-----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, By9wROUvD8JUibGUi7EUMe2GFTAzR2pkFGEtrO0mR+qF4F0re95bOjzCG7ufe+Cw hL6/L5+kVDLKJ2+eFR/dVA== 0001045969-01-500422.txt : 20010522 0001045969-01-500422.hdr.sgml : 20010522 ACCESSION NUMBER: 0001045969-01-500422 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010521 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WAM NET INC CENTRAL INDEX KEY: 0001060274 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 411795247 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-53841 FILM NUMBER: 1645040 BUSINESS ADDRESS: STREET 1: 655 LOAN OAK DR CITY: EGAN STATE: MN ZIP: 55121 BUSINESS PHONE: 6512565100 MAIL ADDRESS: STREET 1: 6100 W 110TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55438 10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ____________ Commission file number: 333-53841 WAM!NET Inc. (Exact name of registrant as specified in its charter) Minnesota 41-1795247 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 655 Lone Oak Dr Eagan, Minnesota 55121 (Address of principal executive offices) (Zip Code) (651) 256-5100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of April 30, 2001 there were 12,220,203 shares of the Corporation's Common Stock, par value $.01 per share, outstanding. Total number of pages in this report: 33 WAM!NET Inc. INDEX TO FORM 10-Q
Part I--Financial Information Page No. -------- Item 1--Financial Statements Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000............................................................................... 3 Consolidated Statements of Operations for the three month periods ended March 31, 2001 and 2000...................................................... 5 Consolidated Statements of Cash Flows for the three month periods ended March 31, 2001 and 2000...................................................... 6 Notes to Consolidated Financial Statements........................................... 8 Risk Factors......................................................................... 10 Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 21 Item 3--Quantitative and Qualitative Disclosures About Market Risk.......................... 28 Part II--Other Information Item 2--Changes in Sercurities and Use of Proceeds.......................................... 29 Item 6--Exhibits and Reports on Form 8-K.................................................... 29 Signature-- ................................................................................... 30 Exhibit Index-- ................................................................................... 31
-2- Part I--FINANCIAL INFORMATION Item 1--Financial Information WAM!NET Inc. Consolidated Balance Sheets (Dollars in thousands)
March 31, December 31, 2001 2000 ---------- ------------ Assets Current assets: Cash and cash equivalents..................................................... $ 4,614 $ 3,207 Accounts receivable, net of allowance of $957 and $1,570, respectively........ 6,543 8,344 Inventory..................................................................... 546 533 Prepaid expenses and other current assets..................................... 4,636 6,919 ---------- --------- Total current assets............................................................... 16,339 19,003 Property, plant, and equipment, net................................................ 92,654 369,796 Goodwill, net...................................................................... 13,660 15,475 Deferred financing charges, net.................................................... 12,460 12,392 Other assets....................................................................... 668 1,105 ---------- --------- Total assets....................................................................... $ 135,781 $ 417,771 ========== =========
-3- WAM!NET Inc. Consolidated Balance Sheets (continued) (Dollars in thousands)
March 31, December 31, 2001 2000 ---------- ------------ Liabilities and shareholders' deficit Current liabilities: Accounts payable................................................................ $ 20,048 $ 17,407 Accrued salaries and wages...................................................... 5,894 5,246 Accrued expenses................................................................ 8,239 7,654 Deferred revenue................................................................ 6,546 7,069 Current portion of long-term debt............................................... 7,792 27,931 --------- --------- Total current liabilities............................................................ 48,519 65,307 Deferred revenue..................................................................... 10,000 10,000 Network Facilities Financing......................................................... -- 235,786 Long-term debt, less current portion................................................. 284,399 264,387 Class A Redeemable Preferred Stock................................................... 1,320 1,300 Class E Convertible Preferred Stock.................................................. 109,407 107,515 Class H Convertible Preferred Stock.................................................. 61,216 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 ................................................................... 122 121 Additional paid-in capital...................................................... 168,150 170,951 Accumulated deficit............................................................. (544,448) (475,789) Accumulated other comprehensive loss............................................ (2,992) (2,235) --------- --------- Total shareholders' deficit.......................................................... (379,080) (306,864) --------- --------- Total liabilities and shareholders' deficit.......................................... $ 135,781 $ 417,771 ========= =========
See accompanying notes. -4- WAM!NET Inc. Consolidated Statements of Operations (Dollars in thousands, except share and per share data)
Three months ended March 31, ----------------------------- 2001 2000 -------------- ---------- Revenues: Net service revenue................................................................... $ 14,227 $ 6,183 Software and hardware sales........................................................... 1,326 1,712 ----------- ---------- Total revenue......................................................................... 15,553 7,895 Operating expenses: Network communications ............................................................... 7,067 7,172 Cost of other service revenue......................................................... 3,980 -- Cost of software and hardware......................................................... 371 546 Technical operations.................................................................. 6,473 5,421 Selling, general and administrative................................................... 11,268 11,617 Depreciation and amortization......................................................... 10,859 8,653 Loss on termination of network facilities agreement................................... 35,204 -- ----------- ---------- 75,222 33,409 ----------- ---------- Loss from operations.................................................................. (59,669) (25,514) Other income (expense): Interest income.................................................................. 92 206 Interest expense................................................................. (10,037) (15,261) Other income..................................................................... 955 792 ----------- ---------- Net loss.............................................................................. $ (68,659) $ (39,477) Less preferred dividends.............................................................. (5,054) (2,244) ----------- ---------- Net loss applicable to common stock................................................... $ (73,713) $ (42,021) =========== ========== Net loss applicable per common share - basic and diluted.............................. $ (6.06) $ (4.41) =========== =========== Weighted average number of common shares outstanding.................................. 12,166,538 9,524,227 =========== ===========
See accompanying notes. -5- WAM!NET Inc. Consolidated Statements of Cash Flows (Dollars in thousands)
Three months ended March 31, ------------------------- 2001 2000 ----------- ---------- Operating activities Net loss.................................................................... $ (68,659) $ (39,777) Adjustments to reconcile net loss to net cash used in operating activities: Gain on sale of building............................................... (359) -- Loss on termination of network facilities agreement.................... 35,204 -- Depreciation and amortization.......................................... 10,861 8,653 Noncash interest expense, including related warrants values............ 7,484 7,118 Value of stock options issued to employees and consultants............. 113 161 Changes in operating assets and liabilities: Accounts receivable............................................... 1,801 296 Prepaid expenses and other assets................................. 2,692 100 Accounts payable.................................................. 2,639 (7,828) Deferred Revenue.................................................. (522) -- Accrued expenses.................................................. 1,234 1,993 ---------- --------- Net cash used in operating activities....................................... (7,512) (29,284) Investing activities Purchases of property and equipment......................................... (7,159) (5,091) Patent Expenditures......................................................... (10) -- Proceeds from sale of building.............................................. 830 -- Business acquisitions (net of cash acquired)................................ -- (353) ---------- --------- Net cash used in investing activities....................................... (6,339) (5,444) Financing activities Proceeds from sale of preferred stock....................................... 19,847 69,098 Proceeds from borrowings (net of financing costs)........................... 14,149 477 Proceeds from exercise of stock options..................................... 30 199 Payments on borrowings...................................................... (18,011) (24,576) ---------- --------- Net cash provided by financing activities................................... 16,015 45,198 Effect of foreign currencies on cash........................................ (757) (358) ---------- --------- Net increase in cash and cash equivalents................................... 1,407 10,112 Cash and cash equivalents at beginning of period............................ 3,207 27,180 ---------- --------- Cash and cash equivalents at end of period.................................. $ 4,614 $ 37,292 ========== =========
See accompanying notes. -6- WAM!NET Inc. Consolidated Statements of Cash Flows (continued) (Dollars in thousands)
Three months ended March 31, ---------------------- 2001 2000 ------- ------- Supplemental schedule of noncash financing activities Dividends declared but unpaid........................................ 2,941 20 Change in market value of investments................................... -- 14,286 Issuance of common stock relating to acquisition........................ -- 62 Exchange of preferred stock for investment........................... -- 50,000 Supplemental schedule of cash flow information Cash paid for interest.................................................. $ 2,495 $ 7,577
See accompanying notes. -7- WAM!NET INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 1. Consolidated Financial Statements The accompanying consolidated financial statements have been prepared by WAM!NET Inc. (the "Company") without audit and reflect all adjustments (consisting only of normal and recurring adjustments and accruals) which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. The statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of regulation S-X, but omit certain information and footnote disclosures necessary to present the statements in accordance with generally accepted accounting principles. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company's audited Consolidated Financial Statements for the year ended December 31, 2000. The December 31, 2000 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Certain amounts for the prior year have been reclassified to conform to current year presentation. 2. Consolidation Policy and Foreign Currency Translations The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its 60% owned joint venture. All significant intercompany accounts and transactions have been eliminated in consolidation. All assets and liabilities are translated to U.S. dollars at period-end exchange rates, while elements of the income statement are translated at average exchange rates in effect during the period. The functional currencies of the Company's foreign subsidiaries are considered to be the respective subsidiary's local currency. All translation gains and losses resulting from fluctuations in currency exchange rates of these subsidiaries are recorded in equity as a component of accumulated other comprehensive loss. 3. Preferred Stock In accordance with the Securities Purchase Agreement entered into with Winstar in September 2000, the Company sold the remaining 20,000 shares of Class H convertible preferred stock for an aggregate of $20 million in January 2001. As a result Winstar received a warrant for 1,450,000 shares of common stock at an exercise price of $0.01. The warrant is immediately exercisable and expires on December 31, 2005. 