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: June 30, 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 July 31, 2001 there were 12,228,630 shares of the Corporation's Common Stock, par value $.01 per share, outstanding. Total number of pages in this report: 35 WAM!NET Inc. INDEX TO FORM 10-Q

-2- Part I--FINANCIAL INFORMATION Item 1--Financial Information WAM!NET Inc. Consolidated Balance Sheets (Dollars in thousands)

-3- WAM!NET Inc. Consolidated Balance Sheets (continued) (Dollars in thousands)

See accompanying notes. -4- WAM!NET Inc. Consolidated Statements of Operations (Dollars in thousands, except share and per share data)

See accompanying notes. -5- WAM!NET Inc. Consolidated Statements of Cash Flows (Dollars in thousands)

See accompanying notes. -6- WAM!NET Inc. Consolidated Statements of Cash Flows (continued) (Dollars in thousands)

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 required by generally accepted accounting principles for a complete set of financial statements. 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 for a complete set of financial statements. 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 Communications, Inc. (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 Commercial Agreements with Winstar The Company has various commercial relationships with Winstar Communications, Inc. and its subsidiaries, Winstar Wireless, Inc. and Winstar Credit Corp. (the three Winstar entities being collectively referred to as "Winstar"). In early 2001 the parties each claimed the other was in default of the terms and conditions of the commercial agreements and sought to terminate the commercial agreements. In December 1999 the Company entered the following commercial agreements with Winstar: 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 payment in 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 million 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 -8- 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. The Company wrote off the related asset of $275 million and the related obligation of $240 million and recorded a $35 million loss on termination in the first quarter of 2001. 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. In addition, the Company entered into a sublease agreement with Winstar for space in the Company's Minnesota data center. In December 1999 Winstar made a one-time advance payment of $12,532. The Company is required to repay this one-time advance at $200 per month over 10 years, at an imputed interest rate of 15.75%. The advance payment has been recorded by the Company as a borrowing. Winstar is required to make monthly payments of approximately $81 over 10 years. In early 2001, payments were suspended by the Company and Winstar. At June 30, 2001 the outstanding balance of the liability was $11,990. Additionally, the Company entered into an agreement with Winstar, whereby Winstar made a five-year commitment to purchase $12,500 of services from the Company, which can be used internally by Winstar or resold to its customers. The commitment was prepaid in December 1999, and recorded as deferred revenue. At June 30, 2001 the deferred revenue remains at $12,500. In August 2001, the Company and Winstar entered into a settlement agreement. The settlement provides, among other things, that (1) the Company pay Winstar $1 million upon the signing of the settlement agreement and an additional $4 million on the closing of the senior secured discounted debt and equity financing arrangement between the Company and Cerberus Capital Management, L.P. and or its affiliates and designees (Cerberus), (2) the Company issued to Winstar a secured senior note in the principal amount of $7.5 million at the closing of the Cerberus Financing, which note would bear interest at the rate of 12.75% per annum with monthly principal and interest payments beginning in January 2003 and terminating in January 2006 (3) the Company would return certain network equipment (primarily radios) to Winstar, relinquish various circuits and other network assets and move out of various collocation sites on a prescribed schedule, (4) the parties would execute mutual releases, and (5) Winstar would relinquish a number of its rights, including the right to designate directors of the Company. The Company believes that it will recognize a gain of approximately $11.9 million in the third quarter of 2001. The settlement agreement with Winstar will be subject to the approval of bankruptcy court having jurisdiction over Winstar. 5. Bank Credit Facilities The Company had a $25,000 line of credit agreement with a bank, which was originally due in September 2000 and was subsequently extended to January 10, 2001. The line of credit 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 credit facility, which expires in January 2003. The credit facility is a revolving credit facility under which the lender will advance to the Company up to $30,000 based upon a borrowing base consisting of the Company's cash collections. Amounts outstanding under the credit facility incur interest at the reference rate plus 3.25% (10.0% at June 30, 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 June 30, 2001, the Company has borrowed $12,895 under the credit facility. In addition, the Company obtained additional financing under the credit facility, as described below. This interim financing is expected to be included as part of a proposed $115 million senior secured discounted debt and equity -9- financing arrangement