<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1997
REGISTRATION NO. 333-25521
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
UNIFI COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7398 04-3097640
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
----------------
900 CHELMSFORD STREET
LOWELL, MASSACHUSETTS 01851
(508) 551-7500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DOUGLAS J. RANALLI
CHAIRMAN OF THE BOARD OF DIRECTORS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
UNIFI COMMUNICATIONS, INC.
900 CHELMSFORD STREET
LOWELL, MASSACHUSETTS 01851
(508) 551-7500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
KIRK A. DAVENPORT, ESQ. Q. ELLIS TELFORD, ESQ.
LATHAM & WATKINS GENERAL COUNSEL AND SECRETARY
885 THIRD AVENUE UNIFI COMMUNICATIONS, INC.
NEW YORK, NEW YORK 10022 900 CHELMSFORD STREET
(212) 906-1267 LOWELL, MASSACHUSETTS 01851
(508) 551-7500
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH PROPOSED AGGREGATE AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER NOTE(1) PRICE(1) FEE(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
14% Senior Notes due
2004................... $175,000,000 100% $175,000,000 $60,345
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
(2)Paid with the initial filing of the Registration Statement.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
UNIFI COMMUNICATIONS, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(A) AND ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF THE INFORMATION
REQUIRED BY PART I OF FORM S-4
<TABLE>
<S> <C>
1.Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus..... Outside Front Cover Page; Cross Reference
Sheet; Inside Front Cover Page
2.Inside Front and Outside Back
Cover Pages of Prospectus.... Inside Front Cover Page; Outside Back Cover
Page
3.Risk Factors, Ratio of Earnings
to Fixed Charges and Other
Information.................. Prospectus Summary; Risk Factors; Selected
Financial Data
4.Terms of the Transaction....... The Exchange Offer; Certain Federal Income
Tax Considerations; Description of
Exchange Notes
5.Pro Forma Financial
Information.................. Prospectus Summary; Selected Consolidated
Financial Data
6.Material Contacts with the
Company Being Acquired....... Not Applicable
7.Additional Information Required
for Reoffering by Persons and
Parties Deemed to be
Underwriters................. Not Applicable
8.Interests of Named Experts and
Counsel...................... Not Applicable
9.Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities.................. Not Applicable
10.Information with Respect to S-3
Registrants.................. Not Applicable
11.Incorporation of Certain
Information by Reference..... Not Applicable
12.Information with Respect to S-2
or S-3 Registrants........... Not Applicable
13.Incorporation of Certain
Information by Reference..... Not Applicable
14.Information with Respect to
Registrants Other Than S-3 or
S-2 Registrants.............. Prospectus Summary; Capitalization;
Selected Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Acquisition of Fax
Business of SingCom (Australia);
Management; Principal Stockholders;
Certain Relationships and Related
Transactions; Description of Certain
Indebtedness; Description of Exchange
Notes; Consolidated Financial Statements
15.Information with Respect to S-3
Companies.................... Not Applicable
16.Information with Respect to S-2
or S-3 Companies............. Not Applicable
17.Information with Respect to
Companies Other Than S-2 or
S-3 Companies................ Not Applicable
18.Information if Proxies,
Consents or Authorizations
are to be Solicited.......... Not Applicable
19.Information if Proxies,
Consents or Authorizations
are not to be Solicited or in
an Exchange Offer............ Management; The Exchange Offer; Certain
Relationships and Related Transactions
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1997
PROSPECTUS
, 1997
OFFER TO EXCHANGE
14% SENIOR NOTES DUE 2004
FOR ALL OUTSTANDING 14% SENIOR NOTES DUE 2004
OF
UNIFI COMMUNICATIONS, INC.
-----------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M, NEW YORK CITY TIME ON , 1997
UNLESS EXTENDED.
UNIFI Communications, Inc., a Delaware corporation (the "Company"), is hereby
offering (the "Exchange Offer"), upon the terms and subject to the conditions
set forth in this Prospectus and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount of its 14% Senior
Notes due 2004 (the "Exchange Notes"), which exchange has been registered under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
registration statement of which this Prospectus is a part (the "Registration
Statement"), for each $1,000 principal amount of its outstanding 14% Senior
Notes due 2004 (the "Private Notes"), of which $175,000,000 in aggregate
principal amount was issued on February 21, 1997 and is outstanding as of the
date hereof. The Private Notes were originally issued (the "Private Offering")
as part of units (the "Units") consisting in the aggregate of $175,000,000 in
aggregate principal amount of Private Notes and 175,000 warrants (the
"Warrants") to purchase 4,816,818 shares of the Company's Common Stock, par
value $.01 per share. The form and terms of the Exchange Notes are the same as
the form and terms of the Private Notes except that (i) the exchange will have
been registered under the Securities Act, and, therefore, the Exchange Notes
will not bear legends restricting the transfer thereof and (ii) holders of the
Exchange Notes will not be entitled to certain rights of holders of the Private
Notes under the Registration Rights Agreement (as defined herein), which rights
will terminate upon the consummation of the Exchange Offer. The Exchange Notes
will evidence the same indebtedness as the Private Notes (which they replace)
and will be entitled to the benefits of an indenture dated as of February 21,
1997 governing the Private Notes and the Exchange Notes (the "Indenture"). The
Private Notes and the Exchange Notes are sometimes referred to herein
collectively as the "Notes." See "The Exchange Offer" and "Description of
Exchange Notes."
The Exchange Notes will bear interest at the same rate and on the same terms
as the Private Notes. Consequently, the Exchange Notes will bear interest at
the rate of 14% per annum and the interest thereon will be payable semi-
annually in arrears on March 1 and September 1 of each year, commencing
September 1, 1997. The Exchange Notes will bear interest from and including the
date of issuance of the Private Notes (February 21, 1997). Holders whose
Private Notes are accepted for exchange will be deemed to have waived the right
to receive any interest accrued on the Private Notes.
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after March 1, 2001 at the redemption prices set forth
herein plus accrued and unpaid interest, if any, to the date of redemption. In
addition, at the option of the Company, up to 33% of the aggregate principal
amount of Notes originally issued may be redeemed prior to March 1, 2000 at the
redemption price set forth herein, plus accrued and unpaid interest, if any, to
the redemption date with the proceeds of certain sales of capital stock of the
Company; provided however, that at least 67% of the aggregate principal amount
of Notes originally issued remain outstanding following such redemption. In the
event of a Change of Control (as defined), holders of the
(Continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------
<PAGE>
(Continued from previous page)
Notes will have the right to require the Company to purchase their Notes, in
whole or in part, at a price equal to 101% of the principal amount thereof
(determined as of the date of repurchase), plus accrued and unpaid interest,
if any, to the date of purchase.
The Notes will be senior unsecured obligations of the Company, will rank
pari passu in right of payment with all existing and future unsubordinated
indebtedness of the Company and will rank senior in right of payment to all
subordinated indebtedness of the Company. The Company conducts substantial
business through its subsidiaries and the Notes will be effectively
subordinated to all Indebtedness and other liabilities (including trade
payables) of the Company's subsidiaries. As of December 31, 1996, on a pro
forma basis after giving effect to the Private Offering and the application of
the proceeds therefrom, the Company's subsidiaries had approximately $5.7
million of liabilities. Such subsidiaries will be permitted to incur
additional indebtedness in the future.
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m., New York City time, on , 1997,
unless the Exchange Offer is extended by the Company in its sole discretion
(the "Expiration Date"). Tenders of Private Notes may be withdrawn at any time
prior to the Expiration Date. Private Notes may be tendered only in integral
multiples of $1,000. The Exchange Offer is subject to certain customary
conditions. See "The Exchange Offer--Conditions."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
a person that is an affiliate of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act; provided that the holder
is acquiring the Exchange Notes in the ordinary course of its business and is
not participating, and had no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Private
Notes wishing to accept the Exchange Offer must represent to the Company, as
required by the Registration Rights Agreement, that such conditions have been
met. Each broker-dealer that receives Exchange Notes for its own account in
exchange for Private Notes, where such Private Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Company believes that none of the
registered holders of the Private Notes is an affiliate (as such term is
defined in Rule 405 under the Securities Act) of the Company.
Prior to the Exchange Offer, there has been no public market for the Notes.
The Company does not intend to list the Exchange Notes on any securities
exchange, but the Private Notes are eligible for trading in the National
Association of Securities Dealers, Inc.'s Private Offerings, Resales and
Trading through Automatic Linkages (PORTAL) market. There can be no assurance
that an active market for the Notes will develop. To the extent that a market
for the Notes does develop, the market value of the Notes will depend on
market conditions (such as yields on alternative investments), general
economic conditions, the Company's financial condition and certain other
factors. Such conditions might cause the Notes, to the extent that they are
traded, to trade at a significant discount from face value. See "Risk
Factors--Absence of Public Market for the Notes; Restrictions on Transfer."
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Private Notes where
such Private Notes were acquired by such broker-
(Continued on next page)
<PAGE>
(Continued from Previous Page)
dealer as a result of market-making activities or other trading activities.
The Company has indicated its intention to make this Prospectus (as it may be
amended or supplemented) available to any broker-dealer for use in connection
with any such resale for a period of 180 days after the Expiration Date. See
"Plan of Distribution."
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection
with this Exchange Offer. See "The Exchange Offer."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
SEE "RISK FACTORS," BEGINNING ON PAGE 12, FOR A DISCUSSION OF CERTAIN
FACTORS THAT INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER
AND AN INVESTMENT IN THE EXCHANGE NOTES.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
OFFERING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN
THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS IN CONNECTION
THEREWITH. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to the Exchange Offer
will be issued in the form of one or more fully registered global notes that
will be deposited with, or on behalf of, the Depository Trust Company ("DTC"
or the "Depository") and registered in its name or in the name of Cede & Co.,
as its nominee. Beneficial interests in the global note representing the
Exchange Notes will be shown on, and transfers thereof will be effected only
through, records maintained by the Depository and its participants. After the
initial issuance of such global note, Exchange Notes in certificated form will
be issued in exchange for the global note only in accordance with the terms
and conditions set forth in the Indenture. See "The Exchange Offer--Book-Entry
Transfer" and "Book Entry; Delivery and Form."
----------------
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements (including the notes
thereto) appearing elsewhere in this Prospectus. As used in this Prospectus,
"UNIFI" or the "Company" refers to UNIFI Communications, Inc. and its
subsidiaries, except where the context requires otherwise.
THE COMPANY
OVERVIEW
The Company is a leading provider of international enhanced facsimile
transmission and delivery services. The Company has developed the Intelligent
Delivery Network, a system which combines highly efficient store-and-forward
network technology with a proprietary Delivery Expert System (as defined
herein) and a 24-hour multi-lingual fax delivery staff. The Intelligent
Delivery Network provides business customers with a facsimile delivery service
that is secure, easy to use, more efficient, more reliable and less expensive
than the direct dial services provided by the world's conventional long-
distance carriers.
UNIFI commenced operations in April 1992 by transmitting one-way facsimile
traffic exclusively from the United States to Japan. By December 1993, the
Company's monthly revenue from this single route had grown to approximately
$440,000, the equivalent of annualized "run-rate" revenue of $5.3 million. As a
result of these accomplishments, the Company was successful in attracting $80
million in total financing from several Asia/Pacific investors including the
Nichimen Corporation (Japan) ("Nichimen"), the ORIX Leasing Corporation (Japan)
("ORIX") and affiliates of Singapore Telecommunications Limited ("SingTel"), a
major provider of telecommunications services in Singapore. With a portion of
the proceeds from these financings, the Company (i) expanded its sales,
document delivery, network monitoring, research and development, and
administrative infrastructures and (ii) from December 1995 to December 1996
established operations, either directly or through SingTel or contractual
relationships with other parties, in seven additional countries to complement
its existing operations in the United States and Japan. As of April 30, 1997,
the Company had approximately 9,886 corporate customers (excluding non-revenue
trial accounts and operations in China), of which approximately 1,490 were
added in the first four months of 1997 and 1,238 were added in the fourth
quarter of 1996. UNIFI's revenues for the year ended December 31, 1995 were
approximately $10.7 million and revenues for the year ended December 31, 1996
were approximately $25.2 million and revenues for the three month periods ended
March 31, 1996 and 1997 were approximately $4.0 million and $9.2 million
respectively.
According to the International Telecommunications Union, international
switched telecommunications traffic grew at an annual compound rate of 13.8%
from 28 billion minutes in 1989 to 53 billion minutes in 1994. Based on several
industry studies, the Company believes that fax transmissions represent
approximately 20-25% of all switched international minutes, and in 1995, the
market for international fax traffic totaled approximately $12 billion
worldwide. The Company expects the growth of the telecommunications market to
continue, particularly in emerging markets and in the Asia/Pacific region where
the Company believes that facsimile will continue to be a preferred business
communications technology. In order to capitalize on the technological trends
in developed markets such as the United States and Western Europe, the Company
has developed, and is actively testing product line extensions that will allow
customers to access the Intelligent Delivery Network for fax transmissions from
their PC-LAN environments, e-mail systems, and Internet software.
Over the past five years, the Company has developed four key competitive
elements which the management team believes are responsible for UNIFI's growth
in the market:
. Network Efficiency. The Intelligent Delivery Network's packet-switched
store-and-forward technology transmits fax documents up to 16 times more
efficiently than the circuit-switched technology utilized by the world's
long-distance carriers. This efficiency advantage allows UNIFI to offer
customers delivery rates that
1
<PAGE>
are significantly lower than the rates charged by long-distance carriers
while generating attractive gross margins from its on-net traffic (i.e.,
traffic terminating in a country where the Company has installed a network
node).
. Superior Service--The Intelligent Delivery Network. Unlike its competitors,
the Company provides end-users with a 24-hour, seven-day-a-week
personalized delivery service based on its proprietary Delivery Expert
System combined with a multi-lingual delivery staff that identifies,
analyzes and resolves fax delivery obstacles. The Company believes this
service is primarily responsible for the less than 1.5% monthly churn it
has experienced in each of the twelve months ending on December 31, 1996
and the four months ending April 30, 1997 (other than October 1996, during
which the Company experienced a 2.3% monthly churn due primarily to the
recovery of FaxLinks from customers with monthly usage below certain
minimum thresholds). The Company further believes that the Delivery Expert
System provides a competitive advantage that cannot be easily replicated
given the Company's experience and proprietary processes developed since
1992.
. Global Sales and Service Infrastructure. UNIFI has operations in the United
States, Japan, the United Kingdom, France, Germany, Hong Kong and Korea. In
addition, the Company conducts operations in China pursuant to a
partnership with a local entity and has a presence in Singapore and
Australia through its relationship with SingTel. UNIFI's investment in a
global sales and account management organization of 364 (as of April 30,
1997) people has created a competitive advantage by allowing the Company to
provide a consistent set of delivery services based on common service
standards and centralized billing. Long-distance carriers, the Company's
largest competitors, do not deploy a consistent set of global services due
to regulatory and other market forces which constrain them from maintaining
a global presence.
. Large, Established Corporate Customer Base. UNIFI has an existing (as of
April 30, 1997) base of approximately 9,886 customers (excluding non-
revenue trial accounts and operations in China). However, the Company
primarily handles its customers' international fax transmission
requirements (domestic fax services in the United States and Canada were
only recently added) which constitute only a small portion of each
customer's fax transmission needs. UNIFI has already begun to make
significant investments necessary to broaden its service offerings to
provide customers with a more complete set of fax delivery services through
direct connection to desktop messaging software packages.
The next phase of expansion for the Company involves increasing the size of
the Intelligent Delivery Network to accommodate projected traffic growth and
to increase the percentage of its traffic that is on-net, thereby decreasing
variable delivery costs and improving gross margins. In addition, the Company
intends to broaden its existing service offering to leverage its large
existing customer base.
GROWTH STRATEGY
UNIFI's goal is to rapidly increase both the number of worldwide customers
that it services and the total volume of fax traffic transported over its
Intelligent Delivery Network. UNIFI's strategy for achieving this goal is to
leverage its existing operational and strategic competitive advantages by
expanding the Intelligent Delivery Network into additional countries and by
increasing the number of ways that customers can gain access to its
Intelligent Delivery Network service.
. Leverage the Intelligent Delivery Network Cost Advantage by Expanding the
Network. In order to capitalize on the efficiency advantage that the
Intelligent Delivery Network provides with respect to on-net traffic, the
Company is in the process of installing network nodes in each of the
countries where the Company terminates a large number of fax minutes. The
Company currently accepts cross-border fax traffic from its customers for
delivery anywhere in the world. Traffic destined for termination outside of
the ten countries (including Singapore and Australia) where the Company
currently has Intelligent Delivery
2
<PAGE>
Network nodes ("off-net" traffic) is costly to deliver because the Company
must utilize conventional long-distance telephone networks to reach those
off-net locations. The Company's strategy is to significantly expand the
Intelligent Delivery Network, both geographically and in terms of
additional network nodes, to accommodate traffic growth and to leverage the
Intelligent Delivery Network on-net efficiency advantage. During April
1997, approximately 64% of the Company's total fax traffic was on-net; the
Company's goal is to significantly improve overall gross margin performance
by increasing the percentage of on-net traffic through this node expansion
program. There can be no assurance, however, that the Company will be
successful in achieving this goal.
. Grow the Customer Base by Leveraging the Existing Global Sales/Service
Infrastructure. The Company's goal is to further accelerate its customer
growth rate and traffic growth rate by establishing sales channels in
approximately two new countries in 1997 (bringing the total to 10 revenue
generating countries by the end of 1997). The Company plans to achieve this
goal by leveraging its existing global sales and service infrastructure by
expanding to new countries located adjacent to existing operating units.
The Company believes that revenue from additional countries can be
generated quickly and efficiently by providing general management,
technical support, administration and account management services to the
new markets via the existing country units.
. Grow Traffic Minutes by Leveraging the Company's Large, Corporate Customer
Base. UNIFI's revenue growth to date has been based on international
traffic originating solely from fax machines. UNIFI has an existing (as of
April 30, 1997) base of approximately 9,886 customers (excluding non-
revenue trial accounts and operations in China). The Company's account base
grew by 762 in October 1996, 840 in November 1996, 558 in December 1996
(due to seasonality), 779 in January 1997, 827 in February 1997, 795 in
March 1997 and 833 in April 1997 (in each case including a substantial
number of non-revenue trial accounts). However, the Company primarily
handles its customers' international fax transmission requirements
(domestic fax services in the United States and Canada were only recently
added), which constitute only a small portion of each customer's fax
transmission needs. UNIFI has already begun to make the investments
necessary to broaden its service offering to provide customers with a more
complete set of fax delivery services through direct connection to desktop
messaging software packages. The following product line extensions are in
the process of being field tested and are currently scheduled to be
introduced commercially in 1997:
. Domestic fax service within the Japan and Germany. Provision of domestic
service is expected to open up additional substantial fax markets to
UNIFI inside these four countries.
. Domestic and international Intelligent Delivery Network service from the
desktop using e-mail and other LAN-based software. This service will
allow customers to send and receive fax documents from the desktop via
their existing e-mail or LAN-based systems.
. Internet accessible fax services. This product will allow customers to
send and receive fax documents via existing Internet connections
utilizing the Company's secure and reliable Intelligent Delivery
Network.
. Broadcast fax service (domestic and international).
The Company is currently providing LAN-based facsimile service from the
desktop to Union Bank of Switzerland's London office utilizing fax server
technology. UNIFI has also entered into a strategic relationship with Control
Data Systems ("CDS") to jointly develop an e-mail-to-fax outsourcing service
that will be designed to allow business customers to send and receive fax
documents from both LAN- and host-based e-mail systems. This new service will
be based on integrating CDS's X.400 messaging technology with the Company's
Intelligent Delivery Network. The Company expects that the joint product will
be marketed to CDS's existing customer base during 1997 and then extended to a
broader business audience in 1998. CDS's stated customer base includes
approximately 170 "Global 2000" companies and approximately 3.5-5.0 million
end users.
3
<PAGE>
The Company has also entered into definitive agreements or agreements in
principle to establish strategic relationships with three software companies
that are focused on providing LAN-based and Internet-based fax software
packages including, RedBox Holdings N.V. ("RedBox"), NetXchange Communications,
Inc., and PonyExpress, Inc. The Company expects to jointly develop software
products that will enable its customers to gain access to UNIFI's Intelligent
Delivery Network via a LAN-based or Internet-based connection utilizing a
standard fax server or browser interface. Each of those transactions is subject
to certain significant conditions, including definitive documentation, and
there can be no assurance that any such transaction will be consummated.
INTEGRATING SERVICES BEYOND FAX
Unified Mail Box Messaging Services. As computer and telephony applications
continue to converge, the Company believes that electronic messaging formats
such as e-mail and voice-mail will grow in importance in the more developed
markets. UNIFI believes that its service paradigm and transmission network is
equally applicable to these messaging environments. Further, UNIFI has
positioned itself to provide electronic messaging services in support of this
new unified mail-box environment. As part of its agreement to develop an e-
mail-to-fax outsourcing service with CDS, UNIFI has licensed CDS's X.400 e-mail
transport technology. UNIFI intends to utilize this technology to provide e-
mail messaging over its Intelligent Delivery Network.
The Company's growth plans are subject to numerous factors outside of its
control, including rapid regulatory and technological change and the activities
of its competitors. Although the Company's Intelligent Delivery Network is
currently operational, the Company has generated substantial operating losses
since its inception. The Company currently expects that the net proceeds of the
Private Offering will be sufficient to satisfy the Company's liquidity needs
through the first quarter of 1998; however, there can be no assurance to that
effect. The Company will be required to obtain substantial additional debt or
equity financing (which may include secured equipment financing) (the
"Additional Financing") which the Company believes (based on current
projections) is necessary to complete the build-out of the Intelligent Delivery
Network, to fund operating losses until the Company begins to earn positive net
cash flow from operations and to fund the Company's other liquidity needs.
There can be no assurance that the Company will be successful in introducing
new products and services, successfully implementing its growth strategy,
completing necessary additional financings or expanding the commercial
acceptance of its existing products and services. See "Risk Factors."
CORPORATE ORGANIZATION
The Company conducts its business in the United States directly and conducts
its business abroad through operating subsidiaries incorporated under the local
laws governing the markets in which they operate. All of the Company's foreign
operating subsidiaries, with the exception of Fax International Japan, Inc.
("Fax Japan") are 100% owned by the Company (except for nominal shares held by
certain officers of the Company in certain jurisdictions requiring more than
one shareholder). Fax Japan is 49% owned by Nichimen and ORIX.
THE EXCHANGE OFFER
The Exchange Offer...... The Company is hereby offering to exchange $1,000
principal amount of Exchange Notes for each $1,000
principal amount of Private Notes that are properly
tendered and accepted. The Company will issue
Exchange Notes on or promptly after the Expiration
Date. As of the date hereof, there is $175,000,000
aggregate principal amount of Private Notes
outstanding. See "The Exchange Offer."
4
<PAGE>
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer in
exchange for Private Notes may be offered for resale,
resold and otherwise transferred by a holder thereof
(other than (i) a broker-dealer who purchases such
Exchange Notes directly from the Company to resell
pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a person
that is an affiliate of the Company within the
meaning of Rule 405 under the Securities Act),
without compliance with the registration and
prospectus delivery provisions of the Securities Act;
provided that the holder is acquiring Exchange Notes
in the ordinary course of its business and is not
participating, and had no arrangement or
understanding with any person to participate, in the
distribution of the Exchange Notes. Each broker-
dealer that receives Exchange Notes for its own
account in exchange for Private Notes, where such
Private Notes were acquired by such broker-dealer as
a result of market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. See "The Exchange Offer--Resale of
the Exchange Notes."
REGISTRATION RIGHTS The Private Notes were sold by the Company on
AGREEMENT............... February 21, 1997 to Smith Barney Inc. (the "Initial
Purchaser") pursuant to a Purchase Agreement, dated
February 14, 1997, by and among the Company and the
Initial Purchaser (the "Purchase Agreement") as part
of Units consisting in the aggregate of $175,000,000
in aggregate principal amount of Private Notes and
175,000 Warrants to purchase 4,816,818 shares of the
Company's Common Stock, par value $.01 per share.
Pursuant to the Purchase Agreement, the Company and
the Initial Purchaser entered into a Registration
Rights Agreement, dated as of February 21, 1997 (the
"Registration Rights Agreement"), which grants the
holders of the Private Notes certain exchange and
registration rights. The Exchange Offer is intended
to satisfy such rights, which will terminate upon the
consummation of the Exchange Offer. The holders of
the Exchange Notes will not be entitled to any
exchange or registration rights with respect to the
Exchange Notes. See "The Exchange Offer--Termination
of Certain Rights."
EXPIRATION DATE......... The Exchange Offer will expire at 5:00 p.m., New York
City time, on , 1997, unless the Exchange Offer is
extended by the Company in its sole discretion, in
which case the term "Expiration Date" shall mean the
latest date and time to which the Exchange Offer is
extended. See "The Exchange Offer--Expiration Date;
Extensions; Amendments."
ACCRUED INTEREST ON THE EXCHANGE
NOTES AND THE PRIVATE
NOTES...................
The Exchange Notes will bear interest from and
including the date of issuance of the Private Notes
(February 21, 1997). Holders whose Private Notes are
accepted for exchange will be deemed to have waived
the right to receive any interest accrued on the
Private Notes. See "The Exchange Offer--Interest on
the Exchange Notes."
5
<PAGE>
CONDITIONS TO THE
EXCHANGE OFFER..........
The Exchange Offer is subject to certain customary
conditions that may be waived by the Company. The
Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Private Notes being
tendered for exchange. See "The Exchange Offer--
Conditions."
PROCEDURES FOR
TENDERING PRIVATE
NOTES................... Each holder of Private Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with such
Private Notes and any other required documentation to
Fleet National Bank, as exchange agent (the "Exchange
Agent"), at the address set forth herein. By
executing the Letter of Transmittal, the holder will
represent to and agree with the Company that, among
other things, (i) the Exchange Notes to be acquired
by such holder of Private Notes in connection with
the Exchange Offer are being acquired by such holder
in the ordinary course of its business, (ii) such
holder has no arrangement or understanding with any
person to participate in a distribution of the
Exchange Notes, (iii) that if such holder is a
broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes
of distributing the Exchange Notes, such holder will
comply with the registration and prospectus delivery
requirements of the Securities Act in connection with
a secondary resale transaction of the Exchange Notes
acquired by such person and cannot rely on the
position of the staff of the Commission set forth in
no-action letters (see "The Exchange Offer--Resale of
Exchange Notes"), (iv) such holder understands that a
secondary resale transaction described in clause
(iii) above and any resales of Exchange Notes
obtained by such holder in exchange for Private Notes
acquired by such holder directly from the Company
should be covered by an effective registration
statement containing the selling securityholder
information required by Item 507 or Item 508, as
applicable, of Regulation S-K of the Commission and
(v) such holder is not an "affiliate," as defined in
Rule 405 under the Securities Act, of the Company. If
the holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange for
Private Notes that were acquired as a result of
market-making activities or other trading activities,
such holder will be required to acknowledge in the
Letter of Transmittal that such holder will deliver a
prospectus in connection with any resale of such
Exchange Notes; however, by so acknowledging and by
delivering a prospectus, such holder will not be
deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. See "The Exchange
Offer--Procedures for Tendering."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS.......
Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender such Private Notes in the
Exchange Offer should contact such registered holder
promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and
executing the Letter of Transmittal and delivering
such
6
<PAGE>
owner's Private Notes, either make appropriate
arrangements to register ownership of the Private
Notes in such owner's name or obtain a properly
completed bond power from the registered holder. The
transfer of registered ownership may take
considerable time and may not be able to be completed
prior to the Expiration Date. See "The Exchange
Offer--Procedures for Tendering."
Guaranteed Delivery Holders of Private Notes who wish to tender their
Procedures.............. Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any other
documentation required by the Letter of Transmittal
to the Exchange Agent prior to the Expiration Date
must tender their Private Notes according to the
guaranteed delivery procedures set forth under "The
Exchange Offer--Guaranteed Delivery Procedures."
Acceptance of the
Private Notes and
Delivery of the
Exchange Notes..........
Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company will
accept for exchange any and all Private Notes that
are properly tendered in the Exchange Offer prior to
the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered on
the earliest practicable date following the
Expiration Date. See "The Exchange Offer--Terms of
the Exchange Offer."
Withdrawal Rights....... Tenders of Private Notes may be withdrawn at any time
prior to the Expiration Date. See "The Exchange
Offer--Withdrawal of Tenders."
Certain Federal Income
Tax Considerations......
For a discussion of certain material federal income
tax considerations relating to the exchange of the
Exchange Notes for the Private Notes, see "Certain
Federal Income Tax Considerations."
Exchange Agent.......... Fleet National Bank is serving as the Exchange Agent
in connection with the Exchange Offer.
THE EXCHANGE NOTES
The Exchange Offer applies to $175,000,000 in aggregate principal amount of
the Private Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Private Notes except that (i) the exchange will have been
registered under the Securities Act and, therefore, the Exchange Notes will not
bear legends restricting the transfer thereof and (ii) holders of the Exchange
Notes will not be entitled to certain rights of holders of the Private Notes
under the Registration Rights Agreement, which rights will terminate upon
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be issued
under, and be entitled to the benefits of, the Indenture. For further
information and for definitions of certain capitalized terms used below, see
"Description of Exchange Notes."
Notes Offered........... $175 million in aggregate principal amount of 14%
Senior Notes due 2004.
Maturity Dated.......... March 1, 2004.
Interest Payment March 1 and September 1 of each year, commencing
Dates................... September 1, 1997.
7
<PAGE>
Optional Redemption..... The Notes will be redeemable, in whole or in part, at
the option of the Company at any time on or after
March 1, 2001 at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, to
the date of redemption. In addition, at any time
prior to March 1, 2000, the Company may redeem up to
33% of the aggregate principal amount of the Notes
originally issued with the net proceeds of one or
more Equity Offerings (as defined) at the redemption
price set forth herein; provided that not less than
67% of the Notes issued under the Indenture remained
outstanding immediately after giving effect to any
such redemption. See "Description of Exchange Notes--
Optional Redemption."
Change of Control....... Upon a Change of Control, each holder of the Notes
will have the right to require the Company to
repurchase such holder's Notes at 101% of the
principal amount thereof, plus accrued and unpaid
interest, if any, to the date of purchase. There can
be no assurance that the Company will have the
financial resources necessary to repurchase the Notes
upon a Change of Control. See "Description of
Exchange Notes--Change of Control."
Ranking.................
The Notes will represent general unsecured senior
obligations of the Company. The Company conducts
substantial business through its subsidiaries. The
Notes will be effectively subordinated to all
Indebtedness and other liabilities of the Company's
subsidiaries (including trade payables). As of March
31, 1997, on a pro forma basis after giving effect to
the application of the proceeds thereof, the
Company's subsidiaries would have had approximately
$5.7 million of liabilities (including trade
payables) outstanding to which holders of the Notes
would have been effectively subordinated in right of
payment. The Indenture governing the Notes will
permit the Company and its subsidiaries to incur
additional indebtedness to fund the expansion of the
Company's network and for other permitted purposes
and to secure such indebtedness with liens on the
assets of the Company and its subsidiaries.
Escrow of Proceeds...... Concurrently with the closing of the Private
Offering, the Company deposited with the Escrow Agent
an amount of U.S. Government Securities that,
together with the proceeds from the investment
thereof, will be sufficient to pay when due the first
four interest payments on the Notes. Such funds will
be used to make the first four interest payments,
with any balance to be retained by the Company. See
"Description of Exchange Notes--Disbursement of
Funds--Escrow Account."