4. Termination of Network Facilities Agreement In December 1999 the Company entered an agreement with Winstar Wireless, Inc. pursuant to which the Company acquired an indefeasible right over 20 years to use backbone capacity and wireless local loop facilities. Under this agreement, and other related agreements, the Company made a $20 million initial paymentin January 2000 for the indefeasible right to use these facilities with additional contemplated quarterly payments of $5.0 million and increasing to approximately $24.9 million over the seven-year period ending December 15, 2006. The indefeasible right of use was capitalized in property, plant and equipment, and the Company recorded a related liability of $260.3 that bore an effective interest rate of 8.3%. At December 31, 2000, the outstanding balance of the liability was $239.6 million. Due to continuing non-performance by Winstar as specified in the agreement, which non-performance resulted in an Event of Default, on April 12, 2001, the Company sent a notice to Winstar terminating these arrangements effective April 30, 2001, citing (1) breaches of representations and warranties by Winstar, (2) breaches of Winstar's obligations to meet deadlines to deliver and install facilities and (3) Winstar's failure to insure that these facilities -8- performed to applicable specifications. On April 18, 2001, Winstar and a number of related entities filed for protection under Chapter 11 of the United States Bankruptcy Code. On or about April 27, 2001, Winstar responded to the Company's termination notice by alleging that the giving of the notice was a breach of the arrangements (and, consequently, did not terminate these arrangements) and seeking to make the Company commence certain dispute resolution procedures. No formal litigation or arbitration proceedings have been initiated as of May 18, 2001. Although the Company and Winstar are engaging in discussions, there can be no assurance that any settlement of this dispute will be reached or as to the possible terms of any resolution. The Company believes that the notice of termination was properly given. The Company wrote off the related asset of $275 million and the related obligation of $240 million and has recorded a $35 million loss on termination in the first quarter of 2001. 5. Bank Credit Facilities The Company had a $25,000 line of credit agreement with a bank, which was orginally due in September 2000 and was subsequently extended to January 10, 2001. The line of credit was guaranteed by MCI WorldCom. At December 31, 2000, the amount outstanding on the line of credit was $15,000. On January 10, 2001, the Company repaid the remaining $15,000 and closed the line of credit. 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% (11.25% at March 31, 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 cancelled in accordance with its terms. As of March 31, 2001, the Company has borrowed $14,060 under the credit facility. In addition subsequent to March 31, 2001, the Company obtained additional financing of $5.64 million under the bank credit facility. On April 27, 2001 the Company obtained a $2.4 million term loan under the bank credit faciliy. The term loan expires in accordance with the original bank credit facility and has a fixed interest rate of 12%. On May 15, 2001 the Company obtained a $3.24 million term loan under the bank credit facility. The term loan expires in accordance with the original bank credit facility and has a fixed interest rate of 19.5%. Up to $3 million of the term loan can be converted into 4.9% of the issued and the outstanding shares of common stock of the Company on a fully diluted basis. Such security is subject to registration rights and anti dilution provisions. The creditor may convert the credit facility or in the alternative may exercise a five warrant for such amount. 6. Purchase Committment On February 1, 2001 the Company entered into an agreement with a strategic vendor. Under the agreement the Company will purchase a minimum of 250 media transport devices over three years. The media transport devices range in prices from $25 to $71 per device. 7. Comprehensive Income Comprehensive income for the Company includes net loss, the effects of currency translation which are charged or credited to the cumulative translation adjustment account within stockholders' equity, and the unrealized gain/loss on investments available for sale which is recorded within stockholders equity. Comprehensive income for the three months ended March 31, 2001 and 2000 was as follows: -9-
- ---------------------------------------------------- ------------------------ ------------------------ For the three months ended March 31, - ---------------------------------------------------- ------------------------ ------------------------ (Dollars in thousands) 2001 2000 - ---------------------------------------------------- ------------------------ ------------------------ Netloss $(68,659) $(39,777) - ---------------------------------------------------- ------------------------ ------------------------ Changes in cumulative translation adjustments (757) (358) - ---------------------------------------------------- ------------------------ ------------------------ Unrealized gain/loss on investments -- 14,286 - ---------------------------------------------------- ------------------------ ------------------------ Comprehensive loss $(69,416) $(25,849) - ---------------------------------------------------- ------------------------ ------------------------
Additional Factors That May Affect Future Results The following risk factors and other information included in this Quarterly Report should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected. 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 $544.4 million as of March 31, 2001. Management expects to continue to operate at a net loss and experience negative cash flow from operating activities through the foreseeable future. At March 31, 2001, 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 is currently in the process of negotiating a revolving credit facility with a financial investor. 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 for the fiscal year ended December 31, 2000 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, Sumitomo and 3M, and develop new relationships and activities with influential suppliers and channel distributors in our target markets; -10- o successfully market our branded services; 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 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 March 31, 2001, we had an accumulated deficit of approximately $544.4 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; o costs relating to the sales and marketing of our branded services; o costs to be incurred in maintaining our network, hosting and storage infrastructure; o recurring telephony, hardware and installation costs resulting from providing service to subscribers to our Direct Service; 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 maintain our technology, network and infrastructure 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 -11- 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 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. -12- 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 March 31, 2001, we had approximately $464.1 million of outstanding debt, including redeemable preferred stock. The most significant portion of the 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 $185.5 million at March 31, 2001, 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 $6.1 million during the remainder of 2001. We have recorded as quasi-equity on our balance sheet as of March 31, 2001, redeemable and convertible preferred stock of $171.9 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 -13- 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. 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 fiscal quarters of 2000 is less than or equal to 5 to 1. We incurred negative cash flow from operating activities for the first fiscal quarter ended March 31, 2001. 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: o fund our operating losses; o meet our capital expenditure requirements; o further develop or deploy services and applications; or o allow us to conduct necessary corporate activities; o we could be unable to obtain lower borrowing costs than are available from secured lenders; -14- 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 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 -15- 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. Adaptation of our network infrastructure may be necessary in order to respond to: o demands for transmission and storage of larger amounts of data; and o changes to our customers' service requirements. The 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 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 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. -16- 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 maintain 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 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 -17- products and services at a commercially reasonable price, or at all. The loss of our affiliation with SGI 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 10,437,096 shares of our common stock, or 46.1% of our outstanding shares of common stock as of April 30, 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 31,593,974 shares of our common stock, or 72.1% of our outstanding shares of common stock as of April 30, 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. 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 11,181,257 shares of our common stock, or 47.8% of our outstanding shares of common stock, as of April 30, 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 -18- 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. 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 -19- 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 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 maintain 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--Management's Discussion and Analysis of Results of Operations and Financial Condition MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is based on the historical results of WAM!NET Inc. (the "Company") and should be read in conjunction with the Company's Financial Statements included herein. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. -20- 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 -21- 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 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 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 March 31, 2001, we had over 2,000 customer points-of-presence consisting of dedicated CPOP devices and local bandwidth connectivity. Of these, about 90 have WAM!NET storage services that customers access through the CPOP. In addition, we had over 15,700 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 -22- billed per computer processing unit hour and revenues are recognized as the service is provided to the customer. 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 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 record and recognize revenue based upon performance on the number of seats ordered. We began recognizing revenue from the subcontract with EDS in the fourth quarter of 2000 under a Pre-Subcontract Authorization Agreement. 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 decline in 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. -23- Cost of other service revenues Cost of other service revenues represents direct labor costs associated with our professional service revenue and costs directly associated with performing under the NMCI contract. Cost of software and hardware Software and hardware expense reflects the costs of software and hardware sold. Technical operations Technical operations 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 technical 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 Three Month Period Ended March 31, 2001 Compared with Three Month Period Ended March 31, 2000 Revenues Total revenue for the quarters ended March 31, 2001 and 2000 was $15.6 million and $7.9 million representing an -24- increase of $7.7 million. This increase is due to net service revenues increasing $8.0 million offset by a decrease of $0.4 million in software and hardware revenues. Net service revenues for the quarters ended March 31, 2001 and 2000 was $14.2 million and 6.2 million. The increase of $8.0 million in net service revenue is primarily due to the following. We recognized $4.3 million from government service revenue primarily related to the NMCI contract with EDS. The remaining increase relates to the expanded service offerings introduced in first quarter 2000 and the increased number of subscribers purchasing our services and increased utilization on our network. Revenues from software and hardware sales for the quarters ended March 31, 2001 and 2000, were $1.3 million and $1.7 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 quarters ended March 31, 2001 and 2000, was $7.1 million and $7.2 million. 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. 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 quarter ended March 31, 2001 were $4.0 million. These costs are related to our direct costs of professional services and our direct costs associated with the subcontract with EDS for the NMCI project. Software and hardware The cost of software and hardware for the quarters ended March 31, 2001 and 2000 was $0.4 million and $0.5 million. The decreases reflects the decline in software and hardware sales. Technical operations Technical operations expense for the quarters ended March 31, 2001 and 2000 was $6.5 million and $5.4 million. The expenses increased from 2000 to 2001 as a direct result of our increased government activity. Selling, general and administrative Selling, general and administrative expense for the quarters ended March 31, 2001 and 2000 was $11.3 million and $11.6 million. Selling, general and administrative expenses decreased $0.3 million due to reduced marketing expenses in 2001 compared to 2000. The decrease was offset with costs incurred for establising our government business and our acquisition of is.com. Depreciation and amortization Depreciation and amortization for the quarters ended March 31, 2001 and 2000 was $10.9 million and $8.7 million. This increase was primarily due to depreciation of additional network and related equipment purchased for network -25- expansion. Included in these totals for 2001 and 2000 was $1.8 million and $1.7 million of amortization expense relating to the goodwill recorded in connection with acquisitions. Interest expense Interest expense for the quarters ended March 31, 2001 and 2000 was $10.0 million and $15.3 million. The decrease in interest exepense is due to the termination of the network facilites agreement with Winstar resulting in the writeoff of the related asset and obligation in the first quarter of 2001 (see footnote 4 to the financial statements). Included in interest expense for the quarters ended March 31, 2001 and 2000 are non-cash charges of $7.5 million and $7.1 million related to the amortization of deferred financing charges, the amortization of the value of warrants issued in connection with debt financing transactions and the accretion of debt. Loss on termination of network facilities agreement In December 1999 the Company entered an agreement with Winstar Wireless, Inc. pursuant to which the Company acquired an indefeasible