between the Company and Cerberus Capital Management, L.P. and or its affiliates and designees, expected to close in the third quarter of 2001. On April 27, 2001 the Company obtained a $2,400 term loan under the credit facility. The term loan expires in accordance with the original credit facility and has a fixed interest rate of 12%. In May and June, 2001 the Company obtained $17,569 through a term loan under the credit facility. The term loan expires in accordance with the original credit facility and has a fixed interest rate of 19.5%. In addition it gives the financial investor the ability to own up to 32.8% of the Company and 32.8% of the Company's wholly-owned subsidiary, WAM!NET Government Services, Inc. ("WGSI") on a fully diluted basis. This right can be exercised by converting debt or through the exercise of a five-year warrant for $7,950 and $15,850 for the Company or WGSI, respectively. The fair value of the warrant granted was calculated using the minimum value method with the following assumptions: zero dividend yield, risk free interest rate of 5% and an expected life of 5 years and 1.5 years for the Company and WGSI warrant, respectively. The fair value of the warrant granted was $1,725 and $1,125 for the Company and WGSI, respectively. Subsequent to June 30, 2001 the Company received an additional $15,307 through a 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%. In addition it gives the financial investor the ability to own an additional 16.2% of the Company and 16.2% of ("WGSI") on a fully diluted basis. This right can be exercised by converting debt or through the exercise of a five-year warrant for $4,050 and $12,150 for the Company or WGSI, respectively. The fair value of the warrant granted was calculated using the minimum value method with the following assumptions: zero dividend yield, risk free interest rate of 5% and an expected life of 5 years and 1.5 years for the Company and WGSI warrant, respectively. The fair value of the warrant granted was $875 and $860 for the Company and WGSI, respectively. 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 six months ended June 30, 2001 and 2000 was as follows:

8. Restructuring Charge In the second quarter of 2001 the Company recorded a $21,003 restructuring charge. Due to the current financial condition of the Company and the overall general economy for technology companies, management finalized a restructuring plan in June 2001. Upon finalizing this plan the Company determined that it was necessary to significantly reduce headcount and close various offices throughout North America, Europe and Asia. Of the total restructuring charge approximately $11.7 million related to the write-off of goodwill related primarily to the -10- acquisition of 4-Sight in March of 1998. Based upon the historical performance of this business unit as well the Company's future strategy and projected operating cash flows for this unit it was determined appropriate to write-off the entire goodwill balance. Additionally, the restructuring charge includes$9.3 million relating to the write-off of certain assets, property contract termination costs and severance and related benefits due to employee reductions. Item 2--Management's Discussion and Analysis of Results of Operations and Financial Condition MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is based on the historical results of WAM!NET Inc. (the "Company") and should be read in conjunction with the Company's Financial Statements included herein. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Overview We own and operate an integrated global Information Technology (IT) infrastructure and related portfolio of managed network, data storage, hosting and professional services 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. Our managed data services include: 1) digital transport services 2) digital data 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 subscription and/or transactional charge per use. By using our services, customers gain access to leading-edge technology without the high cost and challenges of managing technology themselves. Our IP network and associated network, storage and hosting infrastructure services provide customers a common electronic platform to seamlessly integrate their production processes and connect with their customers, business partners and other supply chain or "community of interest" members to accelerate the adoption of online digital collaboration. In the commercial marketplace our global customer base is primarily made up of companies in the graphic arts, advertising, publishing, printing, retail, financial services, entertainment, broadcast, 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 marketplace by receiving 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 for both business and war fighting purposes. 