Certain Covenants....... The Indenture governing the Exchange Notes contains
certain covenants which, among other things, will
restrict the ability of the Company and its
Restricted Subsidiaries (as defined) to (i) incur
additional indebtedness; (ii) enter into sale and
leaseback transactions, (iii) pay dividends or make
distributions in respect of its capital stock or make
certain other restricted payments; (iv) create liens;
(v) enter into certain transactions with affiliates
or related persons; (vi) make certain asset sales; or
(vii) consolidate, merge or sell all or substantially
all of its assets. These covenants are subject to
important exceptions and qualifications. See
"Description of Exchange Notes--Certain Covenants."
8
<PAGE>
RISK FACTORS
An investment in the Exchange Notes involves a high degree of risk.
Accordingly, prospective purchasers of the Exchange Notes should carefully
consider the factors set forth under "Risk Factors" prior to making an
investment in the Exchange Notes and should be able to afford a complete loss
of their investment.
9
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The Summary Consolidated Statements of Operations Data for the years ended
December 31, 1994, 1995 and 1996 and the Summary Consolidated Balance Sheet
Data as of December 31, 1995 and 1996 set forth below, have been derived from
the Consolidated Financial Statements of UNIFI audited by Arthur Andersen LLP,
independent public accountants, and should be read in conjunction with such
Consolidated Financial Statements and the notes thereto included in this
Prospectus. The Summary Consolidated Statement of Operations Data and Summary
Consolidated Balance Sheet Data for the years ended December 31, 1992 and 1993
have been derived from audited Consolidated Financial Statements of UNIFI that
are not included in this Prospectus. The Summary Consolidated Statement of
Operations Data provided for the three months ended March 31, 1996 and 1997,
and the Summary Consolidated Balance Sheet Data as of March 31, 1997 are
unaudited and have been derived from the unaudited Consolidated Financial
Statements of UNIFI included in this Offering Memorandum. These unaudited
Consolidated Financial Statements have been prepared on the same basis as the
audited Consolidated Financial Statements and, in the opinion of the Company's
management, contain all adjustments, consisting only of normal recurring
accruals, necessary for the fair presentation of the consolidated balance sheet
as of March 31, 1997 and the results of operations for such periods.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- ------------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- -------- -------- -------- --------------- --------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues.............. $ 475 $ 3,943 $ 6,952 $ 10,664 $ 25,218 $ 4,043 $ 9,237
------- ------- -------- -------- -------- -------- --------
Costs and Expenses:
Cost of Revenues.... 957 2,979 4,656 7,840 27,599 4,098 9,396
Sales and Customer
Service............ 940 2,611 8,326 11,837 25,706 4,228 8,692
Research and
Development........ 679 1,381 1,656 4,810 11,620 1,721 2,430
General and
Administrative..... 610 1,496 1,800 2,676 4,165 422 993
Information
Systems............ -- -- 290 803 3,527 612 905
------- ------- -------- -------- -------- -------- --------
Total Costs and
Expenses........... 3,186 8,467 16,728 27,966 72,617 11,081 22,416
Loss From Operations.. (2,711) (4,524) (9,776) (17,302) (47,399) (7,038) (13,179)
Interest and Other
Income (Expense),
Net.................. (61) (209) (509) 165 (2,462) (231) (3,609)
------- ------- -------- -------- -------- -------- --------
Net Loss Before
Minority Interest.... (2,772) (4,733) (10,285) (17,137) (49,861) (7,269) (16,788)
Minority Interest(1).. -- -- 1,525 2,480 948 402 --
------- ------- -------- -------- -------- -------- --------
Net Loss.............. $(2,772) $(4,733) $ (8,760) $(14,657) $(48,913) $ (6,867) $(16,788)
======= ======= ======== ======== ======== ======== ========
Net Loss Per Common
Share(2)............. $ (0.85) $ (1.42) $ (2.64) $ (4.26) $ (13.04) $ (1.84) $ (4.43)
Weighted Average
Common Shares
Outstanding.......... 3,271 3,323 3,323 3,437 3,752 3,726 3,790
OTHER FINANCIAL DATA:
EBITDA(3)............. $(2,540) $(4,006) $ (6,441) $(12,016) $(40,036) $ (5,604) $(10,054)
Capital
Expenditures(4)...... 885 2,162 4,486 5,883 22,558 4,110 762
Interest Expense...... (62) (204) (602) (411) (2,499) (62) (4,278)
Ratio of Earnings to
Fixed Charges(5)..... -- -- -- -- -- -- --
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- ---------------
1992 1993 1994 1995 1996 1997
------- ------- -------- -------- -------- ---------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, Cash Equivalents
and Short-term
Investments(6)....... $ 43 $ 180 $ 4,447 $ 11,124 $ 5,630 $150,868
Working Capital
(Deficiency)......... (1,018) (2,584) (1,376) 6,633 (25,936) 105,881
Total Assets.......... 1,135 2,578 5,393 25,378 41,184 191,406
Long-term Debt........ 523 2,437 1,675 9,703 46,613 210,420
Shareholders' Equity
(Deficit)............ (595) 2,578 9,981 8,871 (42,507) (47,519)
</TABLE>
10
<PAGE>
- --------
(1) See Note 2(b) to the Company's Consolidated Financial Statements.
(2) See Note 2(k) to the Company's Consolidated Financial Statements.
(3) EBITDA means net loss plus interest expense, income tax expense,
depreciation and amortization expense and all other non-cash charges, less
any non-cash items which have the effect of increasing net income or
decreasing net income or decreasing net loss. Information with respect to
EBITDA is included herein because a similar measure will be used in the
Indenture (as defined) with respect to the computation of certain
covenants and because it is a widely accepted financial indicator of a
company's ability to service debt. EBITDA should not be considered in
isolation from, as a substitute for or as being more meaningful than net
income, cash flows from operating activities or other income or cash flow
statement data prepared in accordance with generally accepted accounting
principles and should not be construed as an indication of the Company's
operating performance or as a measure of liquidity. EBITDA, as presented
herein, may be calculated differently by other companies and, as such,
EBITDA amounts presented herein may not be comparable to other similarly
titled measure of other companies.
(4) Includes assets acquired under capital lease arrangements of approximately
$1,546,000, $2,545,000, $730,000 and $2,420,000 in 1993, 1994, 1995 and
1996, respectively.
(5) For the purpose of calculating the ratio of earnings to fixed charges,
earnings represent loss from continuing operations before income taxes
plus fixed charges. Fixed charges consist of interest expense on all
indebtedness plus the interest portion of rental expense on non-cancelable
leases and amortization of debt issuance costs and debt discount. The
Company's earnings have been inadequate to meet its fixed charges in 1992,
1993, 1994, 1995, 1996 and the three month periods ended March 31, 1996
and 1997 by $2,711,000, $4,528,000, $8,159,000, $14,246,000, $46,414,000,
$6,804,000 and $12,500,000, respectively.
(6) Includes approximately $47 million of funds that will be deposited in the
escrow account pursuant to the Indenture. See "Description of the Senior
Notes--Disbursement of Funds--Escrow Account."
11
<PAGE>
RISK FACTORS
An investment in the Exchange Notes is subject to a number of risks,
including, but not limited to, those set forth below. The following factors,
together with the other information contained herein, should be considered
carefully by prospective investors in evaluating an investment in the Exchange
Notes offered hereby.
CAUTIONARY STATEMENTS WITH RESPECT TO FORWARD LOOKING STATEMENTS
This Prospectus includes "forward looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Although the Company believes
that its plans, intentions and expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such plans,
intentions or expectations will be achieved. Important factors that could
cause actual results to differ materially from the Company's forward looking
statements are set forth below and elsewhere in this Prospectus. Furthermore,
the Company does not intend to update or revise the forward looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Prospective purchasers are cautioned not
to place undue reliance on any of the forward looking statements included
herein. All forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the
cautionary statements set forth below.
FAILURE TO EXCHANGE PRIVATE NOTES
Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documentation. Therefore, holders of Private Notes desiring to tender such
Private Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under
any duty to give notification of defects or irregularities with respect to
tenders of Private Notes for exchange. Private Notes that are not tendered or
are tendered but not accepted will, following consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer
thereof. In addition, any holder of Private Notes who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Private Notes, where such Private Notes were acquired by such
broker-dealer as a result of market-making activities or any other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. To the extent that Private Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Private Notes could be adversely affected due to
the limited amount, or "float," of the Private Notes that are expected to
remain outstanding following the Exchange Offer. Generally, a lower "float" of
a security could result in less demand to purchase such security and could,
therefore, result in lower prices for such security. For the same reason, to
the extent that a large amount of Private Notes are not tendered or are
tendered and not accepted in the Exchange offer, the trading market for the
Exchange Notes could be adversely affected. See "Plan of Distribution" and
"The Exchange Offer."
HISTORICAL AND ANTICIPATED OPERATING LOSSES; NEGATIVE CASH FLOW FROM
OPERATIONS
Since inception, UNIFI has been primarily engaged in start-up activities and
the build-out of its network, both of which require substantial expenditures.
Consequently, UNIFI has reported operating losses before interest of
approximately $9.8 million, $17.3 million, $47.4 million, $6.8 million and
$12.5 million during 1994, 1995, 1996, and for the three months ended March
31, 1996 and 1997, respectively, and net cash outflow before financing of
approximately $10.5 million, $20.4 million, $43.2 million, $8.8 million and
$23.8 million for the years ended December 31, 1994, 1995, 1996, and for the
three months ended March 31, 1996 and 1997, respectively. Further development
of the Company's business and the expansion of its network will require
significant additional expenditures and the Company expects that it will have
significant operating losses and will record significant net cash outflows
before financing in the near term. A substantial portion of the proceeds from
the Private Offering will be utilized to fund working capital losses. There
can be no assurance that the
12
<PAGE>
Company will have sufficient resources to complete such expenditures and make
principal or interest payments with respect to the Exchange Notes. See "--
Substantial Leverage; Ability to Service Indebtedness," "--Need for Additional
Financing" and "Management's Discussion and Analysis of Results of Operations
and Financial Condition--Liquidity and Capital Resources."
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
The Company is highly leveraged. On March 31, 1997 the Company and its
subsidiaries had approximately $230 million in aggregate principal face value
amount of indebtedness (without discounting the face value of the Notes for
the value of the Warrants) outstanding. In addition, the Company has recorded
a substantial deficiency of earnings to fixed charges in all fiscal years
since inception. The Indenture permits the Company and its subsidiaries to
incur additional indebtedness to fund the expansion of the Company's network
and for other permitted purposes and to secure such indebtedness with liens on
the assets of the Company and its subsidiaries. See "Description of Exchange
Notes--Certain Covenants." In addition, the Company currently expects that the
net proceeds of the Private Offering will be sufficient to satisfy the
Company's liquidity needs through the first quarter of 1998 (although there
can be no assurance to that effect). The Company will be required to obtain
substantial additional debt or equity financing as soon as practicable
following the Private Offering to complete the build-out of the Intelligent
Delivery Network, to fund operating losses until the Company begins to earn
positive net cash flow and to fund the Company's other liquidity needs.
Holders of secured indebtedness will have priority in right of payment to the
extent of the value of the assets securing such indebtedness. The ability of
the Company and its subsidiaries to make scheduled payments with respect to
such indebtedness will depend upon, among other things, the Company's ability
to complete the necessary financing and the build-out of its network on a
timely and cost-effective basis, the market acceptance and customer demand for
the Company's services and the future operating performance of the Company.
Each of these factors is, to a large extent, subject to economic, financial,
competitive, regulatory and other factors, many of which are beyond the
Company's control. If the Company does not generate sufficient increases in
cash flow from operations to repay the Exchange Notes at maturity, it could
attempt to refinance the Exchange Notes; however, no assurance can be given
that such a refinancing would be available on terms acceptable to the Company,
or at all. Any failure by the Company to satisfy its obligations with respect
to the Exchange Notes at maturity (with respect to payments of principal) or
prior thereto (with respect to payments of interest or required repurchases)
would constitute a default under the Indenture and could cause a default under
agreements governing other indebtedness of the Company. In addition, there can
be no assurance that the Company will have available the financial resources
necessary to repurchase any or all Exchange Notes tendered upon a Change of
Control. See "--Need for Additional Financing," "--Historical and Anticipated
Operating Losses; Negative Cash Flow from Operations," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Description of Exchange Notes--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness."
The Company conducts substantial business operations through its
subsidiaries. The Exchange Notes will be effectively subordinated to all
existing and future indebtedness and other liabilities (including trade
payables) of the Company's subsidiaries since the Company's right to receive
any distribution from any such subsidiary upon its liquidation or
reorganization will be subject to the prior satisfaction of the claims of such
subsidiary's creditors (including trade creditors). As of March 31, 1997, the
Company's subsidiaries had approximately $5.7 million of total indebtedness
and other liabilities outstanding. The Company's subsidiaries are expected to
incur additional indebtedness in connection with the build-out of the
Company's network, working capital requirements and development costs. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Liquidity and Capital Resources." The Indenture will limit, but
not prohibit, the ability of the Company and its subsidiaries to incur
additional indebtedness. The Company's obligations under the Exchange Notes
will be effectively subordinated to any such additional indebtedness of its
subsidiaries.
The degree to which the Company is leveraged could have important
consequences for holders of the Exchange Notes, including (i) making it more
difficult for the Company to satisfy its obligations with respect to
13
<PAGE>
the Exchange Notes, (ii) increasing the Company's vulnerability to general
adverse economic and industry conditions, (iii) limiting the Company's ability
to obtain additional financing to complete the build-out of its network, fund
future working capital, capital expenditures and other general corporate
purpose requirements, (iv) requiring the dedication of a substantial portion
of the Company's cash flow from operations to the payment of principal of, and
interest on, its indebtedness, thereby reducing the availability of such cash
flow to fund working capital, capital expenditures or other general corporate
purposes, (v) limiting the Company's flexibility in planning for, or reacting
to, changes in its business and the industry, and (vi) placing the Company at
a competitive disadvantage vis-a-vis less-leveraged competitors. In addition,
the Company's operating and financial flexibility is limited by covenants
contained in agreements governing the indebtedness of the Company, including
the Indenture. Among other things, these covenants limit or may limit the
ability of the Company and its subsidiaries to incur additional indebtedness,
pay dividends or make distributions to its stockholders or make certain other
restricted payments, create certain liens upon assets, apply the proceeds from
the dispositions of certain assets or enter into certain transactions with
affiliates. There can be no assurance that such covenants will not adversely
affect the Company's ability to finance its future operations or capital needs
or to engage in other business activities which may be in the interests of the
Company. See "Description of Exchange Notes--Certain Covenants" and
"Description of Certain Indebtedness."
DEVELOPMENT STAGE COMPANY; SHORT OPERATING HISTORY
The Company began operations by sending fax document transmissions from the
United States to Japan in April 1992 and is still developing. Moreover, the
Company only began originating fax document transmissions from Japan in
February 1995 and from its other markets during the first seven of months of
1996. Accordingly, the Company has a short operating history upon which an
evaluation of the Company's prospects in each of its markets can be made.
Since inception, the Company has been engaged in the provision of enhanced fax
services, the recruitment of key management and technical personnel and
raising capital to fund its operations and the development of the Intelligent
Delivery Network and its existing and planned electronic messaging services.
The Company's viability, profitability and growth depend upon successful
expansion of its network and implementation of its growth plan. There can be
no assurance that any of the Company's growth plans will be successful. The
prospects for the Company's success must be considered in light of the risks,
expenses and difficulties often encountered in the establishment of a new
business in a continually evolving industry subject to rapid technological and
price changes, and characterized by an increasing number of market
competitors. The risks, expenses and difficulties often encountered in
shifting from the research and development of prototype products to the
commercialization of new products based on innovative technology must also be
considered. See "Business."
DEPENDENCE ON NETWORK INFRASTRUCTURE
The Company's future success will depend to a significant degree upon the
capacity, reliability and security of its network infrastructure, and in
particular upon the ability of the Company to continue deploying network nodes
in different countries throughout the world. A network node is a group of
specially configured micro-computers and assorted telecommunications equipment
that allows the Company's systems to interface with telecommunications systems
operated by other companies, similar to what is commonly referred to in the
telecommunications industry as a "point of presence." The Company must
continue to expand and adapt its existing network infrastructure as the number
of customers and the volume of traffic they wish to transmit increase. The
Company must install additional network nodes in countries to which the
Company's customers direct significant portions of their transmissions in
order to improve operating results by reducing the use of expensive third-
party telecommunications carriers. The expansion and adaptation of the
Company's existing network infrastructure, and the addition of new nodes in
different countries, will require substantial financial, operational and
management resources. In addition, such activities are and will remain subject
to favorable political, economic and regulatory circumstances in host
countries. There can be no assurance that the Company will be able to expand,
adapt or add to its network infrastructure to meet additional demand on a
timely basis, or at a commercially reasonable cost, or at all. See "Business--
The Intelligent Delivery Network" and "--Regulation."
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RISKS ASSOCIATED WITH ANTICIPATED GROWTH
The Company has experienced rapid growth. As the Company's business develops
and expands, the Company will need to implement enhanced operational and
financial systems and will require additional employees and management,
operational and financial resources. Specifically, the Company's customer
service personnel currently require a high level of support from information
technology staff and the Company anticipates that it will need to continue to
provide training to customer service personnel involved in connecting new
customers and in providing new services. There can be no assurance that the
Company will successfully implement and maintain such operational and
financial systems or successfully obtain, integrate and utilize the employees
and management, operational and financial resources necessary to manage a
developing and expanding business in an evolving and increasingly competitive
industry. Failure to implement such systems successfully, hire and integrate
such employees or use such resources effectively could have a material adverse
effect on the Company.
NEED FOR ADDITIONAL FINANCING
From inception through March 31, 1997, the Company invested approximately
$120 million (in excess of revenues) to finance the development of the
Intelligent Delivery Network technology and to roll out and operate a portion
of its network. The Company expects to continue to make significant capital
outlays for the foreseeable future to fund the remaining cost of building and
operating its network prior to the time that it begins to generate positive
cash flows from operations and for the foreseeable future thereafter. The
Company currently expects that the net proceeds of the Private Offering will
be sufficient to satisfy the Company's liquidity needs through the first
quarter of 1998; however, there can be no assurance to that effect. If the
Company's plans or assumptions change, if its assumptions prove to be
inaccurate, if the Company experiences unanticipated costs or competitive
pressures or if the net proceeds from the Private Offering otherwise prove to
be insufficient, the Company may be required to seek additional capital sooner
than currently anticipated.
The Company will be required to obtain substantial additional debt or equity
financing (which may include secured equipment financing) (the "Additional
Financing") that the Company believes (based on current projections) is
necessary to complete the build-out of the Intelligent Delivery Network, to
fund operating losses after the first quarter of 1998 until the Company begins
to earn positive net cash flow and to fund the Company's other liquidity
needs. However, there can be no assurance that any such debt or equity
financing will be available to the Company on favorable items or at all or
that the Company will generate positive net cash flow from operations on a
timely basis and in an amount that will be sufficient to meet its liquidity
needs or at all. In the event that the Company is unable to obtain such
additional capital or generate cash flow from operations, the Company will be
required to delay or to reduce the scope of its currently anticipated
expansion of the Intelligent Delivery Network, or take other actions which
could materially adversely affect the Company's business, results of
operations and financial condition and its ability to compete, and the value
of the Securities. Any delay in the expansion of the Intelligent Delivery
Network will delay the projected date on which the Company expects to begin
generating positive net cash flow from operations, thereby increasing the need
for additional financing.
There can be no assurance that the Company's current projection of cash flow
from operations (which will depend upon numerous future factors and
conditions, many of which are outside of the Company's control) will be
accurate. Projections are merely estimates of future events and actual events
should be expected to vary from current estimates, possibly materially.
Furthermore, there can be no assurance that any additional financing will be
available to the Company. In addition, if customer demand exceeds current
expectations and if such demand can be accommodated without adversely
affecting the quality of the Company's service, the Company is likely to
attempt to accelerate its expansion. If the Company elects to accelerate its
build-out or introduce new products or services, its funding needs will
increase, possibly to a significant degree, and there can be no assurance that
such funding will be available on favorable terms, or at all, or that all or a
significant portion of such funding will not be in the form of additional
indebtedness. See "--Substantial Leverage; Ability to Service Indebtedness"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
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Because the Company's cost of expanding its network and operating its
business, as well as the Company's revenues, will depend on a variety of
factors (including the ability of the Company to meet its expansion schedules,
the number of customers and the services for which they subscribe, the nature
and penetration of new services that may be offered by the Company, regulatory
changes and changes in technology) actual costs and revenues may vary from
expected amounts, possibly to a material degree, and such variations are
likely to affect the Company's future capital requirements. Accordingly, there
can be no assurance that the Company will not be required to raise substantial
additional capital in the future or that its current projections will prove to
be accurate. If the Company's current projection of its future net operating
losses or of future cash flows from operations is inaccurate in any material
respect or if the Company is unable to obtain the additional financing it
requires, the Company's cash needs could be higher than currently anticipated
and exceed its cash availability, which would have a material adverse effect
on the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Products and Services."
UNCERTAINTY OF MARKET ACCEPTANCE; POTENTIAL LACK OF CUSTOMER DEMAND
The Company's success is subject to a number of business, economic,
regulatory and competitive factors, many of which are beyond the Company's
control, including the extent to which prospective customers will switch from
their current fax service to the Company's. The Company's ability to service
its indebtedness, including the Notes, is subject to the successful
implementation of its growth strategy, which, in turn, is premised, among
other things, on the Company's expectation that demand for its current
services will increase significantly in its existing markets. The Company
began providing international fax-to-fax services in 1992. Moreover, the
Company has not commercially marketed any other electronic message delivery
services, such as broadcast fax service, LAN-to-fax services, domestic fax
services and e-mail and voice-mail services, and, therefore, the market
acceptance and customer demand for such services are uncertain. Certain of
these other services have not yet been beta tested or commercially introduced
and there can be no assurance that any of them will achieve market acceptance
or generate operating profits. Failure to gain market acceptance for current
or planned products and services would have a material adverse effect on the
Company's prospects. In addition, the Company has incurred and will continue
to incur significant operating expenses, has made, and will continue to make,
significant capital investments, has entered into operating leases, equipment
supply contracts and service arrangements, and is attempting to secure
financing, in each case based upon certain expectations as to the anticipated
market acceptance of, and customer demand for, the Company's services.
Accordingly, any material miscalculation by the Company with respect to its
operating strategy or business plan could have a material adverse effect on
the Company. See "--Need for Additional Financing," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
COMPETITION
The Company's success will depend on its ability to compete with a variety
of other telecommunications providers including, AT&T Corp. ("AT&T"), MCI
Communications Corp. ("MCI"), Sprint Corp. ("Sprint"), numerous national post,
telephone and telegraph companies ("PTTs") around the world (operators of
local public switched telephone networks ("PSTNs")), and other potential
competitors such as the regional Bell operating companies. The market is also
served by more specialized enhanced facsimile service providers that offer
basic store-and-forward services. The Company also faces potential competition
from Internet-based and other alternatives to fax services. Many of the
Company's competitors possess significantly greater financial, marketing,
technological and other resources than the Company and many offer enhanced
and/or basic fax communications services that would compete with those offered
by the Company. The Company cannot predict whether AT&T, MCI, Sprint, any PTTs
or any other competitor will expand its enhanced and/or basic fax
communications services business, and there can be no assurance that these or
other competitors will not commence or expand their fax businesses. If any of
the Company's competitors were to devote substantial resources to marketing
enhanced fax and other electronic messaging services to the Company's target
customer base, there could be an adverse effect on the Company's business. In
addition, certain of the Company's competitors may target discounts in the fax
market in order to gain an advantage in another market or with
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particular customers. The Company may be unable to compete with such discounts
on an economically feasible basis. The PTTs also generally have certain
competitive advantages that the Company and its other competitors do not have
due to their control over the intra-national transmission lines and connection
thereto, their ability to delay access to such lines and their relationship
with often protectionist regulatory authorities. If the PTT in any
jurisdiction uses its competitive advantages to their fullest extent, the
Company could be adversely affected.
The Company's receiving, queuing, routing and other systems hardware are
generally not proprietary to the Company and as a result, there can be no
assurance that such hardware will not be acquired or duplicated by the
Company's existing and potential competitors. Generally, the Company does not
have long-term agreements with its customers and there can be no assurance
that its customers will continue to transact business with the Company in the
future. In addition, even if there is continued growth in the use of enhanced
and/or basic fax services, there can be no assurance that potential customers
will not elect to use their own equipment and existing carriers to fulfill
their needs for enhanced and/or basic fax communications services. There also
can be no assurance that customers will not elect to use fax alternatives or
that companies offering such alternatives will not develop product features or
pricing policies which are more attractive to customers than those offered by
the Company. See "Business--Competition."
The provision of telecommunications services is and will continue to be
extremely competitive. Prices have decreased substantially over the last few
years in most of the markets in which the Company does business and prices are
expected to decline substantially over the next several years in all of the
markets where the Company does business or expects to do business. In
addition, substantially all of the Company's markets and expected future
markets were historically served by regulated or state run monopolies. As a
result, customers in many of these markets are not familiar with shopping for
fax services in a competitive marketplace and may be reluctant to use new
providers, such as the Company. The Company expects that competition will
increase in the future as the deregulation of telecommunications markets
world-wide accelerates.
Competition is based upon the type and quality of fax services offered,
customer service and price. The Company attempts to price its services below
the prices charged by the PTT and/or other major carriers in each of its
markets. The Company has no control over the prices set by its competitors and
some of the Company's larger competitors may be able to use their substantial
financial resources to create price competition in the countries in which the
Company operates. Although the Company does not believe that there is a
sufficiently strong economic incentive for the major carriers to pursue such a
pricing strategy or that such competitors are likely to engage in such a
course of action, there can be no assurance that vigorous price competition
will not occur. Any price competition could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, certain of the Company's competitors will provide potential
customers with a broader range of services than the Company currently offers
or can offer due to regulatory restrictions. See "Business--Regulation."
In addition to these competitive factors, recent and pending deregulation in
each of the Company's markets may encourage new entrants.
RISKS ASSOCIATED WITH RAPIDLY CHANGING INDUSTRY
The electronic messaging and international telecommunications industry is
changing rapidly due to, among other things, deregulation, privatization of
PTTs, technological improvements, expansion of telecommunications
infrastructure, the globalization of the world's economies and free trade.
There can be no assurance that the Company will be able to compete effectively
under, or adjust its contemplated plan of development to meet, changing market
conditions or that the Company will be able to implement its strategy or that
its strategy will be successful in this rapidly evolving market.
This market is also marked by the introduction of new products and services
and increased satellite and fiber optic cable transmission capacity for
services similar to those provided by the Company, including
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utilization of the Internet for international voice and data communications.
Future technological advances in the telecommunications industry may result in
the availability of new product delivery services (or increase the efficiency
of existing services). If a delivery technology becomes available that is more
cost-effective, the Company may be unable to access such technology or its use
may involve substantial capital expenditures which the Company may be unable
to finance. There can be no assurance that existing, proposed or as yet
undeveloped technologies will not render the Company's technology less
profitable or less viable, or that the Company will have available the
financial and other resources to compete effectively against companies
possessing such technologies. The Company is unable to predict which of the
many possible future products and services will meet evolving industry
standards and consumer demands. There can be no assurance that the Company
will be able to adapt to such technological changes or offer such services on
a timely basis or establish or maintain a competitive positions.
TECHNOLOGY RISKS
The Company's international fax-to-fax service is currently being
commercially marketed. However, certain of its planned document delivery
services are in various stages of development. See "Business--Products and
Services." The Company's LAN-to-fax service is being network tested but the
Company does not expect such services to be commercially available until late
1997. The Company's e-mail-to-fax service is currently being laboratory and
network tested and the Company's e-mail and voice-mail services are only in
the initial stages of development. No assurance can be given that such
services will prove to be commercially viable or that the Company will not
experience operational problems with such services after commercial
introduction that could delay or defeat the ability of such services to
generate revenue or operating profits. Future operational problems or the
inability to obtain additional necessary financings could increase the cost
of, or delay the Company's business plan which, in turn, could materially
adversely affect the success of the Company and its ability to satisfy its
obligations with respect to its indebtedness, including the Notes.
DEPENDENCE ON THIRD-PARTY CARRIERS
Currently, the Company does not own any telecommunications lines and does
not intend to construct or acquire any of its own transmission facilities. All
of the faxes sent by the Company's customers are and will continue to be
connected, at least in part, through transmission lines or satellite links
that the Company leases from third-party carriers. The lessors of such
facilities are competitors of the Company, and include, or may include in the
future, AT&T, MCI, Teleglobe Canada, Inc., British Telecommunications PLC,
France Telecom, Deutsche Telekom and Mercury Communications PLC. The Company's
lines are either leased on a per-minute basis (some with minimum volume
commitments) or, where the Company anticipates higher volumes of traffic, on a
monthly or longer-term fixed cost basis. The negotiation of lease agreements
involves estimates regarding future supply and demand for transmission
capacity as well as estimates of the calling patterns and traffic levels of
the Company's existing and future customers. The deterioration or termination
of the Company's relationships with one or more of its carrier vendors could
have a material adverse effect upon the Company's business, financial
condition and results of operations.
In many jurisdictions in which the Company conducts business or plans to
conduct business, the only current provider of significant intra-national
transmission facilities is the PTT. Accordingly, prior to full deregulation,
there may be only one source of intra-national transmission lines in these
countries and the Company may be required to lease transmission capacity at
artificially high rates from a provider that occupies a monopoly or near
monopoly position. Such rates may be too high to allow the Company to generate
gross profit on intra-national calls or international calls routed to a
Company node by means of such intra-national lines. In addition, PTTs will not
necessarily be required by law to allow the Company to lease transmission
lines. To the extent that applicable law requires PTTs to lease transmission
lines to the Company, delays may nevertheless be encountered with respect to
the commencement of operations and extensive delays can be expected with
respect to the negotiation of leases and interconnection agreements. In
addition, disputes may arise with respect to pricing terms and other matters.
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RISK OF SYSTEM FAILURE; SECURITY RISKS
The Company's operations are dependent upon its ability to protect its
network from interruption by damage from fire, earthquake, power loss,
telecommunications failure, unauthorized entry, computer viruses or other
events beyond the Company's control. Although the Company currently locates
its computer hardware and other telecommunications equipment at many sites,
there can be no assurance that the Company's existing and planned precautions
of backup systems, regular data backups and other procedures will be adequate
to prevent significant damage, system failure or data loss. Despite the
implementation of security measures by the Company, its infrastructure may
also be vulnerable to computer viruses, hackers or similar disruptive problems
caused by forces outside of the Company. Persistent problems continue to
affect public and private data networks, including computer break-ins and the
misappropriation of confidential information. Such environmental and human-
caused disruptions may jeopardize the reliability and security of information
stored in and transmitted over the Company's network, which may result in
significant liability to the Company and also may deter potential customers
from using the Company's services. Any damage, failure or security breach that
causes interruption or data loss in the Company's operations or those of its
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
The Company relies on third parties to supply key components of its network
infrastructure, including local and long-distance telecommunications services
and telecommunications node equipment, certain of which may be available only
from limited sources. In addition, LDDS Worldcom (USA), AT&T (USA), Viatel
(USA) and NTT (Japan) are the primary providers of telecommunications services
to the Company and accounted for 24%, 14%, 27% and 4%, respectively, of the
Company's expenditures on telecommunications services in February 1997. In
certain geographic markets, the market for telecommunications services is even
more concentrated due to the predominance of national PTTs. All of the
Company's fax traffic passes through long-distance lines, satellite links
and/or local loop telephone lines operated by firms other than the Company.
The Company has from time to time experienced interruptions of service from
its telecommunications carriers and there can be no assurance that the Company
will not experience such interruptions in the future. In addition, the
Company's contracts with its be no assurance that such telecommunications
providers will continue to provide services to the Company at attractive
rates, or at all, or that the Company will be able to obtain such services in
the future from these or other providers on the scale and within the time
frames required by the Company. Although the Company recently began to
implement satellite-based telecommunications services to supplement its land
lines of transmission, any failure to obtain such land-based
telecommunications services on a timely basis at an affordable cost, or any
significant delays or interruptions of service from such carriers, would have
a material adverse effect on the Company's business, financial condition and
results of operations.