right over 20 years to use backbone capacity and wireless local loop facilities. Under this agreement, and other related agreements, the Company made a $20 million initial paymentin January 2000 for the indefeasible right to use these facilities with additional contemplated quarterly payments of $5.0 million and increasing to approximately $24.9 million, over the seven-year period ending December 15, 2006. The indefeasible right of use was capitalized in property, plant and equipment, and the Company recorded a related liability of $260.3, which bore an effective interest rate of 8.3%. At December 31, 2000, the outstanding balance of the liability was $239.6 million. Due to continuing non-performance by Winstar as specified in the agreement, which non-performance resulted in an Event of Default, on April 12, 2001 the Company sent a notice Winstar terminating these arrangements effective April 30, 2001, citing (1) breaches of representations and warranties by Winstar, (2) breaches of Winstar's obligations to meet deadlines to deliver and install facilities and (3) Winstar's failure to insure that these facilities performed to applicable specifications. On April 18, 2001 Winstar and a number of related entities filed for protection under Chapter 11 of the United States Bankruptcy Code. On or about April 27, 2001 Winstar responded to the Company's termination notice by alleging that the giving of the notice was a breach of the arrangements (and, consequently, did not terminate these arrangements) and seeking to make the Company go through certain dispute resolution procedures. No formal litigation or arbitration proceedings has been initiated as of May 18, 2001. Although the Company and Winstar are engaging in discussions, there can be no assurance that any settlement of this dispute will be reached or as to the possible terms of any resolution. The Company believes that the notice of termination was properly given and that these arrangements with Winstar have been terminated. The Company wrote off the related asset of $275 million and related obligation of $240 million, and recorded a $35 million loss on termination in the first quarter of 2001. Other income Other income for the quarters ended March 31, 2001 and 2000 was $1.0 million and $0.8 million. Other income primarily relates to rental income received from SGI in connection with leasing a portion of the corporate campus facility in Eagan which we received as part of an investment by SGI in March 1999. Income taxes and net loss At March 31, 2001, we had $335 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. -26- Liquidity and Capital Resources Through March 31, 2001, we have issued equity and debt securities and incurred other borrowings resulting in cash received by us of $505.2 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 2001, we entered into the following financing transactions in order to continue to fund our operating and capital requirements: The Company had a $25 million line of credit agreement with a bank, which was orginally due in September 2000 and was subsequently extended to January 10, 2001. The line of credit was guaranteed by MCI WorldCom. At December 31, 2000, the amount outstanding on the line of credit was $15 million. On January 10, 2001, the Company repaid the remaining $15 million and closed the line of credit. In February 2001, the Company entered into a $30 million 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 million 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% (11.25% at March 31, 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 cancelled in accordance with its terms. As of March 31, 2001, the Company has borrowed $14.1 million under the credit facility. In addition subsequent to March 31, 2001, the Company obtained additional financing of $5.64 million under the bank credit facility. On April 27, 2001 the Company entered into amendment number one to the bank credit faciliy. This amendment resulted in the Company receiving an additional $2.4 million term loan. The term loan expires in accordance with the original bank credit facility and has a fixed interest rate of 12%. On May 15, 2001 the Company entered into amendment number two to the bank credit facility. This amendment resulted in the Company receiving an additional $3.24 million term loan. The term loan expires in accordance with the original bank credit facility and has a fixed interest rate of 19.5%. Up to $3 million of the term loan can be converted into 4.9% of the issued and the outstanding shares of common stock of the Company on a fully diluted basis. This right will be granted in the form of a five year warrant. This warrant also contains demand registration rights and anti dilution provisions. 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 $544.4 million as of March 31, 2001. Management expects to continue to operate at a net loss and experience negative cash flow from operating activities through the foreseeable future. At March 31, 2001, 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 is currently in the process of negotiatng a revolving credit facility with a financial investor. However, there is no assurance that such funds will be available or available on terms acceptable to the Company. If the -27- 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 for the fiscal year ended December 31, 2000 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 3--Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Exchange Rates During the three month period ended March 31, 2001, our revenue originating outside the U.S. was 18.1% 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 Cash balances in foreign currencies overseas are operating balances and are invested in short-term deposits of the local operating bank. 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 quarter ended March 31, 2001, 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. Part II--OTHER INFORMATION Item 2 - Changes in Securities and Use of Proceeds (c) The information required by this Item 2 of Part II has been previously reported in Item 2 of Part I of this Form 10-Q, and is incorporated herein by reference. For a complete discussion of the transactions involving recent sales of unregistered securities of the Company please see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Item 6--Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index (b) Reports on Form 8-K -28- No reports on Form 8-K were filed on behalf of the Company during the three months period ending March 31, 2001. -29- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. WAM!NET Inc. Date: May 21, 2001 By: /s/ Terri F. Zimmerman ------------------------ Terri F. Zimmerman Chief Financial Officer -30- EXHIBIT INDEX Item Number Description - ------ ----------- 2.1 (1) Agreement for the Sale and Purchase of the entire issued share capital of WAM!NET U.K. Limited dated February 11, 1998, among the Company, WAM!NET (UK) Limited and the Selling Shareholders listed therein 2.2 (1) Agreement and Plan of Reorganization dated December 17, 1997 by and among NetCo Communications Corporation, NetCo Acquiring Corporation, FreeMail, Inc. and the shareholders listed therein 2.3 (4) June 1, 1999 Amendment to the Agreement and Plan of Reorganization, dated December 17, 1997, by and among the Company, NetCo Acquisition Corporation, FreeMail, Inc. and the shareholders listed therein. 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. 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 -31- with the Secretary of State of the State of Minnesota on March 4, 1999. 4.24 (2) Certificate representing 115,206 shares of Class A Preferred Stock of the Company issued to MCI WorldCom. Inc. on March 4, 1999. 4.25 (2) Certificate representing 5,710,425 shares of Class B Convertible Preferred Stock of the Company issued to Silicon Graphics, Inc. on March 4, 1999. 4.26 (2) Certificate representing 878,527 shares of Class C Convertible Preferred Stock of the Company issued to Silicon Graphics, Inc. on March 4, 1999. 4.27 (2) Certificate representing 2,196,317 shares of Class D Convertible Preferred Stock of the Company issued to MCI WorldCom. Inc. on March 4, 1999. 4.28 (2) Stockholders Agreement by and among the Company, Silicon Graphics, Inc. and MCI WorldCom, Inc. dated as of March 4, 1999. 4.29 (2) Class A Preferred Stock Exchange Agreement by and between the Company and MCI WorldCom, Inc. dated as of March 4, 1999. 4.30 (2) Class D Preferred Stock Conversion Agreement by and between the Company and MCI WorldCom, Inc. dated as of March 4, 1999. 4.31 (6) Certificate of Designation of Rights and Preferences of Class E Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on February 16, 2000, as corrected and filed with the Secretary of State of the State of Minnesota on March 1 and March 8, 2000. 4.32 (6) Certificate of Designation of Rights and Preferences of Class F Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on February 11, 2000, as corrected and filed with the Secretary of State of the State of Minnesota on March 1 and March 9, 2000. 4.33 (6) Certificates of Designation of Rights and Preferences of Class G Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Minnesota on February 6, 2000. 4.34 (6) Securities Purchase Agreement, dated as of December 31, 1999, by and between the Company and Winstar Communications, Inc. 4.35 (6) Securities Purchase Agreement, dated as March 14, 2000, by and between the Company and 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 million Seven Percent Subordinated Note due December 31, 2003, payable to MCI WorldCom, Inc. 10.5 Intentionally omitted. 10.6 Intentionally omitted. 10.7 (1) Right of Refusal Agreement Among WorldCom Inc., Edward Driscoll III and Alan L. Witters dated December 16, 1996. 10.8 (1) Guaranty Agreement dated September 26, 1997, by and between the Company and MCI WorldCom, Inc. 10.9 (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 -32- 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 * Amendment No. 1 to the 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. 10.14 * Amendment No. 2 to the 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. 10.15 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 omitted pursuant to a request for confidential treatment and have been filed with the Securities Commission under separate cover). 10.23 (2) Sale and Purchase Agreement by and between Silicon Graphics, Inc., on behalf of itself and its wholly-owned subsidiary, Cray Research, L.L.C., and the Company dated as of March 4, 1999. 10.24 (2) Lease by and between the Company and Silicon Graphics, Inc. on behalf of itself and its wholly-owned subsidiary, Cray Research, L.L.C., with respect to the Company's corporate campus facility located in Eagan, Minnesota dated as of March 4, 1999. 10.25 Intentionally omitted. 10.26 Intentionally omitted. 10.27 (4) Loan and Security Agreement, dated July 16, 199, by and between Foothill Capital Corporation and the Company. 10.28 (5) Purchase and Sale Agreement and Escrow Instructions, dated September 30, 1999, between the Company and CCPRE-Eagan, LLC. 10.29 (5) Amendment No. 1 to the Purchase and Sale Agreement and Escrow Instructions, dated September 30, 1999 between the Company and CCPRE-Eagan, LLC. 10.30 (5) Net Lease, dated September 30, 1999 between the Company and CCPRE-Eagan, LLC. 10.31 (6) Master Agreement by and between Winstar Wireless, Inc. and the Company, dated December 31, 1999. (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. (9) Incorporated herin by reference to our Annual Report on Form 10-K, filed with the SEC on April 16, 2001. * Filed herewith. -33- EX-10.13 2 dex1013.txt AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT Exhibit 10.13 AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT --------------------------------------------------- This AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT (this "Amendment"), dated as of April 27, 2001, is entered into by and among WAM!NET INC., a Minnesota corporation ("Parent"), 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"), each of the financial institutions signatories hereto (such financial institutions, together with their respective successors and assigns, each a "Lender" and collectively, the "Lenders"), and FOOTHILL CAPITAL CORPORATION, a California corporation, as agent for the Lenders (in such capacity, the "Agent"). WHEREAS, the Borrowers have requested the Lender Group to amend certain terms of that certain Loan and Security Agreement, dated as of February 13, 2001, by and among the Borrowers, the Lenders, and Agent (as amended, restated, supplemented, or otherwise modified from time to time, the "Loan Agreement"), and the Lender Group is willing to amend the Loan Agreement subject to the terms and conditions of this Amendment. All capitalized terms used herein and not defined herein shall have the meanings ascribed to them in the Loan Agreement, as amended hereby. NOW, THEREFORE, in consideration of the premises and of the mutual covenants, agreements and conditions hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Amendments. (a) Section 1.1 of the Loan Agreement is hereby amended by adding the ----------- following definitions in alphabetical order: "First Amendment Closing Date" means the date that all conditions set ---------------------------- forth in Section 3 of this Amendment have been satisfied. --------- "Term A Loan" has the meaning set forth in Section 2.13. ----------- ------------ "Term A Loan Amount" means $2,400,000. ------------------ "Term A Loan Commitment" means, with respect to each Term A Lender, ---------------------- its Term A Loan Commitment, and, with respect to all Term A Lenders, their Term A Loan Commitments, in each case as such Dollar amounts are set forth beside such Term A 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 Term A Lender became a Term A Lender hereunder in accordance with the provisions of Section 14.1. - ------------ -1- "Term A Loan Lender" means each Lender that has issued a Term A Loan ------------------ Commitment. "Term A Loan Rate" means a rate per annum equal to 12.00 %. ---------------- (b) Section 1.1 of the Loan Agreement is hereby amended by amending and ----------- restating the following definitions in their respective entirety as follows: "Commitment" means, with respect to each Lender, its Revolver ---------- Commitment or Term A Loan Commitment, as the context requires, and, with respect to all Lenders, their Revolver Commitments or Term A Loan 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. ------------ "Obligations" means all loans (including the Term A Loan), 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 