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 -11- 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 expanded our professional services offering by acquiring a fifty member professional services company, is.com. Access to our services is provided through our WAM!NET Direct Service, WAM!NET ISDN Tracked Service and WAM!NET Internet Gateway Service. Our initial focus through 1998 was our WAM!NET 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 managed network with a dedicated leased line. In the first quarter of 1999 we began to provide access to our network through our WAM!NET ISDN 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 WAM!NET Internet Gateway Service in the third quarter of 1999. WAM!NET 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 WAM!NET InfoCenter, Electronic Job Tickets and Remote Proofing. We commercially introduced our WAM!NET WAM!BASE Digital Storage Service in the first quarter of 2000 and our web-based storage service, WAM!NET WorkSpace, in fourth quarter of 2000. Also in the first quarter of 2000, we began offering WAM!NET Render 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, designed for transport of compressed video files in MPEG 1 and MPEG 2 formats. We introduced our managed application and infrastructure 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 workflows to augment our service offerings. As of June 30, 2001, we had approximately 2,000 customer points-of-presence consisting of dedicated CPOP devices and local bandwidth connectivity. Of these, about 95 have WAM!NET storage services that customers access through the CPOP. In addition, we had over 15,000 users of our Internet and dial-up services globally. Revenues -12- Net service revenue Our net service revenue from commercial customers is directly related to the number of customers, type of service, and volume of data moved, stored or processed. This revenue is derived primarily from media market customers who are purchasing our managed transport, managed storage, hosted applications and managed hosted services. Revenue is based on annual or multi-year service contracts, many of which have automatic renewal or extension provisions. These contracts generally include a minimum monthly fee and additional charges for usage that exceeds a minimum monthly usage level. We record monthly service revenue for Direct Service, Compressed Video Service and Tracked Service based upon contracts signed with customers, following installation of equipment and commencement of service at a customer's premises. Our Internet Gateway Service is priced primarily on a per-megabyte basis and recognized as revenue in the month the service is provided. Our Render on Demand service is billed per computer processing unit hour and revenues are recognized as the service is provided to the customer. 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 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 -13- 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. 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. 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, and the costs of ongoing marketing activities such as promotions and channel development. Our sales and marketing efforts are focused on expanding opportunities with our existing 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 our administrative infrastructure necessary to manage our global 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 debt financing as well as other intangible assets related to acquisitions. We anticipate additional capital investments in our network, hosting and storage infrastructure commensurate with customer demand and market opportunity. Results of Operations Three and Six Month Periods Ended June 30, 2001 Compared with Three and Six Month Periods Ended June 30, 2000 -14- Revenues Total revenue for the three months ended June 30, 2001 was $13.4 million compared to $9.0 million for the three months ended June 30, 2000, an increase of $4.4 million or 48.8%. Total revenue for the six months ended June 30, 2001 was $29.0 million compared to $16.9 million for the six months ended June 30, 2000, an increase of $12.1 million or 71.3%. Net service revenue was $12.4 million for the three months ended June 30, 2001 compared to $7.3 million for the three months ended June 30, 2000, an increase of $5.1 million or 70.8%. Net service revenue was $26.7 million for the six months ended June 30, 2001 compared to $13.5 million for the six months ended June 30, 2000, an increase of $13.2 million or 98.1%. We recognized $4.3 million and $8.6 million for the three and six month periods ended June 30, 2001 from government service revenue primarily related to the NMCI contract with EDS. The remaining increase relates to our expanded service offerings introduced in first quarter 2000 and the acquisition of is.com, a professional service company, in November 2000. Revenues from software and hardware sales for the three months ended June 30, 2001 and 2000 were $1.0 million and $1.7 million, respectively. Revenues from software and hardware sales for the six months ended June 30, 2001 and 2000 were $2.3 million and $3.5 million, respectively. 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 three months ended June 30, 2001 was $7.2 million compared to $7.0 million for the three months ended June 30, 2000, an increase of $0.2 million or 3.7%. Network communication expense for the six months ended June 30, 2001 was $14.3 million compared to $14.1 million for the six months ended June 30, 2000, an increase of $0.2 million or 1.1%. 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 expect network communications expense to remain at the same level. for the last six months of the current fiscal year. Other service revenue costs Other service revenue costs for the three and six months ended June 30, 2001 were $11.9 million and $15.9 million, respectively. 