All of the faxboards used in the Company's network nodes are supplied by
Brooktrout Technology, Inc. ("Brooktrout"). The Company purchases Brooktrout
faxboards on a non-exclusive basis pursuant to purchase orders issued by the
Company from time to time, carries a limited inventory of faxboards and has no
guaranteed supply arrangement with Brooktrout. In addition to faxboards,
certain other components used in the Company's network infrastructure are
supplied by limited sources on a non-exclusive, purchase order basis. There
can be no assurance that Brooktrout or the Company's other suppliers will not
enter into exclusive arrangements with the Company's competitors, or cease
selling these components to the Company at commercially reasonable prices, or
at all. The anticipated expansion of the Company's network infrastructure is
expected to place a significant demand on the Company's suppliers, some of
which have limited resources and production capacity. In addition, certain of
the Company's suppliers, in turn, rely on sole or limited sources of supply
for components included in their products. Failure of the company's suppliers
to adjust to meet such increasing demand may prevent them from continuing to
supply components and products in the quantities and the quality and at the
times required by the Company, or at all. The Company's inability to obtain
sufficient quantities of sole or limited source components or to develop
alternative sources if required could result in delays and increased costs in
the expansion of the Company's network infrastructure or the inability of the
Company to properly maintain its
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existing network infrastructure. Such occurrences would have a material
adverse effect on the Company's business, financial condition and results of
operations.
PROTECTION OF PROPRIETARY INFORMATION
The Company has applied for patent protection in the United States relating
to certain of its existing and proposed processes and services. There is no
assurance that any patents will be obtained. If obtained, there is no
assurance that any patents will afford the Company commercially significant
protection of its technologies or that the Company will have adequate
resources to enforce its patents. Patent applications in the United States are
maintained in secrecy until patents are issued, and since publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries by several months, the Company cannot be certain that it will be
the first creator of inventions covered by any patent application it makes or
the first to file patent applications on such inventions.
Competitors in both the United States and foreign countries, many of which
have substantially greater resources and have made substantial investments in
competing technologies, may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or otherwise interfere
with the Company's ability to make and sell its products. The Company has not
conducted an independent review of patents issued to third parties. In
addition, because of the developmental stage of the Company, claims that the
Company's products infringe on the proprietary rights of others are more
likely to be asserted after commencement of commercial sales incorporating the
Company's technology. Although the Company believes that its products do not
infringe on the patents or other proprietary rights of third parties, there
can be no assurance that other parties will not assert infringement claims
against the Company or that such claims will not be successful. There can also
be no assurance that competitors will not infringe on any patents obtained by
the Company. Defense and prosecution of patent suits, even if successful, are
both costly and time consuming. An adverse outcome in the defense of a patent
suit could subject the Company to significant liabilities to third parties,
require disputed rights to be licensed from third parties or require the
Company to cease selling its products.
The Company also relies on unpatented proprietary technology and there can
be no assurance that others may not independently develop the same or similar
technology or otherwise obtain access to the Company's unpatented technology.
To protect its trade secrets and other proprietary information, the Company
requires employees, consultants, advisors and collaborators to enter into
confidentiality agreements. There can be no assurance that these agreements
will provide meaningful protection for the Company's trade secrets, know-how
or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information. If the Company is unable to maintain the proprietary
nature of its technologies, the Company could be materially adversely
affected.
REGULATION
The Company is not currently subject to direct communications regulation by
the United States federal or state governments of its international fax-to-fax
service. However, the Company is subject to certain registration and other
regulatory requirements in certain of the countries to which it now provides
service and it may become subject to additional foreign regulations in the
future. Although the Company has undertaken a review of and believes that it
is in material compliance with all foreign regulations applicable to it in
countries where 5% or more of its current international traffic terminates,
there can be no assurance that this is the case. The Company may be subject to
regulations in these or other countries (where it has conducted no review of
applicable law) that limit or restrict its ability to provide existing or
proposed services or that expose it to fines or other penalties.
Certain of the domestic services that the Company now plans to provide in
the United States may subject it to federal regulation by the Federal
Communications Commission (the "FCC") and state regulation by certain public
service commissions. As a result, the Company may be required to file tariffs
and complete certification processes. In addition, certain of the services may
be subject to state rate and/or quality of service regulation.
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Although the Company does not believe any such federal or state regulation
will prohibit it from offering any proposed domestic service, the Company has
not completed a review of all regulations that may be applicable to it and
there can be no assurance that the Company will be able to offer all proposed
services to all areas of the United States.
Moreover, with respect to both existing and proposed foreign and domestic
operations, there can be no assurance that changes in current or future laws
or regulations or future judicial intervention would not have a material
adverse effect on the Company. The Company is unable to predict the effect
that any future foreign or domestic legislation or regulation may have on its
existing or future business. See "Business--Regulation."
DEPENDENCE ON KEY PERSONNEL
The Company's business is managed by a number of key personnel, the loss of
which could have a material adverse effect on the Company. In addition, as the
expansion of the Company's network progresses and its business develops and
expands, the Company believes that its future success will depend greatly on
its continued ability to attract and retain highly skilled and qualified
personnel. Currently the Company has entered into an employment agreement with
Douglas J. Ranalli. There can be no assurance that key personnel will continue
to be employed by the Company or that the Company will be able to attract and
retain qualified personnel in the future. Failure by the Company to retain or
attract such key personnel could have a material adverse effect on the
Company. See "Management."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company's growth strategy involves expanding its operations to numerous
foreign jurisdictions and a significant portion of the Company's current
operations are conducted and located abroad. International operations and
business expansion plans are subject to numerous additional risks, including
the impact of foreign government regulations, currency fluctuations, political
uncertainties and differences in business practices. There can be no assurance
that foreign governments will not adopt regulations or take other actions that
would have a direct or indirect adverse impact on the business or market
opportunities of the Company within such governments' countries. Furthermore,
there can be no assurance that the political, cultural and economic climate
outside the United States will be favorable to the Company's operations and
growth strategy. See "Business--Growth Strategy," "--Marketing and Customer
Service" and "Acquisitions of Fax Business of SingCom (Australia)."
Although the Company's subsidiaries have attempted, and will continue to
attempt, to match costs and revenues and borrowings and repayments in terms of
their respective local currencies, payment for a majority of purchased
equipment has been, and may continue to be, required to be made in currencies,
including dollars, other than local currencies. In addition, the value of the
Company's investment in a subsidiary is partially a function of the currency
exchange rate between the dollar and the applicable local currency. In
general, the Company does not execute hedge transactions to reduce its
exposure to foreign currency exchange rate risks. Accordingly, the Company may
experience economic loss and a negative impact on earnings with respect to its
holdings solely as a result of foreign currency exchange rate fluctuations,
which include foreign currency devaluations against the dollar. The countries
in which the Company's subsidiaries now conduct business generally do not
restrict the removal or conversion of local or foreign currency; however,
there can be no assurance this situation will continue.
RISKS RELATED TO POTENTIAL FUTURE ACQUISITIONS
The Company has signed a letter of intent with respect to the acquisition of
the fax business of SingCom (Australia). Following the consummation of the
Private Offering, the Company commenced negotiation of definitive
documentation which it is attempting to finalize. Although management believes
that this acquisition is in the best interest of the Company, it involves
substantial expenditures and risks on the part of the Company and has resulted
in additional operating losses for the initial period. There can be no
assurance that this
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acquisition will be completed successfully or, if completed, will yield the
expected benefits to the Company or will not materially adversely affect the
Company's business, financial condition or results of operations. See
"Acquisition of Fax Business of SingCom (Australia)" and "Use of Proceeds."
The Company may in the future pursue acquisitions of complementary services
or product lines, technologies or business, although the Company has no
present understandings, commitments or agreements with respect to any such
acquisitions except as described above. Future acquisitions by the Company
could result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities and an increase in amortization
expenses related to goodwill and other intangible assets, which could
materially adversely affect the Company's business, financial condition and
results of operations. Acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies, services and
products of the acquired companies and the diversion of management's attention
from other business concerns. In the event that any such acquisition were to
occur, there can be no assurance that the Company's business, financial
condition and results of operations would not be materially adversely
affected.
SEASONALITY
The Company faces seasonal variations in demand. Fax traffic declines during
periods with lower numbers of business days. For example, fax traffic to and
from Western Europe declines in August, the traditional summer holiday period
in the region.
FRAUDULENT TRANSFER CONSIDERATIONS
Under applicable provisions of the United States Bankruptcy Code or
comparable provisions of state fraudulent transfer or conveyance law, if the
Company, at the time it issued the Private Notes, (a) incurred such
indebtedness with the intent to hinder, delay or defraud creditors, or (b) (i)
received less than reasonably equivalent value or fair consideration and (ii)
(A) was insolvent at the time of such incurrence, (B) was rendered insolvent
by reason of such incurrence (and the application of the proceeds thereof),
(C) was engaged or was about to engage in a business or transaction for which
the assets remaining with the Company constituted unreasonably small capital
to carry on its business, or (D) intended to incur, or believe that it would
incur, debts beyond its ability to pay such debts as they mature, then, in
each such case, a court of competent jurisdiction could avoid, in whole or in
part, the Notes or, in the alternative, subordinate the Notes to existing and
future indebtedness of the Company. The measure of the insolvency for purposes
of the foregoing would likely vary depending upon the law applied in such
case. Generally, however, the Company would be considered insolvent if the sum
of its debts, including contingent liabilities, was greater than all of its
assets at a fair valuation, or if the present saleable value of its assets was
less than the amount that would be required to pay the probably liabilities on
its existing debts, including contingent liabilities, as such debts become
absolute and matured. Management believes that, for purposes of the United
States Bankruptcy Code and state fraudulent transfer or conveyance laws, the
Private Notes were issued without the intent to hinder, delay or defraud
creditors and for proper purposes and in good faith, and that the Company will
receive reasonably equivalent value or fair consideration therefor, and that
after the issuance of the Private Notes and the application of the net
proceeds therefrom, the Company is solvent, will have sufficient capital for
carrying on its business and will be able to pay its debts as they mature.
However, there can be no assurance that a court passing on such issues would
agree with the determination of management.
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
As of the date hereof, the only registered holder of Private Notes is Cede &
Co., as the nominee of DTC. The Company believes that, as of the date hereof,
such holder is not an "affiliate" (as such term is defined in Rule 405 under
the Securities Act) of the Company. Prior to the Private Offering, there had
been no market for the Notes and there can be no assurance that such a market
will develop or, of such a market develops, as to the liquidity of such
market. The Exchange Notes will not be listed on any securities exchange, but
the Private Notes are eligible for trading in the National Association of
Securities Dealers, Inc.'s Private Offering, Resales and
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Trading through Automatic Linkages (PORTAL) market. The Exchange Notes are new
securities for which there is currently no market. The Exchange Notes may
trade at a discount from their initial offering price, depending upon
prevailing interest rates, the market for similar securities, the performance
of the Company and other factors. The Company has been advised by the Initial
Purchasers that they intend to make a market in the Exchange Notes, as well as
the Private Notes, as permitted by applicable laws and regulations; however,
the Initial Purchasers are not obligated to do so and any such market making
activities may be discontinued at any time without notice. In addition, such
market making activities may be limited during the Exchange Offer and the
pendency of the Shelf Registration Statement (as defined in the Registration
Rights Agreement). Therefore, there can be no assurance that an active market
for the Notes will develop. See "The Exchange Offer" and "Plan of
Distribution."
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on February 21, 1997 (the
"Closing Date") to the Initial Purchaser pursuant to the Purchase Agreement as
part of Units consisting of the Private Notes and 175,000 Warrants to purchase
in the aggregate 4,816,818 shares of the Company's Common Stock, $.01 par
value. The Initial Purchaser subsequently sold the Units (including the
Private Notes) to (i) "qualified institutional buyers" ("QIBs"), as defined in
Rule 144A under the Securities Act ("Rule 144A"), in reliance on Rule 144A. As
a condition to the sale of the Units (including the Private Notes), the
Company and the Initial Purchaser entered into the Registration Rights
Agreement on February 21, 1997. Pursuant to the Registration Rights Agreement,
the Company agreed that, unless the Exchange Offer is not permitted by
applicable law or Commission policy, it would (i) file with the Commission a
Registration Statement under the Securities Act with respect to the Exchange
Notes within 60 days after the Closing Date, (ii) use its best efforts to
cause such Registration Statement to become effective under the Securities Act
within 150 days after the Closing Date and (iii) use its best efforts to
consummate the Exchange Offer within 45 days after the date on which the
Registration Statement was declared effective by the Commission. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement. The Registration Statement is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement and the Purchase
Agreement.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
any such holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) who exchanges Private Notes for Exchange
Notes in the ordinary course of business and who is not participating, does
not intend to participate, and has no arrangement with any person to
participate, in a distribution of the Exchange Notes, will be allowed to
resell Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes
a prospectus that satisfies the requirements of Section 10 of the Securities
Act. However, if any holder acquires Exchange Notes in the Exchange Offer for
the purpose of distributing or participating in the distribution of the
Exchange Notes or is a broker-dealer, such holder cannot rely on the position
of the staff of the Commission enumerated in certain no-action letters issued
to third parties and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction,
unless an exemption from registration is otherwise available. Each broker-
dealer that receives Exchange Notes for its own account in exchange for
Private Notes, where such Private Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received
in exchange for Private Notes where such Private Notes were acquired by such
broker-dealer as a result of market-making or other trading activities.
Pursuant to the Registration Rights Agreement, the Company has agreed to make
this Prospectus, as it may be amended or supplemented from time to time,
available to broker-dealers for use in connection with any resale for a period
of 180 days after the Expiration Date. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date. The
Company will issue $1,000 principal amount of Exchange Notes in exchange for
each $1,000 principal
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amount of outstanding Private Notes surrendered pursuant to the Exchange
Offer. Private Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) holders of the Exchange Notes will
not be entitled to any of the rights of holders of Private Notes under the
Registration Rights Agreement, which rights will terminate upon the
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be issued
under, and be entitled to the benefits of, the Indenture, which also
authorized the issuance of the Private Notes, such that both series of Notes
will be treated as a single class of debt securities under the Indenture.
As of the date of this Prospectus, $175,000,000 in aggregate principal
amount of the Private Notes are outstanding and registered in the name of Cede
& Co., as nominee for DTC. Only a registered holder of the Private Notes (or
such holder's legal representative or attorney-in-fact) as reflected on the
records of the Trustee under the Indenture may participate in the Exchange
Offer. There will be no fixed record date for determining registered holders
of the Private Notes entitled to participate in the Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange Offer. The Company intends
to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the
Securities Act, the Exchange Act and the rules and regulations of the
Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on ,
1997, unless the Company, in its sole discretion, extends the Exchange Offer,
in which case the term "Expiration Date" shall mean the latest date and time
to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, (ii) mail to the
registered holders an announcement thereof and (iii) issue a press release or
other public announcement which shall include disclosure of the approximate
number of Private Notes deposited to date, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date. Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "--Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such
delay, extension or termination to the Exchange Agent. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof to the registered holders. If
the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, the Company will promptly
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<PAGE>
disclose such amendment by means of a prospectus supplement that will be
distributed to the registered holders, and the Company will extend the
Exchange Offer for a period of five to ten business days, depending upon the
significance of the amendment and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such five to ten
business day period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 14% per annum.
Interest on the Exchange Notes will be payable semi-annually in arrears on
each March 1 and September 1, commencing September 1, 1997. Holders of
Exchange Notes will receive interest on September 1, 1997 from the date of
initial issuance of the Exchange Notes, plus an amount equal to the accrued
interest on the Private Notes from the date of initial delivery to the date of
exchange thereof for Exchange Notes. Holders of Private Notes that are
accepted for exchange will be deemed to have waived the right to receive any
interest accrued on the Private Notes.
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile
thereof, have the signatures thereon guaranteed if required by the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile to the Exchange Agent at the address set forth below under "--
Exchange Agent" for receipt prior to the Expiration Date. In addition, either
(i) certificates for such Private Notes must be received by the Exchange Agent
along with the Letter of Transmittal, (ii) a timely confirmation of a book-
entry transfer (a "Book-Entry Confirmation") of such Private Notes, if such
procedure is available, into the Exchange Agent's account at the Depository
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (iii) the
holder must comply with the guaranteed delivery procedures described below.
The tender by a holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD
BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name
or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box titled "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible
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Institution. In the event that signatures on a Letter of Transmittal or a
notice of withdrawal, as the case may be, are required to be guaranteed, such
guarantee must be made by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act which is a member of one of the recognized
signature guarantee programs identified in the Letter of Transmittal (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Private Notes listed therein, such Private Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Private
Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Private Notes not properly tendered or any Private Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Private Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Private Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Private Notes, neither
the Company, the Exchange Agent nor any other person shall incur any liability
for failure to give such notification. Tenders of Private Notes will not be
deemed to have been made until such defects or irregularities have been cured
or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Private Notes that are not tendered pursuant to the
Exchange Offer, the Company reserves the right in its sole discretion to
purchase or make offers for any Private Notes that remain outstanding
subsequent to the Expiration Date or, as set forth below under "--Conditions,"
to terminate the Exchange Offer and, to the extent permitted by applicable
law, purchase Private Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
By tendering, each holder of Private Notes will represent to the Company
that, among other things, (i) Exchange Notes to be acquired by such holder of
Private Notes in connection with the Exchange Offer are being acquired by such
holder in the ordinary course of business of such holder, (ii) such holder has
no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iii) such holder acknowledges and agrees
that any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in certain no-action
letters, (iv) such holder understands that a secondary resale transaction
described in clause (iii) above and any resales of Exchange Notes obtained by
such holder in exchange for Private Notes acquired by such holder directly
from the Company should be covered by an effective registration statement
containing the selling securityholder information required by Item 507 or Item
508, as applicable, of
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Regulation S-K of the Commission and (v) such holder is not an "affiliate," as
defined in Rule 405 under the Securities Act, of the Company. If the holder is
a broker-dealer that will receive Exchange Notes for such holder's own account
in exchange for Private Notes that were acquired as a result of market-making
activities or other trading activities, such holder will be required to
acknowledge in the Letter of Transmittal that such holder will deliver a
prospectus in connection with any resale of such Exchange Notes; however, by
so acknowledging and by delivering a prospectus, such holder will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Private Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Private Notes tendered by book-entry transfer into the Exchange
Agent's account at the Depository pursuant to the book-entry transfer
procedures described below, such Private Notes will be credited to an account
maintained with the Depository) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depository for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's systems may make book-
entry delivery of Private Notes by causing the Depository to transfer such
Private Notes into the Exchange Agent's account at the Depository in
accordance with the Depository's procedures for transfer. However, although
delivery of Private Notes may be effected through book-entry transfer at the
Depository, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth
below under "--Exchange Agent" on or prior to the Expiration Date or pursuant
to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Private Notes and
the principal amount of Private Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal
(or a facsimile thereof), together with the certificate(s) representing the
Private Notes in proper form for transfer or a Book-Entry Confirmation, as
the case may be, and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof), as
well as the certificate(s) representing all tendered Private Notes in
proper form for transfer and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
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WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Private Notes) and (iii) be signed by the holder in
the same manner as the original signature on the Letter of Transmittal by
which such Private Notes were tendered (including any required signature
guarantees). All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company in its sole
discretion, whose determination shall be final and binding on all parties. Any
Private Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offer and no Exchange Notes will be issued with
respect thereto unless the Private Notes so withdrawn are validly retendered.
Properly withdrawn Private Notes may be retendered by following one of the
procedures described above under "The Exchange Offer--Procedures for
Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Private Notes, if the Exchange Offer violates
applicable law, rules or regulations or an applicable interpretation of the
staff of the Commission.
If the Company determines in its sole discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Private
Notes and return all tendered Private Notes to the tendering holders,
(ii) extend the Exchange Offer and retain all Private Notes tendered prior to
the expiration of the Exchange Offer, subject, however, to the rights of
holders to withdraw such Private Notes (see "--Withdrawal of Tenders") or
(iii) waive such unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Private Notes that have not been withdrawn. If
such waiver constitutes a material change to the Exchange Offer, the Company
will promptly disclose such waiver by means of a prospectus supplement that
will be distributed to the registered holders of the Private Notes, and the
Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the waiver and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Private Notes eligible to participate in the
Exchange Offer will terminate upon consummation of the Exchange Offer except
with respect to the Company's continuing obligations (i) to indemnify such
holders (including any broker-dealers) and certain parties related to such
holders against certain liabilities (including liabilities under the
Securities Act), (ii) to provide, upon the request of any holder of a
transfer-restricted Private Note, the information required by Rule 144A(d)(4)
under the Securities Act in order to permit resales of such Private Notes
pursuant to Rule 144A, (iii) to use its best efforts to keep the Registration
Statement effective to the extent necessary to ensure that it is available for
resales of transfer-restricted Private Notes by broker-dealers for a period of
up to 180 days from the Expiration Date and (iv) to provide copies of the
latest version of the Prospectus to broker-dealers upon their request for a
period of up to 180 days after the Expiration Date.
ADDITIONAL INTEREST
In the event of a Registration Default (as defined in the Registration
Rights Agreement), the Company is required to pay as liquidated damages,
Additional Interest (as defined in the Registration Rights Agreement) to
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each holder of Transfer Restricted Securities (as defined below), during the
first 90-day period immediately following the occurrence of such Registration
Default in an amount equal to 0.50% per annum per $1,000 principal amount of
Private Notes constituting Transfer Restricted Securities held by such holder.
Such Additional Interest rate will increase by an additional 0.50% per annum
at the beginning of each subsequent 90-day period during which the
Registration Default continues. Transfer Restricted Securities shall mean each
Private Note until (i) the date on which such Private Note has been exchanged
for an Exchange Note in the Exchange Offer, (ii) the date on which such
Private Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement (as defined in
the Registration Rights Agreement) or (iii) the date on which such Private
Note is distributed to the public pursuant to Rule 144(k) under the Securities
Act. The amount of the Additional Interest will increase by an additional
0.50% per annum per $1,000 principal amount of Private Notes constituting
Transfer Restricted Securities for each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum Additional Interest of
2.00% per annum per $1,000 principal amount of Private Notes constituting
Transfer Restricted Securities. Following the cure of all Registration
Defaults, the payment of Additional Interest will cease. The filing and
effectiveness of the Registration Statement of which this Prospectus is a part
and the consummation of the Exchange Offer will eliminate all rights of the
holders of Private Notes eligible to participate in the Exchange Offer to
receive damages that would have been payable if such actions had not occurred.
EXCHANGE AGENT
Fleet National Bank has been appointed as Exchange Agent of the Exchange
Offer. Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
By Registered or Certified Mail: By Hand Delivery:
Fleet National Bank Corporation Fleet National Bank Corporation
Corporate Trust Department Corporate Trust Department
5th Floor 5th Floor
One Federal Street One Federal Street
Boston, MA 02110 Boston, MA 02110
By Overnight Delivery: By Facsimile:
Fleet National Bank Corporation (617) 346-5501
Corporate Trust Department 5th Floor
One Federal Street Boston, MA 02110
Confirm by Telephone:
(617) 346-5498
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$ . Such expenses include registration fees, fees and expenses of the Exchange
Agent and the Trustee, accounting and legal fees and printing costs, among
others.
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The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax
is imposed for any reason other than the exchange of the Private Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their
own decisions on what action to take.
The Private Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Private Notes may be resold only (i) to a person whom the seller reasonably
believes is a QIB in a transaction meeting the requirements of Rule 144A, (ii)
in a transaction meeting the requirements of Rule 144 under the Securities
Act, (iii) outside the United States to a foreign person in a transaction
meeting the requirements of Rule 904 under the Securities Act, (iv) in
accordance with another exemption from the registration requirements of the
Securities Act (and based upon an opinion of counsel if the Company so
requests), (v) to the Company or (vi) pursuant to an effective registration
statement and, in each case, in accordance with any applicable securities laws
of any state of the United States or any other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
31
<PAGE>
USE OF PROCEEDS
The Company will not receive proceeds from the Exchange Offer. The net
proceeds from the Private Offering, were approximately $162.1 million, after
deducting the Initial Purchaser's commission, the issuance of 5,000 Units as
payment for cancellation of a portion of the Interim Financing and other
expenses payable by the Company. The Company has deposited approximately $47
million of such net proceeds with the Escrow Agent to fund the Escrow Account.
See "Description of Exchange Notes--Disbursement of Funds--Escrow Account."
The Company plans to use up to $34.5 million of the remaining net proceeds to
fund the acquisition of hardware for the expansion of the Intelligent Delivery
Network (including the purchase of FaxLink autodialers for installation at
customer facilities), to finance the purchase of business systems to support
the anticipated growth in the size of the Company's business and to finance
the build-out of the Company's new headquarters facility in Lowell,
Massachusetts. In addition, approximately $6.0 million (Australian)
(approximately $4.6 million (U.S.) based upon the February 11, 1997 conversion
rate) will be used to fund the acquisition by the Company of certain assets
and liabilities, including the right to service the existing fax business
customer base, of SingCom (Australia) and the repayment of existing
indebtedness. See "Acquisition of Fax Business of SingCom (Australia)." In
addition, approximately $1.8 million of such net proceeds have been used to
repay a portion of the Interim Financing extended by SingTel. See "Description
of Other Indebtedness--Interim Financing." The remaining net proceeds of the
Private Offering have been or will be used to fund the working capital
requirements of the Company (including approximately $12 million of accrued
accounts payable which have been paid since the Private Offering) and for
general corporate purposes, including to finance substantial additional
operating losses. See "Risk Factors--Historical and Anticipated Operating
Losses; Negative Cash Flow from Operations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Pending such uses,
the net proceeds of the Private Offering have been invested in investment
grade, interest bearing securities.
The Company currently expects that the net proceeds of the Private Offering
will be sufficient to satisfy the Company's liquidity needs through the first
quarter of 1998; however, there can be no assurance to that effect. If the
Company's plans or assumptions change, if its assumptions prove to be
inaccurate, if the Company experiences unanticipated costs or competitive
pressures or if the net proceeds from the Private Offering otherwise prove to
be insufficient, the Company may be required to seek additional capital sooner
than currently anticipated. The Company will be required to obtain substantial
additional debt or equity financing (which may include secured equipment
financing) (the "Additional Financing") which the Company believes (based on
current projections) is necessary to complete the build-out of the Intelligent
Delivery Network, to fund operating losses after the first quarter of 1998
until the Company begins to earn positive net cash flow from operations and to
fund the Company's other liquidity needs. However, there can be no assurance
that any such debt or equity financing will be available to the Company on
favorable terms or at all or that the Company will generate positive net cash
flow from operations on a timely basis and in an amount that will be
sufficient to meet its liquidity needs or at all. In the event that the
Company is unable to obtain such additional capital or generating cash flow
from operations, the Company will be required to delay or to reduce the scope
of its currently anticipated expansion of the Intelligent Delivery Network, or
take other actions which could materially adversely affect the Company's
business, results of operations and financial condition and its ability to
compete, and the value of the Securities. Any delay in the expansion of the
Intelligent Delivery Network will delay the projected date on which the
Company expects to begin generating positive net cash flow from operations,
thereby increasing the need for additional financing. See "Risk Factors--Need
For Additional Financing" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
32
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997 on an actual and on a pro forma basis. This table should be read in
conjunction with the Consolidated Financial Statements and notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
ACTUAL PRO FORMA(1)
-------- ------------
(AMOUNTS IN THOUSANDS
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Cash, Cash Equivalents and Short-Term Investments(1).... $104,163 $ 99,554
======== ========
Restricted Cash(2)...................................... $ 46,705 $ 46,705
======== ========
Current Portion of Long-term Debt(1).................... $ 12,505 $ 7,896
======== ========
Long-term Debt:
14% Senior Notes Due 2004(3).......................... $164,875 $164,875
Capital Lease Obligations............................. 1,585 1,585
Notes Payable......................................... 3,611 3,611
Notes Payable to SingTel(4)........................... 40,349 40,349
-------- --------
Total Long-term Debt................................ 210,420 210,420
-------- --------
Stockholders' Equity (Deficit):
Convertible Preferred Stock, $1.00 Par Value
24,715,500 Shares Authorized, 13,515,030 Shares
Issued and Outstanding............................... 13,515 13,515
Common Stock, $.01 Par Value, 50,000,000 Shares
Authorized, 3,798,440 Shares Issued and Outstanding.. 38 38
Additional Paid-in Capital(4)......................... 35,585 35,585
Accumulated Deficit................................... (97,074) (97,074)
Cumulative Translation Adjustment..................... 417 417
-------- --------
Total Stockholder Equity (deficit).................. (47,519) (47,519)
-------- --------
Total Capitalization................................ 162,901 162,901
======== ========
</TABLE>
- --------
(1) Pro forma to reflect the use of approximately $6.0 million (Australian)
(approximately $4.6 million (U.S.) based upon the March 31, 1997
conversion rate) to acquire certain assets and liabilities of SingCom
(Australia), including the right to service its existing fax business
customer base, and the repayment of existing indebtedness of which
approximately $4.6 million (U.S.) included in the Company's historical
current portion of notes payable to principal stockholder as of March 31,
1997.
(2) Includes approximately $47 million of U.S. Government Securities pledged
to secure the Notes offered hereby and held in escrow for payment of the
first four interest payments on the Notes.
(3) Includes the effects of the issuance of the Initial Warrants.
(4) These obligations are contractually subordinated to the Notes. See
"Description of Certain Indebtedness."
33
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The Summary Consolidated Statements of Operations Data for the years ended
December 31, 1994, 1995 and 1996 and the Summary Consolidated Balance Sheet
Data as of December 31, 1995 and 1996 set forth below, have been derived from
the Consolidated Financial Statements of UNIFI audited by Arthur Andersen LLP,
independent public accountants, and should be read in conjunction with such
Consolidated Financial Statements and the notes thereto included in this
Prospectus. The Summary Consolidated Statement of Operations Data and Summary
Consolidated Balance Sheet Data for the years ended December 31, 1992 and 1993
have been derived from audited Consolidated Financial Statements of UNIFI that
are not included in this Prospectus. The Selected Consolidated Statement of
Operations Data provided for the three months ended March 31, 1996 and 1997,
and the Selected Consolidated Balance Sheet Data as of March 31, 1997 are
unaudited and have been derived from the unaudited Consolidated Financial
Statements of UNIFI included in this Offering Memorandum. These unaudited
Consolidated Financial Statements have been prepared on the same basis as the
audited Consolidated Financial Statements and, in the opinion of the Company's
management, contain all adjustments, consisting only of normal recurring
accruals, necessary for the fair presentation of the consolidated balance
sheet as of March 31, 1997 and the results of operations for such periods.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- -------- -------- -------- ----------- --------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues.............. $ 475 $ 3,943 $ 6,952 $ 10,664 $ 25,218 $ 4,043 $ 9,237
------- ------- -------- -------- -------- -------- --------
Costs and Expenses:
Cost of Revenues.... 957 2,979 4,656 7,840 27,599 4,098 9,396
Sales and Customer
Service............ 940 2,611 8,326 11,837 25,706 4,228 8,692
Research and
Development........ 679 1,381 1,656 4,810 11,620 1,721 2,430
General and
Administrative..... 610 1,496 1,800 2,676 4,165 422 2,993
Information
Systems............ -- -- 290 803 3,527 612 905
------- ------- -------- -------- -------- -------- --------
Total Costs and
Expenses........... 3,186 8,467 16,728 27,967 72,617 11,081 22,416
Loss From Operations.. (2,711) (4,524) (9,776) (17,302) (47,399) (7,038) (13,179)
Interest and Other
Income (Expense),
Net.................. (61) (209) (509) 165 (2,462) (231) (3,609)
------- ------- -------- -------- -------- -------- --------
Net Loss Before
Minority Interest.... (2,772) (4,733) (10,285) (17,137) (49,861) (7,269) (16,788)
Minority Interest(1).. -- -- 1,525 2,480 948 402 --
------- ------- -------- -------- -------- -------- --------
Net Loss.............. $(2,772) $(4,733) $ (8,760) $(14,657) $(48,913) $ (6,866) $(16,788)
======= ======= ======== ======== ======== ======== ========
Net Loss Per Common
Share(2)............. $ (0.85) $ (1.42) $ (2.64) $ (4.26) $ (13.04) $ (1.84) $ (4.43)
Weighted Average
Common Shares
Outstanding.......... 3,271 3,323 3,323 3,437 3,752 3,726 3,790
OTHER FINANCIAL DATA:
EBITDA(3)............. $(2,540) $(4,006) $ (6,441) $(12,016) $(40,036) $ (5,604) $(10,054)
Capital
Expenditures(4)...... 885 2,162 4,486 5,883 22,558 4,110 762
Interest Expense...... (62) (204) (602) (411) (2,499) (62) (4,278)
Ratio of Earnings to
Fixed Charges(5)..... -- -- -- -- -- -- --
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------------------- -----------
1992 1993 1994 1995 1996 1997
------- ------- -------- -------- -------- -----------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, Cash Equivalents
and Short-term
Investments(6)....... $ 43 $ 180 $ 4,447 $ 11,124 $ 5,630 $150,868
Working Capital
(Deficiency)......... (1,018) (2,584) (1,376) 6,633 (25,936) 105,881
Total Assets.......... 1,135 2,578 5,393 25,378 41,184 191,406
Long-term Debt........ 523 2,437 1,675 9,703 46,613 210,420
Shareholders' Equity
(Deficit)............ (595) 2,578 9,981 8,871 (42,507) (47,519)
</TABLE>
34
<PAGE>
- --------
(1) See Note 2(b) to the Company's Consolidated Financial Statements.