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. "Pro Rata Share" means, as of any date of determination: -------------- (a) with respect to a Lender's obligation to make Advances and receive payments of principal, interest, fees, costs, and expenses with respect thereto, (x) prior to the Revolver Commitment being reduced to zero, the percentage obtained by dividing (i) such Lender's Revolver Commitment, by (ii) the aggregate Revolver Commitments of all Lenders, and (y) from and after the time that the Revolver Commitment has been terminated or reduced to zero, the percentage obtained by dividing (I) the aggregate principal amount of such Lender's Advances by (II) the aggregate principal amount of all Advances, (b) with respect to a Lender's obligation to participate in Letters of Credit, to reimburse the Issuing Lender, and to receive payments of fees with respect thereto, (x) prior to the Revolver Commitment being reduced to zero, the percentage obtained by dividing (i) such Lender's Revolver Commitment, by (ii) the aggregate Revolver Commitments of all Lenders, -2- and (y) from and after the time that the Revolver Commitment has been terminated or reduced to zero, the percentage obtained by dividing (I) the aggregate principal amount of such Lender's Advances by (II) the aggregate principal amount of all Advances, (c) with respect to a Lender's obligation to make the Term A Loan and receive payments of interest, fees, and principal with respect thereto, (i) prior to the making of the Term A Loan, the percentage obtained by dividing (x) such Lender's Term A Loan Commitment, by (y) the aggregate amount of all Lenders' Term A Loan Commitments, and (ii) from and after the making of the Term A Loan, the percentage obtained by dividing (x) the principal amount of such Lender's portion of the Term A Loan Amount by (y) the Term A Loan Amount, and (d) with respect to all other matters as to a particular Lender (including the indemnification obligations arising under Section 16.7), the ------------ percentage obtained by dividing (i) such Lender's Revolver Commitment plus the unpaid principal amount of such Lender's portion of the Term A Loan Amount, by (ii) the aggregate amount of Revolver Commitments of all Lenders plus the Term A Loan Amount; provided, however, that in the event the Revolver Commitments have been terminated or reduced to zero, Pro Rata Share shall be the percentage obtained by dividing (A) the principal amount of such Lender's Advances plus the unpaid principal amount of such Lender's portion of the Term A Loan Amount by (B) the principal amount of all outstanding Advances plus the Term A Loan Amount. (c) Section 2.4(b)(i) of the Loan Agreement hereby is amended and restated ----------------- in its entirety to read as follows: (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 expenses that are for Agent's separate account and Term A Loan Lender'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, -3- 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 the 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, until paid in full, G. seventh, so long as no Event of Default has occurred and is ------- continuing or, if an Event of Default has occurred and is continuing and Agent agrees in its sole discretion, to pay interest due in respect of the Term A Loan until paid in full (if an Event of Default has occurred or is continuing, the priority of the payment of interest on the Term A Loan Amount, is deferred to item "twelfth" below), H. eighth, to pay the principal of all Agent Advances until ------ paid in full, I. ninth, to pay the principal of all Swing Loans until paid ----- in full, J. tenth, to pay the principal of all Advances 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, L. twelfth, if an Event of Default has occurred and is ------- continuing, to pay interest due in respect of the Term A Loan until paid in full, M. thirteenth, if an Event of Default has occurred and is ---------- continuing, to pay the outstanding principal balance of the Term A Loan until the Term A Loan is paid in full, N. fourteenth, to pay any other Obligations (other than Bank ---------- Products) until paid in full, O. fifteenth, to the payment of any amounts relating to Bank --------- Products, and P. sixteenth, to Borrowers (to be wired to the Designated --------- Account) or such other Person entitled thereto under applicable law. -4- (d) Section 2.6(a) of the Loan Agreement hereby is amended and restated in -------------- its entirety to read as follows: (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 pursuant to the terms hereof shall bear interest on the Daily Balance thereof as follows: (i) if the relevant Obligation is a Term A Loan, at a per annum rate equal to the Term A Loan Rate, and (ii) otherwise, at a per annum rate equal to the Base Rate plus the Base Rate Margin. (e) Section 2.9 of the Loan Agreement is amended and restated in its ----------- entirety to read as follows: 2.9 Designated Account. Agent is authorized to make the Advances and ------------------ the Term A Loan, 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 and Term A Loan requested by Borrowers and made by Agent or the Lenders hereunder. Unless otherwise agreed by Agent and Administrative Borrower, any Advance, Agent Advance, Swing Loan or Term A Loan requested by Borrowers and made by Agent or the Lenders hereunder shall be made to the Designated Account. (f) Section 2.10 of the Loan Agreement is amended and restated in its ------------ entirety to read as follows: 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) and the Term A Loan 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. -5- (g) Section 2.13 of the Loan Agreement hereby is amended and restated in ------------ its entirety to read as follows: 2.13 Term A Loan. Subject to the terms and conditions of this ----------- Agreement, on the First Amendment Closing Date Lender agrees to make a term loan (the "Term A Loan") to Borrower in an amount equal to the Term A Loan Amount. ----------- The outstanding unpaid principal balance and all accrued and unpaid interest under the Term A Loan shall be due and payable on the date of termination of this Agreement, whether by its terms, by prepayment, or by acceleration. All amounts outstanding under the Term A Loan shall constitute Obligations. (h) Schedule C-1 hereby is amended and restated in its entirety to read as ------------ set forth in Annex I attached hereto. 2. Acknowledgement of the Obligations. Borrowers acknowledge that, as of April 26, 2001, Borrowers owe Lenders $13,924,086.82 in principal plus accrued and unpaid interest. The total amount of the Obligations, including without limitation principal, interest and fees and reasonable expenses of Lenders' counsel, is by the execution of this Amendment by Borrowers, ratified, confirmed and approved by Borrowers in all respects. Borrowers acknowledge and agree that (a) the Obligations are valid and binding obligations of Borrowers, enforceable against Borrowers in accordance with their terms, and (b) Borrowers are presently obligated to pay these amounts and all of their other existing Obligations in accordance with the terms of the Loan Documents, all without any further demand, notice or claim. In addition, Borrowers acknowledge and agree with Lenders that (x) Borrowers have no known claim or cause of action against Lenders (or Lenders' directors, officers, employees, agents, affiliates or attorneys), (y) Borrowers have no known offset right, counterclaim or defense of any kind against any Obligations, and (z) Lenders have heretofore properly performed and satisfied in a timely manner all of Lenders' obligations to Borrowers. 3. Conditions. This Amendment shall become effective only upon satisfaction in full of the following conditions precedent: (a) Agent shall have received on or before the First Amendment Closing Date the following, each in form and substance satisfactory to Agent (and, where indicated, the applicable Lender) and, unless indicated otherwise, dated as of the First Amendment Closing Date: (i) counterparts of this Amendment, duly executed by the Borrowers and Lender Group; and (ii) such other agreements, instruments, approvals, opinions and other documents as Agent or any Lender may reasonably request. (b) Agent shall have received from the Borrowers, for the ratable benefit of the Term A Lenders, an amendment fee in the amount of $400,000, which amendment fee shall be fully earned as of the date of this Amendment; -6- (c) The several counsel to the members of the Lender Group shall have received payment, in immediately available funds, of all accrued and unpaid attorneys fees and expenses constituting Lender Group Expenses incurred in connection with this Amendment and the transactions contemplated hereunder or reasonably ancillary hereto; (d) The representations and warranties in this Amendment, the Loan Agreement as amended by this Amendment, and the other Loan Documents shall be true and correct in all respects on and as of the date hereof, as though made on such date (except to the extent that such representations and warranties relate solely to an earlier date); (e) No Default or Event of Default shall have occurred and be continuing on the date hereof, nor shall result from the consummation of the transactions contemplated herein; (f) No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein shall have been issued and remain in force by any governmental authority against Borrowers or the Lender Group; and (g) All other documents and legal matters in connection with the transactions contemplated by this Amendment shall have been delivered or executed or recorded and shall be in form and substance satisfactory to Agent and its counsel. 4. Representations and Warranties. Each Borrower hereby represents and warrants to the Lender Group that (a) the execution, delivery, and performance of this Amendment and of the Loan Agreement, as amended by this Amendment, are within its corporate or other organizational powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected, and (b) this Amendment and the Loan Agreement, as amended by this Amendment, constitute such Borrower's legal, valid, and binding obligation, enforceable against such Borrower in accordance with its terms. 5. Further Assurances. Borrowers shall execute and deliver all agreements, documents, and instruments, in form and substance satisfactory to Agent, and take all actions as Agent may reasonably request from time to time fully to consummate the transactions contemplated under this Amendment and the Loan Agreement, as amended by this Amendment. 6. Miscellaneous. (a) Upon the effectiveness of this Amendment, each reference in the Loan Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like import referring to the Agreement shall mean and refer to the Loan Agreement as amended by this Amendment. (b) Upon the effectiveness of this Amendment, each reference in the Loan Documents to the "Loan Agreement", "thereunder", "therein", "thereof" or words of like import referring to the Loan Agreement shall mean and refer to the Agreement as amended by this Amendment. -7- (c) This Amendment shall be governed by and construed in accordance with the laws of the State of New York. (d) This Amendment 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 Amendment. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of a manually executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver a manually executed counterpart of this Amendment but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. (e) This Amendment is a Loan Document. [Remainder of this page intentionally left blank] -8- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed 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: _________________________________ WAM!NET PROFESSIONAL SERVICES LLC, a Minnesota limited liability company By: _____________________________________ Title: __________________________________ FOOTHILL CAPITAL CORPORATION, a California corporation, as Agent and as a Lender By: _____________________________________ Title: __________________________________ ABLECO FINANCE LLC, a Delaware limited liability company (for itself and as agent for certain of its affiliates) By: _____________________________________ Title: __________________________________ -9- ANNEX I Schedule C-1 ------------ Commitments
Lender Revolver Commitment Term A Loan Commitment Total Commitment ================================================================================================================== Foothill Capital Corporation $15,000,000 $ 0 $15,000,000 ================================================================================================================== Abelco Finance LLC $15,000,000 $2,400,000 $17,400,000 ================================================================================================================== All Lenders $30,000,000 $2,400,000 $32,400,000 ==================================================================================================================
