding or request-for-proposal processes. In October of 2000, WAM!NET, as a tier one subcontractor, was part of the EDS-led team that won the $6.9 billion Navy Marine Corps Intranet (NMCI) contract. This intranet is a common computing and communications environment to link more than 300 Navy and Marine Corps bases throughout the U.S., Iceland, Puerto Rico, Guam, Hawaii and Guantanamo Bay, Cuba. It is designed to enhance communication and the readiness of the U.S. Armed Forces. Under our subcontract with EDS, we will provide Base Area and Local Area Network design, installation and management at each base. 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 substantial and skilled customer service and professional service groups, which make 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 and 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 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 have integrated the 4-Sight technology into our managed digital transport services. In September 1999 we opened an office in Tokyo and established a joint venture with Sumitomo to support the sales and marketing of our services to the Japanese market. In July 2000 we opened an office in Sydney, Australia, to develop business opportunities in the Australian market. In November, 2000, we purchased all of the outstanding common stock of is.com for 500,000 shares of the Company's common stock. The acquisition was accounted for under the purchase method of accounting and, accordingly, the operating results of is.com have been included in the consolidated operating results since the date of acquisition. The inclusion of the is.com operating 21 results for periods prior to the date of acquisition would not have materially affected results of operations. In connection with the acquisition, the Company issued a warrant to the sole owner of is.com to purchase 100,000 shares of common stock. Access to our services is provided through our Direct Service, Tracked Service and Internet Gateway Service. Our initial focus through 1998 was our Direct Service. This is our fastest, most secure and reliable managed transport service, providing direct, guaranteed access and transport over our managed network. Our Customer Point of Presence (CPOP) devices are installed on our customers' premises and are connected to our network with a dedicated leased line. In December 1999 we 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 customers' premises. In the first quarter of 1999 we began to provide access to our network through our Tracked Service. This 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 dedicated onsite CPOP device or a dedicated connection to our network. We introduced our Internet Gateway Service in the third quarter of 1999. Internet Gateway Service allows connection to our network and services over the Internet. We provide media production-tailored tools with our managed transport services including InfoCenter, Electronic Job Tickets and Remote Proofing. We commercially introduced our WAM!BASE Digital Storage Service in the first quarter of 2000 and our web-based storage service, Workspace, in fourth quarter of 2000. Direct service is required to access WAM!BASE storage service. Also in the first quarter of 2000, we began offering Rendering on Demand, a hosted service that requires specialized software and extensive computing power to generate high-resolution computer animation for film and broadcast special effects. In the first quarter of 2000 we began offering our Compressed Video Service, our transport service for compressed video in MPEG 1 and MPEG 2 formats. We introduced our managed hosting services in third quarter 2000. These services are designed to enable reliable, scalable, mission-critical e-business applications for a wide range of customers. In the fourth quarter 2000, we acquired is.com, a 50-member professional services firm specializing in e-business solutions and workflow to augment our service offering. As of December 31, 2000, we had over 2,100 customer points-of-presence consisting of dedicated CPOP devices and local bandwidth connectivity. Of these, about 60 have WAM!NET storage services that customers access through the CPOP. In addition, we had over 14,700 users of our Internet and dial-up services globally. Revenues Net Service Revenue Our net service revenue from commercial customers is directly related to the number of customers, type of service, and volume of data moved, stored or processed. This revenue is derived primarily from media market customers who are purchasing our managed transport, managed storage, hosted applications and managed hosted services. Revenue is based on 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 usage level. We record monthly service revenue for Direct Service, Compressed Video Service and 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 Tracked Service and Internet Gateway Service in March and September 1999, respectively. Our WAM!BASE digital storage and Workspace services are priced on the basis of megabytes stored per month. We began earning storage revenue in first quarter of 2000. Our managed hosting services are typically custom-oriented solutions and are priced according to the customers' equipment and capacity requirements. We began earning Professional Services revenues in fourth quarter 2000, primarily from our acquisition of a 50-member firm that specializes in e-commerce and workflow consulting services. Revenues are based on consulting engagements that are billed on an hourly rate, depending on the expertise required to meet customer requirements. Revenues are included in net service revenue in the Consolidated Statement of Operations. Our revenue from government customers primarily includes revenue from our subcontract with EDS for NMCI, as well as revenue generated from other government customers. On November 28, 2000, we entered into a Pre-Subcontract Authorization Agreement with EDS. The period of performance was from 22 October 7, 2000 through February 9, 2001 (the date the Definitive Subcontract Agreement was signed) and detailed out certain milestones and the related values. We invoiced EDS $7 million in 2000 based upon the achievement of certain milestones and received payments of $1 million in December 2000 and $6 million in January 2001. We recorded $3.4 million of revenues as of December 31 2000 under this agreement. Government service revenues are included in net service revenue in the Consolidated Statement of Operations. On February 9, 2001, we entered into a definitive Subcontract Agreement with EDS. The contract, which was awarded under the Federal Acquisition Regulation (FAR) Part 12 procedures, is an indefinite quantity type contract (with minimum purchase commitments) where delivery or performance shall be made only as authorized by orders issued by the Navy under the ordering clause of the NMCI contract with EDS. The contract contains a base period of five program years effective October 7, 2000, and an option to extend the period of performance an additional three years. We will record and recognize revenue based upon performance on the number of seats ordered beginning in February 2001. Our full range of services are also sold to government entities through the GSA listing, direct marketing efforts and channel activity. These services are billed to government customers using the same billing model as used for our commercial customers. 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 continue to shift the existing 4-Sight customers from software to our managed transport service. We expect that software and hardware sales will continue at approximately the same level for 2001. 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 wireless local loop facilities from Winstar. Winstar's wireless technology 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. Cost of professional services The cost of professional services represents direct labor costs associated with our professional service revenue. Cost of government services The cost of government services represents costs directly associated with government operations and our direct costs related to performing under the NMCI contract. Cost of software and hardware Software and hardware expense reflects the costs of software and hardware sold. 23 Technical operations 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 is.com, 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, 2000, 1999 and 1998 Revenues Total revenue for the years ended December 31, 2000, 1999 and 1998, was $40.4 million, $24.8 million and $17.6 million. The increases in revenues are due to increased service offerings and greater demand for our services. Net service revenue was $34.1 million, $17.3 million and $6.8 million for the years ended December 31, 2000, 1999 and 1998. This increase in net service revenue was primarily due to growth in the number of subscribers purchasing our services and increased utilization by subscribers. During the fourth quarter of 2000 we also began providing services to the government as well as began providing services and receiving revenue under the NMCI contract. At December 31, 2000, we were providing services to approximately 16,800 users, as compared to approximately 8,700 and 1,475 subscribers, at December 31, 1999 and 1998. Revenues from software and hardware sales for the years ended December 31, 2000, 1999 and 1998, were $6.3 million, $7.5 million and $10.8 million. The decrease in software and hardware sales 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. Operating Expenses Network communication Network communication expense for the years ended December 31, 2000, 1999 and 1998, was $28.4 million, $26.3 million and $18.3 million. The increase in network communication expenses from 1999 to 2000 was a result of increased local loop connections directly related to growth in the number of our Direct Service customers. Approximately $5.0 million of the increase in network communication expenses from 1998 to 1999 is a result of increased local loop connections related to growth in the number of our Direct Service customers and approximately $3.0 million of the increase was from an entire year of expenses incurred as a result of 24 expanding our domestic and foreign network operations through the installation of additional hubs. The network expansion was substantially complete by the end of 1998. 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. Other Service Revenue Costs Other service revenue costs for the year ended December 31, 2000 were $2.2 million. These costs are related to our direct costs of professional services and government. Software and hardware The cost of software and hardware for the years ended December 31, 2000, 1999 and 1998 was $2.0 million, $2.9 million and $3.5 million. The decreases reflects the decline in software and hardware sales as described above. Technical Operations Technical operations expense for the years ended December 31, 2000, 1999 and 1998, was $22.3 million, $22.9 million and $35.1 million. The expenses remained flat from 1999 to 2000 we were able to manage costs and leverage the existing systems and organization. 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. Selling, general and administrative Selling, general and administrative expense for the years ended December 31, 2000, 1999 and 1998, was $50.6 million, $42.7 million and $45.4 million. 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 1999 to 2000 was due to 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, however we expect selling, general and administrative expenses will continue to decline as a percentage of revenue. 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 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 $8.7 million, over the comparable adjusted amount for the year ended December 31, 1998. Depreciation and amortization Depreciation and amortization for the years ended December 31, 2000, 1999 and 1998, was $40.0 million, $34.9 million and $17.7 million. This increase was primarily due to depreciation of additional network and related equipment purchased for network expansion during 2000, 1999 and 1998. Included in these totals for 2000, 1999 and 1998 was $7.3 million, $6.6 million and $5.3 million of amortization expense relating to the goodwill recorded in connection with 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. Loss on investment Loss on investment for the year ended December 31, 2000 was $23.5 million. The loss on investment was due to the sale of Winstar common stock. All shares of Winstar common stock were sold during 2000. Interest expense Interest expense for the years ended December 31, 2000, 1999 and 1998, was $47.0 million, $35.7 million and $22.6 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, 2000, 1999 and 1998, are non-cash charges of $30.5 million, $29.3 million and $18.3 million related to the amortization of deferred financing charges and the value of warrants issued in connection with debt financing transactions. 25 Other income Other income for the years ended December 31, 2000 and 1999 was $2.7 million and $0.6 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 December 31, 2000, we had $318 million of United States 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. 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 Through December 31, 2000, we have issued equity and debt securities and incurred other borrowings resulting in cash received by us of $471.2 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 2000, we entered into the following financing transactions in order to continue to fund our operating and capital requirements: In December, 1999, we 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 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 3 for 2 Winstar stock split declared in February 2000). All shares of Winstar common stock were sold during 2000. Other investors purchased 16,725 shares of Class E convertible preferred stock for an aggregate of $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 elect one director and vote on an as-converted basis on all matters submitted to the vote of common stock holders including the election of directors. In the event that any holder of Class E preferred stock possesses voting power in excess of 17.5% of the voting power of the Company, such holder's voting power shall be reduced to, at most, 17.5% of the total voting power of all the equity holders of the Company. 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 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, if 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. On December 31, 2008, the Company will be required to redeem all of the outstanding shares of Class E Convertible Preferred Stock at a redemption price per share equal to the liquidation amount per share on such date, as adjusted pursuant to the term of the Certificate of Designation of the Class E Convertible Preferred Stock. 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 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. In September 2000, we entered into a Securities Purchase Agreement (the "Agreement") with Winstar, pursuant to which we have the right to sell to Winstar 60,000 shares of Class H Convertible Preferred Stock, par value $.01 per share, at a purchase price of $1,000 per share upon certain dates and in certain amounts pursuant to the terms of the Agreement. In connection with the execution of the Agreement, we issued an immediately exercisable warrant to Winstar to purchase up to 3,000,000 shares of our common stock at a price of $.01 per share, which warrant shall expire on December 31, 2005. The rights and preferences of the Class H convertible preferred stock, including its conversion provisions, are substantially the same as the rights and preferences of the Class E convertible 26 preferred stock. The holders of the Class H 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 shareholders. In addition, Winstar or any subsidiary thereof, individually or as a group, have the right to appoint up to two directors to serve as directors on our Board of Directors. Pursuant to the terms of the Class H preferred stock, Winstar and its subsidiaries, by virtue of their ownership of Class E preferred stock and Class H preferred stock have the right, collectively, to appoint only one person to serve on our Board of Directors. To the extent that Winstar or any subsidiary thereof, individually or as a group, is entitled to more than the number of votes equal to 17.5% of all votes cast at any meeting at which a vote is being taken, by virtue of its ownership of Class E preferred stock, Class H preferred stock or any common stock issued upon the exercise of warrants issued in connection with the issuance of the Class H preferred stock, such holder of Class H preferred stock shall have its voting power reduced to, at most, 17.5% of the total voting power of all equity holders of the Company. On December 31, 2008, the Company will be required to redeem all of the outstanding shares of Class H Convertible Preferred Stock at a redemption price per share equal to the liquidation amount per share on such date, as adjusted pursuant to the term of the Certificate of Designation of the Class H Convertible Preferred Stock. The Class H convertible preferred stock is convertible into shares of common stock at an initial conversion rate of $5.16 per share, subject to anti-dilution provision. As of December 31, 2000, we sold 40,000 shares of Class H convertible preferred stock for an aggregate of $40 million in cash and 1,550,000 shares of common stock are exercisable pursuant to the warrant. In January 2001, we sold 20,000 shares of Class H convertible preferred stock for an aggregate of $20 million in cash and 3,000,000 shares of common stock are exercisable pursuant to the warrant. In February 2001, we entered into a $30 million bank credit facility ,which expires in January 2003. The credit facility is a $30 million revolving credit facility based upon a borrowing base consisting of our cash collections. Amounts outstanding under the credit facility incur interest at the banks reference rate plus 3.25% (11.75% at February 28, 2001). The credit facility is secured by a lien on certain unencumbered and lienable assets. The credit facility requires us to maintain certain financial covenants. The credit facility is automatically renewable at maturity until canceled in accordance with its terms. As of February 28, 2001, we have borrowed $14.7 million under the credit facility. 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 $475.8 million as of December 31, 2000. Management expects to continue to operate at a net loss and experience negative cash flow from operating activities through the foreseeable future. At December 31, 2000, our cash resources and available borrowings are insufficient to fund operations for the next 12 months without raising additional debt and/or equity capital. These factors raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of reported asset amounts or the amount or classification of liabilities, which might result from the outcome of this uncertainty. Management currently is exploring available options for additional capital including borrowings secured by otherwise unencumbered assets, private issuances of secured borrowings or preferred or common stock, or strategic alliances or partnerships. However, there is no assurance that such funds will be available or available on terms acceptable to the Company. If the Company is not successful in obtaining additional funding, it may not be able to continue as a going concern. The report of our independent auditors on our consolidated financial statements includes an explanatory paragraph, which states that the recurring losses from operations, working capital deficiency, net capital deficiency and limited liquid resources raise substantial doubt about our ability to continue as a going concern. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Foreign Currency Exchange Rates During the year ended December 31, 2000, our revenue originating outside the U.S. was 28.1% 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. 27 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 some of our outstanding debt. The outstanding loan balance under our 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, 2000, 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. 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. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth, as of March 15, 2001, the names, ages and positions of our executive officers and directors. Their respective backgrounds are described below.
Name Age Position - ---- --- -------- Edward J. Driscoll............... 40 Chairman of the Board and Chief Executive Officer William E. Sullivan.............. 52 President Terri F. Zimmerman............... 37 Chief Financial Officer Allen L. Witters................. 41 Chief Technology Officer Lisa A. Gray..................... 45 Executive Vice-President, Business Affairs and General Counsel Richard G. Marklund.............. 57 Executive Vice-President, International and Business Development Kenneth L. Coleman............... 58 Director Patrick J. Dirk.................. 61 Director Robert L. Hoffman................ 72 Director William M. Kelly................. 47 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. William E. Sullivan has served as our president since September of 2000. He joined the company in March 2000 as Senior Vice President of Global Marketing from PR21, a New York-based public relations firm, where he was chief executive officer. Prior to that, Sullivan served as chief marketing officer, Imation Corp., where he played a key role in launching the $2.3 billion imaging and information storage company from 3M. Prior to Imation, he was chief executive officer of Rowland Worldwide, a public relations firm owned by Saatchi and Saatchi, and held a number of managerial positions with 3M in the areas of public relations and marketing communications from 1979 to 1987. Sullivan brings more than 25 years of business experience in domestic and international markets. 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 Director of Finance, Vice President of Finance and Operations, 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. 28 Allen L. Witters is one of our founders and a principal shareholder. He has served as our Chief 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. Lisa A. Gray has served as our Corporate General Counsel since December 1998. In September 2000, her role was expanded to include the area of business affairs. Her current title is Executive Vice President of Business Affairs and General Counsel. 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. Richard G. Marklund is our executive vice president, International and Business Development, responsible for our subsidiary companies outside the United States. He joined the company in June 2000 from Hyperport International, Inc., where he served as president and chief executive officer. Marklund brings more than 30 years experience, having served in a variety of executive management and board positions with both public and private companies, ranging from small entrepreneurial start-ups to large multi-billion dollar corporations. Kenneth L. Coleman has served as a director since March 2000. Mr. Coleman is executive vice president of Global Sales, Service and Marketing for SGI, where he served in a number of key senior management positions throughout the past 13 years. In his current role he manages an organization with some 4,000 employees in 179 offices in 41 countries, generating revenues of $2.7 billion in FY 1999. Prior to joining SGI, Mr. Coleman was vice president of Product Development at Activision, Inc., responsible for software development activities. Earlier, he spent 10 years at Hewlett-Packard Company, where he held several management positions. Mr. Coleman is a member of the board of directors of the following institutions: Acclaim Entertainment, Inc., The American Leadership Foundation of Silicon Valley, MIPS Technologies, The Ohio State University Alumni Advisory Council and The Ohio State University Business Dean's Advisory Council. He earned a B.S. degree in Industrial Management and MBA from The Ohio State University. Patrick J. Dirk has served as a director since February 2000. Mr. Dirk has been the Chairman of the Board and Chief Executive Officer of Troy Group, Inc. since he co-founded the company in May 1982. From March 1982 to August 1999, Mr. Dirk also served as President of Troy. Mr. Dirk is the Chairman of the Board and Chief Executive Officer of each of the Troy Group's subsidiaries. From 1980 to 1982 Mr. Dirk served as President and a director of Kroy Inc. where he was employed in various capacities from 1973 until 1982. Kroy Inc. is 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 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, 2000, 1999 and 1998. 29 Summary Compensation Table
Long-Term Annual Compensation Compensation Awards ------------------- ------------------- Securities Underlying Name and Principal Position Year Salary Bonus Options(#) - --------------------------- ---- ------ ----- ---------- Edward J. Driscoll. III ........................... 2000 $ 230,620 $ 237,312(6) -- Chairman of the Board and Chief 1999 195,000 87,126 500,000 Executive Officer 1998 195,000 -- 750,000 William E. Sullivan ............................... 2000 $ 164,225(1) $ 220,000(6) 1,500,000 President 1999 -- -- -- 1998 -- -- -- Terri F. Zimmerman ................................ 2000 $ 207,911 $ 103,824(6) -- Chief Financial Officer 1999 75,769(2) 29,622 1,600,000 1998 -- -- -- Allen L. Witters .................................. 2000 $ 218,744 $ 222,480(6) -- Chief Technology Officer 1999 195,000 76,236 500,000 1998 195,000 -- 750,000 Lisa A. Gray ...................................... 2000 $ 188,019 $ 96,250(6) 175,000 Executive Vice President of Business Affairs and 1999 145,333 78,417 600,000 General Counsel 1998 18,333(3) -- 25,000 Gary L. Hokkanen .................................. 2000 $ 969,538(7) $ 108,768(6) 1999 183,330 122,870 1998 -- -- Denice Y. Gibson .................................. 2000 $ 562,000(7) $ 93,443(6) 1999 97,820 38,242 1998 -- --
(1) Mr. Sullivan's employment began in March 2000. (2) Ms. Zimmerman's employment began in August 1999. (3) Ms. Gray's employment began in November 1998. (4) Mr. Hokkanen served as President from April 1999 to September 2000. (5) Ms. Gibson served as Senior Vice President of Global Operations from July 1999 to September 2000. (6) Reflects amounts earned, a portion of which has not yet been paid. (7) The foregoing amounts include severance compensation which pursuant to the terms of the agreement has not yet been paid in full. 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, 2000. For the fiscal year ended December 31, 2000, 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. 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(4) Options in Fiscal Price ------------------ Name Granted Year ($/Sh) Expiration Date 5% 10% ---- ------- ---- ------ --------------- -- --- Edward J. Driscoll III ....... -- -- -- -- -- -- William E. Sullivan .......... 750,000(1) 8% 2.00 March 7, 2010 $ 943,342 $2,390,614 250,000(2) 3% 2.00 March 7, 2010 314,447 796,871 500,000(1) 5% 2.00 September 1, 2010 628,895 1,593,742 Terri F. Zimmerman............ -- -- -- -- -- -- Allen L. Witters ............. -- -- -- -- -- -- Lisa A. Gray ................. 125,000(3) 1% 2.00 January 1, 2010 157,224 398,436 50,000(1) * 2.00 September 1, 2010 62,889 159,374
* Represents less than one percent of total options granted to employees in fiscal year 2000. (1) These options vest monthly, over 48 months. (2) These options immediately vest. (3) These options vest annually, over 3 years. (4) 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) 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. 30 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, 2000. None of the persons listed in the table below exercised any stock options during 2000. 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 III ...... 2,875,000 375,000 $2,080,000 $-- William E. Sullivan.......... 421,873 1,078,127 -- -- Allen L. Witters ............ 2,875,000 375,000 2,080,000 -- Terri F. Zimmerman .......... 587,496 1,012,504 -- -- Lisa A. Gray ................ 476,020 323,980 -- --
(1) Amount based on the fair market value of our common stock on December 31, 2000, as determined by our Board of Directors, less the exercise price payable under the options. 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 2000, we granted Mr. Hoffman an additional 20,000 stock options at an exercise price of $2.00 per share vesting monthly over 36 months and expiring December 31, 2010. 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. In December 2000, we granted Mr. Kelly an additional 20,000 stock options at an exercise price of $2.00 per share vesting monthly over 36 months and expiring December 31, 2010. In February 2000, we granted Mr. Dirk 75,000 stock options at an exercise price of $2.00 per share vesting 25,000 immediately, 25,000 on February 23, 2001 and 25,000 on February 23, 2002 and expiring February 23, 2010. In March 2000, we granted Mr. Coleman 75,000 stock options at an exercise price of $2.00 per share vesting 25,000 immediately, 25,000 on March 17, 2001 and 25,000 on March 17, 2002 and expiring March 17, 2010. 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 officers 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 2000, none of our executive officers served on the compensation committee or as a director of another entity 31 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, is a shareholder of Larkin, Hoffman, Daly & Lindgren, Ltd. See "Certain Transactions -- Other Agreements." Employment Agreements We have entered into employment agreements with Edward J. Driscoll III, William E. Sullivan, Terri F. Zimmerman, Allen L. Witters 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) 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. 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, 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 32 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, 2000, there were 5,255,515 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, 2000, there were 14,265,800 options issued and outstanding under the 1998 combined stock option plan, at exercise prices ranging from $0.00 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 5,390,000 shares of common stock at exercise prices ranging from $0.45 to $3.90 per share. 33 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information as of March 26, 2001, 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 26, 2001, 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 Beneficially Owned - ------------------- ------------------ ------------------ Edward J. Driscoll(2) .......................... 4,916,664 32.5% William E. Sullivan(3) ......................... 552,078 4.3 Terri F. Zimmerman(4) .......................... 649,996 5.1 Allen L. Witters(2) ............................ 4,916,664 32.5 Lisa A. Gray(5) ................................ 549,990 4.3 Richard G. Marklund(6) ......................... 349,998 2.8 Robert L. Hoffman(7) ........................... 152,800 1.2 William M. Kelly(8) ............................ 77,800 * Patrick J. Dirk(9) ............................. 145,790 1.2 Kenneth L. Coleman(10) ......................... 25,000 * MCI WorldCom, Inc.(11) ......................... 11,577,382 48.7 Winstar(12) .................................... 32,836,913 72.9 SGI(13) ........................................ 11,782,134 49.1 Cerberus(14) ................................... 3,213,354 20.9 Sumitomo(15) ................................... 1,073,606 8.1 James L. Ecker(16) ............................. 922,520 7.6 James R. Clancy(17) ............................ 899,999 6.9 George H. Frisch(18) ........................... 708,333 5.6 David A. Townsend(19) .......................... 1,317,300 10.8 All directors and executive officers as a group (10 persons)(2)(3)(4)(5)(6)(7)(8).............. 12,336,780 60.6 ---------------------------------
* 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. 34 (2) Includes 2,895,831 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 499,996 shares issuable upon exercise of vested stock options and 52,082 shares issuable upon exercise of stock options which will vest within 60 days. (4) Includes 568,746 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 537,389 shares issuable upon exercise of vested stock options and 12,501 shares issuable upon exercise of stock options which will vest within 60 days. (6) Includes 316,664 shares issuable upon exercise of vested stock options and 33,334 shares issuable upon exercise of stock options which will vest within 60 days. (7) Includes 151,680 shares issuable upon exercise of vested stock options and 1,120 shares issuable upon options which will vest within 60 days. Address: Larkin, Hoffman, Daly & Lindgren, Ltd., 1500 Northwest Financial Center, 7900 Xerxes Avenue South, Bloomington, MN 55431. (8) Includes 76,680 shares issuable upon exercise of vested stock options and 1,120 shares issuable upon options which will vest within 60 days. Address: Davis Polk and Wardwell, 1600 El Camino Road, Menlo Park, CA 94025 (9) Includes 25,000 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 (11) Includes 3,350,000 shares issuable upon exercise of warrants that are currently exerciseable, 5,000,000 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 3,227,382 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. MCI WorldCom also owns 115,206 shares of Class A preferred stock. (12) Includes 85,000 shares of Class E convertible preferred stock which are currently convertible into 18,209,007 shares of common stock and 60,000 shares of Class H convertible preferred stock which are currently convertible into 11,627,906 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. Also includes 3,000,000 shares issuable upon exercise of warrants that are currently exercisable. Address: 685 Third Ave., New York, NY 10017 (13) Includes 5,710,425 shares of Class B convertible preferred stock which are currently convertible into 8,338,227 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, 878,527 shares of Class C convertible preferred stock which are mandatorily convertible into 1,290,953 shares of common stock upon completion of an underwritten public offering at offering price of $12.52 per share and 10,000 shares of Class F convertible preferred stock which are currently convertible into 2,152,954 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: 2011 N. Shoreline Blvd., Mountain View, CA 94043-1389. (14) Includes 15,000 shares of Class E convertible preferred stock which are currently convertible into 3,213,354 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 (15) Includes 5,000 shares of Class G convertible preferred stock which are currently convertible into 1,073,606 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 (16) 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. 35 (17) Includes 896,874 shares issuable upon exercise of vested stock options and 3,125 shares issuable upon exercise of stock option which will vest within 60 days. (18) Includes 707,291 shares issuable upon exercise of currently exercisable options and warrants and 1,042 shares issuable upon exercise of stock option which will vest within 60 days. Address: 5030 Woodlawn Blvd., Minneapolis, MN 55417. (19) Address: 64-68 Norwich Avenue West Bournemouth, Dorset BH2-6AW England. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 1996 MCI WorldCom Convertible Subordinated Note In September 1996, we issued the 1996 $5.0 million convertible subordinated note to MCI WorldCom. As of December 31, 2000, $6.7 million was outstanding under the note, which included $1.7 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. In 1999 MCI WorldCom exchanged its shares of Class A preferred stock for 115,206 shares of a new series of Class A preferred stock (1999 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 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 $24.4 million aggregate principal amount was outstanding as of December 31, 2000. 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. The shares of common stock issuable upon exercise of the warrants are subject to registration rights. See guarantee entered into on September 29, 2000 below under "1998 MCI Worldcom Agreement" 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 "-- 1998 MCI WorldCom Agreement" below. MCI WorldCom Guaranteed Revolving Credit Facility In September 1997, we entered into a bank revolving credit facility . The maximum amount that can be borrowed under the revolving credit facility is $25.0 million. MCI WorldCom has guaranteed the payment of all amounts owed under the revolving credit facility. At December 31, 2000, the amount outstanding on the line of credit was $15.0 million. 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 expired in December 2000. The Class B warrants were originally exercisable only if the revolving credit facility was not repaid. On September 29, 2000, MCI WorlCom agreed to extend its guarantee of the line of credit until January 10, 2001 and cancel 40,388,505 warrants based on timely repayments, as specified in the agreement, of the line of credit. As of December 31, 2000, 17,787,500 of the 20,787,500 warrants (`1996 warrants') issued to MCI WorldCom in November 1996 in connection with subordinated notes and the 8,396,170 Class A warrants issued to MCI WorldCom in connection with the line of credit, were cancelled. On January 10, 2001, the Company repaid the remaining $15 million and closed the line of credit. The 14,204,835 Class B warrants issued to MCI WorldCom were cancelled in connection with the repayment of the line in January 2001. As part of the agreement, the Company agreed to extend the expiration date of the remaining 3,000,000 1996 warrants as follows: 1,000,000 until December 31, 2001; 1,000,000 until December 31, 2002; and 1,000,000 until December 31, 2003. The Company further agreed that the exercise price for all 3,000,000 of these warrants be fixed at $1.18 per share until expiration. 36 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 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 $13.9 million, $16.7 million and $11.8 million for the years ended December 31, 2000, 1999 and 1998. 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 and Class C convertible preferred stock is currently convertible. 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. 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." 37 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 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%. As of December 31, 2000, the outstanding balance of the liability was $239.6 million. In December 1999, Winstar 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 March 2000, 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. On December 31, 2008, the Company will be required to redeem all of the outstanding shares of Class E Convertible Preferred Stock at a redemption price per share equal to the liquidation amount per share on such date, as adjusted pursuant to the term of the Certificate of Designation of the Class E Convertible Preferred Stock. In September 2000, the Company and Winstar entered into a Securities Purchase Agreement (the "Agreement"), pursuant to which the Company has the right to sell to Winstar up to 60,000 shares of Class H Convertible Preferred Stock, par value $.01 per share, at a purchase price of $1,000 per share, at the Company's discretion, upon certain dates and in certain amounts pursuant to the terms of the Agreement,. In connection with the execution of the Agreement, the Company issued a warrant to Winstar to purchase up to 3,000,000 shares of common stock of the Company at a price of $.01 per share, which warrant shall expire on December 31, 2005. The right to purchase 500,000 shares of Common Stock pursuant to the warrant became exercisable upon execution of the Agreement, and the right to purchase the remainder of the Common Stock shall become exercisable as the Company sells the Shares to Winstar pursuant to a schedule set forth in the Agreement. The rights and preferences of the Class H convertible preferred stock, including its conversion provisions, are substantially the same as the rights and preferences of the Class E convertible preferred stock. The Class H convertible preferred stock is convertible into shares of common stock at an initial conversion rate of $5.16 per share, subject to anti-dilution provision. As of December 31, 2000, the Company had sold 40,000 shares of Class H convertible preferred stock for an 38 aggregate of $40 million in cash and 1,550,000 shares of common stock were exercisable pursuant to the warrant. On December 31, 2008, the Company will be required to redeem all of the outstanding shares of Class H Convertible Preferred Stock at a redemption price per share equal to the liquidation amount per share on such date, as adjusted pursuant to the term of the Certificate of Designation of the Class H Convertible Preferred Stock. In January 2001, the Company sold 20,000 shares of Class H convertible preferred stock for an aggregate of $20 million in cash and a cumulative 3,000,000 shares of common stock are exercisable pursuant to the warrant. Cumulative dividends in arrears were $340 at December 31, 2000. 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, has been President of WAM!NET Government Services, Inc., a wholly owned subsidiary for government contracting, since its formation in October 2000. He 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 and was granted additional options to purchase up to 400,000 shares of common stock at a price of $2.00 per share, in all cases as partial consideration for his agreement to provide additional consulting services to us. Mr. Driscoll is also 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, 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, and in January 2000, an option to purchase up to 25,000 shares of common stock at a price of $2.00 per share, in all 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. 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 shareholders 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. 39 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. No Current Reports were filed during the three months ended December 31, 2000: (c) Exhibits
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 (7) 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. 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.