(2) See Note 2(k) to the Company's Consolidated Financial Statements.
(3) EBITDA means net loss plus interest expense, income tax expense,
depreciation and amortization expense and all other non-cash charges, less
any non-cash items which have the effect of increasing net income or
decreasing net income or decreasing net loss. Information with respect to
EBITDA is included herein because a similar measure will be used in the
Indenture (as defined) with respect to the computation of certain
covenants and because it is a widely accepted financial indicator of a
company's ability to service debt. EBITDA should not be considered in
isolation from, as a substitute for or as being more meaningful than net
income, cash flows from operating activities or other income or cash flow
statement data prepared in accordance with generally accepted accounting
principles and should not be construed as an indication of the Company's
operating performance or as a measure of liquidity. EBITDA, as presented
herein, may be calculated differently by other companies and, as such,
EBITDA amounts presented herein may not be comparable to other similarly
titled measure of other companies.
(4) Includes assets acquired under capital lease arrangements of approximately
$1,546,000, $2,545,000, $730,000 and $2,420,000 in 1993, 1994, 1995 and
1996, respectively.
(5) For the purpose of calculating the ratio of earnings to fixed charges,
earnings represent loss from continuing operations before income taxes
plus fixed charges. Fixed charges consist of interest expense on all
indebtedness plus the interest portion of rental expense on non-cancelable
leases and amortization of debt issuance costs and debt discount. The
Company's earnings have been inadequate to meet its fixed charges in 1992,
1993, 1994, 1995, 1996 and the three month periods ended March 31, 1996
and 1997 by $2,711,000, $4,528,000, $8,159,000, $14,246,000, $46,414,000,
$6,804,000 and $12,500,000, respectively.
(6) Includes approximately $47 million of funds that will be deposited in the
escrow account pursuant to the Indenture. See "Description of the Senior
Notes--Disbursement of Funds--Escrow Account."
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
UNIFI is a rapidly growing multinational telecommunications company that
provides business-to-business international fax document delivery services.
The Company commenced operations in April 1992 and by the end of 1994 provided
its services to approximately 3,500 customers sending fax transmissions from
the United States to Japan. In February 1995, after receiving $10 million in
financing from ORIX and Nichimen, UNIFI expanded its network to provide its
services to customers originating fax documents in Japan. In April 1995
affiliates of SingTel provided UNIFI with a total of $70 million of debt and
equity financing consisting of $30 million in equity, $25 million in working
capital financing commitments and $15 million in equipment financing
commitments. In October 1996, the Company had utilized all of its borrowing
capacity under such financing commitment. See "Description of Certain
Indebtedness". Since October 1996, the Company has borrowed $15.35 million in
aggregate principal amount of indebtedness of which $13.35 million was
borrowed from SingTel and $2.0 million was borrowed from CDS. Of such amount,
approximately $6.8 million has been subsequently repaid to SingTel. The
Company's obligations under all such indebtedness are unsecured and rank pari
passu with the Company's obligations under the Senior Notes. See "Description
of Other Indebtedness--Interim Financing" and "Certain Relationships and
Related Transactions--Transactions with SingTel." UNIFI has utilized this
financing to expand the Intelligent Delivery Network to permit it to originate
fax document transmissions in six of the world's major telecommunications
markets (in addition to the United States and Japan), expand its
infrastructure to a level that it believes is sufficient to service its
current line of products and services over the expanded Intelligent Delivery
Network and to repurchase equity securities from early round investors and
repay certain existing indebtedness. By December 31, 1996, UNIFI had expanded
the Intelligent Delivery Network to provide its fax document delivery services
to businesses in the United Kingdom, France, Germany, Hong Kong, Korea and
China (the Company conducts operations in China through a joint venture with a
local entity). In addition, UNIFI has entered into agreements with SingTel
pursuant to which SingTel acquired the right to transmit fax documents over
the Intelligent Delivery Network from, to and through Singapore and the
Company agreed to install and maintain a node and other network support in
Singapore. See "Certain Relationships and Related Transactions--Transactions
with SingTel." As of April 30, 1997 UNIFI had approximately 9,886 customers
(excluding non-revenue trial accounts and operations in China), of which
approximately 5,732 were in the United States and Japan.
The Company derives its revenues primarily from monthly customer charges
based on the actual number of minutes (or fractions thereof) of international
fax document transmissions provided to customers. The Company also charges its
customers a monthly rental fee (and in some markets sells FaxLinks) for the
use of each FaxLink installed at the customers' offices. Additionally, SingTel
pays the Company license and network support fees. See "Certain Relationships
and Related Transactions--Transactions with SingTel." UNIFI does not require
its customers to enter into long-term contracts. However, UNIFI has
experienced monthly churn rates of less than approximately 1.5% (calculated on
a revenue-weighted basis) in each of the 12 months ending December 31, 1996
and the four months ending April 30, 1997 (other than October 1996, during
which the Company experienced a 2.3% monthly churn (due primarily to the
recovery of FaxLinks from customers with monthly usage below certain minimum
thresholds). UNIFI attributes its low churn rate primarily to the high value-
added delivery services provided by the Intelligent Delivery Network which,
the Company believes, makes many of its customers less sensitive to the
competitive pricing in the market. However, due to this competitive pricing,
the Company has experienced, and expects to continue to experience, declining
revenue per minute, which UNIFI expects to offset with increased volumes and
decreasing transmission costs per minute, although there can be no assurance
to that effect.
The Company's principal operating costs are sales and customer service
personnel, fax document transmission costs and research and development
expense. As part of the expansion of its infrastructure, during 1995 and 1996
the number of employees and contractors has grown from 157 at December 31,
1994 to 653 at December 31, 1996, and operating expenses have increased from
$12.1 million in 1994 to $20.1 million in 1995 and to $45.0 million for 1996
and to $13.0 million for the three months ended March 31, 1997. A
significant part
36
<PAGE>
of that growth represented the opening of offices in the United Kingdom,
France, Germany, Hong Kong, Korea, and China and the expansion of the
Company's sales force and customer service staff from 92 at the end of 1994 to
151 at the end of 1995, 367 as of December 31, 1996 and 364 as of March 31,
1997. Sales and customer service expenses correspondingly increased from $8.3
million during 1994 to $11.8 million during 1995, $25.7 million for 1996 and
$8.7 million for the three months ended March 31, 1997. However, sales and
customer service expenses as a percentage of revenues have decreased from 120%
in 1994 to 111% in 1995 and to 102% for 1996 and 94% for the three months
ended March 31, 1997.
UNIFI's fax document transmission costs consist of (i) local access cost of
transmitting a fax document from the customer's fax machine to the Intelligent
Delivery Network, (ii) the cost of providing UNIFI's 24-hour personalized fax
document delivery service, (iii) network support costs and (iv) the costs of
long-distance transmission and local delivery costs. Local access costs
represent the cost of a local telephone call from the customer's fax machine
to the nearest Intelligent Delivery Network node and from the Intelligent
Delivery Network node nearest the destination to the receiving fax machine.
The Company bears these local access costs only in a portion of the United
States market as a result of "1-800" service to its nodes. Customers bear the
local access costs directly in all other cases. The cost of providing UNIFI's
delivery service primarily represents the payment of salaries and benefits to
the Company's 24-hour delivery staff. Network support costs consist of the
costs of UNIFI's 24-hour network monitoring group and the costs of
configuring, installing and maintaining the Intelligent Delivery Network
globally.
There are two broad categories of fax document transmission and delivery
costs: (i) on-net costs which are the costs of transmission and delivery to
countries in which the Company has installed a network node and (ii) off-net
costs which are the costs of transmission and delivery to countries where the
Company has no network facilities. On-net costs include the cost of using the
Company's transmission facilities to the destination country and the cost of
delivering faxes from the ending network node to the final destination via the
local PSTN. All calls destined for countries that do not have a network node
(off-net traffic) are routed from a Company network node to one of several
international carriers with which the Company has contractual arrangements.
Off-net costs include the cost of using other carriers' long-distance
services. These long-distance charges are significantly higher than the
Company's on-net costs and, therefore, the Company's cost of delivering a
document varies significantly according to the destination country. Because
the Intelligent Delivery Network was only established in 1992 and has
historically had a limited number of nodes (two in 1992, three in 1993, four
in 1994, 10 in 1995 and 23 as of December 31, 1996) dependence on expensive
long-distance charges has adversely affected the Company's results of
operations. Approximately 36% of all fax deliveries for April 1997 were off-
net.
The Company's pending network build-out is expected to substantially reduce
off-net traffic and, as fax transmission volume increases, improve the
Company's gross margins by reducing variable costs. The Company's variable
costs per transmission and, therefore, gross margins are a function of the
proportion of total traffic that is carried on-net. For example, in 1994
virtually all of the Company's traffic was on-net and its gross margins were
33% despite the fact that it used less than half of its leased long-distance
carrying capacity. (The Company carried fax traffic only one-way from the
United States to Japan but leased long-distance lines, which are always two-
way.) On the other hand, after the Company expanded its service to deliver
faxes to all countries in 1995, the proportion of the Company's fax traffic
that was carried on-net fell to 88% by the end of 1995 and the Company's gross
margins declined to 26%, reflecting, among other things, the increase in off-
net traffic, low capacity utilization of the Company's leased two-way
telecommunications lines and the increased costs associated with the build-up
of the Company's global sales and service infrastructure. In December 1996,
approximately 64% of the Company's total fax traffic was on-net. This drop was
due, in part, to the increase in the number of countries served by the Company
that originate substantial amounts of traffic destined for countries that do
not have a network node. The Company's goal is to increase the proportion of
on-net traffic by increasing its number of network nodes. The Company believes
that this increased on-net traffic, combined with increased utilization of
two-way capacity, will substantially increase gross margins. However, there
can be no assurance that it will realize this goal. Furthermore, the Company
expects that the cost of leasing two-way long-distance lines will be largely
offset by the revenues produced by two-way traffic as volume grows for the new
routes
37
<PAGE>
created by the new nodes. There can be no assurance, however, that revenues
from locations with destination nodes will equal revenues from fax traffic to
such destinations.
The Company has historically made significant expenditures related to the
design, development and build-out of the Intelligent Delivery Network. Since
1990, the Company has invested approximately $115 million in the development,
build-out and operation of the Intelligent Delivery Network and for product
development. The Company expects to continue to spend significant amounts to
expand its network and roll out additional products and services. See "--
Liquidity and Capital Resources" and "Business--Products and Services."
Because the Company has, to date, been engaged primarily in organizational and
start-up activities and investing in its infrastructure and the Intelligent
Delivery Network, the Company has incurred significant negative cash flows
since it commenced operations. The Company expects to continue to incur
substantial operating losses and net losses in the future. See "Risk Factors--
Historical and Anticipated Operating Losses; Negative Cash Flow from
Operations." UNIFI believes that its historical results of operations
discussed below are not indicative of the results of operations of UNIFI which
will follow the completion of the build-out of the Intelligent Delivery
Network and the marketing of UNIFI's full line of electronic document delivery
services. See "--Liquidity and Capital Resources" and "Risk Factors--
Development Stage Company; Short Operating History."
UNIFI conducts operations in the United States, the United Kingdom, France,
Germany, Hong Kong and Korea either directly or through wholly owned
subsidiaries. UNIFI's operations in Japan are conducted by Fax Japan, a 51%
owned subsidiary of UNIFI. In China, the Company's wholly owned subsidiary
operates through an intercompany operating agreement with a local entity.
Pursuant to the management agreement, UNIFI receives a portion (currently 80%)
of the operating income of the international fax business of the local entity
pursuant to an agreed upon formula. In Singapore, the Company granted to
SingTel an exclusive, perpetual and irrevocable license to use (but not
sublicense) the Company's network and technology for the transmission of fax
document transmissions to, from and through Singapore. The Company has also
agreed to maintain the network in Singapore, train SingTel's personnel and
provide user documentation to SingTel to enable SingTel to use the network for
such purposes. SingTel has agreed to pay to the Company 4% of SingTel's gross
revenues from providing fax document delivery services from Singapore on the
Company's network, and to pay certain other fees in exchange for the
maintenance and other services provided by the Company to SingTel.
RECENT DEVELOPMENTS
Operating Plan Update
The Company believes that deregulation in many telecommunications markets in
which the Company operates is leading telecommunications providers in these
markets to lower prices faster and more sharply than the Company had
originally anticipated. For example, on March 4, 1997 France Telecom announced
an immediate 20% price decline along with a promise to reduce rates an
additional 20% in November of 1997 in preparation for general deregulation on
January 1, 1998. In light of these developments and other changes the Company
intends to modify its operating strategy for the remainder of 1997 and 1998
based on the following assumptions:
. The Company has experienced greater price declines in Europe than it had
previously forecast. This is because intra-European calls, which
constitute the highest percentage of the Company's European market
traffic, have experienced steep price declines.
. On a global basis, the Company now anticipates that the liberalization of
telecommunications policy in 9 of the 11 markets in which the Company
operates will lead to faster overall price erosion and a more competitive
environment than had been originally anticipated.
Based on the latest analysis of the operating environment that the Company
expects to encounter for the second half of 1997 and 1998, management has
taken the following actions to modify the Company's operations:
. Control the growth of fixed operating expenses associated with the
Company's core service by significantly reducing planned operating
expenditures in 1997.
38
<PAGE>
. Continue to build third party distribution channels to market new desktop
computer-based services. These third party channels will complement the
Company's existing sales force and aid the Company in developing broader
market penetration.
. Deploy certain nodes later than originally projected because the cost
savings from reductions in off-net delivery rates are expected to offset
in certain cases the savings the Company would have incurred in a higher
rate environment and, therefore, render node deployment unnecessary in
the near term.
. Increase average revenue per minute in Europe by focusing sales efforts
on customers that have a high ratio of traffic destined for markets
outside of Europe.
Management believes that such modifications to its operations will result in
total consolidated gross revenues for 1997 that are approximately double the
Company's 1996 total consolidated gross revenues. Furthermore, management
believes that the Company can achieve its business goals using only the net
proceeds from the sale of the Private Notes plus financing secured in
accordance with the covenants contained in the Indenture.
The foregoing revenue projections and other forward looking statements, like
all projections and forward looking statements, are merely estimates of future
events and results. Actual future results and events will likely be different
from the foregoing estimates, possibly to a material degree. Such projections
and other forward looking statements are dependent on assumptions about many
factors including, among others, demand for the Company's existing core fax
service, timely deployment and market place acceptance of the planned new
desktop services, competition from existing telecommunications providers and
others, the timely and successful build-out of the Company's node network and
other capital projects, the Company's ability to secure additional financing,
the Company's ability to generate future cash flow from operations on a timely
basis, if at all, the Company's ability to achieve economies of scale and
otherwise improve operating margins, the Company's ability to anticipate
technological changes and respond to any such changes effectively, the
regulatory environment, the Company's continued access to third-party network
infrastructure and other services and products necessary for the operation and
expansion of its businesses, the Company's ability to effectively protect and
exploit its proprietary information and the Company's ability to manage growth
and implement the managerial and other systems required by a larger scale of
operations. The foregoing revenue projections and other forward looking
statements are qualified in their entirety by the cautionary statements set
forth herein under the caption "Risk Factors."
Month Ended April 30, 1997 Compared to Month Ended April 30, 1996
The financial statements of the Company for April, 1997 are unaudited,
however, the Company expects to report revenues for the one and four months
ended April 30, 1997 of $3.7 million and $12.9 million, respectively, as
compared to $1.7 million and $5.7 million, for the one and four months ended
April 30, 1996, respectively, an increase of 118% and 126%, respectively. The
increase in revenues in April 1997 reflects an increase in fax document
traffic to approximately 4.4 million minutes in the month of April 1997 as
compared to 1.4 million minutes in April 1996. The increase in traffic was due
to the increase in the number of customers from approximately 4,881 at April
30, 1996 to approximately 9,886 (excluding non-revenue trial accounts and
operations in China) at April 30, 1997 and from an increase in monthly usage
per customer. The Company expects to report operating losses for the one and
four months ended April 30, 1997 of $6.6 million and $23.4 million,
respectively, as compared to $2.8 million and $9.1 million for the one and
four months ended April 30, 1996, respectively. The increase in operating
losses for the period ended April 30, 1997 as compared to the same period
ended, April 30 1996 reflects a significant increase in operating expenses and
initial start up expenses due to the expansion of the Intelligent Delivery
Network into six additional markets and the expansion of the Company's
infrastructure to its current level. In addition, the Company expects to
report that gross margins declined to 2.5% for the four months ended April 30,
1997 from 8% for the four months ended April 30, 1996. The Company believes
that this decline reflects among other things underutilization of the
Company's two way
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telecommunications lines and the increased costs associated with the build up
of the Company's global sales and service infrastructure. However, this gross
margin is an improvement from the fourth quarter, 1996 where the Company
reported gross margins of (1.3%). The foregoing operating results which have
been prepared by management are preliminary and unaudited. There can be no
assurance that they will not be adjusted prior to the completion of the
Company's 1997 audit.
RESULTS OF OPERATIONS
Three-Months Ended March 31, 1997 Compared To Three-Months Ended March 31,
1996
Revenues grew 128.4% to $9.2 million in the three months ended March 31,
1997 from $4.0 million in the three months ended March 31, 1996. The revenue
growth was experienced in new geographical markets which resulted in an
increase in fax document traffic and level of active customers. However,
revenue for the three months ended March 31, 1997 fell slightly below
management's expectations due, in part, to the three month delay in the
closing of the Company's Units offering. As mentioned above, revenue growth
rebounded in the month of April 1997 reaching $3.7 million for the month
compared to $3.3 million for the month of March 1997. Traffic flowing through
the network was approximately 10.3 million minutes in the first quarter of
1997 as compared to 3.7 million minutes in the comparable period in 1996.
Average business day network minutes grew at a compounded rate of
approximately 9% per month during this first quarter of 1997. This substantial
growth rate resulted from a combination of new customer acquisition and
further penetration of service into the existing base of accounts. The number
of active customers increased to approximately 9,880 from 4,800 in the first
quarter of 1997 and 1996, respectively. Active corporate customers grew from
8,600 at the beginning of the first quarter of 1997 and the average customer
usage rate grew from 21 minutes per day at the beginning of the first quarter
of 1997 to 23.4 minutes per day by the end of the quarter.
Sales and customer service expense increased 106% in the first quarter of
1997 to $8.6 million as compared to $4.2 million in the comparable period in
1996. This increase was primarily the result of additional sales and customer
service personnel which were approximately 361 and 208 in the first quarter of
1997 and 1996, respectively. This growth came as a result of the Company's
expansion into additional countries in which the Company originates fax
traffic. Sales and customer service expenses as a percentage of revenue
decreased to 94.1% in the first quarter of 1997 as compared to 104.6% in the
comparable period in 1996.
Cost of revenue increased 129.3% in the first quarter of 1997 to $9.4
million as compared to $4.1 million in the comparable period in 1996. This
increase was primarily the result of an increase in both the level of
transmission activity and the buildout of the infrastructure to support the
increase in the number of countries in which the Company originates fax
traffic. Cost of revenue as a percentage of revenues decreased to 100.1% in
the first quarter of 1997 as compared to 101.3% in the comparable period in
1996.
The Company's gross margin trend over the past four quarters has shown
continued improvement from -24% for the second quarter of 1996 to -17% for the
third quarter of 1996 to -1.5% for the fourth quarter of 1996 to -0.2% for the
first quarter of 1997. This upward trend continued for the month of April,
1997 in which the Company reached positive 9% gross margin. The Company's
improvement in gross margin was achieved despite a 14% drop in average revenue
per minute from December, 1996 through April, 1997. Average revenue per minute
declined from $0.85 per minute in December to $0.73 per minute in April due to
price declines in Europe and due to a shift in mix of countries where the
Company originates fax traffic causing a higher percentage of traffic to
originate in lower priced markets.
Margins improved as a result of aggressive efforts to reduce the Company's
off-net delivery costs from $0.96 per minute to $0.72 per minute over the
period December, 1996 to April, 1997, a 25% cost reduction. Margins are
expected to continue to improve as the Company continues to deploy network
nodes into high volume off-net countries and as the Company continues to
amortize its fixed costs of revenues over increased minutes.
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Research and development expenses increased 41.2% in the first quarter of
1997 to $2.4 million as compared to $1.7 million in the comparable period in
1996. This increase was primarily the result of an increase in research and
development personnel which were approximately 71 and 57 for the first quarter
of 1997 and 1996, respectively. Research and development expenses as a
percentage of revenues decreased to 26.3% in the first quarter of 1997 as
compared to 42.6% in the comparable period in 1996. The Company continues to
invest in new services as well as enhance existing services.
General and administrative expenses increased 135% in the first quarter of
1997 to $1.0 million as compared to $0.4 million in the comparable period in
1996. This increase was primarily the result of start-up expenses incurred to
support new service offerings. General and administrative expenses as a
percentage of revenues increased to 10.7% in the first quarter of 1997 as
compared to 10.4% in the comparable period in 1996. The Company continues to
incur increasing administrative and overhead costs associated with its new
product development strategies to improve service offerings to customers.
Information systems expenses increased 48% in the first quarter of 1997 to
$0.9 million compared to $0.6 million in the comparable period in 1996. This
increase was primarily the result of increased investment in hardware and
systems personnel. Information systems expenses as a percentage of revenues
decreased to 9.8% in the first quarter of 1997 as compared to 15.1% in the
comparable period in 1996.
Interest and other income (expense) increased significantly in the first
quarter of 1997 to $3.6 million as compared to $0.1 million in the comparable
period in 1996. The increase was primarily the result of borrowings under the
Company's debt facility with SingTel (Netherlands Antilles) Pte. N.V., an
affiliate of SingTel ("SingTel N.V.") to fund its operations and the
continuing expansion of the Intelligent Delivery Network.
As a result of the above, the Company reported net loss of $16.8 million for
the first quarter of 1997 as compared to $6.9 million for the comparable
period in 1996, representing an increase of 143.5% over the net loss incurred
in the comparable period in 1996.
UNIFI finished the first quarter of 1997 with $104 million of usable cash
on-hand, plus an additional $47 million of restricted cash held in interest
escrow. The Company's cash position was approximately $14 million ahead of
plan at the end of the quarter due to higher gross margins than projected,
lower operating expenses than projected, and a decision not to proceed with a
$5 million first stage investment in WorldVoice.
Year ended December 31, 1996 Compared to Year ended December 31, 1995
Revenues grew 136% to $25.2 million in 1996 from $10.7 million in 1995. This
increase was primarily a result of an increase in fax document traffic from
approximately 10.5 million minutes in 1995 to approximately 22.7 million
minutes in 1996. The increase in traffic was due to the increase in the number
of UNIFI's customers from approximately 4,300 at December 31, 1995 to
approximately 8,400 at December 31, 1996. The Company believes that
approximately 2,696 of such new customers were added as a result of the
introduction of fax document delivery service for documents originating in the
United Kingdom, France, Germany, Hong Kong and Korea in 1996.
Sales and customer service expenses increased 118% to $25.7 million in 1996
from $11.8 million in 1995. This increase was primarily the result of the
addition of 216 sales and customer service personnel in 1996 to support the
expansion of UNIFI's operations from two countries to eight countries. Sales
and customer service expenses as a percentage of revenue declined to 102% in
1996 from 111%.
Cost of revenues increased 254% to $27.6 million in 1996 from $7.8 million
in 1995. This increase resulted primarily from the increased level of
transmission activity (which increased the proportion of off-net traffic) in
1996 as well as the increase in the number of personnel in the document
delivery and network support groups to support the expansion of the Company's
services from two to eight countries. Cost of revenues as a percentage of
revenues increased to 109% in 1996 from 74% in 1995, as the cost of the build-
out of the Company's
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infrastructure exceeded sales growth over the period. In addition gross
margins were adversely impacted by the increase in the percentage of off-net
deliveries over the period.
Research and development expenses increased 142% to $11.6 million in 1996
from $4.8 million in 1995. This increase resulted primarily from an increase
in research and development personnel from 43 at December 31, 1995 to 92 at
December 31, 1996 to support the simultaneous start-up of six new country
units and the development of additional new product lines. Research and
development expense as a percentage of revenues increased to 46% in 1996 from
45% in 1995.
General and administrative expenses increased 56% to $4.2 million in 1996
from $2.7 million in 1995. This increase resulted primarily from increased
administrative and overhead costs associated with UNIFI's expansion of the
Intelligent Delivery Network. General and administrative expenses as a
percentage of revenue decreased to 17% in 1996 from 25% in 1995.
Information systems expenses increased to $3.5 million in 1996 from $0.8
million in 1995. This increase resulted primarily from increased investment in
hardware and the cost of an additional 24 personnel in 1996 to support the
increase in the number of country operating units from two to eight.
Information systems expenses as a percentage of revenue increased to 14% in
1996 from 8.0% in 1995.
Interest income decreased to $0.2 million in 1996 from $0.7 million in 1995.
This decrease primarily resulted from the decrease in cash which was used in
operating activities and invested in hardware for the expansion of the
Intelligent Delivery Network.
Interest expense increased to $2.5 million in 1996 from $0.4 million in
1995. This increase primarily resulted from borrowings under the Company's
debt facility with SingTel (Netherlands Antilles) Pte. N.V., an affiliate of
SingTel ("SingTel N.V.") to fund its operations and the continuing expansion
of the Intelligent Delivery Network.
As a result of the foregoing, UNIFI incurred a net loss of $48.9 million in
1996, representing an increase of 232% over the net loss incurred in 1995 of
$14.7 million.
Year ended December 31, 1995 Compared to Year ended December 31, 1994
Revenues grew 53% to $10.7 million in 1995 from $7.0 million in 1994. This
increase was primarily a result of an increase in fax document traffic from
approximately 7.4 million minutes in 1994 to approximately 10.5 million
minutes in 1995. The increase in traffic was due to the increase in the number
of UNIFI's customers from approximately 3,500 at the end of 1994 to
approximately 4,300 at the end of 1995. Approximately 680 of such new
customers were in Japan and were added as a result of the introduction of fax
document delivery service for documents originating in Japan in February 1995.
Sales and customer service expenses increased 42% to $11.8 million in 1995
from $8.3 million in 1994. This increase was the result of the addition of 59
sales and customer service personnel in 1995 primarily due to the start-up of
the Company's Japanese operations. Sales and customer service expenses as a
percentage of revenue declined to 111% in 1995 from 120% in 1994 as a result
of the increase in revenues in 1995.
Cost of revenues increased 68% to $7.8 million in 1995 from $4.7 million in
1994. This increase resulted primarily from the increased level of
transmission activity in 1995 as well as the increase in the number of
personnel in the document delivery and network support groups. Cost of
revenues as a percentage of revenues increased to 74% in 1995 from 67% in
1994, as the cost of the build-out of the Company's infrastructure exceeded
sales growth over the period. As a result of the decrease in on-net traffic,
gross margins decreased over the period from 33% in 1994 to 26% in 1995.
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Research and development expenses increased 191% to $4.8 million in 1995
from $1.7 million in 1994. This increase resulted primarily from investments
by UNIFI in the development of enhanced delivery services for the expanded
network including the development of multi-lingual customer action reports,
status reports and statements. Research and development expense as a
percentage of revenues increased to 45% in 1995 from 24% in 1994.
General and administrative expenses increased 49% to $2.7 million in 1995
from $1.8 million in 1994. This increase resulted primarily from increased
administrative and overhead costs associated with UNIFI's expansion into Japan
originated fax document delivery. General and administrative expenses as a
percentage of revenue decreased to 25% in 1995 from 26% in 1994.
Information systems expenses increased 177% to $0.8 million in 1995 from
$0.3 million in 1994. This increase resulted primarily from increased
investment in server capacity and disk storage hardware and the depreciation
of hardware platforms installed to support UNIFI's global expansion.
Information systems expenses as a percentage of revenue increased to 8% in
1995 from 4% in 1994.
Interest and other income (expense), net decreased to $0.2 million in 1995
from ($0.6) million in 1994. This decrease primarily resulted from an increase
in the interest income earned on the proceeds received from SingTel N.V. as
well as a decrease in interest expense as a result of the repayment of debt
with the proceeds of the SingTel N.V. financing.
As a result of the foregoing, UNIFI incurred a net loss of $14.7 million in
1995, representing an increase of 67% over the net loss incurred in 1994 of
$8.8 million.
LIQUIDITY AND CAPITAL RESOURCES
UNIFI has incurred significant operating losses and negative cash flows in
each year since it commenced operations, due primarily to start-up costs, the
costs of developing and building the Intelligent Delivery Network and the cost
of developing, selling and providing UNIFI's products and services. As a
result of operating losses, cash used in operating activities amounted to
$22.7 million for the three-month ended March 31, 1997, $22.5 million in 1996
and $14.4 million and $7.8 million in 1995, and 1994 respectively. Cash used
in investing activities, largely consisting of the purchase of equipment
utilized in the build-out of the Intelligent Delivery Network, was $1.2
million in the three months ended March 31, 1997, $20.7 million for 1996 and
$6.0 million and $2.7 million, in 1995 and 1994 respectively. UNIFI has
historically financed its cash requirements for operations and investments
primarily through private sales of equity securities as well as equipment
financing arrangements and other borrowings. Cash flows from the sale of
equity securities was $9,000 in the three months ended March 31, 1997, $.06
million for 1996 and $30.0 million and $14.6 million, 1995 and 1994
respectively. Cash flows from borrowing was $169.8 million for the three
months ended March 31, 1997, $39.6 million for 1996 and $13.6 million, and
$1.7 million, in 1995 and 1994 respectively. In addition, in 1995, the Company
repurchased shares of Preferred Stock and outstanding warrants to purchase
Common Stock for $7.4 million. There is no further borrowing capacity under
the Company's existing loan agreements. For a summary of the terms and
conditions of the indebtedness issued by the Company during these periods, see
"Description of Certain Indebtedness."