EX-10.14 3 dex1014.txt AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT Exhibit 10.14 AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT --------------------------------------------------- This AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT (this "Amendment"), dated as of May 15, 2001, is entered into by and among WAM!NET INC., a Minnesota corporation ("Parent"), 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"), each of the financial institutions named on the signature pages hereto as Original Lenders (such financial institutions, together with their respective successors and assigns, each an "Original Lender" and collectively, the "Original Lenders"), MADELEINE L.L.C., a New York limited liability company (together with its successors and assigns, the "New Lender"; the New Lender and the Original Lenders are referred to herein, collectively as the "Lenders" and individually as a "Lender"), and FOOTHILL CAPITAL CORPORATION, a California corporation, as agent for the Lenders (in such capacity, the "Agent"). WHEREAS, the Borrowers have requested the Lender Group to amend certain terms of that certain Loan and Security Agreement, dated as of February 13, 2001, as amended by Amendment Number One to Loan and Security Agreement, dated as of April 27, 2001, by and among the Borrowers, the Original Lenders, and Agent (as amended, restated, supplemented, or otherwise modified from time to time, the "Loan Agreement"), and the Lender Group is willing to amend the Loan Agreement subject to the terms and conditions of this Amendment. All capitalized terms used herein and not defined herein shall have the meanings ascribed to them in the Loan Agreement, as amended hereby. WHEREAS, pursuant to this Amendment, the New Lender shall be joined as a Lender for all purposes under the Loan Agreement, except as otherwise provided herein or in the Loan Agreement, as amended hereby. NOW, THEREFORE, in consideration of the premises and of the mutual covenants, agreements and conditions hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Amendments. (a) Section 1.1 of the Loan Agreement is hereby amended by adding the ----------- following definitions in alphabetical order: "Additional Shares of Common Stock" means all shares (including --------------------------------- treasury shares) of Common Stock issued or sold (or, pursuant to Section ------- 2.16.3 or 2.16.4, deemed to be issued) by Parent or WGSI, as the case may ------ ------ be, after the date hereof, whether or not subsequently reacquired or retired by Parent or WGSI, as the case may be, other than 1 (a) (i) shares issued upon the conversion of a portion of the Term B Loan Amount in accordance with Section 2.16 and (ii) such number of ------------ additional shares as may become issuable upon the conversion of such portion of the Term B Loan Amount by reason of adjustments required pursuant to the anti-dilution provisions contained in Section 2.16, and ------------ (b) (i) shares issued pursuant to, and shares issued upon the exercise of options granted or to be granted under, Parent's or WGSI's, as the case may be, stock option plans as in effect on the date hereof or under any other employee stock option or purchase plan or plans adopted or assumed after such date by Parent's or WGSI's, as the case may be, Board of Directors; and (ii) such additional shares as may become issuable pursuant to the terms of any such plans by reason of adjustments required pursuant to anti-dilution provisions applicable to such securities in order to reflect any subdivision or combination of Common Stock, by reclassification or otherwise, or any dividend on Common Stock payable in Common Stock. "Common Stock" means, with respect to Parent, Parent Common ------------ Stock, and with respect to WGSI, WGSI Common Stock. "Conversion Price" means, (i) with respect to Parent Common ---------------- Stock, a price per share equal to (x) $1,500,000, divided by (y) an amount equal to 4.9% of the issued and outstanding shares of Parent Common Stock on a fully diluted basis and (ii) with respect to WGSI Common Stock, a price per share equal to (x) $1,500,000 divided by (y) an amount equal to 4.9% of the issued and outstanding shares of WGSI Common Stock on a fully diluted basis or such adjusted conversion price in effect at the date of the exercise of the Conversion Rights as provided in Section 2.16. ------------ "Conversion Rights" means the Parent Conversion Right and the ----------------- WGSI Conversion Right. "Current Market Price" means, on any date specified herein, the -------------------- average of the daily Market Price during the 10 consecutive trading days commencing 15 trading days before such date, except that, if on any such date the shares of Common Stock are not listed or admitted for trading on any national securities exchange or quoted in the over-the-counter market, the Current Market Price shall be the Market Price on such date. "Fair Value" means, on any date specified herein (i) in the case ---------- of cash, the dollar amount thereof, (ii) in the case of a security, the Current Market Price, and (iii) in all other cases, the higher of (A) the fair value thereof determined by any firm of independent public accountants of recognized standing selected by the Board of Directors of Parent or WGSI, as the case may be, as of the last day of any month ending within 60 days preceding the date as of which the determination is to be made, and (B) the fair value thereof (as of a date which is within 20 days of the date as of which the determination is to be made) determined in good faith by the Board of Directors of Parent or WGSI, as the case may be. -2- "Market Price" means, on any date specified herein, the amount ------------ per share of the Common Stock, equal to (i) the last reported sales price of such Common Stock, regular way, on such date or, in case no such sale takes place on such date, the average of the closing bid and asked prices thereof regular way on such date, in either case as officially reported on the principal national securities exchange on which such Common Stock is then listed or admitted for trading, (ii) if such Common Stock is not then listed or admitted for trading on any national securities exchange but is designated as a national market system security by the NASD, the last reported trading price of the Common Stock on such date, (iii) if there shall have been no trading on such date or if the Common Stock is not so designated, the average of the closing bid and asked prices of the Common Stock on such date as shown by the NASD automated quotation system, or (iv) if such Common Stock is not then listed or admitted for trading on any national exchange or quoted in the over-the-counter market, the higher of (A) the book value thereof as determined by any firm of independent public accountants of recognized standing selected by the Board of Directors of Parent or WGSI, as the case may be, as of the last day of any month ending within 60 days preceding the date as of which the determination is to be made and (B) the fair value thereof (as of a date which is within 20 days of the date as of which the determination is to be made) determined in good faith by the Board of Directors of Parent or WGSI, as the case may be. "Options" means any rights, options or warrants to subscribe for, ------- purchase or otherwise acquire either Additional Shares of Common Stock or Convertible Securities "Parent Common Stock" means duly authorized, validly issued, ------------------- fully paid and nonassessable shares of Common Stock, par value $.01 per share, of Parent, such term to include any stock into which such Common Stock shall have been changed or any stock resulting from any reclassification of such Common Stock, and all other stock of any class or classes (however designated) of Parent the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference. "Parent Conversion Right" has the meaning set forth in Section ----------------------- ------- 2.16.1 ------ "Parent Warrant" has the meaning set forth in Section 4(a) of the -------------- Second Amendment. "Second Amendment" means the Second Amendment to Loan and ---------------- Security Agreement, dated as of May 15, 2001, by and among the Borrowers and Lender Group. "Second Amendment Closing Date" means the date that all ----------------------------- conditions set forth in Section 3 of the Second Amendment have been --------- satisfied. "Term A Lender" means each Lender that has issued a Term A Loan ------------- Commitment. -3- "Term B Anniversary Fee" has the meaning set forth in Section ---------------------- 2.11(b)(iii). "Term B Commitment Fee" has the meaning set forth in Section --------------------- ------- 2.11(b)(i). ---------- "Term B Lender" means each Lender that has issued a Term B Loan ------------- Commitment. "Term B Loan" has the meaning set forth in Section 2.14. ----------- ------------ "Term B Loan Amount" means $3,240,000, plus the then extant Term ------------------ ---- B Loan PIK Amount. "Term B Loan Commitment" means, with respect to each Term B ---------------------- Lender, its Term B Loan Commitment, and, with respect to all Term B Lenders, their Term B Loan Commitments, in each case as such Dollar amounts are set forth beside such Term B 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 Term B Lender became a Term B Lender hereunder in accordance with the provisions of Section 14.1. ------------ "Term B Loan PIK Amount" means, as of any date of determination, ---------------------- the amount of all interest accrued with respect to the Term B Loan Amount that has been paid-in-kind by being added to the balance thereof in accordance with Section 2.6(a)(ii). ------------------ "Term B Loan Rate" means a rate per annum equal to 19.5 %. ---------------- "Term B Use Fee" has the meaning set forth in Section -------------- ------- 2.11(b)(ii). ----------- "Term Loans" means the Term A Loan and the Term B Loan. ---------- "WGSI" means Wam!Net Government Services, Inc., a Minnesota ---- corporation. "WGSI Conversion Right" has the meaning set forth in Section --------------------- ------- 2.16.1 ------ "WGSI Common Stock" means duly authorized, validly issued, fully ----------------- paid and nonassessable shares of Common Stock, par value $.01 per share, of WGSI, such term to include any stock into which such Common Stock shall have been changed or any stock resulting from any reclassification of such Common Stock, and all other stock of any class or classes (however designated) of WGSI the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference. "WGSI Warrant" has the meaning set forth in Section 4(a) of the ------------ Second Amendment. -4- (b) Section 1.1 of the Loan Agreement is hereby amended by amending and ----------- restating the following definitions in their respective entirety as follows: "Commitment" means, with respect to each Lender, its Revolver ---------- Commitment, Term A Loan Commitment or Term B Loan Commitment, as the context requires, and, with respect to all Lenders, their Revolver Commitments, Term A Loan Commitments or Term B Loan 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. ------------ "Obligations" means all loans (including the Term 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, in any letter agreement among the Agent, individual Lenders and, if applicable, the Borrowers, in any other Loan Document or otherwise), 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 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. "Pro Rata Share" means, as of any date of determination: -------------- (a) with respect to a Lender's obligation to make Advances and receive payments of principal, interest, fees, costs, and expenses with respect thereto, (x) prior to the Revolver Commitment being reduced to zero, the percentage obtained by dividing (i) such Lender's Revolver Commitment, by (ii) the aggregate Revolver Commitments of all Lenders, and (y) from and after the time that the Revolver Commitment has been terminated or reduced to zero, the percentage obtained by dividing (I) the aggregate principal amount of such Lender's Advances by (II) the aggregate principal amount of all Advances, (b) with respect to a Lender's obligation to participate in Letters of Credit, to reimburse the Issuing Lender, and to receive payments of fees with respect thereto, (x) prior to the Revolver Commitment being reduced to zero, the percentage -5- obtained by dividing (i) such Lender's Revolver Commitment, by (ii) the aggregate Revolver Commitments of all Lenders, and (y) from and after the time that the Revolver Commitment has been terminated or reduced to zero, the percentage obtained by dividing (I) the aggregate principal amount of such Lender's Advances by (II) the aggregate principal amount of all Advances, (c) with respect to a Lender's obligation to make the Term A Loan and receive payments of interest, fees, and principal with respect thereto, (i) prior to the making of the Term A Loan, the percentage obtained by dividing (x) such Lender's Term A Loan Commitment, by (y) the aggregate amount of all Lenders' Term A Loan Commitments, and (ii) from and after the making of the Term A Loan, the percentage obtained by dividing (x) the principal amount of such Lender's portion of the Term A Loan Amount by (y) the Term A Loan Amount, (d) with respect to a Lender's obligation to make the Term B Loan and receive payments of interest, fees, and principal with respect thereto, (i) prior to the making of the Term B Loan, the percentage obtained by dividing (x) such Lender's Term B Loan Commitment, by (y) the aggregate amount of all Lenders' Term B Loan Commitments, and (ii) from and after the making of the Term B Loan, the percentage obtained by dividing (x) the principal amount of such Lender's portion of the Term B Loan Amount by (y) the Term B Loan Amount, and (e) with respect to all other matters as to a particular Lender (including the indemnification obligations arising under Section 16.7), the ------------ percentage obtained by dividing (i) such Lender's Revolver Commitment plus the unpaid principal amount of such Lender's portion of the Term A Loan Amount and the Term B Loan Amount, by (ii) the aggregate amount of Revolver Commitments of all Lenders, plus the Term A Loan Amount, plus the Term B Loan Amount; provided, however, that in the event the Revolver Commitments have been terminated or reduced to zero, Pro Rata Share shall be the percentage obtained by dividing (A) the principal amount of such Lender's Advances plus the unpaid principal amount of such Lender's portion of the Term A Loan Amount and the Term B Loan Amount by (B) the principal amount of all outstanding Advances, plus the Term A Loan Amount, plus the Term B Loan Amount. (c) Section 1.1 of the Loan Agreement is hereby amended by deleting the ----------- definition for the term "Term A Loan Lender" in its entirety. (d) Section 2.4(b)(i) of the Loan Agreement is amended and restated in its ----------------- entirety to read as follows: (i) Except as otherwise provided with respect to Defaulting Lenders and except as otherwise provided in the Loan Documents (including letter agreements between Agent, individual Lenders and, if applicable, Borrowers), 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 -6- Lender) and payments of fees and expenses (other than fees or expenses that are for Agent's separate account, the Term A Lenders' separate account or the Term B Lenders' separate account, in each case after giving effect to any letter agreements between Agent, individual Lenders and, if applicable, Borrowers) 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 ----- account, after giving effect to any letter agreements between Agent, individual Lenders and, if applicable, Borrowers) 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, individual Lenders and, if applicable, Borrowers) 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, until paid in full, G. seventh, so long as no Event of Default has occurred and is ------- continuing, or if an Event of Default has occurred and is continuing and Agent agrees in its sole discretion, to pay interest due in respect of the Term A Loan until paid in full (if an Event of Default has occurred or is continuing and Agent has not consented to such payment, the