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. We expect direct costs related to the NMCI project to increase as we continue to perform under the contract. Software and hardware The cost of software and hardware for the three months ended June 30, 2001 was $0.2 million compared to $0.5 million for the three months ended June 30, 2000, a decrease of $0.3 million. The cost of software and hardware for the six months ended June 30, 2001 was $0.6 million compared to $1.0 million for the six months ended June 30, 2000, a decrease of $0.4 million. The decrease reflects the decline in software and hardware sales. Technical operations Technical operations expense for the three months ended June 30, 2001 was $4.9 million compared to $5.4 million for the three months ended June 30, 2000, a decrease of $0.5 million or 9.1%. Technical operations expense for the six months ended June 30, 2001 was $11.4 million compared to $10.8 million for the six months ended June 30, 2000, an increase of $0.6 million or 5.2%. The decline in technical operations costs in the second quarter relate to an overall plan to reduce costs. -15- Selling, general and administrative Selling, general and administrative (SG&A) expense for the three months ended June 30, 2001 was $9.5 million compared to $13.4 million, a decrease of $3.9 million or 28.9%. Selling, general and administrative expense for the six months ended June 30, 2001 was $20.8 million compared to $25.0 million, a decrease of $4.2 million or 16.9%. The decrease in SG&A expense for the three month and six month periods ended June 30, 2001 is primarily due to an overall plan to reduce our operating costs. Depreciation and amortization Depreciation and amortization for the three months ended June 30, 2001 was $9.9 million compared to $9.8 million for the three months ended June 30, 2000. Depreciation and amortization for the six months ended June 30, 2001 was $20.8 million compared to $18.5 million for the six months ended June 30, 2000, an increase of $2.3 million or 12.6%. This increase was primarily due to depreciation of additional network and related equipment. Included in these totals for 2001 and 2000 was $3.7 million and $3.5 million of amortization expense relating to the goodwill recorded in connection with acquisitions. Interest expense Interest expense for the three months ended June 30, 2001 was $12.1 million compared to $10.1 million for the three months ended June 30, 2000, an increase of $2.0 million or 19.9%. Interest expense for the six months ended June 30, 2001 was $22.2 million compared to $25.3 million for the six months ended June 30, 2000, an decrease of $3.1 million or 12.4%. The decrease in interest expense is due to the termination of the network facilities 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), offset by additional interest expense incurred on bank financing (see footnote 5 to the financial statements). Included in interest expense for the three months ended June 30, 2001 and 2000, are non-cash charges of $8.0 million and $7.3 million, and $15.5 million and $14.4 million for the six months ended June 30, 2001 and 2000, 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 The Company has various commercial relationships with Winstar Communications, Inc. and its subsidiaries, Winstar Wireless, Inc. and Winstar Credit Corp. (the three Winstar entities being collectively referred to as "Winstar"). In early 2001 the parties each claimed the other was in default of the terms and conditions of the commercial agreements and sought to terminate the commercial agreements. In December 1999 the Company entered the following commercial agreements with Winstar: 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 payment in 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 performed to applicable specifications. The Company wrote off the related asset of $275 million and the related obligation of $240 million and recorded a $35 million loss on termination in the first quarter of 2001. 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 -16- not terminate these arrangements) and seeking to make the Company commence certain dispute resolution procedures. In addition, the Company entered into a sublease agreement with Winstar for space in the Company's Minnesota data center. In December 1999 Winstar made a one-time advance payment of $12,532. The Company is required to repay this one- time advance at $200 per month over 10 years, at an imputed interest rate of 15.75%. The advance payment has been recorded by the Company as a borrowing. Winstar is required to make monthly payments of approximately $81 over 10 years. In early 2001, payments were suspended by the Company and Winstar. At June 30, 2001 the outstanding balance of the liability was $11,990. Additionally, the Company entered into an agreement with Winstar, whereby Winstar made a five-year commitment to purchase $12,500 of services from the Company, which can be used internally by Winstar or resold to its customers. The commitment was prepaid in December 1999, and recorded as deferred revenue. At June 30, 2001 the deferred revenue remains at $12,500. In August 2001, the Company and Winstar entered into a settlement agreement. The settlement provides, among other things, that (1) the Company pay Winstar $1 million upon the signing of the settlement agreement and an additional $4 million on the closing of the senior secured discounted debt and equity financing arrangement between the Company and Cerberus Capital Management, L.P. and or its affiliates and designees (Cerberus), (2) the Company issued to Winstar a secured senior note in the principal amount of $7.5 million at the closing of the Cerberus Financing, which note would bear interest at the rate of 12.75% per annum with monthly principal and