40
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 tSecretary 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 Cerberus 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. 4.42 (8) Securities Purchase Agreement, dated as of March 14, 2000, by and between the Company and the buyers listed on Schedule 1.1 thereto. 4.43 (8) Securities Purchase Agreement, dated as of September 29, 2000, by and between the Company, Winstar Communications, Inc. and Winstar Credit Corp. 4.44 (8) Certificate for 3,000,000 Warrants to purchase shares of Common Stock for the purchase price of $.01 per share issued to Winstar Communications, Inc. in connection with the Securities Purchase Agreement, dated September 29, 2000. 4.45 (8) Certificate of Designation of Rights and Preferences of Class H Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on October 3, 2000. 4.46 (8) Form of Certificate for shares of Class H Convertible Preferred Stock of the Company. 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 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 millioin 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.
41
10.8 (1) Guaranty Agreement dated September 26, 1997, by and between the Company and MCI WorldCom, Inc. 10.9 * Loan and Security Agreement dated February 13, 2001 by and among the Company and each of its subsidiaries as Borrowers and the Lenders that are Signatories thereto as the Lenders, and Foothill Capital Corporation as the Arranger and Administrative Agent. 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 Instreuctins, 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 Agrement by and between Winstar Wireless, Inc. and the Company, dated December 31, 1999.
- ---------------- (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 herin by reference to our Quarterly Report on Form 10-Q, filed with the SEC on May 17, 1999. (4) Incorporated herin by reference to our Quarterly Report on Form 10-Q, filed with the SEC on August 4, 1999. (5) Incorporated herin by reference to our Quarterly Report on Form 10-Q, filed with the SEC on November 12, 1999. (6) Incorporated herin by reference to our Annual Report on Form 10-K, filed with the SEC on March 15, 2000. (7) Incorporated herin by reference to our Quarterly Report on Form 10-Q, filed with the SEC on May 15, 2000. (8) Incorporated herin by reference to our Quarterly Report on Form 10-Q, filed with the SEC on November 14 , 2000. * Filed herewith. 42 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. 43 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 16th day of April, 2001. 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 April 16, 2001 -------------------------- and Chief Executive Edward J. Driscoll III Officer /s/ Robert L. Hoffman Director April 16, 2001 -------------------------- Robert L. Hoffman /s/ William M. Kelly Director April 16, 2001 -------------------------- William M. Kelly /s/ Patrick J. Dirk Director April 16, 2001 -------------------------- Patrick J. Dirk /s/ Kenneth L. Coleman Director April 16, 2001 -------------------------- Kenneth L. Coleman 44 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- 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, 1999 and 2000, and the related consolidated statements of operations, shareholders' deficit and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14 (a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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, 1999 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, 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. The accompanying financial statements have been prepared assuming that WAM!NET Inc. will continue as a going concern. As more fully described in note 2, the Company has incurred recurring operating losses, has a working capital deficiency, and is dependent upon raising additional capital to continue operations. These conditions raise substantial doubt about the company's ability to continue as a going concern. Management's plans in regard to these matters are also described in note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result from the outcome of this uncertainty. Ernst & Young LLP Minneapolis, Minnesota January 26, 2001, except for note 18, as to which the date is February 28, 2001 F-2 WAM!NET Inc. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
December 31, ------------ 1999 2000 ---- ---- Assets Current assets: Cash and cash equivalents ................................... $ 27,180 $ 3,207 Accounts receivable, net of allowance of $1,570 and $1,333 at December 31, 1999 and 2000 ................................. 3,982 8,344 Inventory ................................................... 1,254 533 Prepaid expenses and other current assets ................... 4,018 6,919 --------- --------- Total current assets ........................................... 36,434 19,003 Property, plant and equipment, net ............................. 358,336 369,796 Goodwill, net .................................................. 21,421 15,475 Deferred financing charges, net ................................ 18,300 12,392 Other assets ................................................... 764 1,105 --------- --------- Total assets ................................................... $ 435,255 $ 417,771 ========= ========= Liabilities and shareholders' deficit Current liabilities: Accounts payable ............................................ $ 13,732 $ 17,407 Accrued salaries and wages .................................. 2,839 5,246 Accrued expenses ............................................ 6,450 7,654 Deferred revenue ............................................ 2,500 7,069 Current portion of long-term debt ........................... 55,950 27,931 --------- --------- Total current liabilities ...................................... 81,471 65,307 Deferred revenue ............................................... 10,000 10,000 Long-term debt, less current portion ........................... 490,450 500,173 Class A Redeemable Preferred Stock ............................. 1,219 1,300 Class E Convertible Preferred Stock ............................ -- 107,515 Class H Convertible Preferred Stock ............................ -- 40,340 Shareholders' deficit: Class B Convertible Preferred Stock ......................... 57 57 Class C Convertible Preferred Stock ......................... 9 9 Class D Convertible Preferred Stock ......................... 22 22 Class F Convertible Preferred Stock ......................... -- -- Class G Convertible Preferred Stock ......................... -- -- Common Stock ................................................... 95 121 Additional paid-in capital ..................................... 156,680 170,951 Accumulated deficit ............................................ (303,614) (475,789) Accumulated other comprehensive loss ........................... (1,134) (2,235) --------- --------- Total shareholders' deficit .................................... (147,885) (306,864) --------- --------- Total liabilities and shareholders' deficit..................... $ 435,255 $ 417,771 ========= =========
See accompanying notes. F-3 WAM!NET Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Year Ended December 31, ----------------------- 1998 1999 2000 ---- ---- ---- Revenues: Net service revenue .......................... $ 6,799 $ 17,319 $ 34,107 Software and hardware sales .................. 10,791 7,476 6,334 ------------ ------------ ------------ Total revenues .................................. 17,590 24,795 40,441 Operating expenses: Network communication fees ................... 18,259 26,318 28,428 Cost of other service revenues ............... -- -- 2,199 Cost of software and hardware ................ 3,537 2,905 2,027 Technical operations ......................... 35,095 22,928 22,259 Selling, general and administrative .......... 45,422 42,692 50,569 Depreciation and amortization ................ 17,668 34,875 40,035 ------------ ------------ ------------ 119,981 129,718 145,517 ------------ ------------ ------------ Loss from operations ............................ (102,391) (104,923) (105,076) Other income (expense): Loss on investment ........................... -- -- (23,512) Interest income .............................. 1,748 814 793 Interest (expense) ........................... (22,626) (35,693) (47,047) Other income ................................. 39 575 2,667 ------------ ------------ ------------ Net loss before income tax benefit ........... (123,230) (139,227) (172,175) Income tax benefit ........................... 1,352 -- -- ------------ ------------ ------------ Net loss ........................................ (121,878) (139,227) (172,175) Less preferred dividends ..................... (70) (5,890) (14,383) ------------ ------------ ------------ Net loss applicable to common shareholders ...... $ (121,948) $ (145,117) $ (186,558) ============ ============ ============ Net loss applicable per common share -- basic and diluted ...................................... $ (13.87) $ (15.58) $ (17.73) ============ ============ ============ Weighted average number of common shares outstanding -- basic and diluted ............. 8,793,961 9,315,900 10,523,789 ============ ============ ============
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, 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) Accumulated dividends in connection with Class A, E and H Preferred Stock .................................... -- -- -- -- (6,211) -- -- (6,211) Amortization of stock options .............. -- -- -- -- 456 -- -- 456 Issuance of Convertible Preferred Stock .................................... -- -- 20 -- 16,331 -- -- 16,331 Issuance of Common Stock for acquisitions .. 694 7 -- -- 1,993 -- -- 2,000 Exercise of stock options/warrants ......... 1,927 19 -- -- 1,702 -- -- 1,721 Comprehensive loss: Net loss ................................. -- -- -- -- -- (172,175) -- (172,175) Foreign currency translation adjustment .. -- -- -- -- -- -- (1,101) (1,101) --------- Total comprehensive loss ................... -- -- -- -- -- -- -- (173,276) --------- --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 2000 ................. 12,116 $ 121 8,805 $ 88 $ 170,951 $(475,789) $ (2,235) $(306,864) ========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes. F-5 WAM!NET Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Year Ended December 31, ----------------------- 1998 1999 2000 ---- ---- ---- Operating activities Net loss ............................................................... $(121,878) $(139,227) $(172,175) Adjustments to reconcile net loss to net cash used in operating activities: Loss on sale of investment .......................................... -- -- 23,512 Noncash interest expense, including related warrant values .......... 18,295 29,080 30,470 Value of stock options issued to employees and consultants .......... 12,522 166 456 Depreciation and amortization ....................................... 17,668 34,875 40,035 Loss on disposal of property and equipment .......................... 69 1,746 -- Changes in operating assets and liabilities: Accounts receivable ............................................... 647 (516) (4,032) Prepaid expenses and other assets ................................. (8,424) (969) (2,538) Accounts payable .................................................. 14,795 (3,359) 3,536 Deferred Revenue .................................................. -- 12,500 4,569 Accrued expenses .................................................. 10,428 34 3,066 --------- --------- --------- Net cash used in operating activities .................................. (55,878) (65,670) (73,101) Investing activities Purchases of property and equipment .................................... (54,584) (25,208) (43,467) Patent expenditures .................................................... (370) (87) (34) Proceeds from sale of investment ....................................... -- -- 26,486 Business acquisitions (net of cash acquired) ........................... (16,350) (647) 397 --------- --------- --------- Net cash used in investing activities .................................. (71,304) (25,942) (16,618) Financing activities Proceeds from sale of preferred stock .................................. -- 34,707 108,056 Proceeds from borrowings (net of financing expenses) ................... 161,800 95,771 -- Proceeds from exercise of stock options and warrants ................... 15 5 1,721 Payments on borrowings ................................................. (28,998) (16,986) (42,931) --------- --------- --------- Net cash provided by financing activities .............................. 132,817 113,497 66,846 Effect of foreign currencies on cash ................................... 363 (977) (1,100) --------- --------- --------- Net (decrease) increase in cash and cash equivalents ................... 5,998 20,908 (23,973) Cash and cash equivalents at beginning of year ......................... 274 6,272 27,180 --------- --------- --------- Cash and cash equivalents at end of year ............................... $ 6,272 $ 27,180 $ 3,207 ========= ========= ========= Supplemental schedule of noncash financing activities Value of interest cost assigned to warrants ............................ 10,047 4,297 -- Conversion of accrued interest to subordinated debt .................... 1,965 1,837 -- Issuance of convertible preferred stock in exchange for land, building, and furniture and fixtures .......................... -- 40,000 -- Exchange of preferred stock for investment ............................. -- -- 50,000 Dividends accrued but unpaid ........................................... 70 60 6,211 Purchase of network facilities ......................................... -- 260,280 -- Issuance of common stock relating to acquisition ....................... 20,000 -- 2,000 Conversion of convertible subordinated debenture for common stock....... 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 ................................................. 2,276 6,332 29,427
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 information technology services to government and commercial customers. Our services are sold on an outsourced transactional basis and enable organizations to convert to more efficient and cost-effective digital business processes. In our commercial business we focus on companies that produce and distribute media-rich content including broadcast, film and other entertainment companies, as well as corporations that promote brands, advertising agencies, publishers and related businesses. Our services allow these firms to collaborate online with their supply chain partners to improve the process of creating and distributing media-rich content. Our government business consists of selling services offered to our commercial customers as well as the large contract where we are a tier 1 subcontractor to the Navy Marine Corps Intranet Project (see footnote 16). 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 statement of operations 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 also may offer service rebates which are netted against revenue. 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. In December 1999, the SEC issued Staff Accounting Bulletin, SAB 101, entitled "Revenue Recognition in Financial Statements" as amended, effective as of October 1, 2000, which summarizes the SEC's views in applying generally accepted accounting principles to revenue recognition. The adoption of this Bulletin had no effect on the Company's financial position or results of operations. 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 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. F-7 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) 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 two 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 $11,954 and $19,344 at December 31, 1999 and 2000. 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 $11,135 and $17,043 at December 31, 1999 and 2000. 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 1998, 1999 and 2000 were $13,447, $8,278 and $8,256, respectively. The Company capitalized 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 1999 and 2000 the Company capitalized $3,129 and $0. Accumulated amortization was $1,976 and $4,258 at December 31, 1999 and 2000. 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. Net Loss Per Common Share The Company's basic net loss per share applicable to common shareholders 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. F-8 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) In March 2000, the FASB issued Financial Accounting Series Interpretation No. 44 entitled "Accounting for Certain Transactions involving Stock Compensation," which provides clarification to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The adoption of this Interpretation had no effect on the Company's financial position or results of operations. 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 1998 and 1999 amounts have been reclassified to conform to the 2000 presentation. 2. Liquidity Since inception, the Company has incurred net losses and experienced negative cash flow from operating activities. Net losses since inception have resulted in an accumulated deficit of $476,000 as of December 31, 2000. Management expects to continue to operate at a net loss and experience negative cash flow from operating activities through the foreseeable future. At December 31, 2000, the Company's cash resources and available borrowings are insufficient to fund operations for the next 12 months without raising additional debt and/or equity capital. These factors raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of reported asset amounts or the amount or classification of liabilities, which might result from the outcome of this uncertainty. Management currently is exploring available options for additional capital including borrowings secured by otherwise unencumbered assets, private issuances of secured borrowings or preferred or common stock, strategic alliances or partnerships, or the public offering of common stock. However, there is no assurance that such funds will be available or available on terms acceptable to the Company. If the Company is not successful in obtaining additional funding, it may not be able to continue as a going concern. 3. Property, Plant and Equipment Property, plant and equipment is summarized as follows: December 31, ------------ 1999 2000 ---- ---- Land ............................. $ 8,800 $ 8,800 Building ......................... 30,931 31,741 Network facilities ............... 260,280 274,825 Network equipment ................ 65,941 82,730 Other support equipment .......... 23,989 33,907 Furniture and fixtures ........... 4,180 4,738 Leasehold improvements ........... 3,888 3,926 --------- --------- 398,009 440,667 Less accumulated depreciation..... (39,673) (70,871) --------- --------- $358,336 $369,796 ========= ========= The company capitalized $14,461 of interest relating to the Network facilities during 2000. The capitalized interest will be amortized over the life of the Network facilities. F-9 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) 4. Deferred Revenue In December 1999, the Company entered into an agreement with Winstar, whereby 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 revenue remains deferred at December 31,2000. 5. Long-Term Debt Long-term debt consists of: December 31, ------------ 1999 2000 ---- ---- 13.25% senior discount notes ................... $ 157,999 $ 179,627 Lines of credit ................................ 27,137 15,000 Equipment financing ............................ 21,041 11,433 Sale-leaseback financing ....................... 38,246 39,344 Subordinated notes payable ..................... 29,165 31,003 Other financing ................................ 12,532 12,094 Network facilities financings (see Note 6)...... 260,280 239,603 --------- --------- 546,400 528,104 Less current portion ........................... (55,950) (27,931) --------- --------- $ 490,450 $ 500,173 ========= ========= 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, $1,166 and $1,325 for the years ended December 31, 1998, 1999 and 2000. Lines of Credit The Company has a $25,000 line of credit agreement with a bank, which was originally due in September 2000 and was subsequently extended to January 10, 2001. The line of credit is guaranteed by MCI WorldCom. At December 31, 2000, the amount outstanding on the line of credit was $15,000. 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 (7.35 % at December 31, 2000) and prime (9.5% at December 31, 2000). 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 expired in December, 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, 1998, 1999 and 2000 was $1,589, $1,589 and $1,191. The Class B warrants were originally exercisable only if the line of credit was not repaid, under the terms of the agreement. The Class B warrants were deemed to have no value based on management's intentions and ability to repay the line of credit in accordance with the agreement. F-10 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) On September 29, 2000, MCI WorlCom agreed to extend its guarantee of the line of credit until January 10, 2001 and cancel 40,388,505 warrants based on timely repayments, as specified in the agreement, on the line of credit. As of December 31, 2000, 17,787,500 of the 20,787,500 warrants (`1996 warrants') issued to MCI WorldCom in November 1996 in connection with subordinated notes and the 8,396,170 Class A warrants issued to MCI WorldCom in connection with the line of credit, were cancelled. On January 10, 2001, the Company repaid the remaining $15,000 and closed the line of credit. The 14,204,835 Class B warrants issued to MCI WorldCom were cancelled in connection with the repayment of the line in January 2001. As part of the agreement, the Company agreed to extend the expiration date of the remaining 3,000,000 1996 warrants as follows: 1,000,000 until December 31, 2001; 1,000,000 until December 31, 2002; and 1,000,000 until December 31, 2003. The Company further agreed that the exercise price for all 3,000,000 of these warrants be fixed at $1.18 per share until expiration. In July 1999, the Company entered into a $20,000 bank credit facility. At December 31, 1999 the outstanding balance was $2,137. In March 2000, the Company repaid the $2,137 and closed the bank credit facility. Equipment Financing The Company has entered into various notes payable with equipment financing companies. Monthly payments on the installment notes range from $2 to $149, including imputed interest at rates ranging from 8.74% to 15.58%. The various notes are due between April 2001 through September 2004 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. 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 10% Convertible Subordinated Note 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 1999 and 2000, $507 and $508, of accrued interest was converted into additional subordinated notes. As of December 31, 1999 and 2000 the outstanding balance of the note was $6,142 and $6,650. 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 F-11 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) 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 8), 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, 1999 and 2000, the accumulated and unpaid dividends were $67 and $148. Under the Subordinated Note Agreement contained in the Investment 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 each of 1999 and 2000, $1,330 of accrued interest was converted into additional subordinated notes. The amount outstanding on the subordinated note agreement was $23,023 and $24,353 at December 31, 1999 and December 31, 2000. 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. As discussed above under "Lines of Credit", 17,787,500 of the warrants were cancelled in December 2000. The Company agreed to extend the expiration date on the remaining 3,000,000 warrants and further agreed to fix the exercise price at $1.18 per share as discussed under "Lines of Credit". 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, 1998, 1999 and 2000, the Company recorded amortization expense of $1,226. 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. 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. Other Financing In December, 1999 the Company entered into a sublease agreement with Winstar for space in the Company's Minnesota data center. In December 1999 Winstar made a one-time advance payment 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. Winstar is required to make monthly payments of approximately $81 over 10 years. The carrying amounts of the Company's debt instruments in the balance sheets at December 31, 1999 and 2000 approximate fair value. Maturities of long-term debt as of December 31, 2000 are as follows: 2001 ............................ $ 27,931 2002 ............................ 55,453 2003 ............................ 25,116 2004 ............................ 41,796 2005 ............................ 275,423 Thereafter ....................... 102,385 --------- 528,104 Less current maturities........... (27,931) --------- $ 500,173 ========= F-12 6. 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 related liability at the agreed-upon fair value of $260,280, which liability bears an effective interest rate of 8.3%. 7. Capital Stock The Company has the following classes of capital stock: o Undesignated preferred stock, 864,525 shares authorized which may be issued in one or more series; none issued and outstanding at December 31, 1998, 1999, and 2000. o Class A redeemable preferred stock, 115,206 shares authorized of $10 par value; 100,000, 115,206 and 115,206 shares issued and outstanding at December 31, 1998, 1999 and 2000 (see Note 5). o Class B convertible preferred stock, 5,710,425 shares authorized of $.01 par value; 5,710,425 and 5,710,425 shares issued and outstanding at December 31, 1999 and 2000 (see Note 8). o Class C convertible preferred stock, 878,527 shares authorized of $.01 par value; 878,527 and 878,527 shares issued and outstanding at December 31, 1999 and 2000 (see Note 8). o Class D convertible preferred stock, 2,196,317 shares authorized of $.01 par value; 2,196,317 and 2,196,317 shares issued and outstanding at December 31, 1999 and 2000 (see Note 8). o Class E convertible preferred stock, 115,000 shares authorized of $.01 par value, 101,725 issued and outstanding at December 31, 2000 (See Note 8). o Class F convertible preferred stock, 50,000 shares authorized of $.01 par value, 10,000 issued and outstanding at December 31, 2000 (See Note 8). o Class G convertible preferred stock, 10,000 shares authorized of $.01 par value, 10,000 issued and outstanding at December 31, 2000 (See Note 8). o Class H convertible preferred stock, 60,000 shares authorized of $.01par value; 40,000 shares issued and outstanding at December 31, 2000 (see Note 6). o Common Stock, 490,000,000 shares authorized of $.01 par value; 9,288,194, 9,494,797 and 12,115,613 shares issued and outstanding at December 31, 1998, 1999 and 2000. F-13 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) 8. 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. Cumulative dividends in arrears were $1,453 and $3,203 at December 31,1999 and 2000 respectively. 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. Class B cumulative dividends in arrears were $3,777 and $8,327 at December 31, 1999 and 2000 respectively. Class C cumulative dividends in arrears were $581 and $1,281 at December 31, 1999 and 2000 respectively. 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). All shares of Winstar common stock were sold during 2000 resulting in a loss of $23,512. 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. Cumulative dividends in arrears were $0 and $5,790 at December 31, 1999 and 2000 respectively. 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 on all matters submitted to the vote of common stock holders including the election of directors. In the event that any holder of Class E preferred stock possesses voting power in excess of 17.5% of the voting power of the Company, such holder's voting power shall be reduced to, at most, 17.5% of the total voting power of all the equity holders of the Company. 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 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. On December 31, 2008, the Company will be required to redeem all of the outstanding shares of Class E Convertible Preferred Stock at a redemption price per share equal to the liquidation amount per share on such date, as adjusted pursuant to the term of the Certificate of Designation of the Class E Convertible Preferred Stock. 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. Cumulative dividends in arrears were $660 at December 31, 2000. In February 2000, the Company sold to Sumitomo Corporation 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 F-14 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) 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. Cumulative dividends in arrears were $593 at December 31, 2000. In September 2000, the Company and Winstar entered into a Securities Purchase Agreement (the "Agreement"), pursuant to which the Company to sell to Winstar 60,000 shares of Class H Convertible Preferred Stock, par value $.01 per share, at a purchase price of $1,000 per share upon certain dates and in certain amounts pursuant to the terms of the Agreement,. In connection with the execution of the Agreement, the Company issued an immediately exercisable warrant to Winstar to purchase up to 3,000,000 shares of common stock of the Company at a price of $.01 per share, which warrant shall expire on December 31, 2005. The rights and preferences of the Class H convertible preferred stock, including its conversion provisions, are substantially the same as the rights and preferences of the Class E convertible preferred stock. The holders of the Class H 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 shareholders. In addition, Winstar or any subsidiary thereof, individually or as a group, have the right to appoint up to two directors to serve as directors on the Company's Board of Directors. Pursuant to the terms of the Class H preferred stock, Winstar and its subsidiaries, by virtue of their ownership of Class E preferred stock and Class H preferred stock have the right, collectively, to appoint only one person to serve on the Board of Directors of the Company. To the extent that Winstar or any subsidiary thereof, individually or as a group, is entitled to more than the number of votes equal to 17.5% of all votes cast at any meeting at which a vote is being taken, by virtue of its ownership of Class E preferred stock, Class H preferred stock or any common stock issued upon the exercise of warrants issued in connection with the issuance of the Class H preferred stock, such holder of Class H preferred stock shall have its voting power reduced to, at most, 17.5% of the total voting power of all equity holders of the Company. On December 31, 2008, the Company will be required to redeem all of the outstanding shares of Class H Convertible Preferred Stock at a redemption price per share equal to the liquidation amount per share on such date, as adjusted pursuant to the term of the Certificate of Designation of the Class H Convertible Preferred Stock. The Class H convertible preferred stock is convertible into shares of common stock at an initial conversion rate of $5.16 per share, subject to anti-dilution provision. As of December 31, 2000, the Company had sold 40,000 shares of Class H convertible preferred stock for an aggregate of $40 million in cash and 1,550,000 shares of common stock were exercisable pursuant to the warrant. In January 2001, the Company sold 20,000 shares of Class H convertible preferred stock for an aggregate of $20 million in. Cumulative dividends in arrears were $340 at December 31, 2000. 9. 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 four 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. F-15 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) 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, 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 Granted ....................................... (9,755,712) 9,755,712 -- 1.98 Canceled ...................................... 3,979,680 (3,979,680) -- 2.59 Exercised ..................................... -- (1,235,356) (75,000) .94 ----------- ----------- ----------- ----- Balance at December 31, 2000 ..................... 11,181,432 19,521,315 5,390,000 $2.39 =========== =========== =========== =====
At December 31, 1998, 1999 and 2000, 8,937,698, 12,017,861 and 14,216,742 options were exercisable with weighted average exercise prices of $2.20, $2.42 and $2.39. The following information applies to grants that are outstanding at December 31, 2000:
Options Outstanding ------------------- Options Exercisable Weighted ------------------- Average Weighted Weighted Remaining Average Average Number Contractual Exercise Number Exercise Exercise Price Outstanding Life Price Exercisable Price - -------------- ----------- ---- ----- ----------- ----- $0.00 to 0.45 386,400 1.9 years $ .44 376,400 $ .43 0.46 to 0.96 7,116,908 4.8 years .96 7,116,908 .96 0.97 to 2.00 13,788,405 8.5 years 2.00 3,841,287 2.00 2.01 to 3.90 956,467 3.3 years 3.90 903,968 3.90 3.91 to 8.00 2,663,135 7.3 years 8.00 1,978,179 8.00 ---------- ---------- -------- $0.00 to $8.00 24,911,315 7.0 years $ 2.39 14,216,742 $ 2.39 ========== ========== ========
The fair values of the options granted during 1998, 1999 and 2000 were $1.57, $.97 and $ .45 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 1998, 1999 and 2000: risk-free interest rate of 4.78%, 5.88% and 5.13%; 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. F-16 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) For purposes of pro forma disclosures, as required by FASB Statement No. 123, 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:
1998 1999 2000 ---- ---- ---- Net loss applicable to common stock, as reported ................................. $(121,948) $(145,117) $(186,558) Pro forma net loss ............................. (127,304) (147,423) (188,126) Net loss per common share as reported........... $ (13.87) $ (15.58) $ (17.73) Pro forma net loss per common share ............ (14.48) (15.82) (17.88)
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, 1997 .............. 50,160,170 35,955,335 .60-3.90 Granted: 13.25% Senior Discount Notes (see Note 5) ...................... 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 8) ...................... 350,000 350,000 .01 2004 Sale-Leaseback Financing (see Note 5) ...................... 325,000 325,000 12.00 2009 ----------- ----------- Balance at December 31, 1999 .............. 52,092,606 37,887,771 $.01-$12.00 Granted: Class H Convertible Preferred Stock (see Note 8) ...................... 3,000,000 1,550,000 .01 2007 Acquisition of is.com (see Note 13) ..................... 100,000 100,000 14.00 2003 Cancelled: Line of Credit (see Note 5) ...................... (8,396,170) (8,396,170) MCI WorldCom Subordinated Notes (see Note 5) ...................... (17,787,500) (17,787,500) Exercised ......................... (616,665) (616,665) .60-1.20 Balance at December 31, 2000 .............. 28,392,271 12,737,436 $.01-$14.00 =========== =========== ===========