priority of the payment of interest on the Term A Loan Amount, is deferred to item "twelfth" below), H. eighth, to pay the principal of all Agent Advances until paid ------ in full, I. ninth, to pay the principal of all Swing Loans until paid in ----- full, J. tenth, to pay the principal of all Advances until paid in ----- full, -7- 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, L. twelfth, to pay interest due in respect of the Term A Loan ------- until paid in full, M. thirteenth, to pay the outstanding principal balance of the ---------- Term A Loan until the Term A Loan is paid in full, N. fourteenth, to pay interest due in respect of the Term B ---------- Loan, including the Term B Loan PIK Amount, until paid in full, O. fifteenth, to pay the outstanding principal balance of the --------- Term B Loan, including the Term B Loan PIK Amount, until the Term B Loan is paid in full, P. sixteenth, to pay any other Obligations (other than Bank --------- Products) until paid in full, Q. seventeenth, to the payment of any amounts relating to Bank ----------- Products, and R. eighteenth, to Borrowers (to be wired to the Designated ---------- Account) or such other Person entitled thereto under applicable law. (e) Section 2.6(a) of the Loan Agreement hereby is amended and restated in -------------- its entirety to read as follows: (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 pursuant to the terms hereof shall bear interest on the Daily Balance thereof as follows: (i) if the relevant Obligation is a Term A Loan, at a per annum rate equal to the Term A Loan Rate, (ii) if the relevant Obligation is a Term B Loan (inclusive of any Term B Loan PIK Amount), at a per annum rate equal to the Term B Loan Rate; provided, -------- however, that, so long as no Event of Default has occurred and is ------- continuing, all such interest (the amount of such interest is referred to herein as the "Term B Loan PIK Amount") shall be paid-in-kind by being ---------------------- added to the principal balance of the Term B Loan Amount (inclusive of any Term B Loan PIK Amount theretofore so added), and (iii) otherwise, at a per annum rate equal to the Base Rate plus the Base Rate Margin. (f) Section 2.9 of the Loan Agreement is amended and restated in its ----------- entirety to read as follows: 2.9 Designated Account. Agent is authorized to make the Advances ------------------ and the Term Loans, and Issuing Lender is authorized to issue Letters of Credit, under -8- 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 and Term Loans requested by Borrowers and made by Agent or the Lenders hereunder. Unless otherwise agreed by Agent and Administrative Borrower, any Advance, Agent Advance, Swing Loan or Term Loan requested by Borrowers and made by Agent or the Lenders hereunder shall be made to the Designated Account. (g) Section 2.10 of the Loan Agreement is amended and restated in its ------------ entirety to read as follows: 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) and the Term 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. (h) Section 2.11 of the Loan Agreement is amended as follows: ------------ (i) the existing initial paragraph of Section 2.11 is renumbered as ------------ subsection (a); (ii) the existing subparagraphs (a), (b) and (c) of Section 2.11 are ------------ renumbered as subparagraphs (i), (ii) and (iii), respectively; and (iii) a new subsection (b) is added to Section 2.11, to read as follows: ------------ (b) Term B 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 terminated thereafter) and shall be apportioned among the Term B Lenders in accordance with their Pro Rata Shares: -9- (i) Commitment Fee. A commitment fee of $180,000, due and payable on the Second Amendment Closing Date (the "Term B Commitment Fee"). (ii) Use Fee. A use fee of $60,000, due and payable on the Second Amendment Closing Date (the "Term B Use Fee"). (iii) Anniversary Fee. An anniversary fee equal to 3% of the sum of (A) $3,240,000, plus (B) the difference between (x) the Term B Loan Amount on such anniversary date and (y) $3,240,000, due and payable in cash on each anniversary of the Second Amendment Closing Date (the "Term B Anniversary Fee"). (i) Section 2.14 of the Loan Agreement is amended and restated in its ------------ entirety to read as follows: 2.14 Term B Loan. Subject to the terms and conditions of this ----------- Agreement, on the Second Amendment Closing Date the Term B Lender agrees to make a term loan (the "Term B Loan") to Borrowers in an amount equal to the ----------- Term B Loan Amount. The outstanding unpaid principal balance and all accrued and unpaid interest under the Term B Loan, including the Term B Loan PIK Amount, shall be due and payable on the date of termination of this Agreement, whether by its terms, by prepayment, or by acceleration. All amounts outstanding under the Term B Loan, including all accrued and unpaid interest and including the Term B Loan PIK Amount, shall constitute Obligations. (j) Section 2 of the Loan Agreement is amended by inserting a new Section --------- ------- 2.16 at the end of Section 2, to read as follows: - ---- --------- -10- Section 2.16.1 Right to Convert ---------------- (a) The Term B Lender may, in its sole and absolute discretion, (i) convert a portion of the Term B Loan Amount equal to $1,500,000 into the number of shares of Parent Common Stock representing four and nine-tenths percent (4.9%) of the issued and outstanding shares of Parent Common Stock on a fully diluted basis (the "Parent Conversion Right") and (ii) convert a portion of the Term B Loan Amount equal to $1,500,000 into the number of shares of WGSI Common Stock representing four and nine-tenths percent (4.9%) of the issued and outstanding shares of WGSI Common Stock on a fully diluted basis (the "WGSI Conversion Right"), at any time and from time to time (including, without limitation, during the continuance of an Event of Default) that the Term B Loan Amount is outstanding; provided, however, -------- ------- that the Term B Lender shall not have the right to (i) exercise its Parent Conversion Right in the event that the Term B Lender (or its nominee) has exercised the Parent Warrant or (ii) exercise the WGSI Conversion Right in the event that (A) the Term B Lender (or its nominee) has exercised the WGSI Warrant or (B) the consent of, or notice to any Governmental Authority is required for the exercise of the WGSI Conversion Right, unless and until such consent has been obtained or such notice has been delivered. (b) The option of Term B Lender to exercise its rights pursuant to this Section 2.16.1 shall be exercised by the delivery of a written notice of election by such holder to Parent, which notice shall state the Term B Loan Amount and the date on which such election is to be effective (the "Conversion Date") and shall be delivered on a date not less than 10 nor more than 60 Business Days prior to the Conversion Date. A notice of election, once delivered, may be rescinded at any time prior to the Conversion Date. (c) Upon the Conversion Date the Term B Lender (or its nominee) shall be entitled to receive, (i) in exchange for a portion of the Term B Loan Amount equal to $1,500,000, the number of shares of Parent Common Stock equal to four and nine-tenths percent (4.9%) of the issued and outstanding shares of Parent Common Stock on a fully diluted basis, and (ii) in exchange for a portion of the Term B Loan Amount equal to $1,500,000, the number of shares of WGSI Common Stock equal to four and nine-tenths percent (4.9%) of the issued and outstanding shares of WGSI Common Stock on a fully diluted basis. (d) Each of Parent and WGSI shall at all times, when the Term B Loan Amount shall be outstanding, reserve and keep available out of its authorized but unissued shares of Common Stock, for the purposes of effecting the conversion of the Term B Loan Amount, the number of duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of the Term B Loan Amount pursuant to the Parent Conversion Right and the WGSI Conversion Right, on a fully diluted basis. (e) Each of Parent and WGSI shall comply with all federal and state securities laws regulating the offer and sale of shares of Common Stock upon exercise of the conversion rights set forth in this Section 2.16. ------------ -11- Section 2.16.2. Notices Relating to Potential Conversion Events. ----------------------------------------------- In the event of any of the following, at least 20 days prior to such proposed event Parent or WGSI, as the case may be, shall give notice to the Term B Lender, stating the proposed record or effective date, as the case may be, of such event: (a) Parent or WGSI, as the case may be, proposes to set a record date of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a regularly scheduled cash dividend payable out of consolidated earnings or earned surplus, determined in accordance with generally accepted accounting principles, in an amount not exceeding the amount of the cash dividend for the immediately preceding period) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right or property; (b) any capital reorganization of Parent or WGSI, as the case may be, any reclassification or recapitalization of the capital stock of Parent or WGSI, as the case may be, any consolidation or merger involving Parent or WGSI, on the on hand, and any other Person, on the other hand, any transaction or series of transactions in which more than 50% of the voting securities of Parent or WGSI, as the case may be, are transferred to another Person, or any transfer, sale or other disposition of all or substantially all the assets of Parent or WGSI, as the case may be, to any other Person; or (c) there is proposed a voluntary or involuntary dissolution or liquidation or winding up of Parent or WGSI, as the case may be. Section 2.16.3 Reclassifications, Consolidations, Mergers, ------------------------------------------- Sales, Etc. If any of the following shall occur, namely: (a) any ---------- reclassification or change of the shares of Common Stock issuable upon exercise of the Conversion Rights; (b) any consolidation or merger to which Parent or WGSI, as the case may be, is a party other than a merger in which Parent or WGSI, as the case may be, is the continuing entity and which does not result in any reclassification of, or change (other than a change in name or as a result of a subdivision or combination) in, the Common Stock; or (c) any sale or conveyance of all or substantially all of the assets of Parent or WGSI, as the case may be, then Parent or WGSI, as the case may be, or such successor or purchasing entity, as the case may be, shall, as a condition precedent to such reclassification, change, consolidation, merger, sale or conveyance, execute and deliver to the Term B Lender an agreement providing that the Term B Lender shall have the right to convert up to $3,000,000 of the Term B Loan Amount into the kind and amount of units and other securities and property (including cash) receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock deliverable upon exercise of the Conversion Rights immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. If, in the case of any such consolidation, merger, sale or conveyance, the securities and property (including cash) receivable thereupon by a shareholder include securities and property of a corporation other than the successor or purchasing entity, as the case may be, in such consolidation, merger, sale or conveyance, then such agreement shall also be executed by such other entity and shall -12- contain such additional provisions to protect the shares of Common Stock of the Term B Lender as the Board of Directors of Parent or WGSI, as the case may be, shall reasonably consider necessary by reason of the foregoing. The provisions of this Section 2.16.3 shall similarly apply to successive consolidations, mergers, sales or conveyances. Section 2.16.4 Adjustment of Common Stock. -------------------------- (a) Adjustment of Conversion Price and Common Stock. Upon each ----------------------------------------------- adjustment of the Conversion Price as a result of the calculations made in this Section 2.16.4, the Term B Loan Amount shall thereafter evidence the right to receive, at the adjusted Conversion Price, that number of shares of Common Stock (calculated to the nearest one-hundredth) obtained by dividing (i) the product of the aggregate number of shares of Common Stock into which the Term B Loan Amount was convertible immediately prior to such adjustment and the Conversion Price in effect immediately prior to such adjustment of the Conversion Price by (ii) the Conversion Price in effect immediately after such adjustment of the Conversion Price. (b) Issuance of Additional Shares of Common Stock In case Parent or --------------------------------------------- WGSI, as the case may be, at any time or from time to time after the date hereof shall issue or sell Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 2.16.4(d) or (e)); provided that such Additional Shares of Common Stock -------- shall not be deemed to have been issued unless (i) the consideration per share (determined pursuant to Section 2.16.4(f)) for such shares would be less than the greater of the Conversion Price and the Current Market Price in effect on the date of an immediately prior to such issue, sale, grant or assumption or immediately prior to the close of business on such record date (or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading), as the case may be, then, and in each such case, subject to Section 4.4(i), the Conversion Price shall be reduced, concurrently with such issue or sale, to a price (calculated to the nearest .001 of a cent) determined by multiplying such Conversion Price by a fraction (i) the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issue or sale and (ii) the number of shares of Common Stock which the aggregate consideration received by Parent or WGSI, as the case may be, for the total number of such Additional Shares of Common Stock so issued or sold would purchase at the greater of such Conversion Price and such Current Market Price, and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately after such issue or sale, provided that, for -------- the purposes of this Section 2.16.4, (x) immediately after any Additional Shares of Common Stock are deemed to have been issued pursuant to Section 2.16.4(d) or 2.16.4(e), such Additional Shares of Common Stock shall be deemed to be outstanding, and (y) treasury shares of Common Stock shall not be deemed to be outstanding. -13- (c) Extraordinary Dividends and Distributions In case Parent or WGSI, ----------------------------------------- as