interest payments beginning in January 2003 and terminating in January 2006 (3) the Company would return certain network equipment (primarily radios) to Winstar, relinquish various circuits and other network assets and move out of various collocation sites on a prescribed schedule, (4) the parties would execute mutual releases, and (5) Winstar would relinquish a number of its rights, including the right to designate directors of the Company. The Company believes that it will recognize a gain of approximately $11.9 million in the third quarter of 2001. The settlement agreement with Winstar will be subject to the approval of bankruptcy court having jurisdiction over Winstar. Restructuring Charge In the second quarter of 2001 the Company recorded a $21,003 restructuring charge. Due to the current financial condition of the Company and the overall general economy for technology companies, management finalized a restructuring plan in June 2001. Upon finalizing this plan the Company determined that it was necessary to significantly reduce headcount and close various offices throughout North America, Europe and Asia. Of the total restructuring charge approximately $11.7 million related to the write-off of goodwill related primarily to the acquisition of 4-Sight in March of 1998. Based upon the historical performance of this business unit as well the Company's future strategy and projected operating cash flows for this unit it was determined appropriate to write-off the entire goodwill balance. Additionally, the restructuring charge includes $9.3 million relating to the write-off of certain assets, property contract termination costs and severance and related benefits due to employee reductions. Other income Other income for the three months ended June 30, 2001 was $1.1 million compared to $0.5 million for the three months ended June 30, 2000, an increase of $0.6 million. Other income for the six months ended June 30, 2001 was $2.1 million compared to $1.3 million for the six months ended June 30, 2000, an increase of $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 -17- At June 30, 2001, we had approximately $375 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. Liquidity and Capital Resources Through June 30, 2001, we have issued equity and debt securities and incurred other borrowings resulting in cash received by us of $520.2 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% (10.0% at June 30, 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 June 30, 2001, the Company has borrowed $12.9 million under the credit facility. In addition, the Company obtained additional financing under the bank credit facility as described below. This interim financing is expected to be included as part of a $115 million senior secured discounted debt and equity financing arrangement between the Company and Cerberus Capital Management, L.P. and or its affiliates and designees, expected to close in third quarter 2001. On April 27, 2001 the Company obtained a $2.4 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 12%. In May and June, 2001 the Company obtained $17.6 million through a 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%. In addition it gives the financial investor the ability to own 32.8% of the Company and 32.8% of WAM!NET Government Services, Inc. ("WGSI") on a fully diluted basis. This right can be exercised by converting debt or through the exercise of a five-year warrant for $7.9 million and $15.8 million for the Company or WGSI, respectively. The fair value of the warrant granted was calculated using the minimum value method with the following assumptions: zero dividend yield, risk free interest rate of 5% and an expected life of 5 years and 1.5 years for the Company and WGSI warrant, respectively. The fair value of the warrant granted was $1.7 million and $1.1 million for the Company and WGSI, respectively. Subsequent to June 30, 2001 the Company received an additional $15.3 million through a 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%. In addition it gives the financial investor the ability to own an additional 16.2% of the Company and 16.2% of ("WGSI") on a fully diluted basis. This right can be exercised by converting debt or through the exercise of a five-year warrant for $4.0 million and $12.1 million for the Company or WGSI, respectively. The fair value of -18- the warrant granted was calculated using the minimum value method with the following assumptions: zero dividend yield, risk free interest rate of 5% and an expected life of 5 years and 1.5 years for the Company and WGSI warrant, respectively. The fair value of the warrant granted was $0.9 million and $0.9 million for the Company and WGSI, respectively. 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 $607.3 million as of June 30,2001. Management expects to continue to operate at a net loss and experience negative cash flow from operating activities through the end of this current fiscal year. At June 30, 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 $115 million senior secured discounted debt and equity financing arrangement between the Company and Cerberus Capital Management, L.P. and or its affiliates and designees, expected to close in third quarter 2001. 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. 