On January 10, 2001, 14,204,835 of the 28,392,271 outstanding warrants at December 31, 2000 were cancelled (see Note 5). 10. Income Taxes At December 31, 2000, the Company had net operating loss carryforwards of approximately $354,500. These carryforwards are available to offset future taxable income through 2020 and are subject to the limitations of Internal Revenue Code Section 382 resulting from changes in ownership. F-17 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) 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: 1998 1999 2000 ---- ---- ---- Tax at statutory rate ........................... 34.0% 34.0% 34.0% State income taxes .............................. 6.0 6.0 4.0 Foreign tax benefit ............................. (1.1) -- -- Impact of net operating loss carryforward........ (40.0) (40.0) (38.0) ----- ----- ----- (1.1)% -- % -- % ===== ===== ===== Components of deferred tax assets are as follows: December 31, ------------ 1999 2000 ---- ---- Deferred assets: Net operating loss ............... $ 74,276 $ 134,573 Unearned revenue ................. -- 6,483 Deferred interest ................ 10,206 14,601 Stock option amortization ........ 4,937 4,947 Other ............................ 6,783 3,060 --------- --------- 96,202 163,663 Deferred liability: Depreciation and amortization..... (3,193) (276) --------- --------- Net deferred income tax assets ...... 93,009 163,387 Valuation allowance ................. (93,009) (163,387) --------- --------- Net deferred income taxes ........... $ -- $ -- ========= ========= 11. 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 $11,840, $16,735 and $13,901 for the years ended December 31, 1998, 1999 and 2000. F-18 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) Guaranteed monthly usage levels of data communications with certain of the Company's telecommunication vendors and MCI WorldCom at December 31, 2000 aggregate to the following annual amounts: Guaranteed Guaranteed Usage Usage (all vendors) (MCI WorldCom) ------------- ------------- 2001....................... $5,191 $1,658 2002 ...................... 1,756 -- 2003 ...................... 788 -- 2004 ...................... 254 -- 2005 ...................... 56 -- ------ ------ $8,045 $1,658 ====== ====== The termination contingency of data communications with certain of the Company's telecommunication vendors and MCI WorldCom at December 31, 2000 aggregates to the following annual amounts: Termination Termination Contingency Contingency (all vendors) (WorldCom) ------------- ---------- December 31: 2000........................ $5,710 $2,069 2001 ....................... 1,102 350 2002 ....................... 446 -- 2003 ....................... 405 -- 2004 ....................... 416 -- 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 $2,189, $2,586 and $1,789 for the years ended December 31, 1998, 1999 and 2000. Future minimum lease obligations in excess of one year at December 31, 2000 are as follows: 2001........................ $2,625 2002 ....................... 2,152 2003 ....................... 1,607 2004 ....................... 1,495 2005 ....................... 1,077 Thereafter ................. 437 ------ $9,393 ====== Contingent Liabilities 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. F-19 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) 12. 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. 13. Business Acquisitions 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, 2000. 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, 1998 ---------------------------- (Unaudited) Revenues........................ $ 21,109 Net loss ....................... (121,922) Net loss per share ............. $ (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 projection of future results and do not reflect any synergies that might be achieved from combined operations. Acquisition of is.com On November 29, 2000, the Company purchased all of the outstanding common stock of is.com for 500,000 shares of the Company's Common Stock. The acquisition was accounted for under the purchase method of accounting and, accordingly, the operating results of is.com have been included in the consolidated operating results since the date of acquisition. The inclusion of the is.com operating results for periods prior to the date of acquisition would not have materially affected results of operations. In connection with the acquisition, the Company issued a warrant to purchase 100,000 shares of Common Stock to the sole owner of is.com. 14. 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 owned 90% of WAM!NET Japan K.K., and Sumitomo owned 10%. In February 2000, Sumitomo purchased an additional 30% ownership interest in WAM!NET Japan K.K. bringing their total ownership interest to 40%. 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 and 2000 were not material. F-20 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) 15. 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 Chief Executive Officer assumed an executive position with a subsidiary of the company. He owns 250,000 shares of Common Stock of the Company and holds an option to purchase 300,000 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, 1998, 1999 and 2000, the Company incurred legal fees and expenses of approximately $1,111, $1,277 and $1,009, to such firm for services rendered in connection with litigation and for general legal services. Management believes the fees paid for these services rendered to the Company were on terms at least as favorable to the Company as could have been obtained from an unrelated party. 16. Major Customers In 1998, 1999 and 2000, no single customer accounted for more than 10% of net sales. On October 6, 2000, the Company was part of the Electronic Data Systems-led team that won the $6.9 billion Navy Marine Corps Intranet (NMCI) contract. This intranet is to become a common computing and communications environment linking more that 300 Navy and Marine Corps bases throughout the U. S., Iceland, Puerto Rico, Guam, Hawaii and Guantanamo Bay, and Cuba. It is designed to enhance communication and the readiness of the U. S. Armed Forces. As a tier one subcontractor, the company's responsibility is to provide management services of the intranet IP infrastructure and deliver data services at the seat level to the bases. This model is similar to how we manage our network, storage and hosting infrastructure and deliver services to commercial customers. On November 28, 2000, EDS and WAM!NET entered into a Pre-Subcontract Authorization Agreement. The period of performance was from October 7, 2000 through February 9, 2001 (the date the Definitive Subcontract Agreement was signed) and detailed out certain milestones and the related values. The Company invoiced EDS $7,000 in 2000 based upon the achievement of certain milestones and received payments of $1,000 in December 2000 and $6,000 in January 2001. The Company recorded $3,400 of revenues as of December 31 2000 under this agreement. On February 9, 2001, EDS and WAM!NET entered into a definitive Subcontract Agreement The contract, which was awarded under the Federal Acquisition Regulation (FAR) Part 12 procedures, is an indefinite quantity type contract (with minimum purchase commitments) where delivery or performance shall be made only as authorized by orders issued by the Navy under the ordering clause of the NMCI contract with EDS. The contract contains a base period of five program years effective October 7, 2000, and an option to extend the period of performance an additional three years. The Company will record and recognize revenue based upon performance on the number of seats ordered beginning in February 2001. 17. 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, ----------------------- 1998 1999 2000 ---- ---- ---- Net sales to unaffiliated customers: United States.......................... $ 8,216 $15,879 $29,091 Europe ................................ 9,005 8,797 10,804 Rest of World ......................... 369 119 546 ------- ------- ------- Total net sales .......................... $17,590 $24,795 $40,441 ======= ======= ======= F-21 WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except share and per share amounts) Identifiable assets: United States.................. $107,101 $419,777 $403,369 Europe ........................ 18,358 15,358 13,224 Rest of World ................. -- 120 1,178 -------- -------- -------- Total assets ..................... $125,459 $435,255 $417,770 ======== ======== ======== "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. 18. Subsequent Events In February 2001, the Company entered into a $30,000 bank credit facility ,which expires in January 2003. The credit facility is a revolving credit facility under which the bank will lend the Company up to the $30,000 based upon a borrowing base consisting of the Company's cash collections. Amounts outstanding under the credit facility incur interest at the banks reference rate plus 3.25% (11.75% at February 28, 2001). 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. The credit facility is automatically renewable at maturity until canceled in accordance with its terms. As of February 28, 2001, the Company has borrowed $14,667 under the credit facility. F-22 Schedule II -- Valuation and qualifying accounts
Deductions ------------------------- Charged Balance at to allowance Charged Balance at Beginning for doubtful to other end of Description of period Additions accounts accounts period ----------- --------- ----------- ------------ -------- ---------- Allowance for doubtful accounts December 31, 2000 $1,570,000 $ 881,000 $1,118,000 $ -- $1,333,000 December 31, 1999 430,000 1,393,000 245,000 8,000 1,570,000 December 31, 1998 10,000 420,000 -- -- 430,000
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EX-10.9 2 0002.txt LOAN AND SECURITY AGREEMENT DATED 2/13/2001 EXHIBIT 10.9 ================================================================================ LOAN AND SECURITY AGREEMENT by and among WAM!NET INC. and EACH OF ITS SUBSIDIARIES THAT ARE SIGNATORIES HERETO as Borrowers, THE LENDERS THAT ARE SIGNATORIES HERETO as the Lenders, and FOOTHILL CAPITAL CORPORATION as the Arranger and Administrative Agent Dated as of February 13, 2001 ================================================================================ TABLE OF CONTENTS
1. DEFINITIONS AND CONSTRUCTION....................................................................1 1.1 Definitions............................................................................1 1.2 Accounting Terms......................................................................17 1.3 Code..................................................................................17 1.4 Construction..........................................................................17 1.5 Schedules and Exhibits................................................................18 2. LOAN AND TERMS OF PAYMENT......................................................................18 2.1 Revolver Advances.....................................................................18 2.2 Bank Products.........................................................................19 2.3 Borrowing Procedures and Settlements..................................................19 2.4 Payments..............................................................................25 2.5 Overadvances..........................................................................27 2.6 Interest Rates, Payments, and Calculations............................................27 2.7 Cash Management.......................................................................29 2.8 Crediting Payments....................................................................30 2.9 Designated Account....................................................................30 2.10 Maintenance of Loan Account; Statements of Obligations................................30 2.11 Fees..................................................................................30 2.12 Letters of Credit.....................................................................31 2.13 Intentionally Omitted.................................................................34 2.14 Intentionally Omitted.................................................................34 2.15 Joint and Several Liability of Borrowers..............................................34 3. CONDITIONS; TERM OF AGREEMENT..................................................................37 3.1 Conditions Precedent to the Initial Extension of Credit...............................37 3.2 Conditions Subsequent to the Initial Extension of Credit..............................39 3.3 Conditions Precedent to all Extensions of Credit......................................40 3.4 Term..................................................................................40 3.5 Effect of Termination.................................................................40 3.6 Early Termination by Borrowers........................................................40 4. CREATION OF SECURITY INTEREST..................................................................41 4.1 Grant of Security Interest............................................................41 4.2 Negotiable Collateral.................................................................41 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral................41 4.4 Delivery of Additional Documentation Required.........................................41 4.5 Power of Attorney.....................................................................42 4.6 Right to Inspect......................................................................42 4.7 Control Agreements....................................................................42
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5. REPRESENTATIONS AND WARRANTIES.................................................................43 5.1 No Encumbrances.......................................................................43 5.2 Accounts..............................................................................43 5.3 Intentionally Omitted.................................................................43 5.4 Equipment.............................................................................43 5.5 Location of Inventory and Equipment...................................................43 5.6 Inventory Records.....................................................................43 5.7 Location of Chief Executive Office; FEIN..............................................43 5.8 Due Organization and Qualification; Subsidiaries......................................43 5.9 Due Authorization; No Conflict........................................................44 5.10 Litigation............................................................................45 5.11 No Material Adverse Change............................................................45 5.12 Fraudulent Transfer...................................................................45 5.13 Employee Benefits.....................................................................45 5.14 Environmental Condition...............................................................45 5.15 Brokerage Fees........................................................................46 5.16 Intellectual Property.................................................................46 5.17 Leases................................................................................46 5.18 DDAs..................................................................................46 5.19 Complete Disclosure...................................................................46 5.20 Indebtedness..........................................................................46 6. AFFIRMATIVE COVENANTS..........................................................................47 6.1 Accounting System.....................................................................47 6.2 Collateral Reporting..................................................................47 6.3 Financial Statements, Reports, Certificates...........................................48 6.4 Intentionally Omitted.................................................................49 6.5 Return................................................................................50 6.6 Maintenance of Properties.............................................................50 6.7 Taxes.................................................................................50 6.8 Insurance.............................................................................50 6.9 Location of Inventory and Equipment...................................................51 6.10 Compliance with Laws..................................................................51 6.11 Leases................................................................................51 6.12 Brokerage Commissions.................................................................51 6.13 Existence.............................................................................52 6.14 Environmental.........................................................................52 6.15 Disclosure Updates....................................................................52 7. NEGATIVE COVENANTS.............................................................................52 7.1 Indebtedness..........................................................................52 7.2 Liens.................................................................................53 7.3 Restrictions on Fundamental Changes...................................................53 7.4 Disposal of Assets....................................................................53
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7.5 Change Name...........................................................................54 7.6 Guarantee.............................................................................54 7.7 Nature of Business....................................................................54 7.8 Prepayments and Amendments............................................................54 7.9 Change of Control.....................................................................54 7.10 Consignments..........................................................................54 7.11 Distributions.........................................................................54 7.12 Accounting Methods....................................................................54 7.13 Investments...........................................................................54 7.14 Transactions with Affiliates..........................................................55 7.15 Suspension............................................................................55 7.16 Compensation..........................................................................55 7.17 Use of Proceeds.......................................................................55 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees....55 7.19 Securities Accounts...................................................................55 7.20 Financial Covenants. (a) Fail to maintain:...........................................56 8. EVENTS OF DEFAULT..............................................................................58 9. THE LENDER GROUP'S RIGHTS AND REMEDIES.........................................................59 9.1 Rights and Remedies...................................................................59 9.2 Remedies Cumulative...................................................................62 10. TAXES AND EXPENSES.............................................................................62 11. WAIVERS; INDEMNIFICATION.......................................................................62 11.1 Demand; Protest; etc..................................................................62 11.2 The Lender Group's Liability for Collateral...........................................62 11.3 Indemnification.......................................................................63 12. NOTICES........................................................................................63 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.....................................................64 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS.....................................................65 14.1 Assignments and Participations........................................................65 14.2 Successors............................................................................68 15. AMENDMENTS; WAIVERS............................................................................68 15.1 Amendments and Waivers................................................................68 15.2 Replacement of Holdout Lender.........................................................69 15.3 No Waivers; Cumulative Remedies.......................................................70
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16. AGENT; THE LENDER GROUP........................................................................70 16.1 Appointment and Authorization of Agent................................................70 16.2 Delegation of Duties..................................................................71 16.3 Liability of Agent....................................................................71 16.4 Reliance by Agent.....................................................................71 16.5 Notice of Default or Event of Default.................................................71 16.6 Credit Decision.......................................................................72 16.7 Costs and Expenses; Indemnification...................................................72 16.8 Agent in Individual Capacity..........................................................73 16.9 Successor Agent.......................................................................73 16.10 Lender in Individual Capacity.........................................................74 16.11 Withholding Taxes.....................................................................74 16.12 Collateral Matters....................................................................76 16.13 Restrictions on Actions by Lenders; Sharing of Payments...............................77 16.14 Agency for Perfection.................................................................77 16.15 Payments by Agent to the Lenders......................................................78 16.16 Concerning the Collateral and Related Loan Documents..................................78 16.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information.........................................................78 16.18 Several Obligations; No Liability.....................................................79 16.19 Legal Representation of Agent.........................................................80 17. GENERAL PROVISIONS.............................................................................80 17.1 Effectiveness.........................................................................80 17.2 Section Headings......................................................................80 17.3 Interpretation........................................................................80 17.4 Severability of Provisions............................................................80 17.5 Amendments in Writing.................................................................80 17.6 Counterparts; Telefacsimile Execution.................................................80 17.7 Revival and Reinstatement of Obligations..............................................80 17.8 Integration...........................................................................81 17.9 Parent as Agent for Borrowers.........................................................81
iv EXHIBITS AND SCHEDULES Exhibit A-1 Form of Assignment and Acceptance Exhibit B-1 Form of Borrowing Base Certificate Exhibit C-1 Form of Compliance Certificate Schedule C-1 Commitments Schedule P-1 Permitted Liens Schedule 2.7(a) Cash Management Banks Schedule 5.5 Locations of Inventory and Equipment Schedule 5.7 Chief Executive Office; FEIN Schedule 5.8(b) Capitalization of Borrowers Schedule 5.8(c) Capitalization of Borrowers' Subsidiaries Schedule 5.10 Litigation Schedule 5.13 ERISA Benefit Plans Schedule 5.14 Environmental Matters Schedule 5.16 Intellectual Property Schedule 5.18 Demand Deposit Accounts Schedule 5.20 Permitted Indebtedness Schedule 7.14 Transactions with Affiliates v LOAN AND SECURITY AGREEMENT --------------------------- THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of February 13, 2001, between and among, on the one hand, the lenders identified on the signature pages hereof (such lenders, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders"), FOOTHILL CAPITAL CORPORATION, a California corporation, as the arranger and administrative agent for the Lenders ("Agent"), and, on the other hand, WAM!NET INC., a Minnesota corporation ("Parent"), and each of Parent's Subsidiaries identified on the signature pages hereof (such Subsidiaries, together with Parent, are referred to hereinafter each individually as a "Borrower", and individually and collectively, jointly and severally, as the "Borrowers"). The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of, an Account, chattel paper, or a General Intangible. "Accounts" means all of Borrowers' now owned or hereafter acquired right, title, and interest with respect to "accounts" (as that term is defined in the Code), and any and all supporting obligations in respect thereof. "Additional Documents" has the meaning set forth in Section 4.4. "Administrative Borrower" has the meaning set forth in Section 17.9. "Advances" has the meaning set forth in Section 2.1. "Affiliate" means, as applied to any Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of Stock, by contract, or otherwise; provided, however, that, in any event: (a) any Person which owns directly or indirectly 10% or more of the securities having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed to control such Person; (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person; and (c) each partnership or joint venture in which a Person is a partner or joint venturer shall be deemed to be an Affiliate of such Person. 1 "Agent" means Foothill, solely in its capacity as agent for the Lenders hereunder, and any successor thereto. "Agent's Account" means an account at a bank designated by Agent from time to time as the account into which Borrowers shall make all payments to Agent for the benefit of the Lender Group and into which the Lender Group shall make all payments to Agent under this Agreement and the other Loan Documents; unless and until Agent notifies Administrative Borrower and the Lender Group to the contrary, Agent's Account shall be that certain deposit account bearing account number 323-266193 and maintained by Agent with The Chase Manhattan Bank, 4 New York Plaza, 15th Floor, New York, New York 10004, ABA #021000021. "Agent Advances" has the meaning set forth in Section 2.3(e)(i). "Agent's Liens" means the Liens granted by Borrowers to Agent for the benefit of the Lender Group under this Agreement or the other Loan Documents. "Agent-Related Persons" means Agent together with its Affiliates, officers, directors, employees, and agents. "Agreement" has the meaning set forth in the preamble hereto. "Assignee" has the meaning set forth in Section 14.1. "Assignment and Acceptance" means an Assignment and Acceptance in the form of Exhibit A-1. "Authorized Person" means any officer or other employee of Administrative Borrower. "Availability" means, as of any date of determination, if such date is a Business Day, and determined at the close of business on the immediately preceding Business Day, if such date of determination is not a Business Day, the amount that Borrowers are entitled to borrow as Advances under Section 2.1 (after giving effect to all then outstanding Obligations and all reserves applicable hereunder). "Bank Products" means any one or more types of services or facilities extended to the Borrowers by Wells Fargo or any Affiliate of Wells Fargo in reliance on Wells Fargo's agreement to indemnify such Affiliate. "Bank Product Reserves" means all reserves which the Agent from time to time establishes in its sole discretion for the Bank Products then provided or outstanding. "Bankruptcy Code" means the United States Bankruptcy Code, as in effect from time to time. 2 "Base Rate" means, the rate of interest announced within Wells Fargo at its principal office in San Francisco as its "prime rate", with the understanding that the "prime rate" is one of Wells Fargo's base rates (not necessarily the lowest of such rates) and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto and is evidenced by the recording thereof after its announcement in such internal publication or publications as Wells Fargo may designate. "Base Rate Loan" means each Advance. "Base Rate Margin" means 3.25 percentage points. "Benefit Plan" means a "defined benefit plan" (as defined in Section 3(35) of ERISA) for which any Borrower or any Subsidiary or ERISA Affiliate of any Borrower has been an "employer" (as defined in Section 3(5) of ERISA) within the past six years. "Board of Directors" means the board of directors (or comparable managers) of Parent or any committee thereof duly authorized to act on behalf thereof. "Books" means all of each Borrower's now owned or hereafter acquired books and records (including all of its Records indicating, summarizing, or evidencing its assets (including the Collateral) or liabilities, all of its Records relating to its business operations or financial condition, and all of its goods or General Intangibles related to such information). "Borrower" and "Borrowers" have the respective meanings set forth in the preamble to this Agreement. "Borrowing" means a borrowing hereunder consisting of Advances made on the same day by the Lenders (or Agent on behalf thereof), or by Swing Lender in the case of a Swing Loan, or by Agent in the case of an Agent Advance, in each case, to Administrative Borrower. "Borrowing Base" has the meaning set forth in Section 2.1. "Borrowing Base Certificate" means a certificate in the form of Exhibit B-1. "Business Day" means any day that is not a Saturday, Sunday, or other day on which national banks are authorized or required to close. "Capital Lease" means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. "Capitalized Lease Obligation" means any Indebtedness represented by obligations under a Capital Lease. "Cash Equivalents" means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within 1 year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States or 3 any political subdivision of any such state or any public instrumentality thereof maturing within 1 year from the date of acquisition thereof and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's, (c) commercial paper maturing no more than 1 year from the date of acquisition thereof and, at the time of acquisition, having a rating of A-1 or P-1, or better, from S&P or Moody's, and (d) certificates of deposit or bankers' acceptances maturing within 1 year from the date of acquisition thereof either (i) issued by any bank organized under the laws of the United States or any state thereof which bank has a rating of A or A2, or better, from S&P or Moody's, or (ii) certificates of deposit less than or equal to $100,000 in the aggregate issued by any other bank insured by the Federal Deposit Insurance Corporation. "Cash Management Bank" has the meaning set forth in Section 2.7(a). "Cash Management Account" has the meaning set forth in Section 2.7(a). "Cash Management Agreements" means those certain cash management service agreements, in form and substance satisfactory to Agent, each of which is among Administrative Borrower, Agent, and one of the Cash Management Banks. "Cerberus Partners" means Cerberus Partners, L.P., a Delaware limited partnership. "Change of Control" means (a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act), other than Permitted Holders, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30%, or more, of the Stock of Parent having the right to vote for the election of members of the Board of Directors, or (b) a majority of the members of the Board of Directors do not constitute Continuing Directors, or (c) any Borrower ceases to directly own and control 100% of the outstanding capital Stock of each of its Subsidiaries extant as of the Closing Date. "Closing Date" means the date of the making of the initial Advance (or other extension of credit) hereunder or the date on which Agent sends Borrower a written notice that all of the conditions precedent set forth in Section 3.1 either have been satisfied or have been waived. "Closing Date Business Plan" means the set of Projections of Borrowers for the 3 year period following the Closing Date (on a year by year basis, and for the 1 year period following the Closing Date, on a quarterly basis), in form and substance (including as to scope and underlying assumptions) satisfactory to Agent. "Code" means the New York Uniform Commercial Code, as in effect from time to time. "Collateral Access Agreement" means a landlord waiver, bailee letter, or acknowledgement agreement of any lessor, warehouseman, processor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in the Equipment or Inventory, in each case, in form and substance reasonably satisfactory to Agent. 4 "Collections" means all cash, checks, notes, instruments, and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds) of Borrowers except for proceeds from: (a) an initial public offering or any other private or public sale by Parent of equity or debt securities or private sale by a Borrower other than Parent of debt securities, (b) Equipment financings or (c) dispositions of Excluded Assets that are Equipment. "Commitment" means, with respect to each Lender, its Revolver Commitment, and, with respect to all Lenders, their Revolver Commitments, as the context requires, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 or on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1. "Compliance Certificate" means a certificate substantially in the form of Exhibit C-1 delivered by the chief financial officer of Parent to Agent. "Continuing Director" means (a) any member of the Board of Directors who was a director (or comparable manager) of Parent on the Closing Date, (b) any individual who becomes a member of the Board of Directors pursuant to a right of designation of Winstar, Cerberus Partners, or Silicon Graphics, and (c) any individual who becomes a member of the Board of Directors after the Closing Date if such individual was appointed or nominated for election to the Board of Directors by a majority of the Continuing Directors, but excluding any such individual originally proposed for election in opposition to the Board of Directors in office at the Closing Date in an actual or threatened election contest relating to the election of the directors (or comparable managers) of Parent (as such terms are used in Rule 14a-11 under the Exchange Act) and whose initial assumption of office resulted from such contest or the settlement thereof. "Control Agreement" means a control agreement, in form and substance satisfactory to Agent, executed and delivered by the applicable Borrower, Agent, and the applicable securities intermediary with respect to a Securities Account or a bank with respect to a deposit account. "Daily Balance" means, with respect to each day during the term of this Agreement, the amount of an Obligation owed at the end of such day. "DDA" means any checking or other demand deposit account maintained by any Borrower. "Default" means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default. "Defaulting Lender" means any Lender that fails to make any Advance (or other extension of credit) that it is required to make hereunder on the date that it is required to do so hereunder. 5 "Defaulting Lender Rate" means (a) the Base Rate for the first 3 days from and after the date the relevant payment is due, and (b) thereafter, at the interest rate then applicable to Advances that are Base Rate Loans (inclusive of the Base Rate Margin applicable thereto). "Designated Account" means account number 51-06036 of Administrative Borrower maintained with the Designated Account Bank, or such other deposit account of Administrative Borrower (located within the United States) that has been designated as such, in writing, by Administrative Borrower to Agent. "Designated Account Bank" means Bank One whose office is located at 1 Bank One Plaza, Chicago, Illinois 60670-0196 and whose ABA number is 071-000-013. "Disbursement Letter" means an instructional letter executed and delivered by Administrative Borrower to Agent regarding the extensions of credit to be made on the Closing Date, the form and substance of which is satisfactory to Agent. "Dollars" or "$" means United States dollars. "Due Diligence Letter" means the due diligence letter sent by Agent's counsel to Administrative Borrower, together with Administrative Borrower's completed responses to the inquiries set forth therein, the form and substance of such responses to be satisfactory to Agent. "EBITDA" means, with respect to any fiscal period, Parent's and its Subsidiaries consolidated net earnings (or loss), minus extraordinary gains, plus interest expense, income taxes, and depreciation and amortization for such period, as determined in accordance with GAAP. "EDS" means Electronic Data Systems Corporation, a Delaware corporation. "Eligible Collections" means (a) Collections on Accounts of any Borrower that are received by Agent and (b) Collections on accounts of direct or indirect foreign wholly-owned Subsidiaries of Parent in an amount not to exceed 15% of the amount of (i) the amount of clause (a) and (ii) Collections on accounts of direct or indirect foreign wholly-owned Subsidiaries of Parent. "Eligible Transferee" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $250,000,000, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a political subdivision of any such country and which has total assets in excess of $250,000,000, provided that such bank is acting through a branch or agency located in the United States, (c) a finance company, insurance company, or other financial institution or fund that is engaged in making, purchasing, or otherwise investing in commercial loans in the ordinary course of its business and having (together with its Affiliates) total assets in excess of $250,000,000, (d) any Affiliate (other than individuals) of a Lender that was party hereto as of the Closing Date, (e) so long as no Event of Default has occurred and is continuing, any other Person approved by Agent and Administrative 6 Borrower, and (f) during the continuation of an Event of Default, any other Person approved by Agent. "Enterprise Value" means the value of Parent on a consolidated and debt-free basis when sold, on a nonmarketable, controlling basis, in a less than optimal time period. Less than optimal time period is defined as 6 to 12 months. "Environmental Actions" means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter, or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or releases of Hazardous Materials from (a) any assets, properties, or businesses of any Borrower or any predecessor in interest, (b) from adjoining properties or businesses, or (c) from or onto any facilities which received Hazardous Materials generated by any Borrower or any predecessor in interest. "Environmental Law" means any applicable federal, state, provincial, foreign or local statute, law, rule, regulation, ordinance, code, binding and enforceable guideline, binding and enforceable written policy or rule of common law now or hereafter in effect and in each case as amended, or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, to the extent binding on Borrowers, relating to the environment, employee health and safety, or Hazardous Materials, including CERCLA; RCRA; the Federal Water Pollution Control Act, 33 USCss.1251 et seq; the Toxic Substances Control Act, 15 USC,ss. 2601 et seq; the Clean Air Act, 42 USCss.7401 et seq.; the Safe Drinking Water Act, 42 USC.ss.3803 et seq.; the Oil Pollution Act of 1990, 33 USC.ss. 2701 et seq.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 USC.ss. 11001 et seq.; the Hazardous Material Transportation Act, 49 USCss. 1801 et seq.; and the Occupational Safety and Health Act, 29 USC.ss.651 et seq. (to the extent it regulates occupational exposure to Hazardous Materials); any state and local or foreign counterparts or equivalents, in each case as amended from time to time. "Environmental Liabilities and Costs" means all liabilities, monetary obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts, or consultants, and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand by any Governmental Authority or any third party, and which relate to any Environmental Action. "Environmental Lien" means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs. "Equipment" means all of Borrowers' now owned or hereafter acquired right, title, and interest with respect to equipment, machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), tools, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. 