the case may be, at any time or from time to time after the date hereof shall declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of other or additional stock or other securities or property or options by way of dividend or spin-off, reclassification, recapitalization or similar corporate rearrangement) on Common Stock other than (a) a dividend payable in Additional Shares of Common Stock or (b) a regularly scheduled cash dividend, the Conversion Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of any class of securities entitled to receive such dividend shall be reduced, effective as of the close of business on such record date, to a price determined by multiplying such Conversion Price by a fraction (i) the numerator of which shall be the Current Market Price in effect on such record date or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading, less the Fair Value of such dividend or distribution applicable to one share of Common Stock, and (ii) the denominator of which shall be such Current Market Price. (d) Treatment of Options and Convertible Securities In case Parent or ----------------------------------------------- WGSI, as the case may be, at any time or from time to time after the date hereof shall issue, sell, grant or assume, or shall fix a record date for the determination of holders of any class of securities of Parent or WGSI, as the case may be, entitled to receive, any Options or Convertible Securities (whether or not the rights thereunder are immediately exercisable), then, and in each such case, the maximum number of Additional Shares of Common Stock (as set forth in the instrument relating thereto, without regard to any provisions contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue, sale, grant or assumption or, in case such a record date shall have been fixed, as of the close of business on such record date (or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading), provided that such Additional Shares of Common -------- Stock shall not be deemed to have been issued unless (i) the consideration per share (determined pursuant to Section 2.16.4(f)) for such shares would be less than the greater of the Conversion Price and the Current Market Price in effect on the date of and immediately prior to such issue, sale, grant or assumption or immediately prior to the close of business on such record date (or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading), as the case may be, and provided, further, that -------- ------- (i) whether or not the Additional Shares of Common Stock underlying such Options or Convertible Securities are deemed to be issued, no further adjustment of the Conversion Price shall be made upon the subsequent issue or sale of Convertible Securities or shares of Common Stock upon the exercise of such Options or the conversion or exchange of such Convertible Securities; -14- (ii) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to Parent or WGSI, as the case may be, or decrease in the number of Additional Shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (by change of rate or otherwise), the Conversion Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of the record date, or date prior to the commencement of ex-dividend trading, as the case may be, with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options, or the rights of conversion or exchange under such Convertible Securities, which are outstanding at such time; (iii) upon the expiration (or purchase by Parent or WGSI, as the case may be, and cancellation or retirement) of any such Options which shall not have been exercised or the expiration of any rights of conversion or exchange under any such Convertible Securities which (or purchase by Parent or WGSI, as the case may be, and cancellation or retirement of any such Convertible Securities the rights of conversion or exchange under which) shall not have been exercised, the Conversion Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of the record date, or date prior to the commencement of ex-dividend trading, as the case may be, with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration (or such cancellation or retirement, as the case may be), be recomputed as if: (A) in the case of Options for Common Stock or Convertible Securities, the only Additional Shares of Common Stock issued or sold were the Additional Shares of Common Stock, if any, actually issued or sold upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by Parent or WGSI, as the case may be, for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration actually received by Parent or WGSI, as the case may be, upon such exercise, or for the issue or sale of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by Parent or WGSI, as the case may be, upon such conversion or exchange, and (B) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued or sold upon the exercise of such Options were issued at the time of the issue or sale, grant or assumption of such Options, and the consideration received by Parent or WGSI, as the case may be, for the Additional Shares of Common Stock deemed to have then been issued was the consideration actually received by Parent or WGSI, as the case may be, for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration deemed to have been received by Parent or WGSI, as the case may be (pursuant to Section 2.16.4(f)) upon the issue or sale of such Convertible Securities with respect to which such Options were actually exercised; (iv) no readjustment pursuant to subsection (ii) or (iii) above shall have the effect of increasing the Conversion Price by an amount in excess of the amount of the -15- adjustment thereof originally made in respect of the issue, sale, grant or assumption of such Options or Convertible Securities; and (v) in the case of any such Options which expire by their terms not more than 30 days after the date of issue, sale, grant or assumption thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options, whereupon such adjustment shall be made in the manner provided in subsection (iii) above. (e) Treatment of Stock Dividends, Stock Splits, Etc In case Parent or ----------------------------------------------- WGSI, as the case may be, at any time or from time to time after the date hereof shall declare or pay any dividend on Common Stock payable in Common Stock, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by reclassification or otherwise than by payment of a dividend or dividend in shares of Common Stock), then, and in each such case, Additional Shares of Common Stock shall be deemed to have been issued (i) in the case of any such dividend, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend, or (ii) in the case of any such subdivision, at the close of business on the day immediately prior to the day upon which such action becomes effective. (f) Computation of Consideration For the purposes of this Section ---------------------------- 2.16.4, (i) the consideration for the issue or sale of any Additional Shares of Common Stock shall, irrespective of the accounting treatment of such consideration, (x) insofar as it consists of cash, be computed at the net amount of cash received by Parent or WGSI, as the case may be, without deducting any expenses paid or incurred by Parent or WGSI, as the case may be, or any commissions or compensations paid or concessions or discounts allowed to underwriters, dealers or others performing similar services in connection with such issue or sale, (y) insofar as it consists of property (including securities) other than cash, be computed at the Fair Value thereof at the time of such issue or sale, and (z) in case Additional Shares of Common Stock are issued or sold together with other stock or securities or other assets of Parent or WGSI, as the case may be, for a consideration which covers both, be the portion of such consideration so received, computed as provided in clauses (i) and (ii) above, allocable to such Additional Shares of Common Stock, such allocation to be determined in the same manner that the Fair Value of property not consisting of cash or securities is to be determined as provided in the definition of 'Fair Value' herein; (ii) Additional Shares of Common Stock deemed to have been issued pursuant to Section 2.16.4, relating to Options and Convertible Securities, shall be deemed to have been issued for a consideration per share determined by dividing -16- (x) the total amount, if any, received and receivable by Parent or WGSI, as the case may be, as consideration for the issue, sale, grant or assumption of the Options or Convertible Securities in question, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration to protect against dilution) payable to Parent or WGSI, as the case may be, upon the exercise in full of such Options or the conversion or exchange of such Convertible Securities or, in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, in each case computing such consideration as provided in the foregoing subdivision (i), by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number to protect against dilution) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities; and (iii) Additional Shares of Common Stock deemed to have been issued pursuant to this Section, relating to stock dividends, stock splits, etc. or to employee benefit plans, employee compensation or incentives of Parent or WGSI, as the case may be, or any Affiliate thereof or otherwise to employees of Parent or WGSI, as the case may be, or any Affiliate thereof (except in a public offering open to the public generally on the same terms as such employees) shall be deemed to have been issued for no consideration. (g) Adjustments for Combinations, Etc In case the outstanding --------------------------------- shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. (h) Dilution in Case of Other Securities In case any Other ------------------------------------ Securities shall be issued or sold or shall become subject to issue or sale upon the conversion or exchange of any stock (or Other Securities) of Parent or WGSI, as the case may be, (or any issuer of Other Securities of any other Person) or to subscription, purchase or other acquisition pursuant to any Options issued or granted by Parent or WGSI, as the case may be, (or any such other issuer or Person) for a consideration such as to dilute, on a basis consistent with the standards established in the other provisions of this Section 2.16.4, the Conversion Rights under this Section ------- 2.16, then, and in each such case, the computations, adjustments and ---- readjustments provided for in this Section 2.16.4 with respect to the Conversion Price and the number of shares purchasable hereunder shall be made as nearly as possible in the manner so provided and applied to determine the amount of Other Securities from time to time receivable upon the exercise of the Conversion Rights, so as to protect the holders of the Term B Loan Amount against the effect of such dilution. -17- (i) De Minimis Adjustments. If the amount of any adjustment of the ---------------------- Conversion Price per share required pursuant to this Section 2.16.4 would be less than one tenth (1/10) of one percent (1%) of the Conversion Price, such amount shall be carried forward and adjustment with respect thereto made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate a change in the Conversion Price of at least one tenth (1/10) of one percent (1%) of such Conversion Price. All calculations under this Section shall be made to the nearest .001 of a cent or to the nearest one-hundredth of a share, as the case may be. (j) Abandoned Dividend or Distribution. If Parent or WGSI, as the ---------------------------------- case may be, shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution (which results in an adjustment to the Conversion Price under the terms of this Agreement) and shall, thereafter, and before such dividend is paid or delivered to members entitled thereto, legally abandon its plan to pay or deliver such dividend or distribution, then any adjustment made to the Conversion Price and number of shares of Common Stock into which Term B Loan Amount is convertible by reason of the taking of such record shall be reversed, and any subsequent adjustments, based thereon, shall be recomputed. (k) Other Dilutive Events In case any event shall occur as to which --------------------- the provisions of this Section hereof are not strictly applicable or if strictly applicable would not fairly protect the conversion rights of the holders of this Agreement in accordance with the essential intent and principles of such Sections, then, in each such case, the Board of Directors of Parent or WGSI, as the case may be, shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to preserve, without dilution, the Conversion Rights in accordance with this Section 2.16. ------------ (l) No Dilution or Impairment Parent or WGSI, as the case may be, ------------------------- shall not, by amendment of its certificate of incorporation or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Section ------- 2.16, but will at all times in good faith assist in the carrying out of all ----- such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Term B Lender under this Section 2.16 against dilution or other impairment. Without limiting the ------------ generality of the foregoing, Parent or WGSI, as the case may be (i) shall take all such action as may be necessary or appropriate in order that Parent and WGSI, as the case may be, may validly and legally issue fully paid and nonassessable shares of Common Stock, free from all taxes, liens, security interests, encumbrances, preemptive rights and charges on the exercise of the Conversion Rights, (ii) shall not take any action which results in any adjustment of the Conversion Price if the total number of shares of Common Stock (or Other Securities) issuable after the action upon the exercise of the Conversion Rights would exceed the total number of shares of Common Stock (or Other Securities) then authorized by Parent's or WGSI's, as the case may be, certificate of incorporation and available for the purpose of issue upon -18- such exercise, (iii) shall not permit the par value of any shares of stock receivable upon exercise of the Conversion Rights to exceed the amount payable therefor upon such exercise, and (iv) shall not issue any capital stock of any class which is preferred as to dividends or as to the distribution of assets upon voluntary or involuntary dissolution, liquidation or winding-up, unless the rights of the holders thereof shall be limited to a fixed sum or percentage of par value or a sum determined by reference to a formula based on a published index of interest rates, an interest rate publicly announced by a financial institution or a similar indicator of interest rates in respect of participation in dividends and to a fixed sum or percentage of par value in any such distribution of assets. (k) Section 6 of the Loan Agreement is amended by inserting a new Section --------- ------- 6.16 and Section 6.17 at the end of Section 6, to read as follows: - ---- ------------ --------- Section 6.16 Notice of Required Governmental Consents. Notify the ---------------------------------------- Term B Lender within ten (10) Business Days of the Second Amendment Closing Date whether the consent of, or notice to, any Governmental Authority is required for (i) exercise of the WGSI Conversion Right or (ii) the exercise of the WGSI Warrant. Section 6.17 Full Cooperation and Best Efforts. Cooperate fully with --------------------------------- the Term B Lender and use best efforts to obtain all consents and to deliver all notices which may be required for the exercise of the WGSI Conversion Right and the exercise of the WGSI Warrant, in each case as soon as possible and at the sole cost and expense of the Borrowers. (l) Schedule C-1 hereby is amended and restated in its entirety to read as ------------ set forth in Annex I attached hereto. 