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 $607.3 million as of June 30, 2001. Management expects to continue to operate at a net loss and experience negative cash flow from operating activities through the foreseeable future. At June 30, 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 $115 million senior secured discounted debt and equity financing arrangement between the Company and Cerberus Capital Management, L.P. and or its affiliates and designees, expected to close in third quarter 2001. 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. -19- 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: . increase the size of our customer base and utilization of our network and services; . successfully perform our NMCI subcontract; . raise additional capital; . successfully manage our relationships and activities with our strategic partners and distributors, including EDS, SGI, and Sumitomo, and develop new relationships and activities with influential suppliers and channel distributors in our target markets; . successfully market our branded services; . continue to attract and retain qualified personnel; . accurately assess potential markets and effectively respond to competitive developments; . continue to maintain and upgrade our operational, support and business systems; . comply with evolving governmental regulatory requirements and obtain any required governmental authorizations; . continue to upgrade our services and applications to address new technologies; . provide acceptable customer service; and . 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 June 30, 2001, we had an accumulated deficit of approximately $607.3 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: -20- . costs relating to performance of our NMCI subcontract with EDS; . costs relating to the sales and marketing of our branded services; . costs to be incurred in maintaining our network, hosting and storage infrastructure; . recurring telephony, hardware and installation costs resulting from providing service to subscribers to our Direct Service; . 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 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: . slow the expansion of our network, hosting and storage infrastructure; . scale back or delay the development of new services and applications; . reduce our marketing efforts; and . 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 -21- 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. 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: . the rate of customer acquisition and turnover; . the amount and timing of expenditures relating to the expansion of our infrastructure and the introduction of new services; . the amount and timing of expenditures relating to the performance of our NMCI subcontract with EDS; . introduction of new services or technologies by our competitors; . price competition; . the ability of our equipment and service suppliers to meet our needs; . regulatory developments, including interpretations of the 1996 Telecommunications Act; . technical difficulties or network downtime; . the success of our strategic alliances; and . 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 June 30, 2001, we had approximately $490.1 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 $191.5 million at June 30, 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 $3.3 million during the -22- remainder of 2001. We have recorded as quasi-equity on our balance sheet as of June 30, 2001, redeemable and convertible preferred stock of $175.0 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: . impair our ability to obtain additional financing to fund our operating losses or meet our working capital and capital expenditure requirements; . require that we devote a significant portion of the cash we receive from our operating and financing activities to make debt service payments, thereby reducing the amount we can use for other purposes; . hinder our ability to adjust rapidly to changes in market conditions, including changes in technology that might affect our competitive position; and . 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: . borrow more funds (other than equipment financing); . incur liens; . make minority investments; . sell assets; . engage in transactions with stockholders and affiliates; and . 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 June 30, 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: . we could be unable to obtain additional financing in the future to: -23- . fund our operating losses; . meet our capital expenditure requirements; . further develop or deploy services and applications; or . allow us to conduct necessary corporate activities; . we could be unable to obtain lower borrowing costs than are available from secured lenders; . we could be unable to engage in strategic joint ventures in which we are a minority partner; or . 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 -24- no control, to ensure the continued upgrading of the Internet to avoid any degradation in its performance. If the security, reliability or performance of the Internet is compromised or degraded, the success of our Internet-based services, and the pricing of those services, could be materially and adversely impacted. We are exposed to liability for damages resulting from failure of data transportation or loss of data. Our contracts with customers generally contain provisions limiting our liability for failure of data transportation or loss of stored data to $100 per occurrence, with a maximum liability equal to the subscriber's cumulative monthly payments for a year and, in the case of rendering services, to replacement service. Nevertheless, we may be subject to significant