The Company plans to undertake a significant expansion of the Intelligent
Delivery Network, both geographically and in terms of additional nodes,
thereby enabling the Company to capture a higher percentage of overall traffic
on-net. The Company plans to invest up to $34.5 million of net proceeds from
the Private Offering to fund the purchase of hardware for the expansion of the
Intelligent Delivery Network (including to purchase FaxLink autodialers for
installation at customer facilities), to finance the purchase of business
systems to support the anticipated growth in the size of the Company's
business and to finance the build-out of the Company's new headquarters
facility in Lowell, Massachusetts. The Company will be required to obtain
substantial additional debt or equity financing (which may include secured
equipment financing) that the Company believes (based on current projections)
is necessary to complete the build-out of the Intelligent Delivery Network, to
fund operating losses after the first quarter of 1998 until the Company begins
to earn positive net cash flow and to fund the Company's other liquidity
needs. However, there can be no assurance that any such debt or equity
financing will be available to the Company on favorable terms or at all or
that the
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Company will generate positive net cash flow from operations on a timely basis
and in an amount that will be sufficient to meet its liquidity needs or at
all. In the event that the Company is unable to obtain such additional capital
or generate cash flow from operations, the Company will be required to delay
or to reduce the scope of its currently anticipated expansion of the
Intelligent Delivery Network, or take other actions which could materially
adversely affect the Company's business, results of operations and financial
condition and its ability to compete, and the value of the Securities. Any
delay in the expansion of the Intelligent Delivery Network will delay the
projected date on which the Company expects to begin generating positive net
cash flow from operations, thereby increasing the need for additional
financing. See "Use of Proceeds."
In addition, approximately $6.0 million (Australian) (approximately $4.5
million (U.S.) based upon the February 11, 1997 conversion rate) will be used
to purchase certain assets and liabilities of SingCom (Australia), including
the right to service its fax business customer base, and to repay existing
indebtedness. See "Acquisition of Fax Business of SingCom (Australia)." In
addition, approximately $1.8 million of such net proceeds was used to repay a
portion of the Interim Financing extended by SingTel. See "Description of
Other Indebtedness--Interim Financing." The remaining net proceeds of the
Private Offering have been or will be used to fund the working capital
requirements of the Company (including approximately $12 million of accrued
accounts payable) and for general corporate purposes, including to finance
substantial additional operating losses. See "Risk Factors--Historical and
Anticipated Operating Losses; Negative Cash Flow from Operations" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNIFI does not have a significant source of liquidity other than the net
proceeds of the Private Offering (excluding the approximately $46 million of
U.S. Government Securities held in escrow that will be used to fund the first
four interest payments on the Notes). If the Company's current projection of
its future net operating losses or of future cash flows from operations is
inaccurate in any material respect, the Company's cash needs could exceed its
cash availability, which would have a material adverse effect on the Company.
See "Risk Factors--Need For Additional Financing; and--Substantial Leverage;
Ability to Service Indebtedness."
Pending application of the net proceeds of the Private Offering, the Company
has invested the funds from the Private Offering in short-term, interest
bearing investment grade securities until such funds are applied to the
capital investments and operating needs of the Company and its subsidiaries
and to fund operating losses. A portion of the net proceeds has been delivered
to the Escrow Agent in the form of U.S. Government Securities with maturities
as nearly as possible matching the first four interest payment dates on the
Notes in amounts sufficient to pay interest on the Notes on such dates. The
Company will make the first four interest payments on the Notes with the
proceeds of the U.S. Government Securities.
The Company is highly leveraged. The Indenture permits the Company and its
subsidiaries to incur additional indebtedness under certain circumstances to
fund the expansion of the Company's network, and for other permitted purposes
and, to a limited extent, to secure such indebtedness with liens on the assets
of the Company and its subsidiaries. See "Description of Exchange Notes--
Certain Covenants." Holders of secured indebtedness will have priority over
the holders of Notes in right of payment to the extent of the value of the
assets securing such indebtedness. The ability of the Company and its
subsidiaries to make scheduled payments with respect to indebtedness
(including the Notes) will depend upon, among other things, the Company's
ability to complete the necessary additional financing, the completion of its
network on a timely and cost-effective basis, the market acceptance and
customer demand for the Company's services and the future operating
performance of the Company. Each of these factors is, to a large extent,
subject to economic, financial, competitive, regulatory and other factors,
many of which are beyond the Company's control. If the Company does not
generate sufficient increases in cash flow from operations to repay the Notes
at maturity, it could attempt to refinance the Notes; however, no assurance
can be given that such a refinancing would be available on terms acceptable to
the Company, or at all. Any failure by the Company to satisfy its obligations
with respect to the Notes at maturity (with respect to payments of principal)
or prior thereto (with respect to payments of interest or required
repurchases) would constitute a default under the Indenture and could cause a
default under agreements governing other indebtedness, if any, of the Company.
See "Risk Factors--Historical and Anticipated Operating Losses; Negative Cash
Flow from Operations" and "--Need for Additional Capital" and "Description of
Exchange Notes--Certain Covenants" and "--Limitation on Incurrence of
Additional Indebtedness."
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BUSINESS
OVERVIEW
UNIFI is a leading provider of international enhanced facsimile transmission
and delivery services. The Company has developed the Intelligent Delivery
Network, a system which combines highly efficient store-and-forward network
technology with a proprietary Delivery Expert System and a 24-hour multi-
lingual fax delivery staff. The Intelligent Delivery Network provides business
customers with a facsimile delivery service that is secure, easy to use, more
efficient, more reliable and less expensive than the direct dial services
provided by the world's conventional long-distance carriers.
UNIFI commenced operations in April 1992 by transmitting one-way facsimile
traffic exclusively from the United States to Japan. By December 1993, the
Company's monthly revenue from this single route had grown to approximately
$440,000, the equivalent of annualized "run-rate" revenue of $5.3 million. As
a result of these accomplishments, the Company was successful in attracting
$80 million in total financing from several Asia/Pacific investors including
Nichimen, ORIX and affiliates of SingTel, a major provider of
telecommunications services in Singapore. With a portion of the proceeds from
these financings, the Company (i) expanded its sales, document delivery,
network monitoring, research and development, and administrative
infrastructures and (ii) from December 1995 to September 1996 established
operations, either directly or through SingTel or other contractual
relationships with other parties, in seven additional countries to complement
its existing operations in the United States and Japan. As of April 30, 1997,
the Company had approximately 9,886 corporate customers (excluding non-revenue
trial accounts and operations in China), of which approximately 1,490 were
added in the first four months of 1997 and 1,238 in the fourth quarter of
1996. UNIFI's revenues for the year ended December 31, 1995 were approximately
$10.7 million and revenues for the year ended December 31, 1996 were
approximately $25.2 million.
According to the International Telecommunications Union, international
switched telecommunications traffic grew at an annual compound rate of 13.8%
from 28 billion minutes in 1989 to 53 billion minutes in 1994. Based on
several industry studies, the Company believes that fax transmissions
represent approximately 20-25% of all switched international minutes, and in
1995, the market for international fax traffic totaled approximately $12
billion worldwide. The Company expects the growth of the telecommunications
market to continue, particularly in emerging markets and in the Asia/Pacific
region where the Company believes that facsimile will continue to be a
preferred business communications technology. In order to capitalize on the
technological trends in developed markets such as the United States and
Western Europe, the Company has developed, and is actively testing product
line extensions that will allow customers to access the Intelligent Delivery
Network for fax transmissions from their PC-LAN environments, e-mail systems,
and Internet software.
Over the past five years, the Company has developed four key competitive
elements which the management team believes are responsible for UNIFI's growth
in the market:
. Network Efficiency. The Intelligent Delivery Network's packet-switched
store-and-forward technology transmits fax documents up to 16 times more
efficiently than the circuit-switched technology utilized by the world's
long-distance carriers. This efficiency advantage allows UNIFI to offer
customers delivery rates that are significantly lower than the rates
charged by long-distance carriers while generating attractive gross
margins from its on-net traffic (i.e., traffic terminating in a country
where the Company has installed a network node).
. Superior Service--The Intelligent Delivery Network. Unlike its
competitors, the Company provides end-users with a 24-hour, seven-day-a-
week personalized delivery service based on its proprietary Delivery
Expert System combined with a multi-lingual delivery staff that
identifies, analyzes and resolves fax delivery obstacles. The Company
believes this service is primarily responsible for the less than
approximately 1.5% monthly churn it has experienced in each of the last
twelve months ending April 30, 1997 (other than October 1996, during
which the Company experienced a 2.3% monthly churn due primarily to the
recovery of Fax Links from customers with monthly usage below certain
minimum thresholds). The Company further believes that the Delivery
Expert System provides a competitive advantage that cannot be easily
replicated given the Company's experience and proprietary processes
developed since 1992.
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. Global Sales and Service Infrastructure. UNIFI has operations in the
United States, Japan, the United Kingdom, France, Germany, Hong Kong and
Korea. In addition, the Company conducts operations in China pursuant to
a partnership with a local entity and has a presence in Singapore and
Australia through its relationship with SingTel. UNIFI's investment in a
global sales and account management organization of 364 (as of April 30,
1997) people has created a competitive advantage by allowing the Company
to provide a consistent set of delivery services based on common service
standards and centralized billing. Long-distance carriers, the Company's
largest competitors, do not deploy a consistent set of global services
due to regulatory and other market forces which constrain them from
maintaining a global presence.
. Large, Established Corporate Customer Base. UNIFI has an existing (as of
April 30, 1997) base of approximately 9,886 customers (excluding non-
revenue trial accounts and operations in China). The Company's account
base grew by 762 in October 1996, 840 in November 1996, 558 in December
1996 (due to seasonality), 779 in January 1997, 827 in February 1997, 795
in March 1997 and 833 in April 1997 (in each case including a substantial
number of non-revenue trial accounts). However, the Company primarily
handles its customers' international fax transmission requirements
(domestic fax services in the United States and Canada were only recently
added), which constitute only a small portion of each customer's fax
transmission needs. UNIFI has already begun to make significant
investments necessary to broaden its service offerings to provide
customers with a more complete set of fax delivery services through
direct connection to desktop messaging software packages.
The next phase of expansion for the Company involves increasing the size of
the Intelligent Delivery Network to accommodate projected traffic growth and
to increase the percentage of its traffic that is on-net, thereby decreasing
variable delivery costs and improving gross margins. In addition, the Company
intends to broaden its existing service offering to leverage its large
existing customer base.
THE OPPORTUNITY
The Public Switched Telephone Network ("PSTN") has been designed to carry
real-time, two-way voice signals. This communication mode utilizes a 64,000
bits per second ("bps") capacity circuit to transport the required
information. Since the PSTN does not distinguish between voice and non-voice
calls, it allocates a full 64,000 bps circuit to each call, regardless of
whether the call is voice or fax. However, the conventional fax machine
generates data at an average rate of less than 7,000 bps (with a maximum rate
of 9,600 bps). Moreover, since voice traffic is two-way, the PSTN allocates
one 64,000 bps circuit in each direction regardless of whether a call is voice
or fax. Information flow in a fax transaction is largely one-directional; very
little information flows over the reverse circuit from the destination to the
source fax machine. As a result of this capacity allocation by the PSTN, the
conventional fax machine produces signals which occupy the entire two-way
voice channel on a PSTN but actually utilizes only about 5% of its capacity.
The Company has designed and constructed a store-and-forward network that
overcomes these transmission inefficiencies. The network operates parallel to,
and is accessed by, the PSTN. The network itself consists of a series of nodes
that are interconnected by dedicated communication circuits, either fiber
optic cables or satellite links which are leased from third-party providers.
The nodes interface directly with the PSTN and are the means by which customer
fax traffic enters and exits the Company's network. A fax transmission begins
with the customer dialing a destination fax number. The Company's FaxLink
autodialer attached to the fax machine telephone line intercepts the call and
screens the number. If the call is bound for a domestic destination, it is
allowed to pass through and be carried by the user's normal carrier. If,
however, the call is bound for a destination served by the Company, the
FaxLink autodialer dials the telephone number of the nearest Company node and
allows the attached fax machine to communicate with it once the connection is
made. As the node receives the fax, it converts the fax signal from its analog
format back into the original highly efficient "baseband" digital format
produced by the originating fax machine. This sending node then organizes the
fax file into a series of "packets" and transmits them to the destination
node. Because it is in its baseband digital
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form, the signal can be transmitted without the inefficiencies inherent in
digital format used by the PSTN networks. Incorporating the digital data into
packets and other overhead reduces the efficiency of the store-and-forward
network from a theoretical value of 20:1 to an actual value of approximately
16:1. That is, the Company can send approximately 16 faxes over the same size
circuit that the PSTN utilizes to send only one fax. Upon reaching the
destination node, the fax signal is reconverted to its original analog format;
the destination node then dials the destination fax machine and transfers the
fax to it. The Company's nodes are connected by long-distance transmission
systems, operated by third-party carriers, which form the arteries of the
Intelligent Delivery Network. The Company utilizes the Intelligent Delivery
Network to bypass the expensive international switched circuit facilities.
Traditional store-and-forward facsimile networks are characterized by a
common competitive disadvantage--slow feedback on the outcome of
transmissions. Traditional fax machine technology is activated when a user
dials the destination telephone number and obtains one of three principal
responses: busy, no-answer, or a connection with the destination. With the
first two, the user must attempt the call at a later time. With the third
response, provided a fax machine answers, the call is set-up and the scanned
image is transferred from the originating to the destination machine. This
process provides the user with instant notification of the call progress--
connection or no connection. Moreover, if a person answers, it is likely the
call was placed to a wrong number. The user can, if necessary, take immediate
corrective action. In contrast, a properly provisioned store-and-forward
network node will have a sufficient number of telephone lines such that a
customer never receives a busy signal. All calls are attended to immediately.
However, contact with the node does not equate to contact with a destination
fax machine. The destination may be busy, or may not answer, or the call may
be answered by a human voice. In any case, the customer is unaware of these
events, possibly for an extended period of time.
The Company's experience indicates that about 25% of international fax calls
fail on the first attempt. Store-and-forward faxes are no exception. However,
if a destination node does not succeed on its first call attempt, it is
programmed to repeat the attempt several times, typically every five minutes
for a period of half an hour. The typical store-and-forward network, failing
to deliver the document after several attempts, generates a nondeliverable
notice and sends it to the originating fax machine. The Company believes that
this unreliable delivery behavior undermines the efficiency advantage enjoyed
by store-and-forward networks.
THE INTELLIGENT DELIVERY NETWORK
To overcome the above deficiencies, the Company has created the Intelligent
Delivery Network, a system which combines highly efficient store-and-forward
technology with a personalized delivery system. The personalized delivery
system has two principal components: a proprietary Delivery Expert System
software and a 24-hour, 7-day-a-week Document Delivery Staff. These two
components work in conjunction to identify and resolve the vast majority of
obstacles encountered by the network as it attempts to deliver a fax document.
The computer-based Delivery Expert System is designed to automatically
overcome a large variety of delivery problems. If a network node fails to
deliver a fax on its first attempt, depending on the failure mode, it will
automatically redial the number several times over a fixed period of time. If
preliminary delivery attempts fail, the delivery attempt history is
automatically transferred to the Delivery Expert System for automated analysis
and resolution. For example, a very common problem with a fax machine is that
it does not answer a call when it runs out of paper. If this happens after
business hours or on a weekend, one or more days may pass before the machine
is operational once again. In this instance, the Delivery Expert System would
elect to defer delivery of the document until the beginning of the next
business day. The Delivery Expert System has been designed to recognize
standard holidays as well as weekends in all destination countries and takes
full account of these events in the decision process. Alternatively, where the
Delivery Expert System has been programmed to do so, it will route the call to
another fax machine. The Delivery Expert System was first installed in
September 1996 and is undergoing beta-testing.
If the Delivery Expert System fails to resolve a delivery problem, it
transfers the problem to the Document Delivery Staff for resolution through
human intervention. This Company's centralized facility in Lowell,
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Massachusetts, operates 24 hours a day, seven days a week; collectively,
members of the staff speak most of the major languages of the world.
Individuals in the Document Delivery Staff are responsible for contacting
either the sender or receiver of a fax document to resolve difficulties. In
the example cited above, a delivery analyst would call the sender to obtain
the telephone number of the recipient, an alternative fax number (if any) and
direction as well as authorization to manage future difficulties. All of this
information is ultimately incorporated into the database utilized by the
Delivery Expert System for automatic use in the future. Other activities of
this group range from rerouting traffic to circumvent natural disasters to
responding to constantly changing national dialing patterns.
The Company believes that its personalized delivery system is a cost-
effective method for overcoming many of the common fax delivery obstacles and
a significant service advantage over its unassisted store-and-forward
competitors. The Company further believes that its ability to provide
reliable, value-enhanced fax service is based upon its operational experience
and its accumulated knowledge and database of alternative fax numbers and
other delivery instructions. UNIFI believes that its experience in overcoming
fax delivery obstacles and its growing database of delivery solutions provides
it with a competitive advantage over new market entrants attempting to
duplicate the Company's specialized delivery capabilities.
THE UNIFI INTERNATIONAL STORE-AND-FORWARD NETWORK
The Intelligent Delivery Network consists of a series of nodes or "points-
of-presence" that are interconnected by dedicated long-haul telecommunication
facilities--either fiber cables or satellite links leased from third-party
carriers. Computers, which are based upon the IBM personal computer (PC)
standard, form the core of the equipment in a typical node. All are
inexpensive and generally available as off-the-shelf items from a number of
vendors. A node's computers can be divided into three separate categories
depending on their functionality: the fax concentrator, the traffic
administrator and the file server. The fax concentrator interfaces directly to
the PSTN and is the means by which customer faxes are reformatted and enter
and exit the network. A fax concentrator contains the specialized cards that
transform a fax from its analog to digital format. A single fax concentrator
accepts 5,000 minutes of traffic per day, interfaces with up to 24 telephone
lines and costs approximately $28,000. Fax concentrators were designed to be
added to the network in a modular fashion to accommodate increasing traffic. A
traffic administrator, again a PC-based instrument, controls the flow of
traffic across the network. The file server receives the customer fax in
digital format from the fax concentrator; it stores a copy of the fax until it
is delivered, thereby insuring that a customer document is never lost. Each
node also includes a router, which is also available off-the-shelf from a
number of vendors. Routers provide the connectivity between network nodes;
they transform data files into packets and route them to the proper
destination node. The above machines are replicated as required to provide
redundancy for reliability. A node also contains other ancillary equipment
related to reliability, maintenance and security.
Nodes have been designed to be extremely flexible so that the Company can
efficiently add or otherwise adjust capacity or configuration in response to
growing or changing traffic patterns. Nodes can be either one-way (for
destination use only) or two-way (send and receive). A one-way node would
typically be installed in a country to which a significant amount of traffic
flowed. However, without a sales presence in that country, the Company would
not originate fax traffic from that location. Such a node would also be less
expensive because of reduced equipment needs. The equipment cost of a basic
two-way and one-way node is approximately $176,000 and $40,000, respectively.
One-way nodes are connected to the network by two-way leased long-distance
lines or satellite links and do not, therefore, offer the same opportunity for
the higher gross margins obtainable where traffic flows in both directions.
However, given sufficient traffic, routes serviced by one-way nodes are more
efficient than routes that are completely off-net.
The modular format of the Company's nodes allows them to be easily converted
from one-way to two-way and further to be easily and inexpensively expanded to
increase capacity in tandem with increases in customer demand. In addition,
the simple and inexpensive nature of the node design means that the Company
can quickly deploy new nodes in response to demand in new locations. Finally,
nodes are compact and can be easily and inexpensively moved to new locations
should the Company encounter lower than expected traffic or other
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difficulties in a given market. The Company believes that the flexible nature
of its nodes will allow it to efficiently build-out its network in increments
and at a pace that is related to consumer demand.
The Company has standardized its node equipment and specifications and
limited the number of its suppliers to achieve cost efficiencies.
Substantially all of the Company's node components are readily available from
large, well-known suppliers. The Company continually evaluates new
developments in electronic document distribution technology in connection with
the design and enhancement of its system and development of services to be
offered to its customers.
The Company has made arrangements with standard telecommunication service
providers or similar agencies to house its network nodes. The housing is
typically located in a secure facility containing environmental and fire
control equipment with battery back-up power supplies to contend with power
failures. Where appropriate, earthquake resistant structures have been
utilized. The Company has also designed its nodes to be extremely reliable,
obviating the need for on-site Company personnel. Routine maintenance is
centrally performed from the Company's offices in Burlington; on-site
maintenance is purchased as required from the housing vendor.
The Company's nodes are interconnected by a variety of dedicated third-party
transmission systems including satellite links, leased fiber optic cables and
frame relay circuits. The Company believes that these third-party systems
provide secure, high quality connections and reliable throughput.
TELECOMMUNICATION SERVICE PROVIDERS
The Company requires two basic types of telecommunication services:
dedicated connectivity between nodes and switched services that allow customer
traffic to enter and exit the network.
The Company utilizes a variety of vendors and technology to provide
connectivity between and among its network nodes. Vendors are chosen based
upon reliability of service and price. For international connectivity, the
Company principally relies upon frame relay technology provided by AT&T under
its World Partners program. Frame relay service is typically less expensive
than conventional dedicated circuits while offering greater reliability
because of the built-in redundancy of these networks. Further, frame relay
circuits can be provisioned with forward and return paths having differing
capacities (hence lower costs), an important consideration when large
imbalances in traffic exist between two countries.
The Company has recently completed an agreement with Orion Atlantic, L.P.
("Orion") to provide satellite service between its nodes in the Eastern United
States and Western Europe. The service is currently operational between its
network nodes in Marlboro, Massachusetts and Frankfurt, Germany. The Company
expects to employ satellite linkages between other European cities in the near
future. Satellite service is advantageous to the Company because it eliminates
the need to provide costly land line connectivity between and among the many
important business centers in Europe. The Company believes that its
arrangement with Orion will allow it to efficiently and rapidly expand its
coverage of Western Europe and that similar satellite arrangements may become
available in other locations. This broadcast feature may allow the Company to
economically add new fax routes that might not be justifiable using standard
land lines. The contract with Orion is unlike that available with conventional
telecommunication circuit providers in that the cost is variable and based
upon the total traffic transmitted. This arrangement further decreases the
risk in installing network nodes in new locations in Western Europe.
Within any individual country, the Company attempts to contract with the
most reliable and least expensive carrier to provide switched service from the
node to the PSTN. Although UNIFI accepts fax traffic for delivery to any
country in the world, the Company currently maintains a presence in only nine
countries. Traffic destined for delivery outside of the ten countries
(including Singapore and Australia) where the Company has nodes must currently
be completed by costly, conventional long-distance carriers (so-called off-net
traffic). The Company's planned expansion of its network will increase the
volume of traffic that is on-net. The Company has made
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arrangements with a number of international switched service providers
including AT&T and LDDS WorldCom in the United States and Hong Kong Telecom to
carry off-net traffic. The network chooses the carrier based upon the lowest
cost to the required destination. For example, if AT&T is chosen as the
carrier for a particular fax, the associated file is routed to the network
node in Newark, New Jersey, which maintains dedicated circuits to that
carrier.
GROWTH STRATEGY
UNIFI's goal is to rapidly increase both the number of worldwide customers
that it services and the total volume of fax traffic transported over its
Intelligent Delivery Network. UNIFI's strategy for achieving this goal is to
leverage its existing operational and strategic competitive advantages by
expanding the Intelligent Delivery Network into additional countries and by
increasing the number of ways that customers can gain access to its
Intelligent Delivery Network service.
. Leverage the Intelligent Delivery Network Cost Advantage by Expanding the
Network. In order to capitalize on the efficiency advantage that the
Intelligent Delivery Network provides with respect to on-net traffic, the
Company is in the process of installing network nodes in each of the
countries where the Company terminates a large number of fax minutes. The
Company currently accepts cross-border fax traffic from its customers for
delivery anywhere in the world. Traffic destined for termination outside
of the ten countries (including Singapore and Australia) where the
Company currently has Intelligent Delivery Network nodes ("off-net"
traffic) is costly to deliver because the Company must utilize
conventional long-distance telephone networks to reach those off-net
locations. The Company's strategy is to significantly expand the
Intelligent Delivery Network, both geographically and in terms of
additional network nodes, to accommodate traffic growth and to leverage
the Intelligent Delivery Network on-net efficiency advantage. During
April 1997, approximately 64% of the Company's total fax traffic was on-
net; the Company's goal is to significantly improve overall gross margin
performance by increasing the percentage of on-net traffic through this
node expansion program. There can be no assurance, however, that the
Company will be successful in achieving this goal.
. Grow the Customer Base by Leveraging the Existing Global Sales/Service
Infrastructure. The Company's goal is to further accelerate its customer
growth rate and traffic growth rate by establishing sales channels in
approximately two new countries in 1997 (bringing the total to 10 revenue
generating countries by the end of 1997). The Company plans to achieve
this goal by leveraging its existing global sales and service
infrastructure by expanding to new countries located adjacent to existing
operating units. The Company believes that revenue from additional
countries can be generated quickly and efficiently by providing general
management, technical support, administration and account management
services to the new markets via the existing country units. For example,
Hong Kong will provide support services to Taiwan, the United States will
provide support services to Canada and Mexico, and the Company's French
and German operations will provide support services to Belgium, The
Netherlands and Switzerland.
. Grow Traffic Minutes by Leveraging the Company's Large, Corporate
Customer Base. UNIFI's revenue growth to date has been based on
international traffic originating solely from fax machines. UNIFI has an
existing (as of April 30, 1997) base of approximately 9,886 customers
(excluding non-revenue trial customers and operations in China). The
Company's account base grew by 762 in October 1996, 840 in November 1996,
and 558 in December 1996 (due to seasonality), 779 in January 1997, 827
in February 1997, 795 in March 1997 and 833 in April 1997 (in each case
including a substantial number of non-revenue trial accounts). However,
the Company currently primarily handles its customer's international fax
transmission requirements (domestic fax services in the United States and
Canada were only recently added) which constitute only a small portion of
each customer's fax transmission needs. UNIFI has already begun to make
the investments necessary to broaden its service offering to provide
customers with a more complete set of fax delivery services through
direct connection to desktop
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messaging software packages. The following product line extensions are in
the process of being field tested and are currently scheduled to be
introduced commercially in 1997:
. Domestic fax service within Japan and Germany. Provision of Domestic
service is expected to open up additional substantial fax markets to
UNIFI inside these four countries.
. Domestic and international Intelligent Delivery Network service from
the desktop using e-mail and other LAN-based software. This service
will allow customers to send and receive fax documents from the
desktop via their existing e-mail or LAN-based systems.
. Internet accessible fax services. This product will allow customers to
send and receive fax documents via existing Internet connections
utilizing the Company's secure and reliable Intelligent Delivery
Network.
. Broadcast fax service (domestic and international).
The Company is currently providing LAN-based facsimile service from the
desktop to Union Bank of Switzerland's London office utilizing fax server
technology. UNIFI has also entered into a strategic relationship with CDS to
jointly develop an e-mail-to-fax outsourcing service that will be designed to
allow business customers to send and receive fax documents from both LAN- and
host-based e-mail systems. This new service will be based on integrating CDS's
X.400 messaging technology with the Company's Intelligent Delivery Network.
The Company expects that the joint product will be marketed to CDS's existing
customer base during 1997 and then extended to a broader business audience in
1998. CDS's stated customer base includes approximately 170 "Global 2000"
companies and approximately 3.5-5.0 million end users.
The Company has also entered into agreements in principle to establish
strategic relationships with three software companies that are focused on
providing LAN-based and Internet-based fax software packages: RedBox,
NetXchange Communications, Inc., and PonyExpress, Inc. The Company expects to
jointly develop software products that will enable its customers to gain
access to UNIFI's Intelligent Delivery Network System via a LAN-based or
Internet-based connection utilizing a standard fax servicer or browser
interface. Each of those transactions is subject to certain significant
conditions, including definitive documentation, and there can be no assurance
that any such transactions will be consummated.
PRODUCTS AND SERVICES
International Fax-to-Fax Services. The Company's Intelligent Delivery
Network combines the efficiencies of advanced store-and-forward technologies
with the reliability of sophisticated expert systems and a 24-hour delivery
staff. The Company believes that it provides a secure, low cost, reliable,
business-to-business, international fax service. The Company believes that its
system is a more reliable and less expensive fax service than what is
available from traditional long-distance telephone services. UNIFI currently
serves approximately 9,117 customers in eight countries. In addition, the
Company has granted to SingTel the right to transmit fax documents over the
Intelligent Delivery Network from, to and through Singapore. See "Certain
Relationships and Related Transactions--Transactions with SingTel."
Domestic Fax-to-Fax Services. The Intelligent Delivery Network is already
positioned to offer domestic fax-to-fax services in the markets in which the
network nodes are operational. The Company has initially targeted the United
States, Japan, Canada and Germany for the introduction of domestic fax
document services beginning in 1997 and has recently commenced domestic
service in the United States and Canada. While the Company expects that gross
margins will be lower on this service than on UNIFI's international fax-to-fax
service, the Company believes that it will significantly expand the number of
businesses to which the Intelligent Delivery Network will appeal, as well as
complement the services the Company offers to its existing customers. However,
since UNIFI's domestic fax-to-fax service in the United States will be a real
time, rather than store-and-forward service, it will be subject to regulation
in the United States. See "--Regulation."
LAN-to-Fax Services. The Company is developing LAN-to-fax services. The
Company's network architecture will allow customers to connect their local
area network ("LAN") based fax-server directly to the
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Intelligent Delivery Network. This would give LAN users full faxing
capabilities with the same efficiencies and enhanced reliability realized in
the international fax-to-fax market without investing in fax server related
hardware and without adding new telephone lines. Recent studies indicate that
over 80% of business professionals that use a LAN infrastructure that is
capable of supporting a fax server currently send their faxes using stand-
alone machines. The Company believes that this statistic indicates a
significant growth opportunity.
The Company's LAN-to-fax service has undergone 14 months of beta-test at the
Union Bank of Switzerland's London office. During this test, the Intelligent
Delivery Network has delivered over 30,000 pages of fax documents in September
1996 alone. This extensive beta-test period has helped the Company to refine
its product, particularly the hardware requirements, prior to a full-scale
roll out.
The Company has also entered into an agreement with RedBox in the United
Kingdom to develop technology that would integrate the Company's fax delivery
service with RedBox's fax server. The goal of the RedBox project is to
integrate a feature into all RedBox fax servers that would forward all fax
transmissions routed to such servers to the Company's Intelligent Delivery
Network, providing another means of connecting LAN environments to the
Company's network. The resulting product would be jointly sold by UNIFI and
RedBox. RedBox has conducted extensive testing on this product and is
currently in the beta phase. Following completion of the beta-test, the
Company expects to commence commercial sales of RedBox fax servers
incorporating this new technology in the United Kingdom and France in 1997.
The Company is in discussions with several other fax server companies to make
the Company's LAN-to-fax service available in other markets.
In addition, the Company and CDS have entered into an agreement to jointly
develop an e-mail-to-fax outsourcing service that would allow CDS's customers
to send and receive fax documents from both LAN and host based e-mail systems
by integrating CDS's technology with the Intelligent Delivery Network. CDS
customer base includes 170 "Global 2000" companies using its e-mail
technology, and 3.5-5.0 million end-users that could potentially use this
service. CDS has provided financing to the company and currently holds a 3-
year convertible note for approximately $2.0 million and a warrant to purchase
56,406 shares of the Company's Common Stock. See "Description of Other
Indebtedness--Interim Financing."
E-mail and Voice-Mail Services. The Company also intends to broaden its
service offering in order to position itself as the obvious electronic message
carrier as the unified electronic desktop mailbox becomes a reality. The
Company believes that consumers are increasingly demanding a unified
electronic mailbox that would allow users to manage all forms of electronic
communications with a single desktop terminal. The Company's planned services
are expected to include e-mail and voice-mail as well as fax transmissions.