7 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto. "ERISA Affiliate" means (a) any Person subject to ERISA whose employees are treated as employed by the same employer as the employees of a Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of a Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which a Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any Person subject to ERISA that is a party to an arrangement with a Borrower and whose employees are aggregated with the employees of a Borrower under IRC Section 414(o). "Event of Default" has the meaning set forth in Section 8. "Excess Availability" means the amount, as of the date any determination thereof is to be made, equal to Availability minus the aggregate amount, if any, of all trade payables of Borrowers aged in excess of their historical levels with respect thereto and all book overdrafts in excess of their historical practices with respect thereto, in each case as determined by Agent in its Permitted Discretion. "Exchange Act" means the Securities Exchange Act of 1934, as in effect from time to time. "Excluded Assets" means assets of a Borrower that are: (a) Equipment subject to Liens set forth on Schedule P-1 where the documents respecting the Liens prohibit such Borrower from granting junior Liens in such Equipment or (b) outstanding shares of Borrowers' foreign Subsidiaries in excess of 66% of such outstanding shares for each Subsidiary. "Fee Letter" means that certain fee letter, dated as of even date herewith, between Borrowers and Agent, in form and substance satisfactory to Agent. "FEIN" means Federal Employer Identification Number. "Foothill" means Foothill Capital Corporation, a California corporation. "Funding Date" means the date on which a Borrowing occurs. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "General Intangibles" means all of Borrowers' now owned or hereafter acquired right, title, and interest with respect to general intangibles (including payment intangibles, contract rights, rights to payment, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, 8 infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, money, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), and any and all supporting obligations in respect thereof, and any other personal property other than goods, Accounts, Investment Property, and Negotiable Collateral. "Governing Documents" means, with respect to any Person, the certificate or articles of incorporation, by-laws, or other organizational documents of such Person. "Governmental Authority" means any federal, state, local, or other governmental or administrative body, instrumentality, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body. "Hazardous Materials" means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. "Indebtedness" means (a) all obligations of a Borrower for borrowed money, (b) all obligations of a Borrower evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations of a Borrower in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations of a Borrower under Capital Leases, (d) all obligations or liabilities of others secured by a Lien on any asset of a Borrower, irrespective of whether such obligation or liability is assumed, (e) all obligations of a Borrower for the deferred purchase price of assets (other than trade debt incurred in the ordinary course of a Borrower's business and repayable in accordance with customary trade practices), and (f) any obligation of a Borrower guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted, or sold with recourse to a Borrower) any obligation of any other Person. "Indemnified Liabilities" has the meaning set forth in Section 11.3. "Indemnified Person" has the meaning set forth in Section 11.3. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other state or federal bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal 9 moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "Intangible Assets" means, with respect to any Person, that portion of the book value of all of such Person's assets that would be treated as intangibles under GAAP. "Intellectual Property Security Agreement" means an intellectual security agreement executed and delivered by Borrowers and Agent, the form and substance of which is satisfactory to Agent. "Inventory" means all Borrowers' now owned or hereafter acquired right, title, and interest with respect to inventory, including goods held for sale or lease or to be furnished under a contract of service, goods that are leased by a Borrower as lessor, goods that are furnished by a Borrower under a contract of service, and raw materials, work in process, or materials used or consumed in a Borrower's business. "Investment" means, with respect to any Person, any investment by such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances, or capital contributions (excluding (a) commission, travel, and similar advances to officers and employees of such Person made in the ordinary course of business, and (b) bona fide Accounts arising from the sale of goods or rendition of services in the ordinary course of business consistent with past practice), purchases or other acquisitions for consideration of Indebtedness or Stock, and any other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "Investment Property" means all of Borrowers' now owned or hereafter acquired right, title, and interest with respect to "investment property" as that term is defined in the Code, and any and all supporting obligations in respect thereof. "IRC" means the Internal Revenue Code of 1986, as in effect from time to time. "Issuing Lender" means Foothill or any other Lender that, at the request of Administrative Borrower and with the consent of Agent agrees, in such Lender's sole discretion, to become an Issuing Lender for the purpose of issuing L/Cs or L/C Undertakings pursuant to Section 2.12. "L/C" has the meaning set forth in Section 2.12(a). "L/C Disbursement" means a payment made by the Issuing Lender pursuant to a Letter of Credit. "L/C Undertaking" has the meaning set forth in Section 2.12(a). "Lender" and "Lenders" have the respective meanings set forth in the preamble to this Agreement, and shall include any other Person made a party to this Agreement in accordance with the provisions of Section 14.1. 10 "Lender Group" means, individually and collectively, each of the Lenders (including the Issuing Lender) and Agent. "Lender Group Expenses" means all (a) costs or expenses (including taxes, and insurance premiums) required to be paid by a Borrower under any of the Loan Documents that are paid or incurred by the Lender Group, (b) fees or charges paid or incurred by Agent in connection with the Lender Group's transactions with Borrowers, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic Collateral appraisals or business valuations to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, (c) costs and expenses incurred by Agent in the disbursement of funds to or for the account of Borrowers (by wire transfer or otherwise), (d) charges paid or incurred by Agent resulting from the dishonor of checks, (e) reasonable costs and expenses paid or incurred by the Lender Group to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated, (f) audit fees and expenses of Agent related to audit examinations of the Books to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, (g) reasonable costs and expenses of third party claims or any other suit paid or incurred by the Lender Group in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or the Lender Group's relationship with any Borrower or any guarantor of the Obligations, (h) Agent's and each Lender's reasonable fees and expenses (including attorneys fees) incurred in advising, structuring, drafting, reviewing, administering, or amending the Loan Documents, and (i) Agent's and each Lender's reasonable fees and expenses (including attorneys fees) incurred in terminating, enforcing (including attorneys fees and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning any Borrower or in exercising rights or remedies under the Loan Documents), or defending the Loan Documents, irrespective of whether suit is brought, or in taking any Remedial Action concerning the Collateral. "Lender-Related Person" means, with respect to any Lender, such Lender, together with such Lender's Affiliates, and the officers, directors, employees, and agents of such Lender. "Letter of Credit" means an L/C or an L/C Undertaking, as the context requires. "Letter of Credit Usage" means, as of any date of determination, the aggregate undrawn amount of all outstanding Letters of Credit plus 100% of the amount of outstanding time drafts accepted by an Underlying Issuer as a result of drawings under Underlying Letters of Credit. "Lien" means any interest in an asset securing an obligation owed to, or a claim by, any Person other than the owner of the asset, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and 11 whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Real Property. "Loan Account" has the meaning set forth in Section 2.10. "Loan Documents" means this Agreement, the Cash Management Agreements, the Control Agreements, the Disbursement Letter, the Due Diligence Letter, the Fee Letter, the Officers' Certificate, the Intellectual Property Security Agreement, the Stock Pledge Agreement, any note or notes executed by a Borrower in connection with this Agreement and payable to a member of the Lender Group, and any other agreement entered into, now or in the future, by any Borrower and the Lender Group in connection with this Agreement. "Material Adverse Change" means (a) a material adverse change in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrowers taken as a whole, (b) a material impairment of a Borrower's ability to perform its obligations under the Loan Documents to which it is a party or of the Lender Group's ability to enforce the Obligations or realize upon the Collateral, or (c) a material impairment of the enforceability or priority of the Agent's Liens with respect to the Collateral as a result of an action or failure to act on the part of a Borrower. "Maturity Date" has the meaning set forth in Section 3.4. "Maximum Revolver Amount" means $30,000,000. "Negotiable Collateral" means all of Borrowers' now owned and hereafter acquired right, title, and interest with respect to letters of credit, letter of credit rights, instruments, promissory notes, drafts, documents, and chattel paper (including electronic chattel paper and tangible chattel paper), and any and all supporting obligations in respect thereof. "Obligations" means all loans, Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), contingent reimbursement obligations with respect to outstanding Letters of Credit, premiums, liabilities (including all amounts charged to Borrowers' Loan Account pursuant hereto), obligations, fees (including the fees provided for in the Fee Letter), charges, costs, Lender Group Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties of any kind and description owing by Borrowers to the Lender Group pursuant to or evidenced by the Loan Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all interest not paid when due and all Lender Group Expenses that Borrowers are required to pay or reimburse by the Loan Documents, by law, or otherwise, and all debts, liabilities and obligations now or 12 hereafter arising from or in connection with Bank Products. Any reference in this Agreement or in the Loan Documents to the Obligations shall include all amendments, changes, extensions, modifications, renewals replacements, substitutions, and supplements, thereto and thereof, as applicable, both prior and subsequent to any Insolvency Proceeding. "Officers' Certificate" means the representations and warranties of officers form submitted by Agent to Administrative Borrower, together with Borrowers' completed responses to the inquiries set forth therein, the form and substance of such responses to be satisfactory to Agent. "Originating Lender" has the meaning set forth in Section 14.1(e). "Overadvance" has the meaning set forth in Section 2.5. "Parent" has the meaning set forth in the preamble to this Agreement. "Participant" has the meaning set forth in Section 14.1(e). "Permitted Discretion" means a determination made in good faith and in the exercise of reasonable (from the perspective of a secured asset-based lender) business judgment. "Permitted Dispositions" means (a) sales or other dispositions by Borrowers of Equipment that is substantially worn, damaged, or obsolete in the ordinary course of the applicable Borrower's business, (b) sales by Borrowers of Inventory to buyers in the ordinary course of business, (c) the use or transfer of money or Cash Equivalents by Borrowers in a manner that is not prohibited by the terms of this Agreement or the other Loan Documents, and (d) the licensing by Borrowers, on a non-exclusive basis, of patents, trademarks, copyrights, and other intellectual property rights in the ordinary course of the applicable Borrower's business. "Permitted Holder" means the following Persons and their Affiliates (a) MCI WorldCom, Inc., (b) Winstar, (c) Silicon Graphics, (d) Cerberus Partners and (e) Sumitomo. "Permitted Indebtedness" means Indebtedness set forth on Schedule 5.20. "Permitted Investments" means (a) investments in Cash Equivalents, (b) investments in negotiable instruments for collection, (c) advances made in connection with purchases of goods or services in the ordinary course of business, and (d) investments by any Borrower in any other Borrower. "Permitted Liens" means (a) Liens held by Agent for the benefit of Agent and the Lenders, (b) Liens for unpaid taxes that either (i) are not yet delinquent, or (ii) do not constitute an Event of Default hereunder and are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interests of lessors under operating leases, (e) Liens or the interests of lessors under Capital Leases to the extent that such Liens or interests secure Purchase Money Indebtedness and so long as such Lien attaches only to the asset purchased or acquired and the proceeds thereof, (f) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of 13 Borrowers' business and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet delinquent, or (ii) are the subject of Permitted Protests, (g) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (h) Liens or deposits to secure performance of bids, tenders, or leases incurred in the ordinary course of Borrowers' business and not in connection with the borrowing of money, (i) Liens granted as security for surety or appeal bonds in connection with obtaining such bonds in the ordinary course of Borrowers' business, (j) Liens resulting from any judgment or award that is not an Event of Default hereunder, (k) Liens with respect to the Real Property or Equipment acquired by a Borrower that are subject to such Lien prior to such acquisition, and (l) with respect to any Real Property, easements, rights of way, and zoning restrictions that do not materially interfere with or impair the use or operation thereof by Borrowers. "Permitted Protest" means the right of the applicable Borrower to protest any Lien (other than any such Lien that secures the Obligations), taxes (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the Books in such amount as is required under GAAP, (b) any such protest is instituted promptly and prosecuted diligently by the applicable Borrower in good faith, and (c) Agent is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Agent's Liens. "Person" means natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Personal Property Collateral" means all of each Borrower's now owned or hereafter acquired right, title, and interest in and to each of the following, except for Excluded Assets: (a) Accounts, (b) Books, (c) Equipment, (d) General Intangibles, (e) Inventory, (f) Investment Property, (g) Negotiable Collateral, (h) money or other assets of each such Borrower that now or hereafter come into the possession, custody, or control of any member of the Lender Group, and 14 (i) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the foregoing, and any and all Accounts, Books, Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, Real Property, money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. "Projections" means Parent's forecasted (a) balance sheets, (b) profit and loss statements, and (c) cash flow statements, all prepared on a consistent basis with Parent's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. "Pro Rata Share" means: (a) with respect to a Lender's obligation to make Advances and receive payments of principal, interest, fees, costs, and expenses with respect thereto, the percentage obtained by dividing (i) such Lender's Revolver Commitment, by (ii) the aggregate Revolver Commitments of all Lenders, (b) with respect to all other matters (including the indemnification obligations arising under Section 16.7), the percentage obtained by dividing (i) such Lender's Revolver Commitment, by (ii) the aggregate amount of Revolver Commitments of all Lenders; provided, however, that, in each case, in the event all Revolver Commitments have been terminated, Pro Rata Share shall be determined according to the Revolver Commitments in effect immediately prior to such termination. "Purchase Money Indebtedness" means Indebtedness (other than the Obligations, but including Capitalized Lease Obligations), incurred at the time of, or within 120 days after, the acquisition of any fixed assets for the purpose of financing all or any part of the acquisition cost thereof. "Real Property" means any estates or interests in real property now owned or hereafter acquired by any Borrower and the improvements thereto. "Record" means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. "Remedial Action" means all actions taken to (a) clean up, remove, remediate, contain, treat, monitor, assess, evaluate, or in any way address Hazardous Materials in the indoor or outdoor environment, (b) prevent or minimize a release or threatened release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform any pre-remedial studies, investigations, or post-remedial operation and maintenance activities, or (d) conduct any other actions authorized by 42 USC ss. 9601. "Report" has the meaning set forth in Section 16.17. 15 "Required Availability" means Excess Availability and unrestricted cash and Cash Equivalents in an amount of not less than $10,000,000. "Required Lenders" means, at any time, Lenders whose Pro Rata Shares aggregate 66% of the Revolver Commitments, or if the Commitments have been terminated irrevocably, 66% of the Obligations then outstanding. "Revolver Commitment" means, with respect to each Lender, its Revolver Commitment, and, with respect to all Lenders, their Revolver Commitments, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 or on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1. Revolver Usage" means, as of any date of determination, the sum of (a) the then extant amount of outstanding Advances, plus (b) the then extant amount of the Letter of Credit Usage. "Risk Participation Liability" means, as to each Letter of Credit, all reimbursement obligations of Borrowers to the Issuing Lender with respect to an L/C Undertaking, consisting of (a) the amount available to be drawn or which may become available to be drawn, (b) all amounts that have been paid by the Issuing Lender to the Underlying Issuer to the extent not reimbursed by Borrowers, whether by the making of an Advance or otherwise, and (c) all accrued and unpaid interest, fees, and expenses payable with respect thereto. "SEC" means the United States Securities and Exchange Commission and any successor thereto. "Securities Account" means a "securities account" as that term is defined in the Code. "Settlement" has the meaning set forth in Section 2.3(f)(i). "Settlement Date" has the meaning set forth in Section 2.3(f)(i). "Silicon Graphics" means Silicon Graphics, Inc., a Delaware corporation. "Stock" means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "Stock Pledge Agreement" means a stock pledge agreement, in form and substance satisfactory to Agent, executed and delivered by each Borrower that owns Stock of a Subsidiary of Parent. 16 "Subsidiary" of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of Stock having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. "Swing Lender" means Foothill or any other Lender that, at the request of Administrative Borrower and with the consent of Agent agrees, in such Lender's sole discretion, to become the Swing Lender hereunder. "Swing Loan" has the meaning set forth in Section 2.3(d)(i). "Taxes" has the meaning set forth in Section 2.2. "Underlying Issuer" means a third Person which is the beneficiary of an L/C Undertaking and which has issued a letter of credit at the request of the Issuing Lender for the benefit of Borrowers. "Underlying Letter of Credit" means a letter of credit that has been issued by an Underlying Issuer. "Voidable Transfer" has the meaning set forth in Section 17.7. "Wells Fargo" means Wells Fargo Bank, National Association, a national banking association. "Winstar" means Winstar Wireless, Inc., a Delaware corporation. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrowers" or the term "Parent" is used in respect of a financial covenant or a related definition, it shall be understood to mean Parent and its Subsidiaries on a consolidated basis unless the context clearly requires otherwise. 1.3 Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 1.4 Construction. Unless the context of this Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in the other Loan Documents to any agreement, instrument, or document shall include all alterations, amendments, 17 changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein). Any reference herein to any Person shall be construed to include such Person's successors and assigns. Any requirement of a writing contained herein or in the other Loan Documents shall be satisfied by the transmission of a Record and any Record transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein. 1.5 Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 2. LOAN AND TERMS OF PAYMENT. 2.1 Revolver Advances. (a) Subject to the terms and conditions of this Agreement, and during the term of this Agreement, each Lender with a Revolver Commitment agrees (severally, not jointly or jointly and severally) to make advances ("Advances") to Borrowers in an amount at any one time outstanding not to exceed such Lender's Pro Rata Share of an amount equal to the lesser of (i) the Maximum Revolver Amount less the Letter of Credit Usage, or (ii) the Borrowing Base less the Letter of Credit Usage. For purposes of this Agreement, "Borrowing Base," as of any date of determination, shall mean the result of: (x) the lesser of (i) 33% of Parent's Enterprise Value minus the amount of Parent's consolidated secured Indebtedness other than the Obligations, and (ii) an amount equal to the amount of Eligible Collections for the immediately preceding 60 day period, minus (y) the aggregate amount of reserves, if any, established by Agent under Section 2.1(b). (b) Anything to the contrary in this Section 2.1 notwithstanding, Agent shall have the right to establish reserves in such amounts, and with respect to such matters, as Agent in its Permitted Discretion shall deem necessary or appropriate, against the Borrowing Base, including reserves with respect to (i) sums that Borrowers are required to pay (such as taxes, assessments, insurance premiums, or, in the case of leased assets, rents or other amounts payable under such leases) and has failed to pay under any Section of this Agreement or any other Loan Document, and (ii) amounts owing by Borrowers to any Person to the extent secured by a Lien on, or trust over, any of the Collateral (other than any existing Permitted Lien set forth on Schedule P-1 which is specifically identified thereon as entitled to have priority over the 18 Agent's Liens), which Lien or trust, in the Permitted Discretion of Agent likely would have a priority superior to the Agent's Liens (such as Liens or trusts in favor of landlords, warehousemen, carriers, mechanics, materialmen, laborers, or suppliers, or Liens or trusts for ad valorem, excise, sales, or other taxes where given priority under applicable law) in and to such item of the Collateral. In addition to the foregoing, Agent shall have the right to have the Enterprise Value reappraised by a qualified appraisal company selected by Agent from time to time after the Closing Date for the purpose of redetermining the Enterprise Value and, as a result, redetermining the Borrowing Base; provided, however, that Borrowers shall not be required to pay for more than one appraisal of Enterprise Value in any 6 month period prior to the occurrence and continuation of an Event of Default. (c) Amounts borrowed pursuant to this Section may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. 2.2 Bank Products. Borrowers may request and Wells Fargo may, in its sole and absolute discretion, arrange for the Borrowers to obtain from Wells Fargo or Wells Fargo's Affiliates Bank Products although the Borrowers are not required to do so. To the extent Bank Products are provided by an Affiliate of Wells Fargo, Borrowers agree to indemnify and hold Wells Fargo and the Lenders harmless from any and all costs and obligations now or hereafter incurred by Wells Fargo or any of the Lenders which arise from the indemnity given by Wells Fargo to its Affiliates related to such Bank Products; provided, however, nothing contained herein is intended to limit the Borrowers' rights, with respect to Wells Fargo or its Affiliates, if any, which arise as a result of the execution of documents by and between Borrowers and Wells Fargo which relate to Bank Products. The agreement contained in this Section shall survive termination of this Agreement. Borrowers acknowledge and agree that the obtaining of Bank Products from Wells Fargo or Wells Fargo's Affiliates (a) is in the sole and absolute discretion of Wells Fargo or Wells Fargo's Affiliates, and (b) is subject to all rules and regulations of Wells Fargo or Wells Fargo's Affiliates. 2.3 Borrowing Procedures and Settlements. (a) Procedure for Borrowing. Each Borrowing shall be made by an irrevocable written request by an Authorized Person delivered to Agent (which notice must be received by Agent no later than 10:00 a.m. (California time) on the Business Day prior to the date that is the requested Funding Date in the case of a request for an Advance specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day; provided, however, that in the case of a request for Swing Loan in an amount of $5,000,000, or less, such notice will be timely received if it is received by Agent no later than 10:00 a.m. (California time) on the Business Day that is the requested Funding Date) specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day. At Agent's election, in lieu of delivering the above-described written request, any Authorized Person may give Agent telephonic notice of such request by the required time, with such telephonic notice to be confirmed in writing within 24 hours of the giving of such notice. 19 (b) Agent's Election. Promptly after receipt of a request for a Borrowing pursuant to Section 2.3(a), Agent shall elect, in its discretion, (i) to have the terms of Section 2.3(c) apply to such requested Borrowing, or (ii) if the Borrowing is for an Advance, to request Swing Lender to make a Swing Loan pursuant to the terms of Section 2.3(d) in the amount of the requested Borrowing; provided, however, that if Swing Lender declines in its sole discretion to make a Swing Loan pursuant to Section 2.3(d), Agent shall elect to have the terms of Section 2.3(c) apply to such requested Borrowing. (c) Making of Advances. (i) In the event that Agent shall elect to have the terms of this Section 2.3(c) apply to a requested Borrowing as described in Section 2.3(b), then promptly after receipt of a request for a Borrowing pursuant to Section 2.3(a), Agent shall notify the Lenders, not later than 1:00 p.m. (California time) on the Business Day immediately preceding the Funding Date applicable thereto, by telecopy, telephone, or other similar form of transmission, of the requested Borrowing. Each Lender shall make the amount of such Lender's Pro Rata Share of the requested Borrowing available to Agent in immediately available funds, to Agent's Account, not later than 10:00 a.m. (California time) on the Funding Date applicable thereto. After Agent's receipt of the proceeds of such Advances, upon satisfaction of the applicable conditions precedent set forth in Section 3 hereof, Agent shall make the proceeds thereof available to Administrative Borrower on the applicable Funding Date by transferring immediately available funds equal to such proceeds received by Agent to Administrative Borrower's Designated Account; provided, however, that Agent shall not request any Lender to make, and no Lender shall have the obligation to make, any Advance if Agent shall have actual knowledge that (1) one or more of the applicable conditions precedent set forth in Section 3 will not be satisfied on the requested Funding Date for the applicable Borrowing unless such condition has been waived, or (2) the requested Borrowing would exceed the Availability on such Funding Date. (ii) Unless Agent receives notice from a Lender on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least 1 Business Day prior to the date of such Borrowing, that such Lender will not make available as and when required hereunder to Agent for the account of Borrowers the amount of that Lender's Pro Rata Share of the Borrowing, Agent may assume that each Lender has made or will make such amount available to Agent in immediately available funds on the Funding Date and Agent may (but shall not be so required), in reliance upon such assumption, make available to Borrowers on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to Agent in immediately available funds and Agent in such circumstances has made available to Borrowers such amount, that Lender shall on the Business Day following such Funding Date make such amount available to Agent, together with interest at the Defaulting Lender Rate for each day during such period. A notice submitted by Agent to any Lender with respect to amounts owing under this subsection shall be conclusive, absent manifest error. 20 If such amount is so made available, such payment to Agent shall constitute such Lender's Advance on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to Agent on the Business Day following the Funding Date, Agent will notify Administrative Borrower of such failure to fund and, upon demand by Agent, Borrowers shall pay such amount to Agent for Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Advances composing such Borrowing. The failure of any Lender to make any Advance on any Funding Date shall not relieve any other Lender of any obligation hereunder to make an Advance on such Funding Date, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on any Funding Date. (iii) Agent shall not be obligated to transfer to a Defaulting Lender any payments made by Borrowers to Agent for the Defaulting Lender's benefit, and, in the absence of such transfer to the Defaulting Lender, Agent shall transfer any such payments to each other non-Defaulting Lender member of the Lender Group ratably in accordance with their Commitments (but only to the extent that such Defaulting Lender's Advance was funded by the other members of the Lender Group) or, if so directed by Administrative Borrower and if no Default or Event of Default had occurred and is continuing (and to the extent such Defaulting Lender's Advance was not funded by the Lender Group), retain same to be re-advanced to Borrowers as if such Defaulting Lender had made Advances to Borrowers. Subject to the foregoing, Agent may hold and, in its Permitted Discretion, re-lend to Borrowers for the account of such Defaulting Lender the amount of all such payments received and retained by it for the account of such Defaulting Lender. Solely for the purposes of voting or consenting to matters with respect to the Loan Documents, such Defaulting Lender shall be deemed not to be a "Lender" and such Lender's Commitment shall be deemed to be zero. This Section shall remain effective with respect to such Lender until (x) the Obligations under this Agreement shall have been declared or shall have become immediately due and payable, (y) the non-Defaulting Lenders, Agent, and Administrative Borrower shall have waived such Defaulting Lender's default in writing, or (z) the Defaulting Lender makes its Pro Rata Share of the applicable Advance and pays to Agent all amounts owing by Defaulting Lender in respect thereof. The operation of this Section shall not be construed to increase or otherwise affect the Commitment of any Lender, to relieve or excuse the performance by such Defaulting Lender or any other Lender of its duties and obligations hereunder, or to relieve or excuse the performance by Borrowers of their duties and obligations hereunder to Agent or to the Lenders other than such Defaulting Lender. Any such failure to fund by any Defaulting Lender shall constitute a material breach by such Defaulting Lender of this Agreement and shall entitle Administrative Borrower at its option, upon written notice to Agent, to arrange for a substitute Lender to assume the Commitment of such Defaulting Lender, such substitute Lender to be acceptable to Agent. In connection with the arrangement of such a substitute Lender, the Defaulting Lender shall have no 21 right to refuse to be replaced hereunder, and agrees to execute and deliver a completed form of Assignment and Acceptance Agreement in favor of the substitute Lender (and agrees that it shall be deemed to have executed and delivered such document if it fails to do so) subject only to being repaid its share of the outstanding Obligations (including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever; provided further, however, that any such assumption of the Commitment of such Defaulting Lender shall not be deemed to constitute a waiver of any of the Lender Groups' or Borrowers' rights or remedies against any such Defaulting Lender arising out of or in relation to such failure to fund. (d) Making of Swing Loans. (i) In the event Agent shall elect, with the consent of Swing Lender, as a Lender, to have the terms of this Section 2.3(d) apply to a requested Borrowing as described in Section 2.3(b), Swing Lender as a Lender shall make such Advance in the amount of such Borrowing (any such Advance made solely by Swing Lender as a Lender pursuant to this Section 2.3(d) being referred to as a "Swing Loan" and such Advances being referred to collectively as "Swing Loans") available to Borrowers on the Funding Date applicable thereto by transferring immediately available funds to Administrative Borrower's Designated Account. Each Swing Loan is an Advance hereunder and shall be subject to all the terms and conditions applicable to other Advances, and all payments on any Swing Loan shall be payable to Swing Lender as a Lender solely for its own account (and for the account of the holder of any participation interest with respect to such Swing Loan). Subject to the provisions of Section 2.3(i), Agent shall not request Swing Lender as a Lender to make, and Swing Lender as a Lender shall not make, any Swing Loan if Agent has actual knowledge that (i) one or more of the applicable conditions precedent set forth in Section 3 will not be satisfied on the requested Funding Date for the applicable Borrowing unless such condition has been waived, or (ii) the requested Borrowing would exceed the Availability on such Funding Date. Swing Lender as a Lender shall not otherwise be required to determine whether the applicable conditions precedent set forth in Section 3 have been satisfied on the Funding Date applicable thereto prior to making, in its sole discretion, any Swing Loan. (ii) The Swing Loans shall be secured by the Agent's Liens, shall constitute Advances and Obligations hereunder, and shall bear interest at the rate applicable from time to time to Advances that are Base Rate Loans. (e) Agent Advances. (i) Agent hereby is authorized by Borrowers and the Lenders, from time to time in Agent's sole discretion, (1) after the occurrence and during the continuance of a Default or an Event of Default, or (2) at any time that any of the other applicable conditions precedent set forth in Section 3 have not been 22 satisfied, to make Advances to Borrowers on behalf of the Lenders that Agent, in its Permitted Discretion deems necessary or desirable (A) to preserve or protect the Collateral, or any portion thereof, (B) to enhance the likelihood of repayment of the Obligations, or (C) to pay any other amount chargeable to Borrowers pursuant to the terms of this Agreement, including Lender Group Expenses and the costs, fees, and expenses described in Section 10 (any of the Advances described in this Section 2.3(e) shall be referred to as "Agent Advances"). Each Agent Advance is an Advance hereunder and shall be subject to all the terms and conditions applicable to other Advances, except that all payments thereon shall be payable to Agent solely for its own account (and for the account of the holder of any participation interest with respect to such Agent Advance). (ii) The Agent Advances shall be repayable on demand and secured by the Agent's Liens granted to Agent under the Loan Documents, shall constitute Advances and Obligations hereunder, and shall bear interest at the rate applicable from time to time to Advances that are Base Rate Loans. (f) Settlement. It is agreed that each Lender's funded portion of the Advances is intended by the Lenders to equal, at all times, such Lender's Pro Rata Share of the outstanding Advances. Such agreement notwithstanding, Agent, Swing Lender, and the other Lenders agree (which agreement shall not be for the benefit of or enforceable by Borrowers) that in order to facilitate the administration of this Agreement and the other Loan Documents, settlement among them as to the Advances, the Swing Loans, and the Agent Advances shall take place on a periodic basis in accordance with the following provisions: (i) Agent shall request settlement ("Settlement") with the Lenders on a weekly basis, or on a more frequent basis if so determined by Agent, (1) on behalf of Swing Lender, with respect to each outstanding Swing Loan, (2) for itself, with respect to each Agent Advance, and (3) with respect to Collections received, as to each by notifying the Lenders by telecopy, telephone, or other similar form of transmission, of such requested Settlement, no later than 2:00 p.m. (California time) on the Business Day immediately prior to the date of such requested Settlement (the date of such requested Settlement being the "Settlement Date"). Such notice of a Settlement Date shall include a summary statement of the amount of outstanding Advances, Swing Loans, and Agent Advances for the period since the prior Settlement Date. Subject to the terms and conditions contained herein (including Section 2.3(c)(iii)): (y) if a Lender's balance of the Advances, Swing Loans, and Agent Advances exceeds such Lender's Pro Rata Share of the Advances, Swing Loans, and Agent Advances as 23 of a Settlement Date, then Agent shall, by no later than 12:00 p.m. (California time) on the Settlement Date, transfer in immediately available funds to the account of such Lender as such Lender may designate, an amount such that each such Lender shall, upon receipt of such amount, have as of the Settlement Date, its Pro Rata Share of the Advances, Swing Loans, and Agent Advances, and (z) if a Lender's balance of the Advances, Swing Loans, and Agent Advances is less than such Lender's Pro Rata Share of the Advances, Swing Loans, and Agent Advances as of a Settlement Date, such Lender shall no later than 12:00 p.m. (California time) on the Settlement Date transfer in immediately available funds to the Agent's Account, an amount such that each such Lender shall, upon transfer of such amount, have as of the Settlement Date, its Pro Rata Share of the Advances, Swing Loans, and Agent Advances. Such amounts made available to Agent under clause (z) of the immediately preceding sentence shall be applied against the amounts of the applicable Swing Loan or Agent Advance and, together with the portion of such Swing Loan or Agent Advance representing Swing Lender's Pro Rata Share thereof, shall constitute Advances of such Lenders. If any such amount is not made available to Agent by any Lender on the Settlement Date applicable thereto to the extent required by the terms hereof, Agent shall be entitled to recover for its account such amount on demand from such Lender together with interest thereon at the Defaulting Lender Rate. (ii) In determining whether a Lender's balance of the Advances, Swing Loans, and Agent Advances is less than, equal to, or greater than such Lender's Pro Rata Share of the Advances, Swing Loans, and Agent Advances as of a Settlement Date, Agent shall, as part of the relevant Settlement, apply to such balance the portion of payments actually received in good funds by Agent with respect to principal, interest, fees payable by Borrowers and allocable to the Lenders hereunder, and proceeds of Collateral. To the extent that a net amount is owed to any such Lender after such application, such net amount shall be distributed by Agent to that Lender as part of such next Settlement. (iii) Between Settlement Dates, Agent, to the extent no Agent Advances or Swing Loans are outstanding, may pay over to Swing Lender any payments received by Agent, that in accordance with the terms of this Agreement would be applied to the reduction of the Advances, for application to Swing Lender's Pro Rata Share of the Advances. If, as of any Settlement Date, Collections received since the then immediately preceding Settlement Date have been applied to Swing Lender's Pro Rata Share of the Advances other than to Swing Loans, as provided for in the previous sentence, Swing Lender shall pay to Agent for the accounts of the Lenders, and Agent shall pay to the Lenders, to be applied to the outstanding Advances of such Lenders, an amount such that each Lender shall, upon receipt of such amount, have, as of such Settlement Date, its Pro Rata Share of the Advances. During the period between Settlement Dates, Swing Lender with respect to Swing Loans, Agent with respect to Agent Advances, and each Lender (subject to the effect of letter agreements between Agent and individual Lenders) with respect to the Advances other than Swing Loans and Agent Advances, shall be entitled to interest at the applicable rate or rates payable under this Agreement on the daily amount of funds employed by Swing Lender, Agent, or the Lenders, as applicable. (g) Notation. Agent shall record on its books the principal amount of the Advances owing to each Lender, including the Swing Loans owing to Swing Lender, and Agent Advances owing to Agent, and the interests therein of each Lender, from time to time. In 24 addition, each Lender is authorized, at such Lender's option, to note the date and amount of each payment or prepayment of principal of such Lender's Advances in its books and records, including computer records, such books and records constituting conclusive evidence, absent manifest error, of the accuracy of the information contained therein. (h) Lenders' Failure to Perform. All Advances (other than Swing Loans and Agent Advances) shall be made by the Lenders contemporaneously and in accordance with their Pro Rata Shares. It is understood that (i) no Lender shall be responsible for any failure by any other Lender to perform its obligation to make any Advance (or other extension of credit) hereunder, nor shall any Commitment of any Lender be increased or decreased as a result of any failure by any other Lender to perform its obligations hereunder, and (ii) no failure by any Lender to perform its obligations hereunder shall excuse any other Lender from its obligations hereunder. 