claims and potential liabilities for data losses or delays in the transportation, storage or rendering of data through our network. In addition to general business liability insurance, we maintain $10 million of errors and omissions insurance coverage for our services, $10 million of business interruption insurance coverage for losses from fire and natural disasters, and $10 million of insurance coverage for losses of data due to physical damage to our data archive. We also maintain $25 million of umbrella coverage for loss or liability above our other policies. We cannot be certain that this amount of insurance coverage will be adequate to cover all data loss claims or that additional insurance will be available on affordable terms. Adaptation of our network infrastructure may be necessary in order to respond to: . demands for transmission and storage of larger amounts of data; and . 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. -25- In addition to telecommunication regulations, we may become subject to other current or future regulations in the U.S. or abroad as our business continues to develop and as governments respond to changes brought about by the growth of the Internet and e-commerce. These regulations may affect data privacy, marketing or distribution, or may be applicable to specific industries or businesses to which we may offer services. Such regulations could result in economic burdens or technical or legal constraints that could adversely affect our business. If we are unable to retain our key personnel, our business may suffer. Our successful operation depends on the services of key executives and significant employees, some of whom we have only recently employed. The loss of the services of any of these persons could have a material adverse effect on us. We have entered into employment agreements with substantially all of our officers and significant employees, and have purchased life insurance policies on certain employees. See "Management." We believe our future success will depend on our ability to retain the services of these personnel and to attract and retain qualified technical and marketing personnel. We cannot be certain that we will be able to continue to attract and retain the personnel necessary for the successful conduct of our business. Our failure to manage growth could adversely affect us. We have rapidly and significantly expanded our operations. We are expanding the geographic coverage and capacity of our network, providing new services and media workflow applications as we seek to expand our customer base and achieve our business objectives. Moreover, we have rapidly expanded our workforce in recent months in order to perform our NMCI subcontract with EDS. To manage the growth of our operations, we must: . effectively manage our operational, managerial, financial and accounting resources; . hire, train and manage additional qualified personnel; . maintain our sales force, external installation capacity, customer service teams and information systems; . continue to expand our NMCI implementation work force; . expand and upgrade our core technologies; and . 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 -26- may be required to substantially increase our own workforce to perform these services, and our growth may be constrained while we build and train our workforce. There can be no assurances that we will be able to maintain our relationships with third-party suppliers for equipment and services or that we will be able to find suitable alternative products and services at a commercially reasonable price, or at all. The loss of our affiliation with SGI 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 August 14, 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 31,593,975 shares of our common stock, or 72.1% of our outstanding shares of common stock as of August 14, 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 9,482,503 shares of our common stock, or 43.7% of our outstanding shares of common stock, as of August 14, 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 -27- solutions. Evolving industry standards, new product and service introductions, demand and market acceptance for recently introduced products and services are subject to uncertainty of customer acceptance. There can be no assurance that we will be able to adapt to future technological changes or that developments by competitors will not render our services and related applications obsolete or noncompetitive. We may not be able to maintain proprietary rights in our intellectual property. Our ability to maintain our proprietary rights in our technology will affect the success of our business. We have applications for four U.S. patents pending for certain aspects of our technology. We rely on a combination of trade secrets and copyright protection, as well as patents to protect our proprietary rights in our technology. We also rely on trademark protection concerning various names, marks, logos and other devices that serve to identify us as the source for and originator of our services and applications. We offer our services and applications in foreign countries. Some of these countries lack intellectual property protection comparable to that afforded by the intellectual property laws of the U.S. Our proprietary rights in the technology underlying our network, hosting and storage infrastructure and related services and applications will be protected only to the extent that patent, trade secret, copyright or other