The Company has agreed to license CDS's X.400 message transport and X.500
directory technology which is a key component for multi-media messaging. This
technology base is expected to facilitate the Company's extension into e-mail,
voice-mail, and mixed media messaging services.
Broadcast Fax Services. The Company is planning to introduce broadcast fax
services in 1997. Broadcast fax services will enable customers to rapidly
distribute the same document to many recipients by a single transmission to
the Intelligent Delivery Network. The Company believes that this service will
allow customers to achieve significant savings on the cost of managing the fax
process and documenting fax deliveries to multiple locations.
Although the Company has plans to introduce new products in 1997 and
thereafter, there can be no assurance that any of such new products will be
introduced on the timetable currently contemplated, with the features
currently contemplated, or at all or that they will achieve commercial
success. See "Risk Factors."
MARKETING AND CUSTOMER SERVICE
Several factors make sales and marketing especially high priorities for
UNIFI. Foremost, the Company believes that because of the high level of fixed
costs of establishing, operating and maintaining its Intelligent Delivery
Network and the relatively low variable cost of running additional traffic
through it, it can significantly
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improve its operating margins by increasing sales volume. The Company also
believes that the rapid changes that are taking place in the computer and
telecommunications industries are creating a window of opportunity for
emerging companies like UNIFI to establish themselves as significant carriers.
Lastly, the Company reaps ongoing revenues from new customers because of its
low churn rate. Accordingly, the Company has spent and expects to continue to
spend substantial resources on its sales and marketing programs in an effort
to rapidly increase its customer base.
UNIFI has expanded its sales force and customer service staff from 92 at the
end of 1994, primarily located in the United States, to 364 as of April 30,
1997, located in eight countries worldwide. The Company has recruited
extensively in its local markets and believes that the local knowledge and
contacts of its largely indigenous sales force is a source of competitive
advantage. UNIFI believes that this heavy investment in local sales resources
makes UNIFI well-positioned for its planned geographic expansion and for the
roll-out of additional products as new electronic messaging formats emerge and
proliferate.
The Company's build-out plan has been designed to make the most of existing
Company resources. The Company plans to add nodes in some of the largest
business communications markets that it does not currently serve. The Company
expects to locate these nodes in areas where its customers are directing their
outgoing faxes. Fortunately many of these new markets are adjacent to markets
that the Company is already serving. Accordingly, the Company expects to serve
the majority of these new markets with its existing sales offices in
neighboring markets. The Company also plans to supplement its existing sales
force with local third-party sales agents located in the new markets.
The Company is also leveraging its existing resources by pursuing strategic
ventures with companies in related and complementary fields. For example, the
Company has entered into product development ventures with RedBox, a maker of
fax server hardware, and with CDS, an e-mail service company. See "--Growth
Strategy" and "--Products and Services." The Company believes that these and
similar ventures will help it to reach new customers by integrating its
existing services with products and services offered by other firms. The
Company also believes that such ventures will lead to new hybrid fax-based
products that will interface with emerging electronic messaging formats. The
Company expects to enter into additional strategic ventures in the future.
The Company markets its services primarily with a direct sales force of
Account Executives. The Company's 152 Account Executives are deployed globally
in the Company's 13 sales offices in eight countries. Each of the Company's
Account Executives is given primary marketing responsibility for a defined
geographic territory. The Account Executives focus their efforts on making in-
person and telephone sales calls to medium to large businesses that transmit
at least 15 pages of international facsimiles per day.
Once a customer has been signed up by an Account Executive, the customer
becomes the responsibility of a particular Account Manager. Account Managers
are the primary Company contact point for existing customers in their given
territory. They are responsible for helping new customers install FaxLinks and
training customers' personnel to use the Company's new services. The Company
encourages its Account Managers to make regular service and sales calls to
existing customers. The Company believes that Account Managers establish long-
term, service based relationships with their clients that often lead to high
account retention, additional FaxLink connections (and therefore greater
sales) and also will serve as the springboard for marketing new services, such
as e-mail and voice-mail, when the unified desktop electronic mailbox becomes
a reality.
The Company has recently started an independent sales agent and firm
partnering program. Under this program, the Company's local sales offices are
given a substantial degree of freedom to enter into customized arrangements
with local sales agents and firms with existing distribution networks that are
well suited for selling the Company's services. This program allows the
Company's sales offices to take advantage of the different sales resources and
channels in the various markets that they operate in around the world.
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The Company supports its Account Executives, Account Managers, independent
sale agents, partner firms and strategic ventures with an active head-office
marketing department. The marketing department is responsible for formulating
the Company's marketing strategies and priorities, conducting market research,
analyzing market competition and creating and disseminating advertising and
public relations materials.
COMPETITION
The global market for facsimile transmission services, broadly defined, is
highly competitive and the Company has recently observed increasing
competitive price pressures. This market is served primarily by large
telecommunications companies including AT&T, Sprint and MCI in the United
States and government run PTTs in much of the rest of the world. These
competitors have financial, marketing, technological and other resources far
in excess of the Company's and their historic market positions give them an
incumbency advantage. These companies offer basic and, in some cases, enhanced
fax communications services over networks that for the most part have been
specifically designed to carry voice signals and are based on "circuit
switched" technology. The global market for facsimile services is also served
by a group of low cost long-distance companies, such as Frontier, Worldcom
LDDS and Cable & Wireless. Most of these firms also have financial resources
far in excess of those of the Company. The Company believes that these firms
compete almost exclusively on price. These companies also operate networks
that have been specifically designed to carry voice signals and are based on
"circuit switched" technology.
The market is also served by more specialized facsimile service providers
that offer basic store-and-forward services such as, FaxSav Inc. These firms
operate store-and-forward networks that are specifically designed for
facsimile traffic. The Company also potentially competes with Xpedite Systems,
Inc. which currently operates a broadcast fax service and is adding a point-
to-point fax service. Some of these firms have financial resources in excess
of those of the Company. While, as mentioned above, a limited number of other
firms operate store-and-forward systems, none currently offer the same
monitoring and follow-up services that ensure that customers' facsimiles
overcome typical delivery obstacles. The Company believes that without such
services, the store-and-forward format offers no advantage, other than fax
document delivery cost, over traditional facsimile transmission over voice
networks.
The Company has chosen to serve a very specific segment of the facsimile
transmission service market. The Company expects the focused nature of its
market niche to reduce the chance of a direct competitive response from the
major telecommunications firms. Virtually all of the Company's customers are
acquired at the expense of other telecommunications firms, however, the
Company believes that because it currently provides primarily international
fax document delivery services (and now, domestic service in the United States
and Canada) the amount of sales taken from any one competitor is relatively
small. The Company's small size and focused services may also be an advantage
in gaining access to certain foreign markets. Many foreign telecommunications
markets are dominated by state run PTTs and telecommunications is often the
subject of national priorities. The Company believes that large, high profile
telecommunications companies would be more likely to face protectionist or
other exclusionary forces were they to attempt to replicate the Company's
services in such foreign markets. However, as the Company extends its product
line and grows, some or all of these various advantages will cease or
decrease.
As its facsimile traffic increases, the Company's believes that its
Intelligent Delivery Network should increase its competitive cost advantage
over traditional "circuit-switched" systems designed for voice transmission.
The Company converts its customers' facsimiles into a more efficient format
which reduces its variable cost of transmission. This cost based advantage
will grow as the Company increases its volume of facsimile traffic and expands
its network of international nodes.
The Company also believes that it has an early mover advantage over
potential competitors in its market niche. The Company believes that its
ability to provide effective value-enhancing document delivery services is
based on its operators' experience and its accumulated data base. The Company
has spent the past four years accumulating and refining its document delivery
procedures and accumulating a data base of alternative delivery
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procedures, fax numbers and other routing information that help it to overcome
delivery obstacles and get its customers' faxes to their final destination.
The Company believes that this "learning curve" could slow a potential
competitor's attempt to enter the Company's market niche.
While the Company believes that it enjoys certain competitive advantages in
its market niche, many of the Company's competitors have substantially greater
financial resources than the Company and there can be no assurance that the
Company will be able to compete effectively in a rapidly changing industrial
and technological environment. The Company is also dependent on certain
telecommunications infrastructure owned and operated by these competitors. See
"Risk Factors Dependence on Third-Party Carriers." In addition, the Company
cannot predict whether AT&T, MCI, Sprint or any other competitor will expand
their fax service businesses, cut prices, target the Company's customer base
or otherwise respond competitively to the Company's actual and planned
businesses. Mergers and acquisitions in the telecommunications industry, such
as tile recently announced agreement of merger between MCI and British
Telecom, may alter the competitive environment in a manner that is adverse to
the Company's interests. Lastly, the Company has little proprietary
technology, no exclusive contracts or any other Source of market controls.
Consequently, there can be no assurance that tile Company's services will not
be duplicated by existing or potential competitors. See "Risk Factors--
Competition."
EMPLOYEES
The Company considers its relationship with its employees to be good. As of
April 30, 1997 the Company employed 583 persons (substantially all of whom
were full-time employees) and 57 contractors, none of whom was covered by a
collective bargaining arrangement. Of these employees, 364 were engaged in
sales and customer service; 149 in operations; 94 in research and development;
and 33 in general and administrative activities.
PATENTS AND PROPRIETARY INFORMATION
The Company regards certain of its computer software as proprietary and
seeks to protect such software with internal non-disclosure agreements and
other common law safeguards. The Company currently holds no United States or
foreign patents, but has several United States patent applications pending.
The Company does not believe that patent protection of any of its intellectual
property is material to its business.
REGULATION
Overview. Though the Company's current operations are not subject to federal
or state regulation, its proposed domestic services may subject the Company to
federal regulation by the FCC and state regulation by certain public service
commissions. In addition, the Company is subject to certain registration and
other regulatory requirements in certain of the countries to which it now
provides service and it may become subject to additional foreign regulations
in the future.
Existing Services. The Company believes that its international fax-to-fax
service constitutes an "enhanced service" according to FCC rules and
regulations and thus is not subject to regulation by United States federal or
state governments. However, the Company's international fax-to-fax service is
subject to certain registration and other regulatory requirements in certain
of the countries in which it provides such service. Although the Company has
undertaken a review of, and believes that it is in material compliance with,
foreign regulations applicable to it in each country where more than 5% of its
current international fax-to-fax service traffic terminates, there can be no
assurance that it is in compliance with all applicable regulations. The
Company has not reviewed regulations in other countries in which it provides
international fax-to-fax service. The Company may be subject to regulations in
such other countries that may limit or restrict its ability to provide
existing or proposed services.
Proposed Services. Certain of the domestic services that the Company plans
to provide may subject it to federal regulation by the FCC and state
regulation by certain public service commissions. As a result, the
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<PAGE>
Company may be required to file tariffs and complete certification processes
with such state public service commissions. Such tariff filings may be subject
to challenge by third parties; responding to any challenges to such tariff
filings could divert the Company's resources from its operating business.
Although the Company does not believe any such federal or state regulation
will prohibit it from offering any proposed domestic services, the Company has
not completed its review of all such regulations that may be applicable to it,
and there can be no assurance that the Company will be able to offer all
proposed services to all areas of the United States.
In addition, while the Company believes that the passage of the
Telecommunications Act of 1996 (the "1996 Telcom Act") does not have an
adverse effect upon the Company's proposed services, the FCC has not completed
its implementation of the rules and regulations which are required by the 1996
Telcom Act, and there can be no assurance that such rules will not have a
material adverse effect upon the Company's existing or proposed services. In
addition, the 1996 Telcom Act is intended to foster competition in all sectors
of the communications industry and there can be no assurance that the Company
will not face substantially greater competition in providing both its existing
and proposed services. All federal, state, and foreign regulations affecting
the Company's existing and proposed services are subject to change and the
Company cannot predict the impact that such regulatory changes may have on the
Company's business.
PROPERTIES
UNIFI's principal offices are located at 900 Chelmsford Street, Lowell,
Massachusetts. The Company leases approximately 144,000 square feet pursuant
to a lease which expires on December 7, 2002.
UNIFI also maintains four branch offices in three states ranging in size
from 400-5,000 square feet. Additionally, the Company also maintains offices
for its subsidiaries in Japan, Hong Kong, China, the United Kingdom, France
and Germany. Each of the Company's foreign offices is approximately 5,000-
10,000 square feet. UNIFI believes that the Lowell facility will be adequate
for its currently projected needs.
LEGAL PROCEEDINGS
The Company is involved from time to time in routine legal matters
incidental to its business. Management believes that the resolution of such
matters will not have a material adverse effect on the Company's financial
position or results of operations.
ACQUISITION OF FAX BUSINESS OF SINGCOM (AUSTRALIA)
The Company has executed a letter of intent (the "SingCom (Australia) Letter
of Intent") with SingTel calling for the Company to purchase certain of the
assets (and to assume certain liabilities) of SingCom (Australia), a wholly
owned subsidiary of SingTel, including the right to service the fax business
customer base of SingCom (Australia). On April 1, 1996 UNIFI has assumed
operational control of SingCom (Australia). See Note 13 to the Company's
Consolidated Financial Statements. Following the consummation of the Private
Offering, the Company commenced negotiation of definitive documentation which
it is currently attempting to finalize, although there can be no assurance
that the documentation will be finalized on favorable terms or at all. The
aggregate purchase price for the acquisition of the facsimile business of
SingCom (Australia)'s assets and the repayment of existing indebtedness is
approximately $6.0 million (Australian) (approximately $4.5 million (U.S.)
based on the February 11, 1997 conversion rate), payable in full in cash at
closing. The Company intends to provide these funds out of the proceeds
received from the Private Offering. See "Use of Proceeds."
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the directors and
executive officers of the Company. All directors hold office until the next
annual meeting of the stockholders of the Company and until their successors
are duly elected and qualified, and all executive officers hold office at the
pleasure of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Douglas J. Ranalli*..... 35 Chairman of the Board of Directors, President and Chief Executive Officer
Thomas P. Sosnowski*.... 60 Director, Vice President of Strategic Projects
Robert A. Huebner....... 39 Vice President of Technology
Paula P. Litscher....... 37 Vice President of Corporate Finance
Timothy J. Martel....... 38 Vice President of Product Operations
Shae J. Plimley......... 32 Vice President of Product Management
Alvarado Stoddard**..... 41 Executive Vice President of Worldwide Customer Interaction
Chua Sock Koong***...... 39 Director
Lim Eng***.............. 41 Director
John B. Beinecke........ 57 Director
</TABLE>
- --------
* Designated as a director by Douglas J. Ranalli pursuant to the
Stockholders Agreement.
** Mr. Stoddard joined the Company in November 1996.
*** Designated as a director by SingTel pursuant to the Stockholders
Agreement.
Douglas J. Ranalli founded UNIFI (formerly Fax International, Inc.) in
September 1990 and has been the Chairman, President and CEO of the Company
since that time. Prior to starting UNIFI, Mr. Ranalli was the President and
Founder of Student Life Magazine. Mr. Ranalli founded Student Life in 1981 as
an undergraduate student at Cornell University. Within four years after
graduation, Mr. Ranalli expanded the circulation of the magazine to over
1,000,000 per issue and had given it national distribution. In 1987 Mr.
Ranalli sold the magazine to Time, Inc. Mr. Ranalli holds a B.S. in
Engineering from Cornell University and an M.B.A. from the Harvard Business
School. Mr. Ranalli is the spouse of Shae Plimley.
Thomas P. Sosnowski has been Vice President of Strategic Projects of the
Company since 1994. Prior to that time Dr. Sosnowski was the Vice President
and Director of Engineering of the Company beginning in 1991 when he joined
the Company. Prior to joining the Company, Dr. Sosnowski held various
management positions at GTE Laboratories from 1979 to 1983 and Eikonix, from
1983 to 1986, and a research position at Bell Laboratories from 1967 to 1979.
In 1986 he founded Sosnowski Associates, where he provided consulting services
in engineering management from 1986 to 1991. Dr. Sosnowski holds a B.S. in
Engineering Science from Pennsylvania State University, and a Ph.D. in
Engineering from Case-Western University. He is a senior member of Institute
of Electrical and Electronic Engineers, the author of more then 20 technical
publications and a holder of 10 patents.
Robert A. Huebner has been the Vice President of Technology since he joined
the Company in 1993. Prior to joining UNIFI, Mr. Huebner served as the
Director of Business Practices and Software Engineering at Fidelity Investment
from May 1992 to November 1993. Mr. Huebner has also held technology and
business management positions at McDonnell Douglas SI Company from May 1988 to
May 1992 and ISC International Technologies Group, Inc. from March 1985 to May
1988. He held an engineering position at Electronic Data Systems from June
1981 to March 1985. Mr. Huebner holds a B.S. in Business Administration from
Boston University and an MBA from Pennsylvania State University.
Paula P. Litscher has been Vice President of Corporate Finance of the
Company since she joined the Company in September, 1992. Prior to joining
UNIFI, Ms. Litscher owned and operated a restaurant from 1990
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<PAGE>
to 1992 and prior thereto was Corporate Controller of Martignetti Companies
from 1987 to 1990. Ms. Litscher holds an MBA from Bentley College and a B.A.
from Holy Cross College.
Timothy J. Martel has been Vice President of Product Operations since August
1, 1996. Prior to such position, Mr. Martel served as Vice President of
Development since joining the Company in May 1995. Prior to joining the
Company, Mr. Martel held various management positions at PictureTel
Corporation beginning in March of 1985, most recently Director of Engineering.
Mr. Martel holds a B.S. in Computer Science from the University of
Massachusetts at Amherst.
Shae J. Plimley has been Vice President of Product Management since October
1996. Prior to such position, Ms. Plimley served as Vice President of Product
Operations from February 1995 to October 1995, and Director of Service from
January 1992 to January 1995. Prior to joining the Company in 1992, Ms.
Plimley served as a Captain in the United States Air Force. Ms. Plimley holds
a B.S. in Mechanical Engineering from Cornell University. Between October 1995
and September 1996, Ms. Plimley was on medical leave of absence from the
Company. Ms. Plimley is the spouse of Douglas J. Ranalli.
Alvarado Stoddard joined the Company as its Executive Vice President of
Worldwide Customer Interaction in November 1996. Prior to joining the Company,
Mr. Stoddard was the Vice President of U.S. Distribution for the Systems
Business Unit of Digital Equipment Corporation. From June 1993 to April 1995,
Mr. Stoddard was the Vice President of Workgroup Computing Services at
Synetics Corporation. From January 1992 to June 1993, Mr. Stoddard was Senior
Director, Business Partners (VARs) Sales and Marketing for Lotus Development
Corporation. Mr. Stoddard holds a B.S. from Rensselaer Polytechnic Institute
and an M.B.A. from the University of North Carolina at Chapel Hill.
Chua Sock Koong has been a director of the Company since 1995 and has been
the Senior Vice President (Corporate Affairs and Finance) of Singapore
Telecommunications Limited since July 1995. Ms. Chua has been with Singapore
Telecommunications Limited since 1989 and has also served as that company's
Treasurer and Vice President of Corporate Affairs. Ms. Chua holds a degree in
Accountancy (with honors) from the University of Singapore and is a Certified
Public Accountant and a Chartered Financial Analyst.
Lim Eng has been a Director of the Company since 1996 and has been the
Assistant Vice President of Singapore Telecommunications Limited since
February 1996. Mr. Lim has been with Singapore Telecommunications Limited
since 1980 and has served as that Company's Division Manager (International
Telephone Sales) and as Manager (Teleview). Mr. Lim holds an Electrical
Engineering degree from the University of Singapore and a Master of Science
degree in Management from the Massachusetts Institute of Technology.
John B. Beinecke has been a Director of the Company since 1994, and has
served as Vice President and Director of Antaeus Enterprises, Inc. for the
past 13 years. Mr. Beinecke holds a B.A. from Yale University.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid to the chief executive
officer and each of the other four most highly compensated executive officers
of the Company during 1996.
<TABLE>
<CAPTION>
OTHER RESTRICTED SECURITIES
NAME AND SALARY ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION ($) BONUS ($) COMPENSATION ($) AWARDS ($) OPTIONS (#) PAYOUTS ($) COMPENSATION ($)
------------------ -------- --------- ---------------- ---------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Douglas J. Ranalli,
President & Chief
Executive Officer...... $150,000 -- -- -- -- -- --
Robert A. Huebner, Vice
President--Technology.. $150,000 -- -- -- 4,511 -- --
Thomas P. Sosnowski,
Vice President--
Strategic Projects..... $150,000 $29,500 -- -- 4,254 -- --
Paula P. Litscher,
Vice President--
Corporate Finance...... $124,519 $20,749 -- -- 3,260 -- --
Timothy J. Martel,
Vice President of
Product Operations..... $120,000 -- -- -- 1,915 -- --
</TABLE>
The following table sets forth individual grants of stock options by the
Company during 1996 to the executive officers named above.
OPTION GRANTS FOR 1996
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
---- ----------- ------------- ---------------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Douglas J. Ranalli...... -- -- -- -- -- --
Robert A. Huebner....... 4,511 1.0% $1.05 12/31/05 237 474
Thomas P. Sosnowski..... 4,254 1.0% $1.05 12/31/05 223 447
Paula P. Litscher....... 3,260 * $1.05 12/31/05 171 342
Timothy J. Martel....... 1,915 * $1.05 12/31/05 100 201
</TABLE>
- --------
* Less than 1%.
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<PAGE>
The following table sets forth each exercise of options by the named
executive officers during 1996 and year-end value of stock options held by the
named executive officers.
AGGREGATED OPTION/EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
SHARES FISCAL FISCAL YEAR-
ACQUIRED ON YEAR-END (#) END ($)
EXERCISE EXERCISABLE/ EXERCISABLE/
NAME (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---- ----------- ------------------ ---------------------- --------------
<S> <C> <C> <C> <C>
Douglas J. Ranalli...... 0 0 0/250,000 0/475,000
Robert A. Huebner....... 1,361 $ 952.70 27,932/ 1,533 33,518/ 1,840
Thomas P. Sosnowski..... 0 0 3,962/ 1,446 4,754/ 1,735
Paula P. Litscher....... 33,554 $23,487.80 46,591/ 1,108 69,906/ 1,330
Timothy J. Martel....... 0 0 41,277/ 20,638 49,532/ 24,766
</TABLE>
EMPLOYMENT AGREEMENT WITH MR. RANALLI
In connection with the SingTel Investment, Mr. Ranalli entered into an
employment agreement with the Company in April 1995. The agreement provides
that Mr. Ranalli will serve as Chairman of the Board of Directors, President
and Chief Executive Officer of the Company, subject to removal by the
Company's Board of Directors for any reason after April 2000. Under the
agreement, Mr. Ranalli is entitled to an annual salary of $150,000, which may
be increased by, and at the discretion of, the Board of Directors. In
addition, pursuant to the agreement, Mr. Ranalli was granted an option to
purchase 250,000 shares of the Company's common stock at a price of thirty-
five cents per share. Such option will vest 50% at such time as the Company's
common stock first attains a value of $7.00 per share and 100% at such time as
the Company's common stock first attains a value of $10.50 per share. The
agreement provides that such valuation be determined by the Board of Directors
using its best judgment and standard valuation techniques. Mr. Ranalli's
employment agreement also provides that if his employment is terminated prior
to April 2000 other than for "Cause" (as defined therein) or by reason of his
death or disability, Mr. Ranalli will receive a payment in an amount equal to
the salary which Mr. Ranalli would have earned under the agreement with
respect to the period remaining through April 2000.
STOCK OPTION PLANS
Amended and Restated 1993 Stock Option Plan
The Company's Amended and Restated 1993 Stock Option Plan, as amended (the
"1993 Plan"), was adopted by the Board of Directors and approved by the
shareholders of the Company on November 14, 1994. Of the 4,325,000 shares of
Common Stock authorized for grant under the 1993 Plan, 1,366,776 are currently
available for grant, as of December 31, 1996. The Company has allocated the
shares grantable under the 1993 Plan into two pools: one pool for special
grants, such as grants to new employees, and the other pool for the Company's
Long-Term Retention policy, which provides an annual grant to each employee as
of December 31 of each year based on the employee's base salary paid during
the year.
The 1993 Plan is administered by the Compensation Committee of the Board of
Directors or any other committee appointed by the Board of Directors with the
responsibility for administering the 1993 Plan or, in the absence of either
such committee, by the Board of Directors as a whole (the "Committee"). The
Committee has complete discretion to determine the employees and others to
whom options under the 1993 Plan are granted and the terms of any such option,
including the number of shares subject to the option and the exercise price
thereof, the duration of the option and the exercise date or dates of the
option. The 1993 Plan provides that certain restrictions shall apply to
options granted thereunder that are intended to qualify as incentive stock
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<PAGE>
options under the Internal Revenue Code of 1986, as amended, including that
the exercise price of any such options shall be not less than 100% of the fair
market value of Common Stock on the date of grant (or, not less than 110% of
the fair market value of Common Stock on the date of grant if the recipient
owns stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company (a "Ten Percent Owner")) and that any such
option shall not be exercisable beyond the tenth anniversary of the date of
grant (or, in the case of a Ten Percent Owner, beyond the fifth anniversary of
the date of grant).
1994 Investor Incentive Stock Option Plan
The Company's 1994 Investor Incentive Stock Option Plan, as amended (the
"1994 Plan"), was approved by the Board of Directors and the stockholders of
the Company on March 11, 1994. The purpose of the 1994 Plan is to provide
incentives for investors to make debt and/or equity investments in the Company
or any of its subsidiaries or affiliates. Of the 7,856,818 shares of Common
Stock authorized for grant under the 1994 Plan, 71,329 shares were available
for grant, as of February 28, 1996. The 1994 Plan is administered by a
committee appointed by the Board of Directors with the responsibility for
administering the 1994 Plan or, in the absence of such a committee, by the
Board of Directors as a whole (the "Committee"). The Committee has complete
discretion to determine the investors or prospective investors to whom options
under the 1994 Plan are granted and the terms of any such option, including
the number of shares subject to the option and the exercise price thereof, the
duration of the option and the exercise date or dates of the option.
COMPENSATION OF DIRECTORS
The directors of the Company receive no separate compensation for serving as
directors of the Company.
COMPENSATION INTERLOCKS AND INSIDER PARTICIPATION
The Company has not in the past used a compensation committee to determine
executive officer compensation. Payments to Mr. Ranalli are made in accordance
with the terms of his employment agreement. All other executive compensation
decisions are made by Mr. Ranalli in consultation with the Board of Directors.
See "--Employment Agreement with Mr. Ranalli."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of February 28, 1996
with respect to the beneficial ownership the Company's common stock by: (i)
each director of the Company; (ii) each executive officer of the Company;
(iii) each other person known to hold 5% or more of any class of the
outstanding capital stock of the Company; and (iv) all current executive
officers (regardless of salary and bonus level) and directors of the Company
as a group. Unless otherwise indicated, the persons listed in the table below
have sole beneficial ownership with respect to the shares indicated.
BENEFICIAL OWNER
<TABLE>
<CAPTION>
BENEFICIAL NUMBER OF SHARES NUMBER OF SHARES OF PERCENTAGE OWNERSHIP OF
OWNERSHIP(1) OF COMMON STOCK PREFERRED STOCK(2) VOTING STOCK(3)(4)(5)
------------ ---------------- ------------------- -----------------------
<S> <C> <C> <C>
SingTel Global Services
Pte. Ltd............... 2,000,000(6) 8,570,000(6) 38.5%
Douglas J. Ranalli...... 2,350,000(7) 314,769(8) 9.7%
Thomas P. Sosnowski..... 284,576(9) 135,269(10) 1.5%
Robert A. Huebner....... 154,465(11) -- * %
Paula P. Litscher....... 231,253(12) -- * %
Timothy J. Martel....... 61,915(13) -- * %
Shae J. Plimley......... 675,154(14) 22,500(15) 2.5%
Lim Eng................. 2,000,000(16) 8,570,000(17) 38.5%
Chua Sock Koong......... 2,000,000(16) 8,570,000(17) 38.5%
John B. Beinecke........ 173,955(18) 800,083(19) 3.6%
All executive officers
and directors as a
group (nine persons)... 5,931,318(20) 9,842,621(21) 57.5%
</TABLE>
- --------
* Less than one percent.
(1) The address of each person is c/o the Company, 900 Chelmsford Street,
Lowell MA.
(2) The Company has six series of Convertible Preferred Stock outstanding.
Each share of Convertible Preferred Stock is convertible into one share
of Common Stock, subject to certain adjustments. Holders of Convertible
Preferred Stock are entitled to vote on all matters to be voted on by the
stockholders of the Company as a single class with the holders of the
Company's Common Stock and are entitled to the number of votes equal to
the number of shares of Common Stock into which the Convertible Preferred
Stock is convertible.
(3) Assumes the conversion of the Convertible Preferred Stock into Common
Stock.
(4) Pursuant to the Stockholders Agreement, Mr. Ranalli and certain other
significant stockholders have agreed that two of the Company's five
directors shall be appointed by Mr. Ranalli and two of the Company's five
directors shall be appointed by SingTel. See "Certain Relationships and
Related Transactions."
(5) The number of shares of Common Stock deemed outstanding on February 28,
1997 includes: (i) 3,786,025 shares of Common Stock outstanding on such
date, (ii) assumed conversion of 13,515,030 shares of Convertible
Preferred Stock outstanding on such date, (iii) 7,717,813 shares of
Common Stock issuable pursuant to outstanding warrants to purchase Common
Stock exercisable within 60 days, and (iv) 2,438,350 shares of Common
Stock issuable pursuant to outstanding options.
(6) Represents 2,000,000 shares of Common Stock issuable pursuant to warrants
and 8,570,000 shares of Series G Convertible Preferred Stock representing
100% of the outstanding shares of such series.
(7) Includes 250,000 shares issuable pursuant to options that could become
exercisable within 60 days. Does not include shares owned beneficially
and of record by Shae J. Plimley, spouse of Mr. Ranalli and an executive
officer of the Company.
(8) Includes 70,000 shares of Series A Convertible Preferred Stock and
244,769 shares of Series B Convertible Preferred Stock representing 9%
and 18%, respectively, of the outstanding shares of such series. Does not
include shares owned beneficially and of record by Ms. Plimley.
(9) Includes 5,408 shares issuable pursuant to options that could become
exercisable within 60 days.
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<PAGE>
(10) Includes 50,000 shares of Series A Convertible Preferred Stock and 81,000
shares of Series B Convertible Preferred Stock owned beneficially and of
record by Mary J. Sosnowski, spouse of Mr. Sosnowski Representing 7% and
6% of the outstanding shares of such series, respectively. Mr. Sosnowski
disclaims beneficial ownership of shares held by Ms. Sosnowski. Also
includes 1,500 shares of Series A Convertible Preferred Stock held by Mr.
Sosnowski's children.
(11) Includes 153,104 shares issuable pursuant to options that could become
exercisable within 60 days.
(12) Includes 197,699 shares issuable pursuant to options that could become
exercisable within 60 days.
(13) Represents 61,915 shares issuable pursuant to options that could become
exercisable within 60 days.
(14) Includes 191,684 shares issuable pursuant to options that could become
exercisable within 60 days. Does not include shares owned beneficially
and of record by Douglas J. Ranalli, spouse of Ms. Plimley and an
executive officer of the Company.
(15) Represents 22,500 shares of Series B Convertible Preferred Stock.
(16) Represents 2,000,000 shares issuable to SingTel Global pursuant to
warrants. Mr. Lim Eng and Ms. Chua Sock Koong, each a director of the
Company, are officers of SingTel and could be deemed to share voting
control of shares owned beneficially and of record by SingTel Global. Mr.
Lim Eng and Ms. Chua Sock Koong disclaim beneficial ownership of such
shares.
(17) Represents 8,570,000 shares owned beneficially and of record by SingTel
Global. Mr. Lim Eng and Ms. Chua Sock Koong, each a director of the
Company, are officers of SingTel and could be deemed to share voting
control of shares owned beneficially and of record by SingTel Global. Mr.