2.4 Payments. (a) Payments by Borrowers. (i) Except as otherwise expressly provided herein, all payments by Borrowers shall be made to Agent's Account for the account of the Lender Group and shall be made in immediately available funds, no later than 11:00 a.m. (California time) on the date specified herein. Any payment received by Agent later than 11:00 a.m. (California time), shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day. (ii) Unless Agent receives notice from Administrative Borrower prior to the date on which any payment is due to the Lenders that Borrowers will not make such payment in full as and when required, Agent may assume that Borrowers have made (or will make) such payment in full to Agent on such date in immediately available funds and Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrowers do not make such payment in full to Agent on the date when due, each Lender severally shall repay to Agent on demand such amount distributed to such Lender, together with interest thereon at the Defaulting Lender Rate for each day from the date such amount is distributed to such Lender until the date repaid. (b) Apportionment and Application. (i) Except as otherwise provided with respect to Defaulting Lenders and except as otherwise provided in the Loan Documents (including letter agreements between Agent and individual Lenders), aggregate principal and interest payments shall be apportioned ratably among the Lenders (according to the unpaid principal balance of the Obligations to which such payments relate held by each Lender) and payments of fees and expenses (other than fees or 25 expenses that are for Agent's separate account, after giving effect to any letter agreements between Agent and individual Lenders) shall be apportioned ratably among the Lenders having a Pro Rata Share of the type of Commitment or Obligation to which a particular fee relates. All payments shall be remitted to Agent and all such payments (other than payments received while no Default or Event of Default has occurred and is continuing and which relate to the payment of principal or interest of specific Obligations or which relate to the payment of specific fees), and all proceeds of Accounts or other Collateral received by Agent, shall be applied as follows: A. first, to pay any Lender Group Expenses then due to Agent under the Loan Documents, until paid in full, B. second, to pay any Lender Group Expenses then due to the Lenders under the Loan Documents, on a ratable basis, until paid in full, C. third, to pay any fees then due to Agent (for its separate accounts, after giving effect to any letter agreements between Agent and the individual Lenders) under the Loan Documents until paid in full, D. fourth, to pay any fees then due to any or all of the Lenders (after giving effect to any letter agreements between Agent and individual Lenders) under the Loan Documents, on a ratable basis, until paid in full, E. fifth, to pay interest due in respect of all Agent Advances, until paid in full, F. sixth, ratably to pay interest due in respect of the Advances (other than Agent Advances), and the Swing Loans, G. seventh, to pay the principal of all Agent Advances until paid in full, H. eighth, to pay the principal of all Swing Loans until paid in full, I. ninth, to pay the principal of all Advances until paid in full, J. tenth, to pay any other Obligations (other than Bank Products) until paid in full, K. eleventh, if an Event of Default has occurred and is continuing, to Agent, to be held by Agent, for the ratable benefit of Issuing Lender and those Lenders having a Revolver Commitment, as cash collateral in an amount up to 105% of the then extant Letter of Credit Usage until paid in full, 26 L. twelfth, to the payment of any amounts relating to Bank Products, and M. thirteenth, to Borrowers (to be wired to the Designated Account) or such other Person entitled thereto under applicable law. (ii) Agent promptly shall distribute to each Lender, pursuant to the applicable wire instructions received from each Lender in writing, such funds as it may be entitled to receive, subject to a Settlement delay as provided in Section 2.3(h). (iii) In each instance, so long as no Default or Event of Default has occurred and is continuing, Section 2.4(b) shall not be deemed to apply to any payment by Borrowers specified by Borrowers to be for the payment of specific Obligations then due and payable (or prepayable) under any provision of this Agreement. (iv) For purposes of the foregoing, "paid in full" means payment of all amounts owing under the Loan Documents according to the terms thereof, including loan fees, service fees, professional fees, interest (and specifically including interest accrued after the commencement of any Insolvency Proceeding), default interest, interest on interest, and expense reimbursements, whether or not the same would be or is allowed or disallowed in whole or in part in any Insolvency Proceeding. (v) In the event of a direct conflict between the priority provisions of this Section 2.4 and other provisions contained in any other Loan Document, it is the intention of the parties hereto that such priority provisions in such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of this Section 2.4 shall control and govern. 2.5 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrowers to the Lender Group pursuant to Section 2.1 is greater than either the Dollar or percentage limitations set forth in Section 2.1, (an "Overadvance"), Borrowers immediately shall pay to Agent, in cash, the amount of such excess, which amount shall be used by Agent to reduce the Obligations in accordance with the priorities set forth in Section 2.4(b). In addition, Borrowers hereby promise to pay the Obligations (including principal, interest, fees, costs, and expenses) in Dollars in full to the Lender Group as and when due and payable under the terms of this Agreement and the other Loan Documents. 2.6 Interest Rates, Payments, and Calculations. (a) Interest Rates. Except as provided in clause (c) below, all Obligations (except for undrawn Letters of Credit) that have been charged to the Loan Account 27 pursuant to the terms hereof shall bear interest on the Daily Balance thereof at a per annum rate equal to the Base Rate plus the Base Rate Margin. (b) Letter of Credit Fee. Borrowers shall pay Agent (for the ratable benefit of the Lenders with a Revolver Commitment, subject to any letter agreement between Agent and individual Lenders), a Letter of Credit fee (in addition to the charges, commissions, fees, and costs set forth in Section 2.12(e)) which shall accrue at a rate equal to 3.25% per annum times the Daily Balance of the undrawn amount of all outstanding Letters of Credit. (c) Default Rate. Upon the occurrence and during the continuation of an Event of Default (and at the election of Agent or the Required Lenders), (i) all Obligations (except for undrawn Letters of Credit ) that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof at a per annum rate equal to 4 percentage points above the per annum rate otherwise applicable hereunder, and (ii) the Letter of Credit fee provided for above shall be increased to 4 percentage points above the per annum rate otherwise applicable hereunder. (d) Payment. Interest, Letter of Credit fees, and all other fees payable hereunder shall be due and payable, in arrears, on the first day of each month at any time that Obligations or Commitments are outstanding. Borrowers hereby authorize Agent, from time to time, without prior notice to Borrowers, to charge such interest and fees, all Lender Group Expenses (as and when incurred), the charges, commissions, fees, and costs provided for in Section 2.12(e) (as and when accrued or incurred), the fees and costs provided for in Section 2.11 (as and when accrued or incurred), and all other payments as and when due and payable under any Loan Document to Borrowers' Loan Account, which amounts thereafter constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances hereunder. Any interest not paid when due shall be compounded by being charged to Borrowers' Loan Account and shall thereafter constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances that are Base Rate Loans hereunder. (e) Computation. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed. In the event the Base Rate is changed from time to time hereafter, the rates of interest hereunder based upon the Base Rate automatically and immediately shall be increased or decreased by an amount equal to such change in the Base Rate. (f) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrowers and the Lender Group, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest 28 and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto, as of the date of this Agreement, Borrowers are and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrowers in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.7 Cash Management. (a) Borrowers shall (i) establish and maintain cash management services of a type and on terms satisfactory to Agent at one or more of the banks set forth on Schedule 2.7(a) (each a "Cash Management Bank"), and shall request in writing and otherwise take such reasonable steps to ensure that all of its Account Debtors forward payment of the amounts owed by them directly to such Cash Management Bank, and (ii) deposit or cause to be deposited promptly, and in any event no later than the first Business Day after the date of receipt thereof, all Collections (including those sent directly by Account Debtors to a Cash Management Bank) into a bank account in Agent's name (a "Cash Management Account") at one of the Cash Management Banks. (b) Each Cash Management Bank shall establish and maintain Cash Management Agreements with Agent and Borrowers, in form and substance acceptable to Agent. Each such Cash Management Agreement shall provide, among other things, that (i) all items of payment deposited in such Cash Management Account and proceeds thereof are held by such Cash Management Bank agent or bailee-in-possession for Agent, (ii) the Cash Management Bank has no rights of setoff or recoupment or any other claim against the applicable Cash Management Account, other than for payment of its service fees and other charges directly related to the administration of such Cash Management Account and for returned checks or other items of payment, and (iii) it immediately will forward by daily sweep all amounts in the applicable Cash Management Account to the Agent's Account. (c) So long as no Default or Event of Default has occurred and is continuing, Administrative Borrower may amend Schedule 2.7(a) to add or replace a Cash Management Account Bank or Cash Management Account; provided, however, that (i) such prospective Cash Management Bank shall be satisfactory to Agent and Agent shall have consented in writing in advance to the opening of such Cash Management Account with the prospective Cash Management Bank, and (ii) prior to the time of the opening of such Cash Management Account, Borrowers and such prospective Cash Management Bank shall have executed and delivered to Agent a Cash Management Agreement. Borrowers shall close any of their Cash Management Accounts (and establish replacement cash management accounts in accordance with the foregoing sentence) promptly and in any event within 30 days of notice from Agent that the creditworthiness of any Cash Management Bank is no longer acceptable in Agent's reasonable judgment, or as promptly as practicable and in any event within 60 days of notice from Agent that the operating performance, funds transfer, or availability procedures or performance of the Cash Management Bank with respect to Cash Management Accounts or Agent's liability under any Cash Management Agreement with such Cash Management Bank is no longer acceptable in Agent's reasonable judgment. 29 (d) The Cash Management Accounts shall be cash collateral accounts, with all cash, checks and similar items of payment in such accounts securing payment of the Obligations, and in which Borrowers are hereby deemed to have granted a Lien to Agent. 2.8 Crediting Payments. The receipt of any payment item by Agent (whether from transfers to Agent by the Cash Management Banks pursuant to the Cash Management Agreements or otherwise) shall not be considered a payment on account unless such payment item is a wire transfer of immediately available federal funds made to the Agent's Account or unless and until such payment item is honored when presented for payment. Should any payment item not be honored when presented for payment, then Borrowers shall be deemed not to have made such payment and interest shall be calculated accordingly. Anything to the contrary contained herein notwithstanding, any payment item shall be deemed received by Agent only if it is received into the Agent's Account on a Business Day on or before 11:00 a.m. (California time). If any payment item is received into the Agent's Account on a non-Business Day or after 11:00 a.m. (California time) on a Business Day, it shall be deemed to have been received by Agent as of the opening of business on the immediately following Business Day. 2.9 Designated Account. Agent is authorized to make the Advances, and Issuing Lender is authorized to issue Letters of Credit, under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person, or without instructions if pursuant to Section 2.6(d). Administrative Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrowers and made by Agent or the Lenders hereunder. Unless otherwise agreed by Agent and Administrative Borrower, any Advance, Agent Advance, or Swing Loan requested by Borrowers and made by Agent or the Lenders hereunder shall be made to the Designated Account. 2.10 Maintenance of Loan Account; Statements of Obligations. Agent shall maintain an account on its books in the name of Borrowers (the "Loan Account") on which Borrowers will be charged with all Advances (including Agent Advances and Swing Loans) made by Agent, Swing Lender, or the Lenders to Borrowers or for Borrowers' account, the Letters of Credit issued by Issuing Lender for Borrowers' account, and with all other payment Obligations hereunder or under the other Loan Documents, including, accrued interest, fees and expenses, and Lender Group Expenses. In accordance with Section 2.8, the Loan Account will be credited with all payments received by Agent from Borrowers or for Borrowers' account, including all amounts received in the Agent's Account from any Cash Management Bank. Agent shall render statements regarding the Loan Account to Administrative Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Lender Group Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrowers and the Lender Group unless, within 30 days after receipt thereof by Administrative Borrower, Administrative Borrower shall deliver to Agent written objection thereto describing the error or errors contained in any such statements. 2.11 Fees. Borrowers shall pay to Agent the following fees and charges, which fees and charges shall be non-refundable when paid (irrespective of whether this Agreement is 30 terminated thereafter) and shall be apportioned among the Lenders in accordance with the terms of letter agreements between Agent and individual Lenders: (a) Intentionally Omitted, (b) Fee Letter Fees. As and when due and payable under the terms of the Fee Letter, Borrowers shall pay to Agent the fees set forth in the Fee Letter, and (c) Audit, Appraisal, and Valuation Charges. For the separate account of Agent, audit, appraisal, and valuation fees and charges as follows, (i) a fee of $750 pay day, per auditor, plus out-of-pocket expenses for each financial audit of a Borrower performed by personnel employed by Agent, (ii) if implemented, a one time charge of $3,000 plus out-of-pocket expenses for expenses for the establishment of electronic collateral reporting systems, and (iii) the actual charges paid or incurred by Agent if it elects to employ the services of one or more third Persons to perform financial audits of Borrowers, to appraise the Collateral, or any portion thereof, or to assess Parent's Enterprise Value. So long as no Event of Default shall have occurred and be continuing, Agent will require only semi-annual assessments of Parent's Enterprise Value, and each semi-annual assessment of Parent's Enterprise Value shall not exceed $30,000. 2.12 Letters of Credit (a) Subject to the terms and conditions of this Agreement, the Issuing Lender agrees to issue letters of credit for the account of Borrowers (each, an "L/C") or to purchase participations or execute indemnities or reimbursement obligations (each such undertaking, an "L/C Undertaking") with respect to letters of credit issued by an Underlying Issuer (as of the Closing Date, the prospective Underlying Issuer is to be Wells Fargo) for the account of Borrowers. To request the issuance of an L/C or an L/C Undertaking (or the amendment, renewal, or extension of an outstanding L/C or L/C Undertaking), Administrative Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Lender) to the Issuing Lender and Agent (reasonably in advance of the requested date of issuance, amendment, renewal, or extension) a notice requesting the issuance of an L/C or L/C Undertaking, or identifying the L/C or L/C Undertaking to be amended, renewed, or extended, the date of issuance, amendment, renewal, or extension, the date on which such L/C or L/C Undertaking is to expire, the amount of such L/C or L/C Undertaking, the name and address of the beneficiary thereof (or of the Underlying Letter of Credit, as applicable), and such other information as shall be necessary to prepare, amend, renew, or extend such L/C or L/C Undertaking. If requested by the Issuing Lender, Borrowers also shall be an applicant under the application with respect to any Underlying Letter of Credit that is to be the subject of an L/C Undertaking. The Issuing Lender shall have no obligation to issue a Letter of Credit if any of the following would result after giving effect to the requested Letter of Credit: (i) the Letter of Credit Usage would exceed the Borrowing Base less the amount of outstanding Advances, or 31 (ii) the Letter of Credit Usage would exceed $5,000,000, or (iii) the Letter of Credit Usage would exceed the Maximum Revolver Amount less the then extant amount of outstanding Advances. Each Letter of Credit (and corresponding Underlying Letter of Credit) shall have an expiry date no later than 30 days prior to the Maturity Date and all such Letters of Credit (and corresponding Underlying Letter of Credit) shall be in form and substance acceptable to the Issuing Lender (in the exercise of its Permitted Discretion), including the requirement that the amounts payable thereunder must be payable in Dollars. If Issuing Lender is obligated to advance funds under a Letter of Credit, Borrowers immediately shall reimburse such L/C Disbursement to Issuing Lender by paying to Agent an amount equal to such L/C Disbursement not later than 11:00 a.m., California time, on the date that such L/C Disbursement is made, if Administrative Borrower shall have received written or telephonic notice of such L/C Disbursement prior to 10:00 a.m., California time, on such date, or, if such notice has not been received by Administrative Borrower prior to such time on such date, then not later than 11:00 a.m., California time, on (i) the Business Day that Administrative Borrower receives such notice, if such notice is received prior to 10:00 a.m., California time, on the date of receipt, and, in the absence of such reimbursement, the L/C Disbursement immediately and automatically shall be deemed to be an Advance hereunder and, thereafter, shall bear interest at the rate then applicable to Advances that are Base Rate Loans under Section 2.6. To the extent an L/C Disbursement is deemed to be an Advance hereunder, Borrowers' obligation to reimburse such L/C Disbursement shall be discharged and replaced by the resulting Advance. Promptly following receipt by Agent of any payment from Borrowers pursuant to this paragraph, Agent shall distribute such payment to the Issuing Lender or, to the extent that Lenders have made payments pursuant to Section 2.12(c) to reimburse the Issuing Lender, then to such Lenders and the Issuing Lender as their interest may appear. (b) Promptly following receipt of a notice of L/C Disbursement pursuant to Section 2.12(a), each Lender with a Revolver Commitment agrees to fund its Pro Rata Share of any Advance deemed made pursuant to the foregoing subsection on the same terms and conditions as if Borrowers had requested such Advance and Agent shall promptly pay to Issuing Lender the amounts so received by it from the Lenders. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Lender or the Lenders with Revolver Commitment, the Issuing Lender shall be deemed to have granted to each Lender with a Revolver Commitment, and each Lender with a Revolver Commitment shall be deemed to have purchased, a participation in each Letter of Credit, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Letter of Credit, and each such Lender agrees to pay to Agent, for the account of the Issuing Lender, such Lender's Pro Rata Share of any payments made by the Issuing Lender under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender with a Revolver Commitment hereby absolutely and unconditionally agrees to pay to Agent, for the account of the Issuing Lender, such Lender's Pro Rata Share of each L/C Disbursement made by the Issuing Lender and not reimbursed by Borrowers on the date due as provided in clause (a) of this Section, or of any reimbursement payment required to be refunded to Borrowers for any reason. Each Lender with a Revolver Commitment acknowledges and 32 agrees that its obligation to deliver to Agent, for the account of the Issuing Lender, an amount equal to its respective Pro Rata Share pursuant to this Section 2.12(b) shall be absolute and unconditional and such remittance shall be made notwithstanding the occurrence or continuation of an Event of Default or Default or the failure to satisfy any condition set forth in Section 3. If any such Lender fails to make available to Agent the amount of such Lender's Pro Rata Share of any payments made by the Issuing Lender in respect of such Letter of Credit as provided in this Section, Agent (for the account of the Issuing Lender) shall be entitled to recover such amount on demand from such Lender together with interest thereon at the Defaulting Lender Rate until paid in full. (c) Each Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless from any loss, cost, expense, or liability, and reasonable attorneys fees incurred by the Lender Group arising out of or in connection with any Letter of Credit; provided, however, that no Borrower shall be obligated hereunder to indemnify for any loss, cost, expense, or liability that is caused by the gross negligence or willful misconduct of the Issuing Lender or any other member of the Lender Group. Each Borrower agrees to be bound by the Underlying Issuer's regulations and interpretations of any Underlying Letter of Credit or by Issuing Lender's interpretations of any L/C issued by Issuing Lender to or for such Borrower's account, even though this interpretation may be different from such Borrower's own, and each Borrower understands and agrees that the Lender Group shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrowers' instructions or those contained in the Letter of Credit or any modifications, amendments, or supplements thereto. Each Borrower understands that the L/C Undertakings may require Issuing Lender to indemnify the Underlying Issuer for certain costs or liabilities arising out of claims by Borrowers against such Underlying Issuer. Each Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless with respect to any loss, cost, expense (including reasonable attorneys fees), or liability incurred by the Lender Group under any L/C Undertaking as a result of the Lender Group's indemnification of any Underlying Issuer; provided, however, that no Borrower shall be obligated hereunder to indemnify for any loss, cost, expense, or liability that is caused by the gross negligence or willful misconduct of the Issuing Lender or any other member of the Lender Group. (d) Each Borrower hereby authorizes and directs any Underlying Issuer to deliver to the Issuing Lender all instruments, documents, and other writings and property received by such Underlying Issuer pursuant to such Underlying Letter of Credit and to accept and rely upon the Issuing Lender's instructions with respect to all matters arising in connection with such Underlying Letter of Credit and the related application. (e) Any and all charges, commissions, fees, and costs incurred by the Issuing Lender relating to Underlying Letters of Credit shall be Lender Group Expenses for purposes of this Agreement and immediately shall be reimbursable by Borrowers to Agent for the account of the Issuing Lender; it being acknowledged and agreed by each Borrower that, as of the Closing Date, the issuance charge imposed by the prospective Underlying Issuer is .825% per annum times the face amount of each Underlying Letter of Credit, that such issuance charge may be changed from time to time, and that the Underlying Issuer also imposes a schedule of charges for amendments, extensions, drawings, and renewals. 33 (f) If by reason of (i) any change in any applicable law, treaty, rule, or regulation or any change in the interpretation or application thereof by any Governmental Authority, or (ii) compliance by the Underlying Issuer or the Lender Group with any direction, request, or requirement (irrespective of whether having the force of law) of any Governmental Authority or monetary authority including, Regulation D of the Federal Reserve Board as from time to time in effect (and any successor thereto): (i) any reserve, deposit, or similar requirement is or shall be imposed or modified in respect of any Letter of Credit issued hereunder, or (ii) there shall be imposed on the Underlying Issuer or the Lender Group any other condition regarding any Underlying Letter of Credit or any Letter of Credit issued pursuant hereto; and the result of the foregoing is to increase, directly or indirectly, the cost to the Lender Group of issuing, making, guaranteeing, or maintaining any Letter of Credit or to reduce the amount receivable in respect thereof by the Lender Group, then, and in any such case, Agent may, at any time within a reasonable period after the additional cost is incurred or the amount received is reduced, notify Administrative Borrower, and Borrowers shall pay on demand such amounts as Agent may specify to be necessary to compensate the Lender Group for such additional cost or reduced receipt, together with interest on such amount from the date of such demand until payment in full thereof at the rate then applicable to Base Rate Loans hereunder. The determination by Agent of any amount due pursuant to this Section, as set forth in a certificate setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on all of the parties hereto. 2.13 Intentionally Omitted. 2.14 Intentionally Omitted. 2.15 Joint and Several Liability of Borrowers. (a) Each of Borrowers is accepting joint and several liability hereunder and under the other Loan Documents in consideration of the financial accommodations to be provided by the Agent and the Lenders under this Agreement, for the mutual benefit, directly and indirectly, of each of Borrowers and in consideration of the undertakings of the other Borrowers to accept joint and several liability for the Obligations. (b) Each of Borrowers, jointly and severally, hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Borrowers, with respect to the payment and performance of all of the Obligations (including, without limitation, any Obligations arising under this Section 2.15), it being the intention of the parties hereto that all the Obligations shall be the joint and several obligations of each Person composing Borrowers without preferences or distinction among them. 34 (c) If and to the extent that any of Borrowers shall fail to make any payment with respect to any of the Obligations as and when due or to perform any of the Obligations in accordance with the terms thereof, then in each such event the other Persons composing Borrowers will make such payment with respect to, or perform, such Obligation. (d) The Obligations of each Person composing Borrowers under the provisions of this Section 2.15 constitute the absolute and unconditional, full recourse Obligations of each Person composing Borrowers enforceable against each such Borrower to the full extent of its properties and assets, irrespective of the validity, regularity or enforceability of this Agreement or any other circumstances whatsoever. (e) Except as otherwise expressly provided in this Agreement, each Person composing Borrowers hereby waives notice of acceptance of its joint and several liability, notice of any Advances or Letters of Credit issued under or pursuant to this Agreement, notice of the occurrence of any Default, Event of Default, or of any demand for any payment under this Agreement, notice of any action at any time taken or omitted by Agent or Lenders under or in respect of any of the Obligations, any requirement of diligence or to mitigate damages and, generally, to the extent permitted by applicable law, all demands, notices and other formalities of every kind in connection with this Agreement (except as otherwise provided in this Agreement). Each Person composing Borrowers hereby assents to, and waives notice of, any extension or postponement of the time for the payment of any of the Obligations, the acceptance of any payment of any of the Obligations, the acceptance of any partial payment thereon, any waiver, consent or other action or acquiescence by Agent or Lenders at any time or times in respect of any default by any Person composing Borrowers in the performance or satisfaction of any term, covenant, condition or provision of this Agreement, any and all other indulgences whatsoever by Agent or Lenders in respect of any of the Obligations, and the taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of the Obligations or the addition, substitution or release, in whole or in part, of any Person composing Borrowers. Without limiting the generality of the foregoing, each of Borrowers assents to any other action or delay in acting or failure to act on the part of any Agent or Lender with respect to the failure by any Person composing Borrowers to comply with any of its respective Obligations, including, without limitation, any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with applicable laws or regulations thereunder, which might, but for the provisions of this Section 2.15 afford grounds for terminating, discharging or relieving any Person composing Borrowers, in whole or in part, from any of its Obligations under this Section 2.15, it being the intention of each Person composing Borrowers that, so long as any of the Obligations hereunder remain unsatisfied, the Obligations of such Person composing Borrowers under this Section 2.15 shall not be discharged except by performance and then only to the extent of such performance. The Obligations of each Person composing Borrowers under this Section 2.15 shall not be diminished or rendered unenforceable by any winding up, reorganization, arrangement, liquidation, reconstruction or similar proceeding with respect to any Person composing Borrowers or any Agent or Lender. The joint and several liability of the Persons composing Borrowers hereunder shall continue in full force and effect notwithstanding any absorption, merger, amalgamation or any other change whatsoever in the name, constitution or place of formation of any of the Persons composing Borrowers or any Agent or Lender. 