protection is available in countries in which we market our services and applications, and only to the extent we are able to obtain such protection and enforce such rights. We cannot be certain that the steps taken by us to protect our intellectual property and proprietary rights will be adequate to deter misappropriation of our technology or development of technologies that are substantially equivalent to our technology. Misappropriation of our technology or development of competitive technologies could have a material adverse effect on our business. We could incur substantial expense in protecting and enforcing our intellectual property rights. Intellectual property litigation is complex, and we cannot be certain of its outcome. We have conducted a limited inquiry regarding the possibility of infringement on patents and intellectual property rights of others. We are not aware of any infringements nor have we received any claims for such infringements. Any future intellectual property litigation, regardless of outcome, could result in substantial expense to us and significant diversion of the efforts of our technical and management personnel. An adverse determination in any such proceeding could subject us to significant liabilities to third-parties, require disputed rights to be licensed from such parties or require us to cease using disputed technology. Loss of significant customers and their workflow chains could have a significant effect on our business. During the year ended December 31, 2000, EDS, Time and Quebecor World, Inc. were our largest customers, representing 8.4%, 1.8% and 2.5%, respectively, of our total revenue. Although Time and Quebecor World do not individually represent a significant percentage of our revenue, both companies have developed important workflow chains of vendors, suppliers and customers who use our network. If either Time or Quebecor World were to significantly reduce or terminate (at the end of their current service contract or otherwise) their use of our network and services, their workflow partners might do the same, and our business, financial condition and results of operations could be materially adversely affected. The loss of EDS as a customer would have a significant adverse effect on future revenues. We are subject to the risks associated with foreign investment and international operations. Our operations extend outside of the U.S. During 1999 and 2000, a significant portion of our revenue was generated in Europe, and, to a lesser extent, Asia. We are exposed to the risk of changes to laws and policies that govern foreign investment in countries where we have operations, as well as changes in U.S. laws and regulations relating to investing in or trading with countries in which we may have investments. Certain countries in which we operate or may operate are subject to a substantially greater degree of social, political and economic instability than in the U.S. Risks associated with social, political and economic instability in a particular country could materially adversely affect our business and could result in the loss of our assets in that country. In addition, some markets in which we have undertaken or may in the future undertake international -28- 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: . uncertainty of acceptance of our services by different cultures; . unforeseen changes in regulatory requirements; . differing technology standards; . difficulties in staffing and managing multinational operations; . government-imposed restrictions on the repatriation of funds; . difficulties imposed by language barriers; . difficulties in finding appropriate distribution channels; and . 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 3--Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Exchange Rates During the six month period ended June 30, 2001, our revenue originating outside the U.S. was 19.1% 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 -29- 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 June 30, 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 The Company filed a report on Form 8-K on July 27, 2001. -30- 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: August 20, 2001 By: /s/ Terri F. Zimmerman ----------------------- Terri F. Zimmerman Chief Financial Officer -31- EXHIBIT INDEX

-32- 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 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 (10) 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 (10) 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

-33- (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. 10.32 * Amendment No. 3 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. 10.33 * Amendment No. 4 (a) 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. 10.34 * Amendment No. 4 (b) 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. 10.35 * Amendment No. 4 (c) 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. 10.36 * Amendment No. 4 (d) 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. 10.37 * Amendment No. 4 (e) 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. 10.38 * Amendment No. 4 (f) 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.

(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. -34- (9) Incorporated herin by reference to our Annual Report on Form 10-K, filed with the SEC on April 16, 2001. (10) Incorporated herin by reference to our Quarterly Report on Form 10- Q, filed with the SEC on May 21, 2000. * Filed herewith. -35-

WAM NET INC 10-Q