Lim Eng and Ms. Chua Sock Koong disclaim beneficial ownership of such
shares.
(18) Represents 35,000 shares issuable pursuant to warrants owned beneficially
and of record by Antaeus Enterprises, Inc., a Delaware corporation
("Antaeus"), and 71,955 shares issuable pursuant to warrants owned
beneficially and of record by 420 Associates, a New York General
Partnership. Mr. Beinecke is a Vice President and Director of Antaeus and
a general partner of 420 Associates, and may be deemed to share voting
and investment control with respect to shares in the Company held by each
such entity. Does not include 3,500 shares issuable pursuant to warrants
held beneficially or of record by certain trusts of which Mr. Beinecke is
an income beneficiary only.
(19) Includes 125,820 shares owned beneficially and of record by Antaeus and
674,262 shares owned beneficially and of record by 420 Associates, a New
York General Partnership. Does not include 434,185 shares held
beneficially or of record by certain trusts of which Mr. Beinecke is an
income beneficiary only.
(20) Represents 2,897,553 shares owned beneficially and of record, 2,173,955
shares issuable pursuant to warrants and 859,810 shares issuable pursuant
to options.
(21) Includes 761,615 shares of Series A Convertible Preferred Stock, 351,038
shares of Series B Convertible Preferred Stock, 8,570,000 shares of
Series G Convertible Preferred Stock, 34,285 shares of Series D
Convertible Preferred Stock and 125,682 Shares of Series F Convertible
Preferred Stock.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH SINGTEL
On April 10, 1995, affiliates of SingTel agreed to make $70 million of
investments in the Company (the "SingTel Investment"), consisting of (i) a $25
million term loan, (ii) $15 million of equipment financing and (iii) the
purchase of 8,570,000 shares of the Company's Series G Convertible Preferred
Stock for $30 million. For a summary of the terms of such instruments, see
"Description of Certain Indebtedness." On October 31, 1996, these arrangements
were revised in contemplation of the Private Offering (the "Restructuring").
In connection with the Restructuring, the Company also granted SingTel Global
or its assigns a warrant to purchase up to 2 million additional shares of
Common Stock at $1.83 a share at any time or from time to time prior to March
1, 2007. Since October 31, 1996, SingTel has provided the Company with an
additional $13.35 million of debt financing, approximately $6.8 million of
which has subsequently been repaid. See "Use of Proceeds" and "Description of
Certain Indebtedness--SingTel Advances." The following is a summary of certain
arrangements entered into among the Company and its stockholders, on the one
hand, and SingTel and its affiliates, on the other hand.
SingTel and its affiliates do not guarantee the obligations of the Company
and are under no obligation to provide any financial support to the Company.
SingTel Global can be expected to exercise its rights with respect to the
Company in the interests of SingTel Global and its affiliates, which may
conflict with the interests of holders of the Notes and the Warrants.
The Stockholders Agreement
In connection with the SingTel Investment, the Company, SingTel Global,
Douglas J. Ranalli and certain other significant stockholders of the Company
entered into the Stockholders Agreement, which contains certain restrictions
with respect to the transferability of Mr. Ranalli's capital stock of the
Company, and provides for certain voting arrangements and other rights granted
by the parties with respect to their shares of capital stock of the Company.
The Stockholders Agreement provides that the Company's Board of Directors
shall be comprised of (i) seven directors if the holders of the Company's
Series D Convertible Preferred Stock are entitled to and have elected a
director and (ii) five directors at all other times. SingTel Global is
entitled to (i) appoint three directors if the Board of Directors is comprised
of seven directors and two of the directors if the Board of Directors is
comprised of five directors so long as it and its affiliates own at least six
million shares of common stock of the Company (or Convertible Preferred Stock
representing the right to acquire such shares) and (ii) appoint one director
so long as it and its affiliates own at least one million but less than six
million shares of the Company's common stock (or Convertible Preferred Stock
representing the right to acquire such shares). Douglas J. Ranalli is entitled
to appoint two of the directors and the stockholders which are unaffiliated
with SingTel Global, Mr. Ranalli or management of the Company are entitled to
appoint one director. In addition, if upon the death of Mr. Ranalli, SingTel
Global and its affiliates own more than 50% of the outstanding common stock of
the Company, SingTel Global will be entitled to appoint one additional
director (and the number of directors shall be increased to give effect to
such right). The Stockholders Agreement also provides that, subject to certain
exceptions, Mr. Ranalli may not sell any shares of capital stock of the
Company during the term of the Agreement. Currently, the Board of Directors is
comprised of 5 directors, two of whom are appointed by Mr. Ranalli and two of
whom are appointed by SingTel Global.
The Stockholders Agreement will terminate upon the earlier to occur of (i)
the consummation of a primary initial public offering of the Company's common
stock by the Company at any time if such public offering is approved by a
majority of the Board of Directors, has an aggregate price to the public of
$20 million or more, and such shares are listed on certain national stock
exchanges or NASDAQ (other than pursuant to the registration rights described
herein) (a "Primary Initial Public Offering"), (ii) at SingTel Global's
option, at any time that the stockholders party thereto (other than SingTel
Global and its affiliates) own in the aggregate less than one million shares
of common stock of the Company or (iii) the occurrence of certain events of
insolvency with respect to the Company.
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The InterCompany Operating Agreement
In connection with the SingTel Investment, the Company granted to SingTel an
exclusive, perpetual and irrevocable license to use (but not sublicense) the
Company's network and technology for the transmission of fax document
transmissions to, from and through Singapore. The Company has also agreed to
maintain the network in Singapore, train SingTel's personnel and provide user
documentation to SingTel to enable SingTel to use the network for such
purposes. SingTel has agreed to pay to the Company 4% of SingTel's gross
revenues from providing fax document delivery services from Singapore on the
Company's network, and to pay certain other fees in exchange for the
maintenance and other services provided by the Company to SingTel. During 1995
and 1996, SingTel incurred expenses payable to the Company in an aggregate of
approximately $.09 million and $3.4 million, respectively, pursuant to such
agreement. SingTel has also provided $13.35 million of advances under the
Intercompany Operating Agreement as Interim Financing since October 31, 1996.
See "Description of Other Indebtedness--Interim Financing."
The Stock Purchase Agreement
The stock purchase agreement pursuant to which SingTel Global purchased the
Company's Series G Convertible Preferred Stock (the "Stock Purchase
Agreement") contains significant operating restrictions on the Company. Among
other restrictions, the Stock Purchase Agreement provides that without the
approval of at least two-thirds of the Board of Directors, the Company will
not (subject to certain exceptions) (i) make, or permit any subsidiary to
make, any material change in the nature of its business, (ii) consolidate or
merge the Company with or into, or sell all or substantially all of its assets
to another entity, (iii) loan funds to or provide other credit support for any
borrowing by, any other person, (iv) redeem, purchase or otherwise acquire for
value any shares of its capital stock, (v) declare or pay a dividend or other
distribution, (vi) authorize or issue any capital stock senior to or on a
parity with the Series G Convertible Preferred Stock, (vii) liquidate,
voluntarily wind-up or dissolve the Company, (viii) issue, or grant any
registration rights in respect of, any equity or debt securities or rights,
options or warrants, to purchase any such securities, (ix) incur any
indebtedness for borrowed money, (x) invest in the equity of any other person,
(xi) make capital expenditures in excess of $50,000 per transaction or (xii)
amend the Company's Certificate of Incorporation or By-Laws. In addition, the
Company's annual budget must be approved by at least two-thirds of the Board
of Directors. Pursuant to the Stock Purchase Agreement, SingTel Global has the
right so long as it and its affiliates own at least six million shares of the
Company's Series G Convertible Preferred Stock (or shares of the Company's
Series I Convertible Preferred Stock or Common Stock into which such Series G
Shares are convertible) to appoint two members of the Company's executive
staff (vice president level, including the Chief Financial Officer and the
Chief Operating Officer) and up to three members of the Company's lower-tier
management. In addition, pursuant to the Stock Purchase Agreement, the Company
granted to SingTel Global (subject to certain exceptions) a right of first
refusal to acquire (on terms to be agreed to in good faith) a 49% interest in
any joint venture subsidiary established by the Company in either Australia or
the Philippines for the purpose of providing facsimile network transmission
services from those countries under an agreement similar to the agreement with
the minority interest in Fax Japan. The Company also granted a right of first
refusal to SingTel Global (subject to certain exceptions) with respect to an
interest in any joint venture subsidiary established by the Company. Most of
such restrictions (other than the rights of first refusal) terminate upon
termination of the Stockholders Agreement.
Pursuant to the Restructuring, the Stock Purchase Agreement was amended to
provide that a Primary Initial Public Offering may be approved by a simple
majority of the Board of Directors.
The Registration Rights Agreement
Pursuant to a registration rights agreement (the "Amended and Restated
Registration Rights Agreement") among the Company and certain significant
stockholders, holders of specified percentages of capital stock of the Company
(other than Doug Ranalli) may demand registration of their capital stock
subsequent to December 31, 1997 (subject to certain exceptions). The
registration rights agreement also provides such stockholders with incidental
registration rights with respect to such holders' shares of capital stock.
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CAPITAL STOCK REPURCHASES
From June 13, 1995 to July 7, 1995 the Company repurchased an aggregate of
1,738,440 shares of its Convertible Preferred Stock and warrants to purchase
543,149 shares of common stock for an aggregate cash purchase price of
$7,385,838 or $3.50 per share.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
THE CREDIT AGREEMENT
In connection with the SingTel Investment, the Company and SingTel N.V. have
entered into a credit agreement (the "Credit Agreement") under which the
Company has borrowed the $25 million. Amounts drawn under the Credit Agreement
must be repaid on the later of (i) March 1, 2005 or (ii) the date on which the
Notes are paid, defeased, redeemed, repurchased or otherwise satisfied in full
(the "Note Payment Date") (provided that if the Note Payment Date is prior to
March 1, 2005, borrowings under the Credit Agreement will become due 91 days
after the Note Payment Date). Borrowings under the Credit Agreement accrue
interest at a rate equal to the five-year benchmark treasury rate (as defined)
on the applicable drawdown date plus 3% per annum (with a premium of 3% per
annum during the continuance of an event of default). Prior to the Note
Payment Date, interest will not be paid in cash but will be added to the
principal amount of the loan quarterly in arrears. Thereafter, interest shall
be paid quarterly in arrears. The Company's obligations under the Credit
Agreement are unsecured and subordinated to the Company's obligations under
the Notes.
The Credit Agreement contains significant operating restrictions on the
Company, including prohibitions on the Company's ability to (i) incur liens,
(ii) make investments, (iii) make asset sales outside the ordinary course of
business, (iv) purchase, lease or otherwise acquire assets outside the
ordinary course of business, (v) become a party to a sale-lease-back
transaction, (vi) pay dividends or make other distributions in respect of
capital stock, (vii) redeem, repurchase or otherwise acquire outstanding
capital stock or (viii) merge or consolidate with or into any other person.
The Credit Agreement contains customary events of default in addition to a
cross default to the Stock Purchase Agreement. See "Certain Relationships and
Related Transactions."
As of December 31, 1996, there was $25 million in aggregate principal amount
of indebtedness and approximately $1.4 million of accrued interest outstanding
under the Credit Agreement.
THE EQUIPMENT FINANCING AGREEMENT
The Company and SingTel N.V. have also entered into an equipment financing
agreement (the "Equipment Financing Agreement"), pursuant to which SingTel
N.V. has loaned the Company the maximum of $15 million to purchase equipment
provided for in the Company's annual budget, which annual budget is subject to
the approval of two-thirds of the Board of Directors pursuant to the Stock
Purchase Agreement. Amounts drawn under the Equipment Financing Agreement must
be repaid on the later of (i) March 1, 2005 or (ii) the Note Payment Date
(provided that if the Note Payment Date is prior to March 1, 2005, borrowings
under the Equipment Financing Agreement will become due 91 days after the
Senior Note Payment Date). Prior to the Note Payment Date, interest will not
be paid in cash but will be added to the principal amount of the loan
quarterly in arrears. Thereafter, interest shall be paid quarterly in arrears.
Borrowings under the Equipment Financing Agreement accrue interest at six
month United States Dollar LIBOR on the applicable drawdown date plus 2% per
annum (with a premium of 3% per annum during the continuance of an event of
default). The covenants and events of default provided for in the Equipment
Financing Agreement are substantially the same as those provided for in the
Credit Agreement. The Company's obligations under the Equipment Financing
Agreement are unsecured and subordinated to the Company's obligations under
the Notes.
As of December 31, 1996, there was approximately $15 million in aggregate
principal amount of indebtedness and approximately $0.2 million of accrued
interest outstanding under the Equipment Financing Agreement.
INTERIM FINANCING
SingTel Advances
Pursuant to a series of letter agreements, SingTel has made advances (the
"SingTel Advances") to the Company of $13.35 million under the Company's
InterCompany Operating Agreement with SingTel. See
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"Certain Relationships and Related Transactions--Transactions with SingTel--
The InterCompany Operating Agreement," Each such advance bears interest at a
rate per annum equal to the sum of (i) the one-year United States Treasury
rate in effect at the time the advance was made plus (ii) 5%. All such
interest is payable in cash monthly in arrears. Such advances will be applied
to the fees and other amounts payable by SingTel to the Company under the
Intercompany Operating Agreement. As of March 31, 1997, approximately $2.4
million of the SingTel Advances had been so applied. SingTel has canceled $6.8
million of such indebtedness in exchange for 5,000 Units and payment of $1.8
million in cash. In connection with such advances, among other things the
Company granted SingTel the right to appoint a second executive officer of the
Company (thereby giving SingTel the contractual right to appoint both the
Chief Operating Officer and Chief Financial Officer of the Company plus three
members of lower-tier management). See "Certain Related Transactions--
Transactions with SingTel--The Stock Purchase Agreement."
After December 1996 the Company has not made the required payments of
interest of approximately $250,000 on the Sing Tel Advances and the Term Loan
Agreement. Sing Tel has agreed to waive such defaults upon receipt of such
interest payments, which waiver is effective as of the consummation of the
Private Offering.
CDS Financing
In December 1996, the Company obtained $2.0 million of interim debt
financing (the "CDS Financing") from Control Data Systems, Inc. ("CDS"),
pursuant to a 10% convertible term note issued by the Company to CDS (the
"Original CDS Note"). As of April 1, 1997, the Company and CDS entered into an
agreement pursuant to which CDS exchanged the Original CDS Note for (i) the
Company's 14% Convertible Term Note (the "CDS Exchange Note:) in principal
amount equal to the original principal amount of the Original CDS Note plus
accrued interest thereon through March 31, 1997, and (ii) a warrant to
purchase up to 56,406 shares of the Company's Common Stock (the "CDS Warrant")
at an exercise price per share equal to $0.25. The terms of the CDS Exchange
Note provide that (i) such note shall mature three years from the date of
issuance thereof, (ii) interest thereon shall accrue and be paid semi-annually
in arrears on April 1 and October 1 in each year, commencing on October 1,
1997, (iii) CDS may redeem all (but not less than all) of the outstanding
principal and accrued and unpaid interest thereon at any time on or after
April 1, 1999 in the event the Company shall have completed an initial public
offering of Common Stock, convert all (but not less than all) of the
outstanding principal and accrued and unpaid interest thereon into shares of
Common Stock at a price per share equal to the lesser of (a) $15.0, or (b) the
price per share to the public of the shares of Common Stock sold by the
Company in such offering. The CDS Warrant is exercisable in whole or in part
for ten years form the date of issuance. The number of shares for which the
CDS Warrant is exercisable are subject to adjustment for certain events such
as stock splits, stock dividends, and certain issuances of Common Stock or
rights to acquire Common Stock.
STEELCASE FINANCING
The Company has entered into financing arrangements consisting of a loan to
the Company of $308,000 and lease financing of up to $2,500,000, in each case
from Steelcase Financial Services Inc. ("Steelcase"). Such lease is for work
stations and furniture for the Company's new headquarters facilities in
Lowell, MA, and such loan was made to enable the Company to discharge its
remaining obligations under a prior third-party equipment and furniture lease
and bears interest at a rate of 12% per annum. The Company has granted to
Steelcase a first-priority security interest in the workstations and furniture
financed by Steelcase as well as certain of the Company's accounts
receivables. Steelcase has agreed to release its security interests in such
accounts receivable upon receipt by Steelcase of a letter of credit or cash
collateral from the Company.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Latham & Watkins, counsel to the Company, the following
discussion describes the material federal income tax consequences expected to
result to holders whose Private Notes are exchanged for Exchange Notes in the
Exchange Offer. Such opinion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable Treasury
regulations, judicial authority and administrative rulings and practice. There
can be no assurance that the Internal Revenue Service (the "Service") will not
take a contrary view, and no ruling from the Service has been or will be
sought with respect to the Exchange Offer. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including insurance companies, tax-
exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. EACH HOLDER OF
PRIVATE NOTES SHOULD CONSULT ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES OF EXCHANGING PRIVATE NOTES FOR EXCHANGE NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN LAWS.
The exchange of Private Notes for Exchange Notes will be treated as a "non-
event" for federal income tax purposes because the Exchange Notes will not be
considered to differ materially in kind or extent from the Private Notes. As a
result, no material federal income tax consequences will result to holders
exchanging Private Notes for Exchange Notes.
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DESCRIPTION OF EXCHANGE NOTES
The Exchange Notes will be issued under an indenture, dated as of February
21, 1997 (the "Indenture") between the Company and Fleet National Bank, as
Trustee (the "Trustee"). The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be entitled to
the benefits of the Indenture. The form and terms of the Exchange Notes are
the same as the form and terms of the Private Notes except that (i) the
Exchange Notes will have been registered under the Securities Act, and,
therefore, the Exchange Notes will not bear legends restricting the transfer
thereof and (ii) Holders of the Exchange Notes will not be entitled to certain
rights of Holders of Private Notes under the Registration Rights Agreement,
which rights will terminate upon the consummation of the Exchange Offer. The
terms of the Exchange Notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939
(the "TIA"), as in effect on the Date of the Indenture. The following summary
of the material provisions of the Indentures does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the
provisions of the Indenture and Escrow Agreement, including the definitions of
certain terms contained therein and those terms made a part of the Indenture
by reference to the TIA. The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions." As used
below in this "Description of Exchange Notes" section, the term "Company"
means UNIFI Communications, Inc., but not any of its Subsidiaries, unless the
context otherwise requires.
GENERAL
The Notes will be senior obligations of the Company. The Notes will be
collateralized by a first priority security interest in the Escrow Account
described under "Disbursement of Funds--Escrow Account." The Notes will be
effectively subordinated to all Indebtedness and other liabilities (including
trade payables) of the Subsidiaries of the Company. As of December 31, 1996,
after giving effect to the Private Offering and the consummation of the
transactions contemplated hereby, the Company would have had approximately
$55.2 million of indebtedness outstanding ranking subordinate to the Notes and
the Subsidiaries of the Company would have had approximately $5.7 million of
indebtedness and other liabilities outstanding ranking effectively senior to
the Notes.
The Notes will be issued only in registered form, without coupons, in
principal denominations of $1,000 and integral multiples thereof. Principal
of, premium, if any, and interest on the Notes will be payable, and the Notes
will be transferable, at the office of the Company's agent in the City of New
York located at the corporate trust office of the Trustee. In addition,
interest may be paid at the option of the Company, by check mailed to the
person entitled thereto as shown on the security register. No service charge
will be made for any transfer, exchange or redemption of Notes, except in
certain circumstances for any tax or other governmental charge that may be
imposed in connection therewith. Initially, the Trustee will act as paying
agent and registrar for the Notes. The Company may change any paying agent and
registrar without notice to the holders.
MATURITY, INTEREST AND PRINCIPAL
The Notes are limited to an aggregate principal amount of $175,000,000 and
will mature on March 1, 2004. Interest on the Notes will accrue at a rate of
14% per annum and will be payable semi-annually on each March 1 and September
1, commencing on September 1, 1997, to the persons who are registered holders
at the close of business on the February 15 and August 15 immediately
preceding the applicable interest payment date. The Company will pay interest
on overdue principal from time to time on demand at the rate of 2% per annum
in excess of the rate shown on the cover page of this Prospectus. The Company
shall, to the extent lawful, pay interest on overdue installments of interest
(without regard to any applicable grace periods) from time to time on demand
at the rate of 2% per annum in excess of the rate shown on the cover page of
this Prospectus. Interest on the Notes will accrue from and including the most
recent date to which interest has been paid or, if no interest has been paid,
from and including the Issue Date. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months, and, in the case of a partial
month, the actual number of days elapsed.
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Interest on the Notes may increase if the Company fails to fulfill its
obligations under the Notes Registration Rights Agreement. See "Exchange
Offer; Registration Rights."
The Notes will not be entitled to the benefit of any mandatory sinking fund.
OPTIONAL REDEMPTION
The Indenture provides that the Notes will not be redeemable (except as
provided below) prior to March 1, 2001. On and after March 1, 2001 the Notes
will be redeemable, at the option of the Company, in whole or in part, on not
less than 30 nor more than 60 days' prior notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued
and unpaid interest, if any, to the redemption date if redeemed during the 12-
month period beginning on March 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001............................................................ 114.000%
2002............................................................ 107.000%
2003 and thereafter............................................. 103.500%
</TABLE>
The Indenture provides that in the event that on or prior to March 1, 2000,
the Company consummates one or more Equity Offerings (as defined), the Company
may, at its option, redeem from the proceeds of such Equity Offerings no later
than 60 days following the consummation thereof 33% of the aggregate principal
amount of the Notes originally issued at a redemption price equal to 114% of
the aggregate principal amount thereof, plus accrued and unpaid interest, if
any, to the date of redemption; provided, however, that immediately after
giving effect to any such redemption, not less than 67% of the aggregate
principal amount of the Notes originally issued remains outstanding.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control, each
holder will have the right to require that the Company repurchase all or a
portion of such holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the
date of repurchase.
The Indenture provides that within 30 days following the date upon which a
Change of Control occurs, the Company must send, by first class mail, a notice
to each holder, with a copy to the Trustee, which notice shall govern the
terms of the Change of Control Offer. Such notice will state, among other
things, the purchase date, which must be not less than 30 days nor more than
45 days from the date such notice is mailed, other than as may be required by
law (the "Change of Control Payment Date"). Holders electing to have a Note
purchased pursuant to a Change of Control Offer will be required to surrender
the Note, properly endorsed for transfer together with such other customary
documents as the Company may reasonably request, to the paying agent at the
address specified in the notice prior to the close of business on the date the
Change of Control Offer expires.
The Indenture provides that the Company will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable
in connection with the purchase of Notes pursuant to a Change of Control
Offer.
If a Change of Control were to occur, there can be no assurance that the
Company would have sufficient funds to pay the purchase price for all Notes
that the Company might be required to purchase. In the event that the Company
were required to purchase Notes pursuant to a Change of Control Offer, the
Company expects that it would need to seek third-party financing to the extent
it does not have available funds to meet its purchase obligations. However,
there can be no assurance that the Company would be able to obtain such
financing on favorable terms, if at all.
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With respect to the sale of assets referred to in the definition of Change
of Control, the phrase "all or substantially all" as used in such definition
varies according to the facts and circumstances of the subject transaction,
has no clearly established meaning under relevant law and is subject to
judicial interpretation. Accordingly, in certain circumstances there may be a
degree of uncertainty in ascertaining whether a particular transaction would
involve a disposition of "all or substantially all" of the assets of a person
and therefore it may be unclear whether a Change of Control has occurred and
whether the Notes are subject to a Change of Control Offer.
The foregoing provisions may not necessarily afford the holders of the Notes
protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or other similar transaction involving
the Company that may adversely affect the holders because such transactions
may not involve a shift in voting power or beneficial ownership or, even if
they do, may not involve a shift of the magnitude required under the
definition of Change of Control to trigger the provisions.
SELECTION AND NOTICE
The Indenture provides that in the event that less than all of the Notes are
to be redeemed at any time, selection of such Notes for redemption will be
made by the Trustee pro rata, by lot or by such method as the Trustee shall
deem fair and appropriate; provided, however, that if the Notes are redeemed
in part with the proceeds of an Equity Offering, the Trustee shall select the
Notes to be redeemed by prorating, as nearly as may be, the principal amount
of Notes to be redeemed among the holders of the Notes in proportion to the
principal amount of Notes registered in their respective names. In any
proration pursuant to an Equity Offering, the Trustee shall make such
adjustments, reallocations and eliminations as it shall deem proper to the end
that the principal amount of Notes so prorated shall be $1,000 or a multiple
thereof, by increasing or decreasing or eliminating the amount which would be
allocable to any holder on the basis of exact proportion by an amount not
exceeding $1,000. The Trustee in its discretion may determine the particular
Notes (if there are more than one) registered in the name of any holder which
are to be redeemed, in whole or in part. No Notes of a principal amount of
$1,000 or less shall be redeemed in part. Notice of redemption shall be mailed
by first-class mail at least 30 but not more than 60 days before the
redemption date to each holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof
upon surrender for cancellation of the original Note. On and after the
redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption, unless the Company defaults in the payment of the
redemption price therefor.
DISBURSEMENT OF FUNDS--ESCROW ACCOUNT
The Notes will be collateralized, pending disbursement pursuant to the
Escrow Agreement dated as of February 21, 1997, among the Company, the Trustee
and Fleet National Bank, as Escrow Agent (the "Escrow Agreement"), by a pledge
of the Escrow Account, which initially contained approximately $46 million of
the net proceeds from the sale of the Private Notes issued pursuant to the
Private Offering (the "Escrow Collateral"), representing funds that together
with the proceeds from the investment thereof will be sufficient to pay two
years' interest on the Notes.
The Company entered into the Escrow Agreement which provides for the grant
by the Company to the Trustee, for the benefit of the holders, of security
interests in the Escrow Collateral. All such security interests will
collateralize the payment and performance when due of certain of the
Obligations of the Company under the Indenture and the Notes, as provided in
the Escrow Agreement. The Liens created by the Escrow Agreement will be first
priority security interests in the Escrow Collateral. The ability of holders
to realize upon any such funds or securities may be subject to certain
bankruptcy law limitations in the event of the bankruptcy of the Company.
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Pursuant to the Escrow Agreement, immediately prior to an interest payment
date on the Notes, the Company may either deposit with the Trustee from funds
otherwise available to the Company cash sufficient to pay the interest on the
Notes scheduled to be paid on such date or the Company may direct the Escrow
Agent to release to the Note Trustee from the Escrow Account proceeds
sufficient to pay interest then due on the Notes. In the event that the
Company exercises the former option, the Escrow Agreement provides that the
Company may thereafter direct the Escrow Agent to release to the Company
proceeds or Escrow Collateral from the Escrow Account in like amount.
In the event that the funds or U.S. Government Securities (the "Available
Funds") held in the Escrow Account exceed the amount sufficient, in the
opinion of a nationally recognized firm of independent public accountants
selected by the Company or the Company's regular independent public
accountants, to provide for payment in full of the first four scheduled
interest payments due on the Notes (or, in the event an interest payment or
payments have been made, an amount sufficient to provide for payment in full
of any interest payments remaining, up to and including the fourth scheduled
interest payment), the Trustee will be permitted to release to the Company at
the Company's request any such excess amount.
Pending such disbursements, all funds contained in the Escrow Account will
be invested in U.S. Government Securities. Interest earned on the U.S.
Government Securities will be placed in the Escrow Account. Upon the
acceleration of the maturity of the Notes, the Escrow Agreement will provide
for the foreclosure by the Trustee upon the net proceeds of the Escrow
Account. Under the terms of the Indenture, the proceeds of the Escrow Account
shall be applied, first, to amounts owing to the Trustee in respect of fees
and expenses of the Trustee and second, to the Obligations under the Notes and
the Indenture. Under the Escrow Agreement, assuming that the Company makes the
first four scheduled interest payments on the Notes in a timely manner with
Available Funds (the "Available Funds"), all of the U.S. Government Securities
will be released from the Escrow Account.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants.
Limitation on Incurrence of Additional Indebtedness. The Indenture provides
that neither the Company nor any Restricted Subsidiary will, directly or
indirectly, create, incur, assume, guarantee, acquire or become liable,
contingently or otherwise, for (collectively "incur") any Indebtedness other
than Permitted Indebtedness. Notwithstanding the foregoing limitations, the
Company may incur Indebtedness (including, without limitation, any Acquired
Indebtedness) and Restricted Subsidiaries may incur Indebtedness under Vendor
Financing Arrangements if after giving pro forma effect to the incurrence of
such Indebtedness and the receipt and application of the proceeds therefrom
the Company's Leverage Ratio would be less than 5.0 to 1; provided, that if
prior to March 1, 1999, the Company has not consummated a primary underwritten
public offering (excluding any offering pursuant to Form S-8 under the
Securities Act or any other publicly registered offering pursuant to the
Securities Act pertaining to an issuance of shares of Common Stock or
securities exercisable therefor under any benefit plan, employee compensation
plan, or employee or director stock purchase plan) of Common Stock of the
Company pursuant to an effective registration statement under the Securities
Act resulting in gross proceeds to the Company of at least $35 million, such
ratio shall be reduced to 4.5 to 1 until such time as the Company completes
such an offering.
The Indenture provides that any Indebtedness of an entity existing at the
time it becomes a Restricted Subsidiary (whether by merger, consolidation,
acquisition of Capital Stock or otherwise) or is merged with or into the
Company or any Restricted Subsidiary shall be deemed to be incurred as of the
date such entity becomes a Restricted Subsidiary or the date of such merger.
The Indenture provides that the Company will not incur any Indebtedness that
is subordinate to any other Indebtedness of the Company unless such
Indebtedness is also expressly subordinated to the Notes; provided, however,
that no Indebtedness of the Company shall be deemed to be subordinate to any
other Indebtedness of
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the Company solely because such other Indebtedness is secured. Accretion of
accreted value and accrual of interest shall not be deemed to be an
"incurrence" for purposes of this covenant, nor shall the payment of interest
in the form of additional Indebtedness.