35 (f) Each Person composing Borrowers represents and warrants to Agent and Lenders that such Borrower is currently informed of the financial condition of Borrowers and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of the Obligations. Each Person composing Borrowers further represents and warrants to Agent and Lenders that such Borrower has read and understands the terms and conditions of the Loan Documents. Each Person composing Borrowers hereby covenants that such Borrower will continue to keep informed of Borrowers' financial condition, the financial condition of other guarantors, if any, and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the Obligations. (g) The provisions of this Section 2.15 are made for the benefit of the Agent, the Lenders and their respective successors and assigns, and may be enforced by it or them from time to time against any or all of the Persons composing Borrowers as often as occasion therefor may arise and without requirement on the part of any such Agent, Lender, successor or assign first to marshal any of its or their claims or to exercise any of its or their rights against any of the other Persons composing Borrowers or to exhaust any remedies available to it or them against any of the other Persons composing Borrowers or to resort to any other source or means of obtaining payment of any of the Obligations hereunder or to elect any other remedy. The provisions of this Section 2.15 shall remain in effect until all of the Obligations shall have been paid in full or otherwise fully satisfied. If at any time, any payment, or any part thereof, made in respect of any of the Obligations, is rescinded or must otherwise be restored or returned by any Agent or Lender upon the insolvency, bankruptcy or reorganization of any of the Persons composing Borrowers, or otherwise, the provisions of this Section 2.15 will forthwith be reinstated in effect, as though such payment had not been made. (h) Each of the Persons composing Borrowers hereby agrees that it will not enforce any of its rights of contribution or subrogation against the other Persons composing Borrowers with respect to any liability incurred by it hereunder or under any of the other Loan Documents, any payments made by it to the Agent or the Lenders with respect to any of the Obligations or any collateral security therefor until such time as all of the Obligations have been paid in full in cash. Any claim which any Borrower may have against any other Borrower with respect to any payments to any Agent or Lender hereunder or under any other Loan Documents are hereby expressly made subordinate and junior in right of payment, without limitation as to any increases in the Obligations arising hereunder or thereunder, to the prior payment in full in cash of the Obligations and, in the event of any insolvency, bankruptcy, receivership, liquidation, reorganization or other similar proceeding under the laws of any jurisdiction relating to any Borrower, its debts or its assets, whether voluntary or involuntary, all such Obligations shall be paid in full in cash before any payment or distribution of any character, whether in cash, securities or other property, shall be made to any other Borrower therefor. (i) Each of the Persons composing Borrowers hereby agrees that, after the occurrence and during the continuance of any Default or Event of Default, the payment of any amounts due with respect to the indebtedness owing by any Borrower to any other Borrower is hereby subordinated to the prior payment in full in cash of the Obligations. Each Borrower hereby agrees that after the occurrence and during the continuance of any Default or Event of Default, such Borrower will not demand, sue for or otherwise attempt to collect any indebtedness 36 of any other Borrower owing to such Borrower until the Obligations shall have been paid in full in cash. If, notwithstanding the foregoing sentence, such Borrower shall collect, enforce or receive any amounts in respect of such indebtedness, such amounts shall be collected, enforced and received by such Borrower as trustee for the Agent, and the Agent shall deliver any such amounts to the Administrative Agent for application to the Obligations in accordance with Section 2.4(b). 3. CONDITIONS; TERM OF AGREEMENT. 3.1 Conditions Precedent to the Initial Extension of Credit. The obligation of the Lender Group (or any member thereof) to make the initial Advance (or otherwise to extend any credit provided for hereunder), is subject to the fulfillment, to the satisfaction of Agent, of each of the conditions precedent set forth below: (a) the Closing Date shall occur on or before February 16, 2001; (b) Agent shall have received all financing statements required by Agent, duly executed by the applicable Borrowers, and Agent shall have received searches reflecting the filing of all such financing statements; (c) Agent shall have received each of the following documents, in form and substance satisfactory to Agent, duly executed, and each such document shall be in full force and effect: (i) the Control Agreements; (ii) the Disbursement Letter; (iii) the Due Diligence Letter; (iv) the Fee Letter; (v) the Officers' Certificate; (vi) the Intellectual Property Security Agreement; (vii) the Stock Pledge Agreement, together with all certificates representing the shares of Stock pledged thereunder, as well as Stock powers with respect thereto endorsed in blank; (d) Agent shall have received a certificate from the Secretary of each Borrower attesting to the resolutions of such Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which such Borrower is a party and authorizing specific officers of such Borrower to execute the same; 37 (e) Agent shall have received copies of each Borrower's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of such Borrower; (f) Agent shall have received a certificate of status with respect to each Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Borrower, which certificate shall indicate that such Borrower is in good standing in such jurisdiction; (g) Agent shall have received certificates of status with respect to each Borrower, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of such Borrower) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that such Borrower is in good standing in such jurisdictions; (h) Agent shall have received a certificate of insurance, together with the endorsements thereto, as are required by Section 6.8, the form and substance of which shall be satisfactory to Agent; (i) Agent shall have received Collateral Access Agreements with respect to the following locations: 655 Lone Oak Drive, Eagan, Minnesota 55121 and 895 Blue Gentian Road, Eagan, Minnesota 55121; (j) Agent shall have received opinions of Borrowers' counsel in form and substance satisfactory to Agent; (k) Agent shall have received satisfactory evidence (including a certificate of the chief financial officer of Parent) that all tax returns required to be filed by Borrowers have been timely filed and all taxes upon Borrowers or their properties, assets, income, and franchises (including Real Property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; (l) Borrowers shall have the Required Availability after giving effect to the initial extensions of credit hereunder; (m) Agent shall have completed its business, legal, and collateral due diligence, including (i) a collateral audit and review of Borrowers' books and records and verification of Borrowers' representations and warranties to the Lender Group, the results of which shall be satisfactory to Agent, and (ii) an inspection of each of the locations where Inventory is located, the results of which shall be satisfactory to Agent; (n) Agent shall have received completed reference checks with respect to Borrowers' senior management, the results of which are satisfactory to Agent in its sole discretion; 38 (o) Agent shall have received the appraisal of Borrowers' Enterprise Value, the results of which shall be satisfactory to Agent; (p) Agent shall have received Borrowers' Closing Date Business Plan; (q) Borrowers shall pay all Lender Group Expenses incurred in connection with the transactions evidenced by this Agreement; (r) Agent shall have received satisfactory reference checks for Borrowers' key management and stockholders; (s) Agent shall have received an audit of Borrowers' books and records, the results of which shall be satisfactory to Agent; (t) Wam!Net Government Services, Inc. shall have entered into a definitive subcontractor agreement with EDS regarding the Navy Marine Corps Intranet (NMCI) Program and Agent shall have received an executed copy thereof; (u) Borrowers shall have received all licenses, approvals or evidence of other actions required by any Governmental Authority in connection with the execution and delivery by Borrowers of this Agreement or any other Loan Document or with the consummation of the transactions contemplated hereby and thereby; and (v) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Agent. 3.2 Conditions Subsequent to the Initial Extension of Credit. The obligation of the Lender Group (or any member thereof) to continue to make Advances (or otherwise extend credit hereunder) is subject to the fulfillment, on or before the date applicable thereto, of each of the conditions subsequent set forth below (the failure by Borrowers to so perform or cause to be performed constituting an Event of Default): (a) within 7 Business Days of the Closing Date, deliver to Agent a Cash Management Agreement; (b) within 30 days of the Closing Date, deliver to Agent certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 6.8, the form and substance of which shall be satisfactory to Agent and its counsel; (c) Borrowers shall use their best efforts to obtain a Collateral Access Agreement for the location at 4740 Polaris Street, Las Vegas, Nevada 89103 within 30 days of the Closing Date; and (d) within 60 days of the Closing Date, Borrowers shall have selected a Cash Management Bank with a financial institution acceptable to Required Lenders. 39 3.3 Conditions Precedent to all Extensions of Credit. The obligation of the Lender Group (or any member thereof) to make all Advances shall be subject to the following conditions precedent: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof; (c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any Governmental Authority against any Borrower, Agent, any Lender, or any of their Affiliates; and (d) no Material Adverse Change shall have occurred. 3.4 Term. This Agreement shall become effective upon the execution and delivery hereof by Borrowers, Agent, and the Lenders and shall continue in full force and effect for a term ending on January 1, 2003 (the "Maturity Date"). The foregoing notwithstanding, the Lender Group, upon the election of the Required Lenders, shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.5 Effect of Termination. On the date of termination of this Agreement, all Obligations (including contingent reimbursement obligations of Borrowers with respect to any outstanding Letters of Credit) immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrowers of their duties, Obligations, or covenants hereunder and the Agent's Liens in the Collateral shall remain in effect until all Obligations have been fully and finally discharged and the Lender Group's obligations to provide additional credit hereunder have been terminated. When this Agreement has been terminated and all of the Obligations have been fully and finally discharged and the Lender Group's obligations to provide additional credit under the Loan Documents have been terminated irrevocably, Agent will, at Borrowers' sole expense, execute and deliver any UCC termination statements, lien releases, re-assignments of trademarks, discharges of security interests, and other similar discharge or release documents (and, if applicable, in recordable form) as are reasonably necessary to release, as of record, the Agent's Liens and all notices of security interests and liens previously filed by Agent with respect to the Obligations. 3.6 Early Termination by Borrowers. Borrowers have the option, at any time upon 30 days prior written notice by Administrative Borrower to Agent, to terminate this Agreement by paying to Agent, for the benefit of the Lender Group, in cash, the Obligations (including either (i) providing cash collateral to be held by Agent for the benefit of Lenders with a Revolver 40 Commitment in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to the Issuing Lender), in full). If Administrative Borrower has sent a notice of termination pursuant to the provisions of this Section, then the Commitments shall terminate and Borrowers shall be obligated to repay the Obligations (including either (i) providing cash collateral to be held by Agent for the benefit of those Lenders with a Revolver Commitment in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to the Issuing Lender), in full, without any premium or early termination fee. If Administrative Borrower has sent a notice of termination pursuant to the provisions of this Section, then the Commitments shall terminate and Borrowers shall be obligated to repay the Obligations, in full, on the date set forth as the date of termination of this Agreement in such notice. 4. CREATION OF SECURITY INTEREST. 4.1 Grant of Security Interest. Each Borrower hereby grants to Agent, for the benefit of the Lender Group, a continuing security interest in all of its right, title, and interest in all currently existing and hereafter acquired or arising Personal Property Collateral in order to secure prompt repayment of any and all of the Obligations in accordance with the terms and conditions of the Loan Documents and in order to secure prompt performance by Borrowers of each of their covenants and duties under the Loan Documents. The Agent's Liens in and to the Personal Property Collateral shall attach to all Personal Property Collateral without further act on the part of Agent or Borrowers. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for Permitted Dispositions, Borrowers have no authority, express or implied, to dispose of any item or portion of the Collateral. 4.2 Negotiable Collateral. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, and if and to the extent that perfection or priority of Agent's security interest is dependent on or enhanced by possession, the applicable Borrower, immediately upon the request of Agent, shall endorse and deliver physical possession of such Negotiable Collateral to Agent. 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral. At any time after the occurrence and during the continuation of an Event of Default, Agent or Agent's designee may (a) notify Account Debtors of Borrowers that the Accounts, chattel paper, or General Intangibles have been assigned to Agent or that Agent has a security interest therein, or (b) collect the Accounts, chattel paper, or General Intangibles directly and charge the collection costs and expenses to the Loan Account. Each Borrower agrees that it will hold in trust for the Lender Group, as the Lender Group's trustee, any Collections that it receives and immediately will deliver said Collections to Agent or a Cash Management Bank in their original form as received by the applicable Borrower. 4.4 Delivery of Additional Documentation Required. At any time upon the request of Agent, Borrowers shall execute and deliver to Agent, any and all financing statements, original financing statements in lieu of continuation statements, fixture filings, security agreements, pledges, assignments, endorsements of certificates of title, and all other documents (the "Additional Documents") that Agent may request in its Permitted Discretion, in form and 41 substance satisfactory to Agent, to perfect and continue perfected or better perfect the Agent's Liens in the Collateral (whether now owned or hereafter arising or acquired), and in order to fully consummate all of the transactions contemplated hereby and under the other Loan Documents. To the maximum extent permitted by applicable law, each Borrower authorizes Agent to execute any such Additional Documents in the applicable Borrower's name and authorize Agent to file such executed Additional Documents in any appropriate filing office. In addition, on a bi-monthly basis, Borrowers shall (a) provide Agent with a report of all new patentable or trademarkable materials acquired or generated by Borrowers during the prior period, (b) cause all patents and trademarks acquired or generated by Borrowers that are not already the subject of a registration with the appropriate filing office (or an application therefor diligently prosecuted) to be registered with such appropriate filing office in a manner sufficient to impart constructive notice of Borrowers' ownership thereof, and (c) cause to be prepared, executed, and delivered to Agent supplemental schedules to the applicable Loan Documents to identify such patents and trademarks as being subject to the security interests created thereunder. 4.5 Power of Attorney. Each Borrower hereby irrevocably makes, constitutes, and appoints Agent (and any of Agent's officers, employees, or agents designated by Agent) as such Borrower's true and lawful attorney, with power to (a) if such Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of such Borrower on any of the documents described in Section 4.4, (b) at any time that an Event of Default has occurred and is continuing, sign such Borrower's name on any invoice or bill of lading relating to the Collateral, drafts against Account Debtors, or notices to Account Debtors, (c) send requests for verification of Accounts, (d) endorse such Borrower's name on any Collection item that may come into the Lender Group's possession, (e) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under such Borrower's policies of insurance and make all determinations and decisions with respect to such policies of insurance, and (f) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting the Accounts, chattel paper, or General Intangibles directly with Account Debtors, for amounts and upon terms that Agent determines to be reasonable, and Agent may cause to be executed and delivered any documents and releases that Agent determines to be necessary. The appointment of Agent as each Borrower's attorney, and each and every one of its rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and the Lender Group's obligations to extend credit hereunder are terminated. 4.6 Right to Inspect. Agent and each Lender (through any of their respective officers, employees, or agents) shall have the right, from time to time hereafter to inspect the Books and to check, test, and appraise the Collateral in order to verify Borrowers' financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral; provided, however, that prior to the occurrence of an Event of Default, Agent shall not conduct more than 4 inspections in any 12 month period. 4.7 Control Agreements. Each Borrower agrees that it will not transfer assets out of any Securities Accounts other than as permitted under Section 7.19 and, if to another securities intermediary, unless each of the applicable Borrower, Agent, and the substitute securities intermediary have entered into a Control Agreement. No arrangement contemplated hereby or 42 by any Control Agreement in respect of any Securities Accounts or other Investment Property shall be modified by Borrowers without the prior written consent of Agent. Upon the occurrence and during the continuance of a Default or Event of Default, Agent may notify any securities intermediary to liquidate the applicable Securities Account or any related Investment Property maintained or held thereby and remit the proceeds thereof to the Agent's Account. 5. REPRESENTATIONS AND WARRANTIES. In order to induce the Lender Group to enter into this Agreement, each Borrower makes the following representations and warranties to the Lender Group which shall be true, correct, and complete, in all material respects, as of the date hereof, and shall be true, correct, and complete, in all material respects, as of the Closing Date, and at and as of the date of the making of each Advance (or other extension of credit) made thereafter, as though made on and as of the date of such Advance (or other extension of credit) (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 5.1 No Encumbrances. Each Borrower has good and indefeasible title to its Collateral, free and clear of Liens except for Permitted Liens. 5.2 Accounts. The Accounts are bona fide existing payment obligations of Account Debtors created by the sale and delivery of Inventory or the rendition of services to such Account Debtors in the ordinary course of Borrowers' business, owed to Borrowers without defenses, disputes, offsets, counterclaims, or rights of return or cancellation. 5.3 Intentionally Omitted. 5.4 Equipment. All of the Equipment is used or held for use in Borrowers' business and is fit for such purposes. 5.5 Location of Inventory and Equipment. The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party and are located only at the locations identified on Schedule 5.5. 5.6 Inventory Records. Each Borrower keeps correct and accurate records itemizing and describing the type, quality, and quantity of its Inventory and the book value thereof. 5.7 Location of Chief Executive Office; FEIN. The chief executive office of each Borrower is located at the address indicated in Schedule 5.7 and each Borrower's FEIN is identified in Schedule 5.7. 5.8 Due Organization and Qualification; Subsidiaries (a) Each Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its organization and qualified to do business in any state where the failure to be so qualified reasonably could be expected to have a Material Adverse Change. 43 (b) Set forth on Schedule 5.8(b), is a complete and accurate description of the authorized capital Stock of each Borrower, by class, and a description of the number of shares of each such class that are issued and outstanding. Other than as described on Schedule 5.8(b), there are no subscriptions, options, warrants, or calls relating to any shares of each Borrower's capital Stock, including any right of conversion or exchange under any outstanding security or other instrument as of the Closing Date. No Borrower is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital Stock or any security convertible into or exchangeable for any of its capital Stock. (c) Set forth on Schedule 5.8(c), is a complete and accurate list of each Borrower's direct and indirect Subsidiaries showing: (i) the jurisdiction of their organization; (ii) the number of shares of each class of common and preferred Stock authorized for each of such Subsidiaries; and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by the applicable Borrower. All of the outstanding capital Stock of each such Subsidiary has been validly issued and is fully paid and non-assessable. (d) Except as set forth on Schedule 5.8(c), there are no subscriptions, options, warrants, or calls relating to any shares of any Borrower's Subsidiaries' capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. No Borrower or any of its respective Subsidiaries is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of any Borrower's Subsidiaries' capital Stock or any security convertible into or exchangeable for any such capital Stock. (e) Borrower may, from time to time, update Schedule 5.8 so long as the change requiring the update is in compliance with this Agreement. 5.9 Due Authorization; No Conflict. (a) As to each Borrower, the execution, delivery, and performance by such Borrower of this Agreement and the Loan Documents to which it is a party have been duly authorized by all necessary action on the part of such Borrower. (b) As to each Borrower, the execution, delivery, and performance by such Borrower of this Agreement and the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to any Borrower, the Governing Documents of any Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on any Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of any Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Permitted Liens, or (iv) require any approval of any Borrower's interestholders or any approval or consent of any Person under any material contractual obligation of any Borrower. (c) Other than the filing of financing statements and fixture filings, the execution, delivery, and performance by each Borrower of this Agreement and the Loan 44 Documents to which such Borrower is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority or other Person. (d) As to each Borrower, this Agreement and the other Loan Documents to which such Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Borrower will be the legally valid and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Agent's Liens are validly created, perfected, and first priority Liens, subject only to Permitted Liens. 5.10 Litigation. Other than those matters disclosed on Schedule 5.10, there are no actions, suits, or proceedings pending or, to the best knowledge of Borrowers, threatened against Borrowers, or any of their Subsidiaries, as applicable, except for (a) matters that are fully covered by insurance (subject to customary deductibles), and (b) matters arising after the Closing Date that, if decided adversely to Borrowers, or any of their Subsidiaries, as applicable, reasonably could not be expected to result in a Material Adverse Change. 5.11 No Material Adverse Change. All financial statements relating to Borrowers that have been delivered by Borrowers to the Lender Group have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and present fairly in all material respects, Borrowers' financial condition as of the date thereof and results of operations for the period then ended. There has not been a Material Adverse Change with respect to Borrowers since the date of the latest financial statements submitted to the Lender Group on or before the Closing Date. 5.12 Fraudulent Transfer. No transfer of property is being made by any Borrower and no obligation is being incurred by any Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrowers. 5.13 Employee Benefits. Except as set forth in Schedule 5.13, none of Borrowers, any of their Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan. 5.14 Environmental Condition. Except as set forth on Schedule 5.14, (a) to Borrowers' knowledge, none of Borrowers' properties or assets has ever been used by Borrowers or by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials, where such production, storage, handling, treatment, release or transport was in violation, in any material respect, of applicable Environmental Law, (b) to Borrowers' knowledge, none of Borrowers' properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous 45 Materials disposal site, (c) none of Borrowers have received notice that a Lien arising under any Environmental Law has attached to any revenues or to any Real Property owned or operated by Borrowers, and (d) none of Borrowers have received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by any Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 5.15 Brokerage Fees. Borrowers have not utilized the services of any broker or finder in connection with Borrowers' obtaining financing from the Lender Group under this Agreement and no brokerage commission or finders fee is payable by Borrowers in connection herewith. 5.16 Intellectual Property. Each Borrower owns, or holds licenses in, all trademarks, trade names, copyrights, patents, patent rights, and licenses that are necessary to the conduct of its business as currently conducted.. Attached hereto as Schedule 5.16 is a true, correct, and complete listing of all material patents, patent applications, trademarks, trademark applications, copyrights, and copyright registrations as to which each Borrower is the owner or is an exclusive licensee. 5.17 Leases. Borrowers enjoy peaceful and undisturbed possession under all leases material to the business of Borrowers and to which Borrowers are a party or under which Borrowers are operating. All of such leases are valid and subsisting and no material default by Borrowers exists under any of them. 5.18 DDAs. Set forth on Schedule 5.18, as such schedule may be modified from time to time, are all of the DDAs of each Borrower, including, with respect to each depository (i) the name and address of that depository, and (ii) the account numbers of the accounts maintained with such depository. 5.19 Complete Disclosure. All factual information (taken as a whole) furnished by or on behalf of Borrowers in writing to Agent or any Lender (including all information contained in the Schedules hereto or in the other Loan Documents) for purposes of or in connection with this Agreement, the other Loan Documents or any transaction contemplated herein or therein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of Borrowers in writing to the Agent or any Lender will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. On the Closing Date, the Closing Date Projections represent, and as of the date on which any other Projections are delivered to Agent, such additional Projections represent Borrowers' good faith best estimate of their future performance for the periods covered thereby. 5.20 Indebtedness. Set forth on Schedule 5.20 is a true and complete list of all Indebtedness of each Borrower outstanding immediately prior to the Closing Date that is to remain outstanding after the Closing Date and such Schedule accurately reflects the aggregate principal amount of such Indebtedness and the principal terms thereof. 46 6. AFFIRMATIVE COVENANTS. Each Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrowers shall and shall cause each of their respective Subsidiaries to do all of the following: 6.1 Accounting System. Maintain a system of accounting that enables Borrowers to produce financial statements in accordance with GAAP and maintain records pertaining to the Collateral that contain information as from time to time reasonably may be requested by Agent. Borrowers also shall keep an inventory reporting system that shows all additions, sales, claims, returns, and allowances with respect to the Inventory. 6.2 Collateral Reporting. Provide Agent (and if so requested by Agent, with copies for each Lender) with the following documents at the following times in form satisfactory to Agent: ========================== ===================================================== Weekly (a) (i) a summary aging of the Accounts and (ii) a calculation of the Borrowing Base as of such date. - -------------------------- ----------------------------------------------------- - -------------------------- ----------------------------------------------------- Monthly (not later than (b) a copy of each invoice provided to EDS regarding the 10th day of each the Navy Marine Corps Intranet (NMCI) Program month) promptly upon issuance thereof. (c) a detailed aging, by total, of the Accounts, together with a reconciliation to the detailed calculation of the Borrowing Base previously provided to Agent. (d) a summary aging, by vendor, of Borrowers' accounts payable and any book overdraft. - -------------------------- ----------------------------------------------------- Quarterly (e) a detailed list of each Borrower's customers. - -------------------------- ----------------------------------------------------- Upon request by Agent (f) copies of invoices in connection with the Accounts, credit memos, remittance advices, deposit slips, shipping and delivery documents in connection with the Accounts and, for Inventory and Equipment acquired by Borrowers, purchase orders and invoices, and (g) such other reports as to the Collateral, or the financial condition of Borrowers as Agent may request. ========================== ===================================================== In addition, each Borrower agrees to cooperate fully with Agent to facilitate and implement a system of electronic collateral reporting in order to provide electronic reporting of each of the items set forth above. 6.3 Financial Statements, Reports, Certificates. Deliver to Agent, with copies to each Lender: 47 (a) as soon as available, but in any event within 30 days (45 days in the case of a month that is the end of one of the first 3 fiscal quarters in a fiscal year) after the end of each month during each of Parent's fiscal years, (i) a company prepared consolidated balance sheet, income statement, and statement of cash flow covering Parent's and its Subsidiaries' operations during such period, (ii) a certificate signed by the chief financial officer of Parent to the effect that: A. the financial statements delivered hereunder have been prepared in accordance with GAAP (except for the lack of footnotes and being subject to year-end audit adjustments) and fairly present in all material respects the financial condition of Parent and its Subsidiaries, B. the representations and warranties of Borrowers contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), and C. there does not exist any condition or event that constitutes a Default or Event of Default (or, to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrowers have taken, are taking, or propose to take with respect thereto), and (iii) for each month that is the date on which a financial covenant in Section 7.20 is to be tested, a Compliance Certificate demonstrating, in reasonable detail, compliance at the end of such period with the applicable financial covenants contained in Section 7.20, (b) as soon as available, but in any event within 90 days after the end of each of Parent's fiscal years, financial statements of Parent and its Subsidiaries for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Agent and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP (such audited financial statements to include a balance sheet, income statement, and statement of cash flow and, if prepared, such accountants' letter to management), (c) as soon as available, but in any event within 30 days prior to the start of each of Parent's fiscal years, (i) copies of Borrowers' Projections, in form and substance (including as to scope and underlying assumptions) satisfactory to Agent, in its sole discretion, for the forthcoming 3 years, year by year, and for the forthcoming 48 fiscal year, quarter by quarter, certified by the chief financial officer of Parent as being such officer's good faith best estimate of the financial performance of Parent and its Subsidiaries during the period covered thereby, (d) if and when filed by any Borrower, (i) 10-Q quarterly reports, Form 10-K annual reports, and Form 8-K current reports, (ii) any other filings made by any Borrower with the SEC, (iii) copies of Borrowers' federal income tax returns, and any amendments thereto, filed with the Internal Revenue Service, and (iv) any other information that is provided by Parent to its shareholders generally, (e) if and when filed by any Borrower and as requested by Agent, satisfactory evidence of payment of applicable excise taxes in each jurisdictions in which (i) any Borrower conducts business or is required to pay any such excise tax, (ii) where any Borrower's failure to pay any such applicable excise tax would result in a Lien on the properties or assets of any Borrower, or (iii) where any Borrower's failure to pay any such applicable excise tax reasonably could be expected to result in a Material Adverse Change, (f) as soon as a Borrower has knowledge of any event or condition that constitutes a Default or an Event of Default, notice thereof and a statement of the curative action that Borrowers propose to take with respect thereto, and (g) upon the request of Agent, any other report reasonably requested relating to the financial condition of Borrowers. In addition to the financial statements referred to above, Borrowers agree to deliver financial statements prepared on both a consolidated and consolidating basis for Parent and Wam!Net Government Services, Inc. and that no Borrower, or any Subsidiary of a Borrower, will have a fiscal year different from that of Parent. Borrowers agree that their independent certified public accountants are authorized to communicate with Agent and to release to Agent whatever financial information concerning Borrowers that Agent reasonably may request. Each Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Agent pursuant to or in accordance with this Agreement, and agree that Agent may contact directly any such accounting firm or service bureau in order to obtain such information. 6.4 Intentionally Omitted. 6.5 Return. Cause returns and allowances as between Borrowers and their Account Debtors, to be on the same basis and in accordance with the usual customary practices of the applicable Borrower, as they exist at the time of the execution and delivery of this Agreement. 49 If, at a time when no Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to any Borrower, the applicable Borrower promptly shall determine the reason for such return and, if the applicable Borrower accepts such return, issue a credit memorandum (with a copy to be sent to Agent) in the appropriate amount to such Account Debtor. If, at a time when an Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to any Borrower, the applicable Borrower promptly shall determine the reason for such return and, if Agent consents (which consent shall not be unreasonably withheld), issue a credit memorandum (with a copy to be sent to Agent) in the appropriate amount to such Account Debtor. 6.6 Maintenance of Properties. Maintain and preserve all of its properties which are necessary or useful in the proper conduct to its business in good working order and condition, ordinary wear and tear excepted, and comply at all times with the provisions of all leases to which it is a party as lessee, so as to prevent any loss or forfeiture thereof or thereunder. Notwithstanding the foregoing, in the event the Equipment cannot be efficiently repaired, as determined by Borrowers in their reasonable discretion, Borrowers shall be allowed to sell or otherwise dispose of such Equipment from time to time in the ordinary course of their business. 6.7 Taxes. Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrowers or any of their assets to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. Borrowers will make timely payment or deposit of all tax payments and withholding taxes required of them by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Agent with proof satisfactory to Agent indicating that the applicable Borrower has made such payments or deposits. Borrowers shall deliver satisfactory evidence of payment of applicable excise taxes in each jurisdictions in which any Borrower is required to pay any such excise tax. 6.8 Insurance. (a) At Borrowers' expense, maintain insurance respecting its property and assets wherever located, covering loss or damage by fire, theft, explosion, and all other hazards and risks as ordinarily are insured against by other Persons engaged in the same or similar businesses. Borrowers also shall maintain business interruption, public liability, and product liability insurance, as well as insurance against larceny, embezzlement, and criminal misappropriation. All such policies of insurance shall be in such amounts and with such insurance companies as are reasonably satisfactory to Agent. Borrowers shall deliver copies of all such policies to Agent with a satisfactory lender's loss payable endorsement naming Agent as loss payee or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Agent in the event of cancellation of the policy for any reason whatsoever. (b) Administrative Borrower shall give Agent prompt notice of any loss covered by such insurance. Agent shall have the right to adjust any losses payable under any such insurance policies in excess of $1,000,000 with respect to Collateral in which Agent 50 has a first priority security interest, without any liability to Borrowers whatsoever in respect of such adjustments. Any monies received as payment for any loss under any insurance policy mentioned above (other than liability insurance policies) or as payment of any award or compensation for condemnation or taking by eminent domain, shall be paid over to Agent to be applied at the option of the Required Lenders either to the prepayment of the Obligations or shall be disbursed to Administrative Borrower under staged payment terms reasonably satisfactory to the Required Lenders for application to the cost of repairs, replacements, or restorations. Any such repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items or property destroyed prior to such damage or destruction. (c) Borrowers shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 6.8, unless Agent is included thereon as named insured with the loss payable to Agent under a lender's loss payable endorsement or its equivalent. Administrative Borrower immediately shall notify Agent whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and copies of such policies promptly shall be provided to Agent. 