2. Acknowledgement of the Obligations. Borrowers acknowledge that, as of May 15, 2001, (i) Borrowers owe the Original Lenders $13,752,136.29 in principal for Advances plus accrued and unpaid interest and (ii) Borrowers owe the Term A Lender $2,400,000 in principal for the Term A Loan plus accrued and unpaid interest. The total amount of the Obligations, including without limitation principal, interest and fees and reasonable expenses of Lenders' counsel, is by the execution of this Amendment by Borrowers, ratified, confirmed and approved by Borrowers in all respects. Borrowers acknowledge and agree that (a) the Obligations are valid and binding obligations of Borrowers, enforceable against Borrowers in accordance with their terms, and (b) Borrowers are presently obligated to pay these amounts and all of their other existing Obligations in accordance with the terms of the Loan Documents, all without any further demand, notice or claim. In addition, Borrowers acknowledge and agree with Lenders that (x) Borrowers have no known claim or cause of action against Lenders (or Lenders' directors, officers, employees, agents, affiliates or attorneys), (y) Borrowers have no known offset right, counterclaim or defense of any kind against any Obligations, and (z) Lenders have heretofore properly performed and satisfied in a timely manner all of Lenders' obligations to Borrowers. -19- 3. Conditions. This Amendment shall become effective only upon satisfaction in full of the following conditions precedent: (a) Agent shall have received on or before the Second Amendment Closing Date the following, each in form and substance satisfactory to Agent (and, where indicated, the applicable Lender) and, unless indicated otherwise, dated as of the Second Amendment Closing Date: (i) counterparts of this Amendment, duly executed by the Borrowers and the Lender Group; and (ii) such other agreements, instruments, approvals, opinions and other documents as Agent or any Lender may reasonably request. (b) Agent shall have received from the Borrowers, for the benefit of the New Lender, the Term B Commitment Fee and the Term B Use Fee, which Term B Commitment Fee and the Term B Use Fee shall be fully earned as of the date of this Amendment; the parties hereto agree that the Term B Commitment Fee and the Term B Use Fee shall be paid from the proceeds of the Term B Loan. (c) The New Lender shall have received each of the Term B Equity Documents (as defined in Section 4 below), duly executed by each of the parties thereto and in form and substance satisfactory to the New Lender. (d) The several counsel to the members of the Lender Group shall have received payment, in immediately available funds, of all accrued and unpaid attorneys fees and expenses constituting Lender Group Expenses incurred in connection with this Amendment and the transactions contemplated hereunder or reasonably ancillary hereto; (e) The representations and warranties in this Amendment, the Loan Agreement as amended by this Amendment, and the other Loan Documents shall be true and correct in all respects on and as of the date hereof, as though made on such date (except to the extent that such representations and warranties relate solely to an earlier date); (f) No Default or Event of Default shall have occurred and be continuing on the date hereof, nor shall result from the consummation of the transactions contemplated herein; (g) No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein shall have been issued and remain in force by any governmental authority against Borrowers or the Lender Group; and (h) All other documents and legal matters in connection with the transactions contemplated by this Amendment shall have been delivered or executed or recorded and shall be in form and substance satisfactory to Agent and its counsel. -20- 4. Term B Equity Documents. In consideration of the financial accommodations being provided to Borrowers by the New Lender pursuant to this Amendment, the parties hereto hereby agree as follows: (a) On the Second Amendment Closing Date, the following instruments shall be delivered to the New Lender (collectively, the "Term B Equity Documents"; together with this Amendment and any other document delivered pursuant to Section 3(a) above, each an "Amendment Document" and collectively, the "Amendment Documents"): (i) a warrant issued to the New Lender (or its nominee) to purchase up to four and nine-tenths percent (4.9%), on a fully diluted basis, of the number of shares of the Parent's common stock on the Second Amendment Closing Date (the "Parent Warrant"), duly executed by the Parent; (ii) a warrant issued to the New Lender (or its nominee) to purchase up to four and nine-tenths percent (4.9%), on a fully diluted basis, of the number of shares of WGSI Common Stock on the Second Amendment Closing Date (the "WGSI Warrant"; together with the Parent Warrant, collectively, the "Warrants"), duly executed by WGSI; provided that, -------- if the consent of, or notice to, any Governmental Authority is required for the exercise of the WGSI Warrant, the New Lender (or its nominee) shall not have the right to exercise the WGSI Warrant unless and until such consent has been obtained or such notice has been delivered; (iii) a registration rights agreement between the Parent and the New Lender (or its nominee) in respect of the shares of common stock issuable under the Parent Warrant or pursuant to the Parent Conversion Right under Section 2.16 of the Loan Agreement (as amended hereby) ------------ (the "Parent Registration Rights Agreement"), duly executed by the Parent; (iv) a registration rights agreement between WGSI and the New Lender (or its nominee) in respect of the shares of common stock of WGSI issuable under the WGSI Warrant or pursuant to the WGSI Conversion Right under Section 2.16 of the Loan Agreement (as amended hereby) ------------ (the "WGSI Registration Rights Agreement"; together with the WGSI Registration Rights Agreement, collectively, the "Registration Rights Agreements"), duly executed by WGSI; and (v) such other agreements, instruments, approvals, opinions and other documents as the New Lender may reasonably request in connection with the Warrants and the Registration Rights Agreement. (b) The Parent and WGSI agree that (i) each of the Warrants shall have (A) an expiration date of five (5) years from the Second Amendment Closing Date, (B) an exercise price per share equal to the Exercise Price (as defined below) and (C) anti-dilution provisions acceptable to the New Lender but in no event less favorable than those of shareholders existing on or after the date hereof, and (ii) each of the Registration Rights Agreements shall grant the -21- New Lender (or its nominee) (A) at least two demand registration rights, (B) unlimited "S-3" registration rights and (C) unlimited "piggy-back" registration rights. (c) As used in subsection (b) above, "Exercise Price" means (i) with respect to Parent Common Stock, a price per share equal to (x) $1,500,000, divided by (y) an amount equal to 4.9% of the issued and outstanding shares of Parent Common Stock on a fully diluted basis and (ii) with respect to WGSI Common Stock, a price per share equal to (x) $1,500,000 divided by (y) an amount equal to 4.9% of the issued and outstanding shares of WGSI Common Stock on a fully diluted basis or such adjusted exercise price in effect at the date of the exercise of the Parent Warrant or the WGSI Warrant, as applicable. (d) The New Lender agrees that (i) if the New Lender exercises its Parent Conversion Right under Section 2.16 of the Loan Agreement (as amended hereby), ------------ the Parent Warrant shall expire, and (ii) if the New Lender exercises its WGSI Conversion Right under Section 2.16 of the Loan Agreement (as amended hereby), ------------ the WGSI Warrant shall expire. (e) The Agent and each of the Lenders hereby consent to the issuance of the Term B Equity Documents and to the terms thereof and waive any term, agreement or covenant in the Loan Agreement or in any other Loan Document which would otherwise restrict or prohibit the execution, delivery and performance of the Term B Equity Documents. Such consent and waiver shall be effective only in this specific instance and for this specific purpose and shall not permit any further departure from the terms of the Loan Documents, all of which shall remain in full force in effect (except as expressly set forth in this Amendment) and are hereby ratified and confirmed. 5. Representations and Warranties. Each Borrower hereby represents and warrants to the Lender Group that (a) the execution, delivery, and performance of each Amendment Document to which it is a party, and the performance of the Loan Agreement, as amended by this Amendment, are within its corporate or other organizational powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected, and (b) each Amendment Document to which it is a party and the Loan Agreement, as amended by this Amendment, constitute such Borrower's legal, valid, and binding obligation, enforceable against such Borrower in accordance with its terms. 6. Further Assurances. Borrowers shall execute and deliver all agreements, documents, and instruments, in form and substance satisfactory to Agent, and take all actions as Agent or any Lender may reasonably request from time to time fully to consummate the transactions contemplated under the Amendment Documents and the Loan Agreement, as amended by this Amendment. 7. New Lender. Each of the Borrowers, the Agent, the Original Lenders and the New Lender agree that, as of the Second Amendment Closing Date, the New Lender shall be deemed a Term B Lender, a Lender and a member of the Lender Group for all purposes under the Loan -22- Agreement, as amended hereby, and the other Loan Documents, except as otherwise expressly provided in this Amendment, in the Loan Agreement, as amended hereby, or in the other Loan Documents. 8. Miscellaneous. (a) Upon the effectiveness of this Amendment, each reference in the Loan Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like import referring to the Loan Agreement shall mean and refer to the Loan Agreement as amended by this Amendment. (b) Upon the effectiveness of this Amendment, each reference in the Loan Documents to the "Loan Agreement", "thereunder", "therein", "thereof" or words of like import referring to the Loan Agreement shall mean and refer to the Loan Agreement as amended by this Amendment. (c) This Amendment shall be governed by and construed in accordance with the laws of the State of New York. (d) This Amendment 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 Amendment. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of a manually executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver a manually executed counterpart of this Amendment but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. (e) This Amendment is a Loan Document. [Remainder of this page intentionally left blank] -23- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. Borrowers: --------- WAM!NET INC., a Minnesota corporation By: ____________________________________ Title: _________________________________ WAM!NET GOVERNMENT SERVICES, INC., a Minnesota corporation By: ____________________________________ Title: _________________________________ WAM!NET PROFESSIONAL SERVICES LLC, a Minnesota limited liability company By: ____________________________________ Title: _________________________________ Agent: ----- FOOTHILL CAPITAL CORPORATION, a California corporation, as Agent By: ____________________________________ Title: _________________________________ Original Lenders: ---------------- FOOTHILL CAPITAL CORPORATION, a California corporation By: ____________________________________ Title: _________________________________ ABLECO FINANCE LLC, a Delaware limited liability company (for itself and as agent for certain of its affiliates) By: ____________________________________ Title: _________________________________ -24- New Lender: ---------- MADELEINE L.L.C., a New York limited liability company (for itself and as agent for certain of its affiliates) By: ____________________________________ Title: _________________________________ (Signature Page to the Second Amendment) -25- ANNEX I Schedule C-1 ------------ Commitments
========================================================================================================================== Revolver Term A Loan Term B Loan Total Lender Commitment Commitment Commitment Commitment ========================================================================================================================== Foothill Capital Corporation $15,000,000 $ 0 $ 0 $15,000,000 ========================================================================================================================== Ableco Finance LLC $15,000,000 $2,400,000 $ 0 $17,400,000 ========================================================================================================================== Madeleine L.L.C. $ 0 $ 0 $3,240,000 $ 3,240,000 ========================================================================================================================== All Lenders $30,000,000 $2,400,000 $3,240,000 $35,640,000 ==========================================================================================================================
Schedule C-1 -----END PRIVACY-ENHANCED MESSAGE-----