6.9 Location of Inventory and Equipment. Keep the Inventory and Equipment only at the locations identified on Schedule 5.5; provided, however, that Administrative Borrower may amend Schedule 5.5 so long as such amendment occurs by written notice to Agent not less than 30 days prior to the date on which the Inventory or Equipment is moved to such new location, so long as such new location is within the continental United States, and so long as, at the time of such written notification, the applicable Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected the Agent's Liens on such assets and also provides to Agent a Collateral Access Agreement. 6.10 Compliance with Laws. Comply with the requirements of all applicable laws, rules, regulations, and orders of any Governmental Authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, would not result in and reasonably could not be expected to result in a Material Adverse Change. 6.11 Leases. Pay when due all rents and other amounts payable under any leases to which any Borrower is a party or by which any Borrower's properties and assets are bound, unless such payments are the subject of a Permitted Protest. 6.12 Brokerage Commissions. Pay any and all brokerage commission or finders fees incurred in connection with or as a result of Borrowers' obtaining financing from the Lender Group under this Agreement. Borrowers agree and acknowledge that payment of all such brokerage commissions or finders fees shall be the sole responsibility of Borrowers, and each Borrower agrees to indemnify, defend, and hold Agent and the Lender Group harmless from and against any claim of any broker or finder arising out of Borrowers' obtaining financing from the Lender Group under this Agreement. 51 6.13 Existence. At all times preserve and keep in full force and effect each Borrower's valid existence and good standing and any rights and franchises material to Borrowers' businesses. 6.14 Environmental. (a) Keep any property either owned or operated by any Borrower free of any Environmental Liens or post bonds or other financial assurances sufficient to satisfy the obligations or liability evidenced by such Environmental Liens, (b) comply, in all material respects, with Environmental Laws and provide to Agent documentation of such compliance which Agent reasonably requests, (c) promptly notify Agent of any release of a Hazardous Material of any reportable quantity from or onto property owned or operated by any Borrower and take any Remedial Actions required to abate said release or otherwise to come into compliance with applicable Environmental Law, and (d) promptly provide Agent with written notice within 10 days of the receipt of any of the following: (i) notice that an Environmental Lien has been filed against any of the real or personal property of any Borrower, (ii) commencement of any Environmental Action or notice that an Environmental Action will be filed against any Borrower, and (iii) notice of a violation, citation, or other administrative order which reasonably could be expected to result in a Material Adverse Change. 6.15 Disclosure Updates. Promptly and in no event later than 5 Business Days after obtaining knowledge thereof, (a) notify Agent if any written information, exhibit, or report furnished to the Lender Group contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which made, and (b) correct any defect or error that may be discovered therein or in any Loan Document or in the execution, acknowledgement, filing, or recordation thereof. 7. NEGATIVE COVENANTS. Each Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrowers will not and will not permit any of their respective Subsidiaries to do any of the following: 7.1 Indebtedness. Create, incur, assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement and the other Loan Documents, together with Indebtedness owed to Underlying Issuers with respect to Underlying Letters of Credit; (b) Permitted Indebtedness set forth on Schedule 5.20; (c) Purchase Money Indebtedness; 52 (d) Unsecured Indebtedness as provided in Parent's Projections (as delivered to Agent from time to time) that is on terms and conditions reasonably acceptable to Required Lenders; and (e) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b), (c) and (d) of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or extensions do not, in Agent's judgment, materially impair the prospects of repayment of the Obligations by Borrowers or materially impair Borrowers' creditworthiness, (ii) such refinancings, renewals, or extensions do not result in an increase in the principal amount of, or interest rate with respect to, the Indebtedness so refinanced, renewed, or extended, (iii) such refinancings, renewals, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, nor are they on terms or conditions, that, taken as a whole, are materially more burdensome or restrictive to the applicable Borrower, and (iv) if the Indebtedness that is refinanced, renewed, or extended was subordinated in right of payment to the Obligations, then the terms and conditions of the refinancing, renewal, or extension Indebtedness must be include subordination terms and conditions that are at least as favorable to the Lender Group as those that were applicable to the refinanced, renewed, or extended Indebtedness. (f) Indebtedness composing Permitted Indebtedness. 7.2 Liens. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of its assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced, renewed, or extended under Section 7.1(d) and so long as the replacement Liens only encumber those assets that secured the refinanced, renewed, or extended Indebtedness). 7.3 Restrictions on Fundamental Changes. (a) Enter into any merger, consolidation, reorganization, except among Borrowers and mergers of Subsidiaries into a Borrower. (b) Liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution). (c) Convey, sell, lease, license, assign, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its assets. 7.4 Disposal of Assets. Other than Permitted Dispositions, convey, sell, lease, license, assign, transfer, or otherwise dispose of any of the assets of any Borrower. 7.5 Change Name. Change any Borrower's name, state of incorporation, FEIN, corporate structure or identity, or add any new fictitious name; provided, however, that a Borrower may change its name upon at least 30 days prior written notice by Administrative 53 Borrower to Agent of such change and so long as, at the time of such written notification, such Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Agent's Liens. 7.6 Guarantee. Guarantee or otherwise become in any way liable with respect to the obligations of any third Person except by endorsement of instruments or items of payment for deposit to the account of Borrowers or which are transmitted or turned over to Agent. 7.7 Nature of Business. Make any change in the principal nature of Borrowers' business. 7.8 Prepayments and Amendments. (a) Except in connection with a refinancing permitted by Section 7.1(d), prepay, redeem, defease, purchase, or otherwise acquire any Indebtedness of any Borrower, other than the Obligations in accordance with this Agreement, and (b) Except in connection with a refinancing permitted by Section 7.1(d), directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under Sections 7.1(b) or (c). 7.9 Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control. 7.10 Consignments. Consign any Inventory or sell any Inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale. 7.11 Distributions. Other than distributions or declaration and payment of dividends by a Borrower to another Borrower, make any distribution or declare or pay any dividends (in cash or other property, other than common Stock) on, or purchase, acquire, redeem, or retire any of any Borrower's Stock, of any class, whether now or hereafter outstanding. 7.12 Accounting Methods. Modify or change its method of accounting (other than as may be required to conform to GAAP) or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrowers' accounting records without said accounting firm or service bureau agreeing to provide Agent information regarding the Collateral or Borrowers' financial condition. 7.13 Investments. Except for Permitted Investments and Investments of up to $2,000,000 per month, (but not to exceed $40,000,000, in the aggregate, from and after the Closing Date) in direct and indirect wholly-owned Subsidiaries of Parent (other than a Borrower), directly or indirectly, make or acquire any Investment, or incur any liabilities (including contingent obligations) for or in connection with any Investment; provided, however, that Borrowers shall not have Permitted Investments (other than (a) Investments by any 54 Borrower in any other Borrower or (b) Investments in the Cash Management Accounts) in excess of $500,000 outstanding at any one time unless the applicable Borrower and the applicable securities intermediary or bank have entered into Control Agreements or similar arrangements governing such Permitted Investments, as Agent shall determine in its Permitted Discretion, to perfect (and further establish) the Agent's Liens in such Permitted Investments. 7.14 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any transaction with any Affiliate of any Borrower except for (a) Permitted Investments and (b) transactions that are in the ordinary course of Borrowers' business, upon fair and reasonable terms, that are fully disclosed to Agent, and that are no less favorable to Borrowers than would be obtained in an arm's length transaction with a non-Affiliate. 7.15 Suspension. Suspend or go out of a substantial portion of its business. 7.16 Compensation. Increase the annual fee or per-meeting fees paid to the members of its Board of Directors during any year by more than 20% over the prior year; pay or accrue total cash compensation, during any year, to its officers and senior management employees in an aggregate amount in excess of 120% of that paid or accrued in the prior year. 7.17 Use of Proceeds. Use the proceeds of the Advances for any purpose other than (a) on the Closing Date, to pay transactional fees, costs, and expenses incurred in connection with this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby, and (b) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted purposes. 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees. Relocate its chief executive office to a new location without Administrative Borrower providing 30 days prior written notification thereof to Agent and so long as, at the time of such written notification, the applicable Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected the Agent's Liens and also provides to Agent a Collateral Access Agreement with respect to such new location. The Inventory and Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without Agent's prior written consent. 7.19 Securities Accounts. Establish or maintain any Securities Account unless Agent shall have received a Control Agreement in respect of such Securities Account. Borrowers agree to not transfer assets out of any Securities Account; provided, however, that, so long as no Event of Default has occurred and is continuing or would result therefrom, Borrowers may use such assets (and the proceeds thereof) to the extent not prohibited by this Agreement. 7.20 Financial Covenants. (a) Fail to maintain: (i) Minimum EBITDA. EBITDA, measured on a fiscal quarter-end basis, of not less than the required amount set forth in the following table for the applicable period set forth opposite thereto; 55
--------------------------------------- ------------------------------------------------------------------- Applicable Amount Applicable Period --------------------------------------- ------------------------------------------------------------------- ($12,800,000) For the 3 month period ending March 31, 2001 --------------------------------------- ------------------------------------------------------------------- ($10,400,000) For the 3 month period ending June 30, 2001 --------------------------------------- ------------------------------------------------------------------- ($3,000,000) For the 3 month period ending September 30, 2001 --------------------------------------- ------------------------------------------------------------------- $5,000,000 For the 3 month period ending December 31, 2001 --------------------------------------- ------------------------------------------------------------------- $14,600,000 For the 3 month period ending March 31, 2002 --------------------------------------- ------------------------------------------------------------------- $21,800,000 For the 3 month period ending June 30, 2002 --------------------------------------- ------------------------------------------------------------------- $29,300,000 For the 3 month period ending September 30, 2002 --------------------------------------- ------------------------------------------------------------------- $37,200,000 For the 3 month period ending December 31, 2002 --------------------------------------- -------------------------------------------------------------------
(ii) Minimum Revenues. Net revenues of at least the required amount set forth in the following table as of the applicable date set forth opposite thereto:
--------------------------------------- ------------------------------------------------------------------- Applicable Amount Applicable Period --------------------------------------- ------------------------------------------------------------------- $14,000,000 For the 3 month period ending March 31, 2001 --------------------------------------- ------------------------------------------------------------------- $16,700,000 For the 3 month period ending June 30, 2001 --------------------------------------- ------------------------------------------------------------------- $26,000,000 For the 3 month period ending September 30, 2001 --------------------------------------- ------------------------------------------------------------------- $38,500,000 For the 3 month period ending December 31, 2001 --------------------------------------- ------------------------------------------------------------------- $47,200,000 For the 3 month period --------------------------------------- -------------------------------------------------------------------
56
--------------------------------------- ------------------------------------------------------------------- ending March 31, 2002 --------------------------------------- ------------------------------------------------------------------- $58,900,000 For the 3 month period ending June 30, 2002 --------------------------------------- ------------------------------------------------------------------- $73,700,000 For the 3 month period ending September 30, 2002 --------------------------------------- ------------------------------------------------------------------- $99,500,000 For the 3 month period ending December 31, 2002 --------------------------------------- -------------------------------------------------------------------
(b) Make: (i) Capital Expenditures. Capital expenditures in any in any fiscal quarter in excess of the amount set forth in the following table for the applicable period:
--------------------------------------- ------------------------------------------------------------------- Applicable Amount Applicable Period --------------------------------------- ------------------------------------------------------------------- $14,600,000 For the 3 month period ending March 31, 2001 --------------------------------------- ------------------------------------------------------------------- $12,700,000 For the 3 month period ending June 30, 2001 --------------------------------------- ------------------------------------------------------------------- $21,500,000 For the 3 month period ending September 30, 2001 --------------------------------------- ------------------------------------------------------------------- $10,900,000 For the 3 month period ending December 31, 2001 --------------------------------------- ------------------------------------------------------------------- $25,000,000 For the 3 month period ending March 31, 2002 --------------------------------------- ------------------------------------------------------------------- $18,000,000 For the 3 month period ending June 30, 2002 --------------------------------------- ------------------------------------------------------------------- $18,000,000 For the 3 month period ending September 30, 2002 --------------------------------------- ------------------------------------------------------------------- $27,000,000 For the 3 month period ending December 31, 2002 --------------------------------------- -------------------------------------------------------------------
57 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (each, an "Event of Default") under this Agreement: 8.1 If Borrowers fail to pay when due and payable or when declared due and payable, all or any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due the Lender Group, reimbursement of Lender Group Expenses, or other amounts constituting Obligations); 8.2 If Borrowers fail to perform, keep, or observe: (a) any term, provision, condition, covenant, or agreement contained in Section 6.2, Section 6.3 or Section 6.7 and such failure continues for a period of 5 days after such failure, (b) any term, provision, condition, covenant, or agreement contained in Section 6.7, Section 6.9, or Section 6.11 and such failure continues for a period of 10 days after such failure, or (c) any other term, provision, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement (including in respect to Bank Products) between any Borrower and Agent or Lenders; 8.3 If any material portion of any Borrower's assets is attached, seized, subjected to a writ or distress warrant, levied upon, or comes into the possession of any third Person: (a) which involves more than $100,000, or (b) if such attachment, seizure or levy is for $100,000 or less and it is not released or satisfied within 15 days of its occurrence or (c) if such attachment, seizure or levy is for $500,000, or less, and is subject of a Permitted Protest and it is not released or satisfied within 30 days of its occurrence; provided, however, that Agent may reserve the amount of such attachment, seizure, warrant or levy; 8.4 If an Insolvency Proceeding is commenced by any Borrower; 8.5 If an Insolvency Proceeding is commenced against any Borrower, and any of the following events occur: (a) the applicable Borrower consents to the institution of the Insolvency Proceeding against it, (b) the petition commencing the Insolvency Proceeding is not timely controverted, (c) the petition commencing the Insolvency Proceeding is not dismissed within 45 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, Agent (including any successor agent) and each other member of the Lender Group shall be relieved of their obligation to extend credit hereunder, (d) an interim trustee is appointed to take possession of all or any substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, any Borrower, or (e) an order for relief shall have been entered therein; 8.6 If any Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; 8.7 If a notice of Lien, levy, or assessment is filed of record with respect to any Borrower's or any of its Subsidiaries' assets by the United States, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any 58 taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon any Borrower's or any of its Subsidiaries' assets and the same is not paid on the payment date thereof; 8.8 If a judgment or other claim becomes a Lien or encumbrance upon any material portion of any Borrower's properties or assets; 8.9 If there is a default in any material agreement to which any Borrower is a party and such default (a) occurs at the final maturity of the obligations thereunder, or (b) results in a right by the other party thereto, irrespective of whether exercised, to accelerate the maturity of the applicable Borrower's obligations thereunder, to terminate such agreement, or to refuse to renew such agreement pursuant to an automatic renewal right therein; 8.10 If any Borrower makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; 8.11 If any material misstatement or misrepresentation exists now or hereafter in any warranty, representation, statement, or Record made to the Lender Group by any Borrower, its Subsidiaries, or any officer, employee, agent, or director of any Borrower or any of its Subsidiaries; 8.12 If this Agreement or any other Loan Document that purports to create a Lien, shall, for any reason, fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority Lien on or security interest in the Collateral covered hereby or thereby; or 8.13 Any provision of any Loan Document shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by any Borrower, or a proceeding shall be commenced by any Borrower, or by any Governmental Authority having jurisdiction over any Borrower, seeking to establish the invalidity or unenforceability thereof, or any Borrower shall deny that any Borrower has any liability or obligation purported to be created under any Loan Document. 9. THE LENDER GROUP'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. Upon the occurrence, and during the continuation, of an Event of Default, the Required Lenders (at their election but without notice of their election and without demand) may authorize and instruct Agent to do any one or more of the following on behalf of the Lender Group (and Agent, acting upon the instructions of the Required Lenders, shall do the same on behalf of the Lender Group), all of which are authorized by Borrowers: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; 59 (b) Cease advancing money or extending credit to or for the benefit of Borrowers under this Agreement, under any of the Loan Documents, or under any other agreement between Borrowers and the Lender Group; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of the Lender Group, but without affecting any of the Agent's Liens in the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Agent considers advisable, and in such cases, Agent will credit the Loan Account with only the net amounts received by Agent in payment of such disputed Accounts after deducting all Lender Group Expenses incurred or expended in connection therewith; (e) Cause Borrowers to hold all returned Inventory in trust for the Lender Group, segregate all returned Inventory from all other assets of Borrowers or in Borrowers' possession and conspicuously label said returned Inventory as the property of the Lender Group; (f) Without notice to or demand upon any Borrower, make such payments and do such acts as Agent considers necessary or reasonable to protect its security interests in the Collateral. Each Borrower agrees to assemble the Personal Property Collateral if Agent so requires, and to make the Personal Property Collateral available to Agent at a place that Agent may designate which is reasonably convenient to both parties. Each Borrower authorizes Agent to enter the premises where the Personal Property Collateral is located, to take and maintain possession of the Personal Property Collateral, or any part of it, and to pay, purchase, contest, or compromise any Lien that in Agent's determination appears to conflict with the Agent's Liens and to pay all expenses incurred in connection therewith and to charge Borrowers' Loan Account therefor. With respect to any of Borrowers' owned or leased premises, each Borrower hereby grants Agent a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of the Lender Group's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to any Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of the Code), set off and apply to the Obligations any and all (i) balances and deposits of any Borrower held by the Lender Group (including any amounts received in the Cash Management Accounts), or (ii) Indebtedness at any time owing to or for the credit or the account of any Borrower held by the Lender Group; (h) Hold, as cash collateral, any and all balances and deposits of any Borrower held by the Lender Group, and any amounts received in the Cash Management Accounts, to secure the full and final repayment of all of the Obligations; (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Personal Property 60 Collateral. Each Borrower hereby grants to Agent a license or other right to use, without charge, such Borrower's labels, patents, copyrights, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Personal Property Collateral, in completing production of, advertising for sale, and selling any Personal Property Collateral and such Borrower's rights under all licenses and all franchise agreements shall inure to the Lender Group's benefit; (j) Sell the Personal Property Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrowers' premises) as Agent determines is commercially reasonable. It is not necessary that the Personal Property Collateral be present at any such sale; (k) Agent shall give notice of the disposition of the Personal Property Collateral as follows: (i) Agent shall give Administrative Borrower (for the benefit of the applicable Borrower) a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Personal Property Collateral, the time on or after which the private sale or other disposition is to be made; and (ii) The notice shall be personally delivered or mailed, postage prepaid, to Administrative Borrower as provided in Section 12, at least 10 days before the earliest time of disposition set forth in the notice; no notice needs to be given prior to the disposition of any portion of the Personal Property Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market; (l) Agent, on behalf of the Lender Group may credit bid and purchase at any public sale; (m) Agent may seek the appointment of a receiver or keeper to take possession of all or any portion of the Collateral or to operate same and, to the maximum extent permitted by law, may seek the appointment of such a receiver without the requirement of prior notice or a hearing; (n) The Lender Group shall have all other rights and remedies available to it at law or in equity pursuant to any other Loan Documents; and (o) Any deficiency that exists after disposition of the Personal Property Collateral as provided above will be paid immediately by Borrowers. Any excess will be returned, without interest and subject to the rights of third Persons, by Agent to Administrative Borrower (for the benefit of the applicable Borrower). 9.2 Remedies Cumulative. The rights and remedies of the Lender Group under this Agreement, the other Loan Documents, and all other agreements shall be cumulative. The 61 Lender Group shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by the Lender Group of one right or remedy shall be deemed an election, and no waiver by the Lender Group of any Event of Default shall be deemed a continuing waiver. No delay by the Lender Group shall constitute a waiver, election, or acquiescence by it. 10. TAXES AND EXPENSES. If any Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, Agent, in its sole discretion and without prior notice to any Borrower, may do any or all of the following: (a) make payment of the same or any part thereof, (b) set up such reserves in Borrowers' Loan Account as Agent deems necessary to protect the Lender Group from the exposure created by such failure, or (c) in the case of the failure to comply with Section 6.8 hereof, obtain and maintain insurance policies of the type described in Section 6.8 and take any action with respect to such policies as Agent deems prudent. Any such amounts paid by Agent shall constitute Lender Group Expenses and any such payments shall not constitute an agreement by the Lender Group to make similar payments in the future or a waiver by the Lender Group of any Event of Default under this Agreement. Agent need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1 Demand; Protest; etc. Each Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of documents, instruments, chattel paper, and guarantees at any time held by the Lender Group on which any such Borrower may in any way be liable. 11.2 The Lender Group's Liability for Collateral. Each Borrower hereby agrees that: (a) so long as the Lender Group complies with its obligations, if any, under the Code, Agent shall not in any way or manner be liable or responsible for: (i) the safekeeping of the Collateral, (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause, (iii) any diminution in the value thereof, or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person, and (b) all risk of loss, damage, or destruction of the Collateral shall be borne by Borrowers. 11.3 Indemnification. Each Borrower shall pay, indemnify, defend, and hold the Agent-Related Persons, the Lender-Related Persons with respect to each Lender, each Participant, and each of their respective officers, directors, employees, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually 62 incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them (a) in connection with or as a result of or related to the execution, delivery, enforcement, performance, or administration of this Agreement, any of the other Loan Documents, or the transactions contemplated hereby or thereby, and (b) with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event, or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). The foregoing to the contrary notwithstanding, Borrowers shall have no obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which Borrowers were required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by Borrowers with respect thereto. WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LIABILITIES WHICH IN WHOLE OR IN PART CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON. 12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by Borrowers or Agent to the other relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, electronic mail (at such email addresses as Administrative Borrower or Agent, as applicable, may designate to each other in accordance herewith), or telefacsimile to Borrowers in care of Administrative Borrower or to Agent, as the case may be, at its address set forth below: If to Administrative Borrower: WAM!NET INC. 655 Lone Oak Drive Eagan, Minnesota 55121 Attn: Chief Financial Officer Fax No. 651.256.5176 with copies to: WAM!NET INC. 655 Lone Oak Drive Eagan, Minnesota 55121 Attn: General Counsel Fax No. 651.256.5176 63 with copies to: LARKIN, HOFFMAN, DALY & LINDGREN, LTD. 7900 Xerxes Avenue South 1500 Wells Fargo Plaza Bloomington, Minnesota 55431 Attn: Andrew F. Perrin, Esq. Fax No. 952.896.1511 If to Agent: FOOTHILL CAPITAL CORPORATION 2450 Colorado Avenue Suite 3000W Santa Monica, California 90404 Attn: Business Finance Division Manager Telephone No. 310.453-7300 with copies to: BUCHALTER, NEMER, FIELDS & YOUNGER 601 So. Figueroa Street, Suite 2400 Los Angeles, California 90017 Attn: Robert C. Colton, Esq. Fax No.: 213.896.0400 Agent and Borrowers may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other party. All notices or demands sent in accordance with this Section 12, other than notices by Agent in connection with enforcement rights against the Collateral under the provisions of the Code, shall be deemed received on the earlier of the date of actual receipt or 3 Business Days after the deposit thereof in the mail. Each Borrower acknowledges and agrees that notices sent by the Lender Group in connection with the exercise of enforcement rights against Collateral under the provisions of the Code shall be deemed sent when deposited in the mail or personally delivered, or, where permitted by law, transmitted by telefacsimile or any other method set forth above. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. (a) THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. (b) THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, 64 STATE OF NEW YORK, PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWERS AND THE LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13(b). BORROWERS AND THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWERS AND THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS. 14.1 Assignments and Participations. (a) Any Lender may, with the written consent of Agent (provided that no written consent of Agent shall be required in connection with any assignment and delegation by a Lender to an Eligible Transferee or to an Affiliate of a Lender or to a fund or account managed by a Lender or its Affiliates (an "Exempt Assignment")), assign and delegate to one or more assignees (each an "Assignee") all, or any ratable part of all, of the Obligations, the Commitments and the other rights and obligations of such Lender hereunder and under the other Loan Documents, in a minimum amount of $5,000,000 (such amount being inapplicable in the case of an Exempt Assignment); provided, however, that Borrowers and Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses, and related information with respect to the Assignee, have been given to Administrative Borrower and Agent by such Lender and the Assignee, (ii) such Lender and its Assignee have delivered to Administrative Borrower and Agent an Assignment and Acceptance in form and substance satisfactory to Agent, and (iii) the assignor Lender or Assignee has paid to Agent for Agent's separate account a processing fee in the amount of $5,000 (such amount being inapplicable in the case of an Exempt Assignment). Anything contained herein to the contrary notwithstanding, the consent of Agent shall not be required (and payment of any fees shall not be required) if such assignment is in connection with any merger, consolidation, sale, transfer, or other disposition of all or any substantial portion of the business or loan portfolio of such Lender. 65 (b) From and after the date that Agent notifies the assignor Lender (with a copy to Administrative Borrower) that it has received an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (except with respect to Section 11.3 hereof) and be released from its obligations under this Agreement (and in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement and the other Loan Documents, such Lender shall cease to be a party hereto and thereto), and such assignment shall affect a novation between Borrowers and the Assignee. (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (1) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document furnished pursuant hereto, (2) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrowers or the performance or observance by Borrowers of any of their obligations under this Agreement or any other Loan Document furnished pursuant hereto, (3) such Assignee confirms that it has received a copy of this Agreement, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance, (4) such Assignee will, independently and without reliance upon Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement, (5) such Assignee appoints and authorizes Agent to take such actions and to exercise such powers under this Agreement as are delegated to Agent, by the terms hereof, together with such powers as are reasonably incidental thereto, and (6) such Assignee agrees that it will perform all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance and receipt and acknowledgment by Agent of such fully executed Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Lender pro tanto. (e) Any Lender may at any time, with the written consent of Agent, sell to one or more commercial banks, financial institutions, or other Persons not Affiliates of such Lender (a "Participant") participating interests in its Obligations, the Commitment, and the 66 other rights and interests of that Lender (the "Originating Lender") hereunder and under the other Loan Documents (provided that no written consent of Agent shall be required in connection with any sale of any such participating interests by a Lender to an Eligible Transferee); provided, however, that (i) the Originating Lender shall remain a "Lender" for all purposes of this Agreement and the other Loan Documents and the Participant receiving the participating interest in the Obligations, the Commitments, and the other rights and interests of the Originating Lender hereunder shall not constitute a "Lender" hereunder or under the other Loan Documents and the Originating Lender's obligations under this Agreement shall remain unchanged, (ii) the Originating Lender shall remain solely responsible for the performance of such obligations, (iii) Borrowers, Agent, and the Lenders shall continue to deal solely and directly with the Originating Lender in connection with the Originating Lender's rights and obligations under this Agreement and the other Loan Documents, (iv) no Lender shall transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating, (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating, (C) release all or a material portion of the Collateral or guaranties (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating, (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant through such Lender, or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums; and (v) all amounts payable by Borrowers hereunder shall be determined as if such Lender had not sold such participation; except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. The rights of any Participant only shall be derivative through the Originating Lender with whom such Participant participates and no Participant shall have any rights under this Agreement or the other Loan Documents or any direct rights as to the other Lenders, Agent, Borrowers, the Collections, the Collateral, or otherwise in respect of the Obligations. No Participant shall have the right to participate directly in the making of decisions by the Lenders among themselves. (f) In connection with any such assignment or participation or proposed assignment or participation, a Lender may disclose all documents and information which it now or hereafter may have relating to Borrowers or Borrowers' business. (g) Any other provision in this Agreement notwithstanding, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR ss.203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 67 14.2 Successors. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Borrowers may not assign this Agreement or any rights or duties hereunder without the Lenders' prior written consent and any prohibited assignment shall be absolutely void ab initio. No consent to assignment by the Lenders shall release any Borrower from its Obligations. A Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 14.1 hereof and, except as expressly required pursuant to Section 14.1 hereof, no consent or approval by any Borrower is required in connection with any such assignment. 15. AMENDMENTS; WAIVERS. 15.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrowers therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by Agent at the written request of the Required Lenders) and Administrative Borrower (on behalf of all Borrowers) and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all of the Lenders affected thereby and Administrative Borrower (on behalf of all Borrowers) and acknowledged by Agent, do any of the following: (a) increase or extend any Commitment of any Lender, (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees, or other amounts due hereunder or under any other Loan Document, (c) reduce the principal of, or the rate of interest on, any loan or other extension of credit hereunder, or reduce any fees or other amounts payable hereunder or under any other Loan Document, (d) change the percentage of the Commitments that is required to take any action hereunder, (e) amend this Section or any provision of the Agreement providing for consent or other action by all Lenders, (f) release Collateral other than as permitted by Section 16.12, (g) change the definition of "Required Lenders", (h) contractually subordinate any of the Agent's Liens, (i) release any Borrower from any obligation for the payment of money, or 68 (j) change the definition of Borrowing Base or the definitions of Eligible Accounts, Eligible Inventory, Maximum Revolver Amount, or change Section 2.1(b); or (k) amend any of the provisions of Section 16. and, provided further, however, that no amendment, waiver or consent shall, unless in writing and signed by Agent, Issuing Lender, or Swing Lender, affect the rights or duties of Agent, Issuing Lender, or Swing Lender, as applicable, under this Agreement or any other Loan Document. The foregoing notwithstanding, any amendment, modification, waiver, consent, termination, or release of, or with respect to, any provision of this Agreement or any other Loan Document that relates only to the relationship of the Lender Group among themselves, and that does not affect the rights or obligations of Borrowers, shall not require consent by or the agreement of Borrowers. 15.2 Replacement of Holdout Lender If any action to be taken by the Lender Group or Agent hereunder requires the unanimous consent, authorization, or agreement of all Lenders, and a Lender ("Holdout Lender") fails to give its consent, authorization, or agreement, then Agent, upon at least 5 Business Days prior irrevocable notice to the Holdout Lender, may permanently replace the Holdout Lender with one or more substitute Lenders (each, a "Replacement Lender"), and the Holdout Lender shall have not right to refuse to be replaced hereunder. Such notice to replace the Holdout Lender shall specify an effective date for such replacement, which date shall not be later than 15 Business Days after the date such notice is given. Prior to the effective date of such replacement, the Holdout Lender and each Replacement Lender shall execute and deliver an Assignment and Acceptance Agreement, subject only to the Holdout Lender being repaid its share of the outstanding Obligations (including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever. If the Holdout Lender shall refuse or fail to execute and deliver any such Assignment and Acceptance Agreement prior to the effective date of such replacement, the Holdout Lender shall be deemed to have executed and delivered such Assignment and Acceptance Agreement. The replacement of any Holdout Lender shall be made in accordance with the terms of Section 14.1. Until such time as the Replacement Lenders shall have acquired all of the Obligations, the Commitments, and the other rights and obligations of the Holdout Lender hereunder and under the other Loan Documents, the Holdout Lender shall remain obligated to make the Holdout Lender's Pro Rata Share of Advances and to purchase a participation in each Letter of Credit, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Letter of Credit. 15.3 No Waivers; Cumulative Remedies. No failure by Agent or any Lender to exercise any right, remedy, or option under this Agreement or, any other Loan Document, or delay by Agent or any Lender in exercising the same, will operate as a waiver thereof. No waiver by Agent or any Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by Agent or any Lender on any occasion shall affect or diminish Agent's and each Lender's rights thereafter to require strict performance by Borrowers of any provision of this Agreement. Agent's and each Lender's rights under this Agreement and 69 the other Loan Documents will be cumulative and not exclusive of any other right or remedy that Agent or any Lender may have. 16. AGENT; THE LENDER GROUP. 16.1 Appointment and Authorization of Agent. Each Lender hereby designates and appoints Foothill as its representative under this Agreement and the other Loan Documents and each Lender hereby irrevocably authorizes Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to Agent by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Agent agrees to act as such on the express conditions contained in this Section 16. The provisions of this Section 16 are solely for the benefit of Agent, and the Lenders, and Borrowers shall have no rights as a third party beneficiary of any of the provisions contained herein. Any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document notwithstanding, Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Agent; it being expressly understood and agreed that the use of the word "Agent" is for convenience only, that Foothill is merely the representative of the Lenders, and only has the contractual duties set forth herein. Except as expressly otherwise provided in this Agreement, Agent shall have and may use its sole discretion with respect to exercising or refraining from exercising any discretionary rights or taking or refraining from taking any actions that Agent expressly is entitled to take or assert under or pursuant to this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, or of any other provision of the Loan Documents that provides rights or powers to Agent, Lenders agree that Agent shall have the right to exercise the following powers as long as this Agreement remains in effect: (a) maintain, in accordance with its customary business practices, ledgers and records reflecting the status of the Obligations, the Collateral, the Collections, and related matters, (b) execute or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to the Loan Documents, (c) make Advances, for itself or on behalf of Lenders as provided in the Loan Documents, (d) exclusively receive, apply, and distribute the Collections as provided in the Loan Documents, (e) open and maintain such bank accounts and cash management accounts as Agent deems necessary and appropriate in accordance with the Loan Documents for the foregoing purposes with respect to the Collateral and the Collections, (f) perform, exercise, and enforce any and all other rights and remedies of the Lender Group with respect to Borrowers, the Obligations, the Collateral, the Collections, or otherwise related to any of same as provided in the Loan Documents, and (g) incur and pay such Lender Group Expenses as Agent may deem necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to the Loan Documents. 16.2 Delegation of Duties. Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Agent shall not be 70 responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects as long as such selection was made without gross negligence or willful misconduct. 16.3 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by any Borrower or any Subsidiary or Affiliate of any Borrower, or any officer or director thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of any Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the Books or properties of Borrowers or the books or records or properties of any of Borrowers' Subsidiaries or Affiliates. 16.4 Reliance by Agent. Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent, or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrowers or counsel to any Lender), independent accountants and other experts selected by Agent. Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless Agent shall first receive such advice or concurrence of the Lenders as it deems appropriate and until such instructions are received, Agent shall act, or refrain from acting, as it deems advisable. If Agent so requests, it shall first be indemnified to its reasonable satisfaction by Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. 16.5 Notice of Default or Event of Default. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest, fees, and expenses required to be paid to Agent for the account of the Lenders, except with respect to Events of Default of which Agent has actual knowledge, unless Agent shall have received written notice from a Lender or Administrative Borrower referring to this Agreement, describing such Default or Event of Default, and stating that such notice is a "notice of default." Agent promptly will notify the Lenders of its receipt of any such notice or of any Event of Default of which Agent has actual knowledge. If any Lender obtains actual knowledge of any Event of Default, such Lender promptly shall notify the other Lenders and Agent of such Event of Default. Each Lender shall be solely responsible for giving any notices to its Participants, if any. Subject to Section 16.4, Agent shall take such action with 71 respect to such Default or Event of Default as may be requested by the Required Lenders in accordance with Section 9; provided, however, that unless and until Agent has received any such request, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable. 16.6 Credit Decision. Each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by Agent hereinafter taken, including any review of the affairs of Borrowers and their Subsidiaries or Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrowers and any other Person (other than the Lender Group) party to a Loan Document, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrowers. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrowers and any other Person (other than the Lender Group) party to a Loan Document. Except for notices, reports, and other documents expressly herein required to be furnished to the Lenders by Agent, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrowers and any other Person party to a Loan Document that may come into the possession of any of the Agent-Related Persons. 16.7 Costs and Expenses; Indemnification. Agent may incur and pay Lender Group Expenses to the extent Agent reasonably deems necessary or appropriate for the performance and fulfillment of its functions, powers, and obligations pursuant to the Loan Documents, including court costs, reasonable attorneys fees and expenses, costs of collection by outside collection agencies and auctioneer fees and costs of security guards or insurance premiums paid to maintain the Collateral, whether or not Borrowers are obligated to reimburse Agent or Lenders for such expenses pursuant to the Loan Agreement or otherwise. Agent is authorized and directed to deduct and retain sufficient amounts from Collections received by Agent to reimburse Agent for such out-of-pocket costs and expenses prior to the distribution of any amounts to Lenders. In the event Agent is not reimbursed for such costs and expenses from Collections received by Agent, each Lender hereby agrees that it is and shall be obligated to pay to or reimburse Agent for the amount of such Lender's Pro Rata Share thereof. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrowers and without limiting the obligation of Borrowers to do so), according to their Pro Rata Shares, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to any Agent-Related Person of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct nor shall any Lender be liable for the obligations 72 of any Defaulting Lender in failing to make an Advance or other extension of credit hereunder. Without limitation of the foregoing, each Lender shall reimburse Agent upon demand for such Lender's ratable share of any costs or out-of-pocket expenses (including attorneys fees and expenses) incurred by Agent in connection with the preparation, execution, delivery, administration, modification, amendment, or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that Agent is not reimbursed for such expenses by or on behalf of Borrowers. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of Agent. 16.8 Agent in Individual Capacity. Foothill and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in, and generally engage in any kind of banking, trust, financial advisory, underwriting, or other business with Borrowers and their Subsidiaries and Affiliates and any other Person (other than the Lender Group) party to any Loan Documents as though Foothill were not Agent hereunder, and, in each case, without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, Foothill or its Affiliates may receive information regarding Borrowers or their Affiliates and any other Person (other than the Lender Group) party to any Loan Documents that is subject to confidentiality obligations in favor of Borrowers or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver Agent will use its reasonable best efforts to obtain), Agent shall not be under any obligation to provide such information to them. The terms "Lender" and "Lenders" include Foothill in its individual capacity. 16.9 Successor Agent. Agent may resign as Agent upon 45 days notice to the Lenders. If Agent resigns under this Agreement, the Required Lenders shall appoint a successor Agent for the Lenders. If no successor Agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with the Lenders, a successor Agent. If Agent has materially breached or failed to perform any material provision of this Agreement or of applicable law, the Required Lenders may agree in writing to remove and replace Agent with a successor Agent from among the Lenders. In any such event, upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers, and duties of the retiring Agent and the term "Agent" shall mean such successor Agent and the retiring Agent's appointment, powers, and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 16 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor Agent has accepted appointment as Agent by the date which is 45 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Lenders appoint a successor Agent as provided for above. 73 16.10 Lender in Individual Capacity. Any Lender and its respective Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrowers and their Subsidiaries and Affiliates and any other Person (other than the Lender Group) party to any Loan Documents as though such Lender were not a Lender hereunder without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, such Lender and its respective Affiliates may receive information regarding Borrowers or their Affiliates and any other Person (other than the Lender Group) party to any Loan Documents that is subject to confidentiality obligations in favor of Borrowers or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver such Lender will use its reasonable best efforts to obtain), such Lender not shall be under any obligation to provide such information to them. With respect to the Swing Loans and Agent Advances, Swing Lender shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the sub-agent of the Agent. 16.11 Withholding Taxes. (a) If any Lender is a "foreign corporation, partnership or trust" within the meaning of the IRC and such Lender claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the IRC, such Lender agrees with and in favor of Agent and Borrowers, to deliver to Agent and Administrative Borrower: (i) if such Lender claims an exemption from withholding tax pursuant to its portfolio interest exception, (a) a statement of the Lender, signed under penalty of perjury, that it is not a (I) a "bank" as described in Section 881(c)(3)(A) of the IRC, (II) a 10% shareholder (within the meaning of Section 881(c)(3)(B) of the IRC), or (III) a controlled foreign corporation described in Section 881(c)(3)(C) of the IRC, and (B) a properly completed IRS Form W-8BEN, before the first payment of any interest under this Agreement and at any other time reasonably requested by Agent or Administrative Borrower; (ii) if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Form W-8BEN before the first payment of any interest under this Agreement and at any other time reasonably requested by Agent or Administrative Borrower; (iii) if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed and executed copies of IRS Form W-8ECI before the first payment of any interest is due under this Agreement and at any other time reasonably requested by Agent or Administrative Borrower; 74 (iv) such other form or forms as may be required under the IRC or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Lender agrees promptly to notify Agent and Administrative Borrower of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form W-8BEN and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Borrowers to such Lender, such Lender agrees to notify Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of Borrowers to such Lender. To the extent of such percentage amount, Agent will treat such Lender's IRS Form W-8BEN as no longer valid. (c) If any Lender is entitled to a reduction in the applicable withholding tax, Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to Agent, then Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (d) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify and hold Agent harmless for all amounts paid, directly or indirectly, by Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to Agent under this Section, together with all costs and expenses (including attorneys fees and expenses). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of Agent. (e) All payments made by Borrowers hereunder or under any note or other Loan Document will be made without setoff, counterclaim, or other defense, except as required by applicable law other than for Taxes (as defined below). All such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction (other than the United States) or by any political subdivision or taxing authority thereof or therein (other than of the United States) with respect to such payments (but excluding, any tax imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein (i) measured by or based on the net income or net profits of a Lender, or (ii) to the extent that such tax results from a change in the circumstances of the Lender, including a change in the residence, place of organization, or principal place of business of the Lender, or a change in the branch or lending office of the Lender participating in the transactions 75 set forth herein) and all interest, penalties or similar liabilities with respect thereto (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, each Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any note, including any amount paid pursuant to this Section 16.11(e) after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein; provided, however, that Borrowers shall not be required to increase any such amounts payable to Agent or any Lender (i) that is not organized under the laws of the United States, if such Person fails to comply with the other requirements of this Section 16.11, or (ii) if the increase in such amount payable results from Agent's or such Lender's own willful misconduct or gross negligence. Borrowers will furnish to Agent as promptly as possible after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by Borrowers. 16.12 Collateral Matters. (a) The Lenders hereby irrevocably authorize Agent, at its option and in its sole discretion, to release any Lien on any Collateral (i) upon the termination of the Commitments and payment and satisfaction in full by Borrowers of all Obligations, (ii) constituting property being sold or disposed of if a release is required or desirable in connection therewith and if Administrative Borrower certifies to Agent that the sale or disposition is permitted under Section 7.4 of this Agreement or the other Loan Documents (and Agent may rely conclusively on any such certificate, without further inquiry), (iii) constituting property in which no Borrower owned any interest at the time the security interest was granted or at any time thereafter, or (iv) constituting property leased to a Borrower under a lease that has expired or is terminated in a transaction permitted under this Agreement. Except as provided above, Agent will not execute and deliver a release of any Lien on any Collateral without the prior written authorization of (y) if the release is of all or substantially all of the Collateral, all of the Lenders, or (z) otherwise, the Required Lenders. Upon request by Agent or Administrative Borrower at any time, the Lenders will confirm in writing Agent's authority to release any such Liens on particular types or items of Collateral pursuant to this Section 16.12; provided, however, that (1) Agent shall not be required to execute any document necessary to evidence such release on terms that, in Agent's opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release of such Lien without recourse, representation, or warranty, and (2) such release shall not in any manner discharge, affect, or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of Borrowers in respect of) all interests retained by Borrowers, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral. (b) Agent shall have no obligation whatsoever to any of the Lenders to assure that the Collateral exists or is owned by Borrowers or is cared for, protected, or insured or has been encumbered, or that the Agent's Liens have been properly or sufficiently or lawfully created, perfected, protected, or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent pursuant to any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or 76 any act, omission, or event related thereto, subject to the terms and conditions contained herein, Agent may act in any manner it may deem appropriate, in its sole discretion given Agent's own interest in the Collateral in its capacity as one of the Lenders and that Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing, except as otherwise provided herein. 16.13 Restrictions on Actions by Lenders; Sharing of Payments. (a) Each of the Lenders agrees that it shall not, without the express consent of Agent, and that it shall, to the extent it is lawfully entitled to do so, upon the request of Agent, set off against the Obligations, any amounts owing by such Lender to Borrowers or any deposit accounts of Borrowers now or hereafter maintained with such Lender. Each of the Lenders further agrees that it shall not, unless specifically requested to do so by Agent, take or cause to be taken any action, including, the commencement of any legal or equitable proceedings, to foreclose any Lien on, or otherwise enforce any security interest in, any of the Collateral the purpose of which is, or could be, to give such Lender any preference or priority against the other Lenders with respect to the Collateral. (b) If, at any time or times any Lender shall receive (i) by payment, foreclosure, setoff, or otherwise, any proceeds of Collateral or any payments with respect to the Obligations arising under, or relating to, this Agreement or the other Loan Documents, except for any such proceeds or payments received by such Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent in excess of such Lender's ratable portion of all such distributions by Agent, such Lender promptly shall (1) turn the same over to Agent, in kind, and with such endorsements as may be required to negotiate the same to Agent, or in immediately available funds, as applicable, for the account of all of the Lenders and for application to the Obligations in accordance with the applicable provisions of this Agreement, or (2) purchase, without recourse or warranty, an undivided interest and participation in the Obligations owed to the other Lenders so that such excess payment received shall be applied ratably as among the Lenders in accordance with their Pro Rata Shares; provided, however, that if all or part of such excess payment received by the purchasing party is thereafter recovered from it, those purchases of participations shall be rescinded in whole or in part, as applicable, and the applicable portion of the purchase price paid therefor shall be returned to such purchasing party, but without interest except to the extent that such purchasing party is required to pay interest in connection with the recovery of the excess payment. 16.14 Agency for Perfection. Agent hereby appoints each other Lender as its agent (and each Lender hereby accepts such appointment) for the purpose of perfecting the Agent's Liens in assets which, in accordance with Article 9 of the UCC can be perfected only by possession. Should any Lender obtain possession of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent's request therefor shall deliver such Collateral to Agent or in accordance with Agent's instructions. 16.15 Payments by Agent to the Lenders. All payments to be made by Agent to the Lenders shall be made by bank wire transfer or internal transfer of immediately available funds pursuant to such wire transfer instructions as each party may designate for itself by written notice 77 to Agent. Concurrently with each such payment, Agent shall identify whether such payment (or any portion thereof) represents principal, premium, or interest of the Obligations. 16.16 Concerning the Collateral and Related Loan Documents. Each member of the Lender Group authorizes and directs Agent to enter into this Agreement and the other Loan Documents relating to the Collateral, for the benefit of the Lender Group. Each member of the Lender Group agrees that any action taken by Agent in accordance with the terms of this Agreement or the other Loan Documents relating to the Collateral and the exercise by Agent of its powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders. 16.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information. By becoming a party to this Agreement, each Lender: (a) is deemed to have requested that Agent furnish such Lender, promptly after it becomes available, a copy of each field audit or examination report (each a "Report" and collectively, "Reports") prepared by Agent, and Agent shall so furnish each Lender with such Reports, (b) expressly agrees and acknowledges that Agent does not (i) make any representation or warranty as to the accuracy of any Report, and (ii) shall not be liable for any information contained in any Report, (c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent or other party performing any audit or examination will inspect only specific information regarding Borrowers and will rely significantly upon the Books, as well as on representations of Borrowers' personnel, (d) agrees to keep all Reports and other material, non-public information regarding Borrowers and their Subsidiaries and their operations, assets, and existing and contemplated business plans in a confidential manner; it being understood and agreed by Borrowers that in any event such Lender may make disclosures (a) to counsel for and other advisors, accountants, and auditors to such Lender, (b) reasonably required by any bona fide potential or actual Assignee or Participant in connection with any contemplated or actual assignment or transfer by such Lender of an interest herein or any participation interest in such Lender's rights hereunder, (c) of information that has become public by disclosures made by Persons other than such Lender, its Affiliates, assignees, transferees, or Participants, or (d) as required or requested by any court, governmental or administrative agency, pursuant to any subpoena or other legal process, or by any law, statute, regulation, or court order; provided, however, that, unless prohibited by applicable law, statute, regulation, or court order, such Lender shall notify Administrative Borrower of any request by any court, governmental or administrative agency, or pursuant to any subpoena or other legal process for disclosure of any such non-public material information concurrent with, or where practicable, prior to the disclosure thereof, and 78 (e) without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold Agent and any such other Lender preparing a Report harmless from any action the indemnifying Lender may take or conclusion the indemnifying Lender may reach or draw from any Report in connection with any loans or other credit accommodations that the indemnifying Lender has made or may make to Borrowers, or the indemnifying Lender's participation in, or the indemnifying Lender's purchase of, a loan or loans of Borrowers; and (ii) to pay and protect, and indemnify, defend and hold Agent, and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses, and other amounts (including, attorneys fees and costs) incurred by Agent and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender. In addition to the foregoing: (x) any Lender may from time to time request of Agent in writing that Agent provide to such Lender a copy of any report or document provided by Borrowers to Agent that has not been contemporaneously provided by Borrowers to such Lender, and, upon receipt of such request, Agent shall provide a copy of same to such Lender, (y) to the extent that Agent is entitled, under any provision of the Loan Documents, to request additional reports or information from Borrowers, any Lender may, from time to time, reasonably request Agent to exercise such right as specified in such Lender's notice to Agent, whereupon Agent promptly shall request of Administrative Borrower the additional reports or information reasonably specified by such Lender, and, upon receipt thereof from Administrative Borrower, Agent promptly shall provide a copy of same to such Lender, and (z) any time that Agent renders to Administrative Borrower a statement regarding the Loan Account, Agent shall send a copy of such statement to each Lender. 16.18 Several Obligations; No Liability. Notwithstanding that certain of the Loan Documents now or hereafter may have been or will be executed only by or in favor of Agent in its capacity as such, and not by or in favor of the Lenders, any and all obligations on the part of Agent (if any) to make any credit available hereunder shall constitute the several (and not joint) obligations of the respective Lenders on a ratable basis, according to their respective Commitments, to make an amount of such credit not to exceed, in principal amount, at any one time outstanding, the amount of their respective Commitments. Nothing contained herein shall confer upon any Lender any interest in, or subject any Lender to any liability for, or in respect of, the business, assets, profits, losses, or liabilities of any other Lender. Each Lender shall be solely responsible for notifying its Participants of any matters relating to the Loan Documents to the extent any such notice may be required, and no Lender shall have any obligation, duty, or liability to any Participant of any other Lender. Except as provided in Section 16.7, no member of the Lender Group shall have any liability for the acts or any other member of the Lender Group. No Lender shall be responsible to any Borrower or any other Person for any failure by any other Lender to fulfill its obligations to make credit available hereunder, nor to advance for it or on its behalf in connection with its Commitment, nor to take any other action on its behalf hereunder or in connection with the financing contemplated herein. 16.19 Legal Representation of Agent. In connection with the negotiation, drafting, and execution of this Agreement and the other Loan Documents, or in connection with future legal representation relating to loan administration, amendments, modifications, waivers, or 79 enforcement of remedies, Buchalter, Nemer, Fields & Younger, a Professional Corporation ("BNFY") only has represented and only shall represent Foothill in its capacity as Agent and as a Lender. Each other Lender hereby acknowledges that BNFY does not represent it in connection with any such matters. 17. GENERAL PROVISIONS. 17.1 Effectiveness. This Agreement shall be binding and deemed effective when executed by Borrowers, Agent, and each Lender whose signature is provided for on the signature pages hereof. 17.2 Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each Section applies equally to this entire Agreement. 17.3 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against the Lender Group or Borrowers, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish fairly the purposes and intentions of all parties hereto. 17.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 17.5 Amendments in Writing. This Agreement only can be amended by a writing in accordance with Section 15.1. 17.6 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis. 17.7 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by any Borrower or the transfer to the Lender Group of any property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, or other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if the Lender Group is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable 80 advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender Group is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender Group related thereto, the liability of Borrowers automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 17.8 Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. 17.9 Parent as Agent for Borrowers. Each Borrower hereby irrevocably appoints Parent as the borrowing agent and attorney-in-fact for all Borrowers (the "Administrative Borrower") which appointment shall remain in full force and effect unless and until Agent shall have received prior written notice signed by each Borrower that such appointment has been revoked and that another Borrower has been appointed Administrative Borrower. Each Borrower hereby irrevocably appoints and authorizes the Administrative Borrower (i) to provide Agent with all notices with respect to Advances and Letters of Credit obtained for the benefit of any Borrower and all other notices and instructions under this Agreement and (ii) to take such action as the Administrative Borrower deems appropriate on its behalf to obtain Advances and Letters of Credit and to exercise such other powers as are reasonably incidental thereto to carry out the purposes of this Agreement. It is understood that the handling of the Loan Account and Collateral of Borrowers in a combined fashion, as more fully set forth herein, is done solely as an accommodation to Borrowers in order to utilize the collective borrowing powers of Borrowers in the most efficient and economical manner and at their request, and that Lender Group shall not incur liability to any Borrower as a result hereof. Each Borrower expects to derive benefit, directly or indirectly, from the handling of the Loan Account and the Collateral in a combined fashion since the successful operation of each Borrower is dependent on the continued successful performance of the integrated group. To induce the Lender Group to do so, and in consideration thereof, each Borrower hereby jointly and severally agrees to indemnify each member of the Lender Group and hold each member of the Lender Group harmless against any and all liability, expense, loss or claim of damage or injury, made against the Lender Group by any Borrower or by any third party whosoever, arising from or incurred by reason of (a) the handling of the Loan Account and Collateral of Borrowers as herein provided, (b) the Lender Group's relying on any instructions of the Administrative Borrower, or (c) any other action taken by the Lender Group hereunder or under the other Loan Documents, except that Borrowers will have no liability to the relevant Agent-Related Person or Lender-Related Person under this Section 17.9 with respect to any liability that has been finally determined by a court of competent jurisdiction to have resulted solely from the gross negligence or willful misconduct of such Agent-Related Person or Lender-Related Person, as the case may be. [Signature page to follow.] 81 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. WAM!NET INC., a Minnesota corporation By: ------------------------------------- Title: WAM!NET GOVERNMENT SERVICES, INC., a Minnesota corporation By: ------------------------------------- Title: KEYTECH LLC, a Minnesota limited liability company By: ------------------------------------- Title: FOOTHILL CAPITAL CORPORATION, a California corporation, as Agent and as a Lender By: ------------------------------------- Title: ABELCO FINANCE LLC, a Delaware limited liability company By: ------------------------------------- Title: 82 Schedule C-1 ------------ Commitments ===================================== ========================================== Lender Revolver Commitment ===================================== ========================================== Foothill Capital Corporation $15,000,000 ===================================== ========================================== Abelco Finance LLC $15,000,000 ===================================== ========================================== ===================================== ========================================== ===================================== ========================================== ===================================== ========================================== All Lenders $30,000,000 ===================================== ==========================================
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