Limitation on Restricted Payments. The Indenture provides that neither the
Company nor any Restricted Subsidiary will, directly or indirectly:
(i) declare or pay any dividend or make any distribution (other than
dividends or distributions payable in Qualified Capital Stock of the
Company or payable to any Restricted Subsidiary of the Company) on shares
of the Capital Stock of the Company;
(ii) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or of any Restricted Subsidiary not owned or
held by the Company or a Restricted Subsidiary, or any warrants, rights or
options to acquire shares of any class of such Capital Stock, other than
(x) the exchange of such Capital Stock or any warrants, rights or options
to acquire shares of any class of such Capital Stock for Qualified Capital
Stock of the Company or warrants, rights or options to acquire Qualified
Capital Stock of the Company or (y) to the extent that such Capital Stock
or warrants, rights or options are owned by the Company or any Restricted
Subsidiary of the Company;
(iii) make any principal payment on, purchase, decrease, redeem, prepay,
defease or otherwise acquire or retire for value, prior to any scheduled
final maturity, scheduled repayment or scheduled sinking fund payment, any
Indebtedness that is subordinate or junior in right of payment to the Notes
(other than any such Indebtedness owing to the Company or any Restricted
Subsidiary of the Company); or
(iv) make any Investment (other than Permitted Investments) after the
Issue Date;
(each of the foregoing prohibited actions set forth in clauses (i), (ii),
(iii) and (iv) being referred to as a "Restricted Payment"), if at the time of
such Restricted Payment or immediately after giving effect thereto, (a) a
Default or an Event of Default under the Indenture shall have occurred and be
continuing or would result therefrom, (b) the Company is not, at such time,
able to incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with the Leverage Ratio described under the
covenant "--Limitation on Incurrence of Additional Indebtedness" above, or (c)
the aggregate amount of Restricted Payments made subsequent to the Issue Date
(the amount expended for such purposes, if other than in cash, being the fair
market value of such property as determined in good faith by the Board of
Directors of the Company, whose determination shall be conclusive and
evidenced by a Board Resolution) exceeds or would exceed the sum of:
(A) Cumulative EBITDA since the Issue Date less the product of 2.0 times
Cumulative Interest Expense since the Issue Date, plus
(B) 100% of the aggregate net cash proceeds received by the Company from
any Person (other than a Restricted Subsidiary) from the issuance and sale
subsequent to the Issue Date of Qualified Capital Stock of the Company
(excluding net cash proceeds attributable to the equity securities
comprising a part of the Units), plus
(C) without duplication of any amounts included in the immediately
preceding subclause (B), 100% of the aggregate net proceeds (determined
pursuant to the penultimate paragraph of this covenant) received by the
Company from the issuance and sale (other than to any Restricted
Subsidiary) of any Qualified Capital Stock of the Company upon the
conversion of, or in exchange for, any Indebtedness of the Company or any
Restricted Subsidiary (other than Indebtedness under the SingTel Credit
Agreement and SingTel Equipment Financing Agreement and any other
subordinated Indebtedness outstanding immediately after the Issue Date),
plus
(D) an amount equal to the aggregate amount of cash dividends, repayments
of loans or advances in cash or other assets constituting Productive Assets
and valued at the fair market value thereof, or other transfers of cash, in
each case to the Company or to any Restricted Subsidiary of the Company
from Unrestricted Subsidiaries (but without duplication of any such amount
included in calculating Cumulative such amount included in calculating
Cumulative EBITDA of the Company), or the amount resulting from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (in
each case valued as provided in
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the covenant described under "--Limitation on Restricted and Unrestricted
Subsidiaries" below), not to exceed, in the case of any Unrestricted
Subsidiary, the amount of Investments previously made by the Company or any
Restricted Subsidiary in such Unrestricted Subsidiary and which was treated
as a Restricted Payment under the Indenture, plus
(E) without duplication of the immediately preceding subclause (D), an
amount equal to (i) the lesser of the cost or net cash proceeds or other
assets constituting Productive Assets and valued at the fair market value
thereof received upon the sale or other disposition of any Investment made
after the Issue Date which had been treated as a Restricted Payment and
(ii) the cost of any Investment then outstanding in any Person (other than
an Unrestricted Subsidiary) at the time of a transaction whereby such
Person becomes a Restricted Subsidiary (but, in each case, without
duplication of any amount included in calculating Cumulative EBITDA of the
Company).
No amount determined under subclause (D) or (E) above shall be less than
zero for purposes of this covenant.
Notwithstanding the foregoing, these provisions do not prohibit:
(1) the payment of any dividend or the making of any distribution within
60 days after the date of its declaration if the dividend or distribution
would have been permitted on the date of declaration; or
(2) the acquisition of Capital Stock of the Company or any Restricted
Subsidiary or warrants, options or other rights to acquire such Capital
Stock through the application of the net proceeds of any capital
contribution (other than from a Restricted Subsidiary) or a substantially
concurrent sale for cash (other than to a Restricted Subsidiary) of
Qualified Capital Stock of the Company or warrants, options or other rights
to acquire Qualified Capital Stock of the Company; or
(3) the acquisition of Indebtedness of the Company that is subordinate or
junior in right of payment to the Notes, either (i) solely in exchange for
shares of Qualified Capital Stock of the Company (or warrants, options or
other rights to acquire Qualified Capital Stock of the Company) or for
Indebtedness of the Company which is subordinate or junior in right of
payment to the Notes, at least to the extent that the Indebtedness being
acquired is subordinated to the Notes, and has a Weighted Average Life to
Maturity no less than that of the Indebtedness being exchanged or (ii)
through the application of the net proceeds of any capital contribution or
a substantially concurrent sale for cash (other than to or from a
Restricted Subsidiary) of Qualified Capital Stock of the Company (or
warrants, options or other rights to acquire Qualified Capital Stock of the
Company) or Refinancing Indebtedness; or
(4) the repurchase of Capital Stock of the Company (including options,
warrants or other rights to acquire such Capital Stock) from employees or
former employees of the Company or any Restricted Subsidiary for
consideration which, when added to all loans made pursuant to clause (5)
below of this paragraph during the same fiscal year and then outstanding
(determined as provided in clause (5) below) does not exceed $500,000 in
the aggregate in any fiscal year plus the aggregate cash proceeds received
by the Company during such fiscal year from the sale of Capital Stock to
employees of the Company or any Restricted Subsidiary; or
(5) the making of loans and advances to employees of the Company or any
Restricted Subsidiary in an aggregate amount at any time outstanding
(including as outstanding any such loan or advance written off or forgiven)
which, when added to the aggregate consideration paid pursuant to clause
(4) of this paragraph during the same fiscal year, does not exceed $500,000
in any fiscal year plus the aggregate cash proceeds received by the Company
during such fiscal year from the sale of Capital Stock to employees of the
Company or any Restricted Subsidiary; or
(6) the redemption, repurchase or other acquisition of shares of Capital
Stock in satisfaction of indemnification or similar claims arising under
any merger, asset purchase, stock purchase, contribution, joint venture,
consolidation or similar acquisition agreement pursuant to which such
shares of Capital Stock were issued;
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(7) the purchase, redemption or other acquisition or retirement for value
of any Capital Stock of any Restricted Subsidiary from any person other
than an Affiliate; or
(8) the repurchase of the Warrant Shares pursuant to the terms of the
Warrant Agreement (as in effect on the Issue Date); or
provided, however, that in the case of the immediately preceding clauses (2),
(3), (4), (5) and (6), and in the case of clauses (vi), (x) and (xi) of the
definition of "Permitted Investment," no Default or Event of Default shall
have occurred or be continuing at the time of such Restricted Payment or
Permitted Investment, as the case may be, or would occur as a result thereof.
For purposes of clause (3) above, Indebtedness that is "subordinate or junior
in right of payment to the Notes" will qualify under subclauses (i) and (ii)
thereof if such Indebtedness provides that interest and other amounts are not
payable thereon prior to the times at which, and in the amounts of, interest
and other amounts may be paid upon the Indebtedness being acquired. For
purposes of clause (4) above, the proceeds of Capital Stock sold to employees
shall not be duplicative of any such proceeds credited under clause (B) above.
The Indenture provides that in determining the aggregate amount of
Restricted Payments made subsequent to the Issue Date, amounts expended
pursuant to clauses (1), (2), (3) (but only to the extent that Indebtedness is
acquired in exchange for, or with the net proceeds from, the issuance of
Qualified Capital Stock of the Company or warrants, options or other rights to
acquire Qualified Capital Stock of the Company), (4), (5) and (6) of the
immediately preceding paragraph, and clauses (vi), (x) (except, if at the time
of such Investment, WorldVoice, Inc. shall be a Restricted Subsidiary) and
(xi) of the definition of "Permitted Investment," shall be included in such
calculation.
The Indenture provides that for purposes of calculating the net proceeds
received by the Company from the issuance or sale of its Capital Stock either
upon the conversion of, or exchange for, Indebtedness of the Company or any
Restricted Subsidiary, such amount will be deemed to be an amount equal to the
difference of (a) the sum of (i) the principal amount or accreted value
(whichever is less) of such Indebtedness on the date of such conversion or
exchange and (ii) the additional cash consideration, if any, received by the
Company upon such conversion or exchange, less any payment on account of
fractional shares, minus (b) all expenses incurred in connection with such
issuance or sale. In addition, for purposes of calculating the net proceeds
received by the Company from the issuance or sale of its Capital Stock upon
the exercise of any options or warrants of the Company, such amount will be
deemed to be an amount equal to the difference of (a) the additional cash
consideration, if any, received by the Company upon such exercise, minus (b)
all expenses incurred in connection with such issuance or sale.
The Indenture provides that not later than the date of making any Restricted
Payment, the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by this covenant were computed, which
calculation may be based on the Company's latest financial statements.
Limitation on Asset Sales. The Indenture provides that neither the Company
nor any Restricted Subsidiary will, directly or indirectly, consummate any
Asset Sale unless:
(i) the Company or the applicable Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to
the fair market value of the assets sold or otherwise disposed of;
(ii) at least 80% of the consideration received by the Company or the
Restricted Subsidiary, as the case may be, from such Asset Sale is cash or
Cash Equivalents and is received at the time of such disposition; provided,
that, for purposes of this covenant "cash" shall include the amount of any
liabilities of the Company or a Restricted Subsidiary that are assumed by
the transferee of assets in such Asset Sale (excluding any liability
incurred in connection with or in anticipation of such Asset Sale), but
only to the extent that such assumption is without further recourse to the
Company and the Restricted Subsidiaries; and
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(iii) the Company applies, or causes such Restricted Subsidiary to apply,
or enters into, or causes such Restricted Subsidiary to enter into, a
binding commitment to apply, any Net Cash Proceeds within 270 days of
receipt thereof (it being understood that any binding commitment to so
apply must be consummated within 360 days of such receipt) either (A) to
reinvest in Productive Assets, or (B) to repay or prepay Indebtedness
(other than non-recourse Indebtedness) of any Restricted Subsidiary, or (C)
to repay or prepay any Indebtedness of the Company that is secured by a
Lien permitted to be incurred pursuant to "--Limitation on Liens" below, or
(immediately preceding clauses (A), (B) or (C), pro rata (based on the
aggregate principal amount of the Notes and such other Indebtedness then
outstanding) to (I) the repayment or prepayment of any Indebtedness of the
Company (other than the Notes, and any Indebtedness subordinated to the
Notes) that is at the time redeemable or prepayable (and is so redeemed or
prepaid) and (II) purchase Notes tendered to the Company for purchase at a
price equal to 100% of the principal amount thereof, plus in each case
accrued and unpaid interest, if any, to the date of purchase pursuant to an
offer to purchase made by the Company as set forth below (an "Asset Sale
Offer"); provided, however, that if at any time any non-cash consideration
received by the Company or any Restricted Subsidiary, as the case may be,
in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash, then such conversion or disposition shall be deemed
to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof
shall be applied in accordance with this clause (iii); provided, further,
however, that the Company may defer making an Asset Sale Offer until the
aggregate Net Cash Proceeds from Asset Sales to be applied equal or exceed
$5,000,000.
The Indenture provides that each notice of an Asset Sale Offer will be
mailed, by first class mail, to holders of Notes as shown on the applicable
register of holders of Notes. Such notice will specify, among other things,
the purchase date (which will be not less than 30 days nor more than 45 days
from the date such notice is mailed, except as otherwise required by law) and
the amount of Net Cash Proceeds available to repurchase Notes and will
otherwise comply with the procedures set forth in the Indenture. Upon
receiving notice of the Asset Sale Offer, holders of Notes may elect to tender
their Notes in whole or in part in integral multiples of $1,000 in principal
amount. To the extent holders properly tender Notes with an aggregate
principal amount exceeding the Net Cash Proceeds available to repurchase Notes
in the Asset Sale Offer, Notes of tendering holders will be repurchased on a
pro rata basis (based upon the aggregate principal amount tendered). To the
extent that the aggregate principal amount of Notes tendered pursuant to a
Asset Sale Offer is less than the amount of Net Cash Proceeds available
therefor, the Company may use any remaining portion of such available Net Cash
Proceeds not required to fund the repurchase of tendered Notes for any
purposes otherwise permitted by the Indenture. Upon the consummation of any
Asset Sale Offer, the amount of Net Cash Proceeds from the Asset Sale in
question to be the subject of future Asset Sale Offers shall be deemed to be
zero.
The Indenture provides that the Company will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable
in connection with the repurchase of Notes pursuant to an Asset Sale Offer.
Limitations on Transactions with Affiliates. The Indenture provides that
neither the Company nor any Restricted Subsidiary will, directly or
indirectly, enter into or amend any transaction (including, without
limitation, the purchase, sale, lease or exchange of any property, the
guaranteeing of any Indebtedness or the rendering of any service) with or for
the benefit of any of its Affiliates (an "Affiliate Transaction"), other than
any Affiliate Transaction or Affiliate Transactions that are on terms that are
no less favorable to the Company than those that might reasonably have been
obtained at such time in a comparable transaction by the Company on an arm's-
length basis from a Person that is not an Affiliate; provided, however, that
for a transaction or series of related transactions involving value of
$1,000,000 or more, such determination will be made in good faith by a
majority of the disinterested members of the Board of Directors of the
Company, if any; provided, further, however, that for a transaction or series
of related transactions involving value of $5,000,000 or more, the Board of
Directors of the Company shall have received, prior to the consummation
thereof, an opinion from a nationally recognized investment banking,
accounting or appraisal firm that such Affiliate Transaction is fair, from a
financial point of view, to the holders of Notes. The foregoing provisions
shall not prohibit or restrict
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(a) transactions between the Company and a Restricted Subsidiary of the
Company or among Restricted Subsidiaries of the Company, (b) Restricted
Payments and Permitted Investments made in accordance with the covenant
described under "--Limitation on Restricted Payments" above, (c) the payment
of reasonable and customary fees to directors of the Company who are not
employees of the Company and the payment of reasonable and customary
compensation for director and Board of Director observer fees, meeting
expenses, insurance premiums and indemnities, to the extent permitted by law,
(d) making loans or advances to officers, employees or consultants of the
Company and the Restricted Subsidiaries (including travel and moving expenses)
in the ordinary course of business for bona fide business purposes of the
Company or such Restricted Subsidiary, (e) any employment or option agreement
entered into by the Company or any Restricted Subsidiary in the ordinary
course of business that is approved by the Board of Directors of the Company,
(f) Affiliate Transactions in existence, or for which rights or agreements are
in existence, on the Issue Date, in each case as in effect on the Issue Date
and as amended thereafter as long as such amendment is not materially adverse
to the interests of the holders of the Notes as determined in good faith by
the Board of Directors, (g) the issuance of stock options (and shares of stock
upon the exercise thereof) pursuant to any stock option plan approved by the
Board of Directors and shareholders of the Company, and (h) Affiliate
Transactions pursuant to or contemplated by the SingTel Documents, in each
case as in effect on the Issue Date and as amended thereafter as long as such
amendment is not materially adverse to the interests of the holders of the
Notes as determined in good faith by the Board of Directors.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that neither the Company nor any
Restricted Subsidiary will, directly or indirectly, create or otherwise cause
or permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to: (a) pay dividends or make any other
distributions on its Capital Stock; (b) make loans or advances or to pay any
Indebtedness or other obligation owed to the Company or any Restricted
Subsidiary; (c) guarantee any Indebtedness or any other obligation of the
Company or any Restricted Subsidiary; or (d) transfer any of its property or
assets to the Company or any Restricted Subsidiary (each of the foregoing
restrictions, a "Payment Restriction"), except for such encumbrances or
restrictions existing under or by reason of: (1) applicable law; (2) the
Indenture; (3) customary non-assignment provisions of any lease or other
agreement of the Company or any Restricted Subsidiary; (4) any instrument
governing Acquired Indebtedness, which encumbrance or restriction was not
incurred in connection with, as a result of, or in anticipation of the
incurrence of such Indebtedness and is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property or
assets of the Person, so acquired; (5) instruments governing Indebtedness of
Restricted Subsidiaries in respect of Vendor Financing Arrangements incurred
in accordance with the terms of the Indenture; (6) agreements existing on the
Issue Date as such agreements are from time to time in effect; provided,
however, that any amendments or modifications of such agreements which affect
the encumbrances or restrictions of the types subject to this covenant shall
not result in such encumbrances or restrictions being less favorable to the
Company in any material respect, as determined in good faith by the Board of
Directors of the Company, than the provisions as in effect before giving
effect to the respective amendment or modification; (7) an agreement effecting
a refinancing, replacement or substitution of Indebtedness issued, assumed or
incurred pursuant to an agreement described in clause (4), (5) or (6) of this
covenant; provided, however, that the provisions relating to such encumbrance
or restriction contained in any such refinancing, replacement or substitution
agreement are not less favorable to the Company in any material respect as
determined in good faith by the Board of Directors of the Company than the
provisions relating to such encumbrance or restriction contained in agreements
referred to in such clause (4), (5) or (6) of this covenant; (8) Liens
permitted under the Indenture to the extent that such Liens restrict the
transfer of the asset or assets subject thereto; and (9) with respect to
clause (d) above, purchase money obligations for property acquired in the
ordinary course of business pursuant to ordinary business terms.
Limitation on Restricted and Unrestricted Subsidiaries. The Indenture
provides that the Board of Directors of the Company may (subject to the
penultimate paragraph of this covenant), if no Default or Event of Default
shall have occurred and be continuing or would arise therefrom, designate an
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that
(i) any such redesignation shall be deemed to be an incurrence as
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of the date of such redesignation by the Company and the Restricted
Subsidiaries of the Indebtedness (if any) of such redesignated Subsidiary for
purposes of the covenant described under "--Limitation on Incurrence of
Additional Indebtedness" above; and (ii) unless such redesignated Subsidiary
shall not have any Indebtedness outstanding, other than Indebtedness which
would be Permitted Indebtedness, no such designation shall be permitted if
immediately after giving effect to such redesignation and the incurrence of
any such additional Indebtedness the Company could not incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
Leverage Ratio of the covenant described under "--Limitation on Incurrence of
Additional Indebtedness" above. The Board of Directors of the Company also
may, if no Default or Event of Default shall have occurred and be continuing
or would arise therefrom, designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if (i) such designation is at that time permitted
under the covenant described under "--Limitation on Restricted Payments" above
and (ii) immediately after giving effect to such designation, the Company
could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the Leverage Ratio of the covenant described under
"--Limitation on Incurrence of Additional Indebtedness" above. Any such
designation by the Board of Directors of the Company shall be evidenced to the
Trustee by the filing with the Trustee of a certified copy of the resolution
of the Company's Board of Directors giving effect to such designation or
redesignation and an Officers' Certificate certifying that such designation or
redesignation complied with the foregoing conditions and setting forth in
reasonable detail the underlying calculations.
The Indenture provides that for purposes of the covenant described under "--
Limitation on Restricted Payments" above, (i) an "Investment" shall be deemed
to have been made at the time any Restricted Subsidiary is designated as an
Unrestricted Subsidiary in an amount (proportionate to the Company's equity
interest in such Subsidiary) equal to the net worth of such Restricted
Subsidiary at the time that such Restricted Subsidiary is designated as an
Unrestricted Subsidiary; (ii) at any date the aggregate of all Restricted
Payments made as Investments since the Issue Date shall exclude and be reduced
by an amount (proportionate to the Company's equity interest in such
Subsidiary) equal to (A) the amount of Investments in any Unrestricted
Subsidiary that becomes a Restricted Subsidiary after the date of such
Investment or (B) the net worth of any Unrestricted Subsidiary at the time
that such Unrestricted Subsidiary is designated a Restricted Subsidiary, not
to exceed, in the case of any such redesignation of an Unrestricted Subsidiary
as a Restricted Subsidiary, the amount of Investments previously made by the
Company and the Restricted Subsidiaries in such Unrestricted Subsidiary that
were treated as Restricted Payments under the Indenture (in each case (i) and
(ii) "net worth" to be calculated based upon the fair market value of the
assets of such Subsidiary as of any such date of designation); and (iii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer.
The Indenture provides that notwithstanding the foregoing, the Board of
Directors of the Company may not designate any Subsidiary of the Company to be
an Unrestricted Subsidiary if, after such designation, (a) the Company or any
other Restricted Subsidiary (i) provides credit support for, or a guarantee
of, any Indebtedness of such Subsidiary (including any undertaking, agreement
or instrument evidencing such Indebtedness) or (ii) is directly or indirectly
liable for any Indebtedness of such Subsidiary, (b) a default with respect to
any Indebtedness of such Subsidiary (including any right which the holders
thereof may have to take enforcement action against such Subsidiary) would
permit (upon notice, lapse of time or both) any holder of any other
Indebtedness of the Company or any Restricted Subsidiary to declare a default
on such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity or (c) such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, any Restricted
Subsidiary which is not a Subsidiary of the Subsidiary to be so designated.
The Indenture provides that Subsidiaries of the Company that are not
designated by the Board of Directors as Restricted or Unrestricted
Subsidiaries will be deemed to be Restricted Subsidiaries. Notwithstanding any
provisions of this covenant, all Subsidiaries of an Unrestricted Subsidiary
will be Unrestricted Subsidiaries.
Limitation on Preferred Stock of Restricted Subsidiaries. The Indenture
provides that the Company will not permit any Restricted Subsidiary to,
directly or indirectly, issue any Preferred Stock (other than to the Company
or to a Restricted Subsidiary of the Company) or permit any Person (other than
the Company or a
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Subsidiary of the Company) to own any Preferred Stock of any Restricted
Subsidiary; provided, however, that this covenant shall not prevent the
issuance of or be violated by reason of (i) Preferred Stock of Restricted
Subsidiaries to the extent that such Preferred Stock is outstanding on the
Issue Date; (ii) Preferred Stock issued by a Person prior to the time that (a)
such Person becomes a Restricted Subsidiary, (b) such Person merges with or
into a Restricted Subsidiary or (c) another Person merges with or into such
Person in a transaction in which such Person becomes a Restricted Subsidiary,
in each case only if such Preferred Stock was not issued in anticipation of or
in connection with or as a result of such transaction; and (iii) Preferred
Stock issued in exchange for, or the proceeds of which are used to refinance,
Preferred Stock referred to in the foregoing clauses (i) or (ii) (other than
Preferred Stock which by its terms (or by the terms of any security into which
it is convertible or for which it is exchangeable) is redeemable at the option
of the holder thereof or is otherwise redeemable, pursuant to sinking fund
obligations or otherwise, prior to that date of redemption or maturity of the
Preferred Stock being so refinanced); provided, further, however, that (a) the
liquidation value of such Preferred Stock so issued shall not exceed the
liquidation value of the Preferred Stock so refinanced and (b) the Preferred
Stock so issued (I) shall have a stated maturity not earlier than the stated
maturity of the Preferred Stock being refinanced and (II) shall have a
Weighted Average Life to Maturity equal to or greater than the remaining
Weighted Average Life to Maturity of the Preferred Stock being refinanced.
Limitation on Liens. The Indenture provides that neither the Company nor any
Restricted Subsidiary will, directly or indirectly, create, incur, assume or
suffer to exist any Liens upon any of their respective property or assets or
on any income or profits therefrom, or assign or otherwise convey any right to
receive income or profits thereon, whether owned on the date of the Indenture
or thereafter acquired, unless (x) in the case of Liens securing Indebtedness
subordinate to the Notes, the Notes are secured by a valid, perfected Lien on
such property, assets or proceeds that is senior in priority to such Liens and
(y) in all other cases, the Notes are equally and ratably secured; provided,
however, that the foregoing shall not prohibit or restrict, and the Company
need not equally and ratably secure the Notes as a result of, Permitted Liens.
Limitation on Sale and Leaseback Transactions. The Indenture provides that
neither the Company nor any Restricted Subsidiary will, directly or
indirectly, enter into any Sale and Leaseback Transaction, except that the
Company or any Restricted Subsidiary may enter into a Sale and Leaseback
Transaction if (i) after giving effect to such Sale and Leaseback Transaction
(the Indebtedness thereunder being equivalent to the Attributable Value
thereof) (A) the Company could incur at least $1.00 of additional Indebtedness
in compliance with the Leverage Ratio of the covenant described under "--
Limitation on Incurrence of Additional Indebtedness" above provided, that in
the case of a Restricted Subsidiary, the Indebtedness incurred in such Sale
and Leaseback Transaction was Indebtedness in respect of a Vendor Financing
Arrangement, or (B) the Indebtedness incurred in such Sale and Leaseback could
have been incurred as (and shall be deemed incurred as) Permitted Indebtedness
under clauses (v), (vi), or (vii) thereof, and (ii) the Sale and Leaseback
Transaction is effected in accordance with the requirements of the covenant
described under "--Limitation on Asset Sales" above.
Limitation on Line of Business. The Indenture provides that for so long as
any Notes are outstanding, the Company and the Restricted Subsidiaries will
engage in all material respects in the business of (i) communications
services, including facsimile transmission and delivery services and voice,
video or data transmission and delivery services, (ii) utilizing their
facilities for any commercial purpose permitted by applicable regulation, and
(iii) evaluating, participating or pursuing any other activity or opportunity
that is ancillary or related to those identified in (i) or (ii) above
(including pursuant to acquisitions of entities or divisions or lines of
business of entities in the foregoing business) (together, the "Electronic
Messaging Business"); notwithstanding the foregoing, however, ownership by the
Company or any Restricted Subsidiary of stock in any Unrestricted Subsidiary,
or any other entity which is not a Restricted Subsidiary, shall not be deemed
to violate this covenant.
Merger, Consolidation and Sale of Assets. The Indenture provides that the
Company will not, in any transaction or series of transactions, merge or
consolidate with or into, or sell, assign, convey, transfer, lease or
otherwise dispose of all or substantially all of its properties and assets as
an entirety to, any Person or Persons, and the Company will not permit any
Restricted Subsidiary to enter into any such transaction or series of related
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transactions if such transaction or series of transactions, in the aggregate,
would result in a direct or indirect sale, assignment, conveyance, transfer,
lease or other disposition of all or substantially all of the properties and
assets of the Company or the Company and the Restricted Subsidiaries, taken as
a whole, to any other Person or Persons, unless at the time of and after
giving effect thereto (a) either (i) if the transaction or series of
transactions is a merger or consolidation involving the Company, the Company
shall be the surviving Person of such merger or consolidation, or (ii) the
Person formed by such consolidation or into which the Company is merged or to
which the properties and assets of the Company or such Restricted Subsidiary,
as the case may be, are sold, assigned, conveyed, transferred, leased or
otherwise disposed of (including, with respect to the Restricted Subsidiaries,
by merger or consolidation) (any such surviving Person or Persons of such
merger or consolidation or to whom such sale, assignment, conveyance, lease or
other disposition has been made being the "Surviving Entity") shall be a
corporation organized and existing under the laws of the United States of
America, any state thereof or the District of Columbia and shall expressly
assume by supplemental indentures executed and delivered to the Trustee, in
form reasonably satisfactory to the Trustee, all the obligations of the
Company under the Notes, the Indenture and, if then in effect, the Notes
Registration Rights Agreement, and the Escrow Agreement, and in each case, the
Indenture and, if then in effect, the Notes Registration Rights Agreement, and
the Escrow Agreement shall remain in full force and effect; (b) immediately
before and immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), no Default or Event of
Default shall have occurred and be continuing and the Company or the Surviving
Entity, as the case may be, after giving effect to such transaction or series
of transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), could incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
Leverage Ratio in the covenant described under "--Limitation on Incurrence of
Additional Indebtedness" above; and (c) immediately after giving effect to
such transaction or series of transactions on a pro forma basis (including,
without limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions),
the Consolidated Net Worth of the Company or the Surviving Entity, as the case
may be, is at least equal to the Consolidated Net Worth of the Company
immediately before such transaction or series of transactions.
The Indenture provides that in connection with any consolidation, merger,
sale, assignment, conveyance, transfer, lease or other disposition
contemplated hereby, the Company shall deliver, or cause to be delivered, to
the Trustee, in form and substance reasonably satisfactory to the Trustee, an
officer's certificate and an opinion of counsel, each stating that such
consolidation, merger, transfer, lease, assignment or other disposition and
the supplemental indenture in respect thereof complies with the requirements
under the Indenture.
The Indenture provides that upon any consolidation or merger or any sale,
assignment, conveyance, transfer, lease or other disposition of all or
substantially all of the assets of the Company in accordance with the
foregoing, in which the Company is not the continuing corporation, the
successor corporation formed by such a consolidation or into which the Company
is merged or to which such transfer is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture with the same effect as if such successor corporation had been
named as the Company therein, and thereafter, except in the case of a lease,
the predecessor corporation shall be relieved of all obligations and covenants
under the Indenture, the Notes, and if then in effect, the Notes Registration
Rights Agreement; provided, however, that solely for purposes of calculating
Cumulative EBITDA in connection with the covenant described under "--
Limitation on Restricted Payments" above, any such successor Person shall only
be deemed to have succeeded to and be substituted for the Company with respect
to periods subsequent to the effective time of such merger, consolidation or
sale, assignment, conveyance, transfer, lease or other disposition of assets.
The Indenture provides that for all purposes of the Indenture and the Notes
(including the provisions of this covenant and the covenants described under
"--Limitation on Incurrence of Additional Indebtedness," "--Limitation on
Restricted and Unrestricted Subsidiaries" and "--Limitation on Liens"),
Subsidiaries of any Surviving Entity will, upon such transaction or series of
transactions, become Restricted Subsidiaries or
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Unrestricted Subsidiaries as provided pursuant to the covenant described under
"--Limitation on Restricted and Unrestricted Subsidiaries" and all
Indebtedness, and all Liens on property or assets, of the Company and the
Restricted Subsidiaries immediately prior to such transaction or series of
transactions will be deemed to have been incurred upon such transaction or
series of transactions.
Issuance of Contingent Warrants. The Indenture provides that the Company
will be obligated to issue to holders of the Notes the Contingent Warrants,
exercisable for 8.0% of the Common Stock of the Company on a fully-diluted
basis as of the date of such issuance after giving effect to the issuance of
such warrants, in the event that the Company does not effect a primary
underwritten public offering (excluding any offering pursuant to Form S-8
under the Securities Act or any other publicly registered offering pursuant to
the Securities Act pertaining to an issuance of shares of Common Stock or
securities exercisable therefor under any benefit plan, employee compensation
plan, or employee or director stock purchase plan) of Common Stock of the
Company pursuant to an effective registration statement under the Securities
Act on or prior to September 1, 1999 resulting in gross proceeds to the
Company of at least $35.0 million. Such Warrants will be issued pursuant to
the Warrant Agreement and holders will have the benefits of the Warrant Shares
Registration Rights Agreement.
Any Contingent Warrants issued shall be issued to the holders of the
outstanding Notes as of September 1, 1999 pro rata, based upon the aggregate
principal amount of Notes held by such holders as of August 15, 1999.
EVENTS OF DEFAULT
The Indenture provides that the following events constitute "Events of
Default:"
(i) the failure to pay interest on the Notes when the same becomes due
and payable and the Default continues for a period of 30 days;
(ii) the failure to pay the principal of any Note when such principal
becomes due and payable, at maturity, upon acceleration, redemption,
pursuant to a required offer to purchase or otherwise;
(iii) a default in the observance or performance of any other covenant or
agreement contained in the Notes, the Indenture or the Escrow Agreement
which default continues for a period of 60 days after the Company receives
written notice thereof from the Trustee specifying the default and stating
that such notice is a "Notice of Default" under the Indenture or the
Company and the Trustee receive such notice from holders of at least 25% in
aggregate principal amount of the outstanding Notes;
(iv) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any Material Subsidiary
(or the payment of which is guaranteed by the Company or any Material
Subsidiary), whether such Indebtedness or guarantee now exists, or is
created after the Issue Date, which default (a) is caused by a failure to
pay principal, at the final stated maturity thereof, on such Indebtedness
(which failure continues beyond any applicable grace period) (a "Payment
Default") or (b) results in the acceleration of such Indebtedness prior to
its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $5,000,000 or more and with
respect to such clauses (a) and (b) such Payment Default or acceleration
has not been rescinded or annulled or such Indebtedness discharged or paid
in full in cash within 20 days;
(v) one or more judgments in an aggregate amount in excess of $5,000,000
(unless covered by insurance by a reputable insurer as to which the insurer
has acknowledged coverage) being rendered against the Company or any of its
Material Subsidiaries and such judgments remain undischarged or unstayed
for a period of 60 days after such judgment or judgments become final and
non-appealable;
(vi) certain events of bankruptcy, insolvency or reorganization affecting
the Company or any of its Material Subsidiaries; or
(vii) any holder or holders of at least $5,000,000 in aggregate principal
amount of Indebtedness of the Company or any Material Subsidiary shall
foreclose upon assets of the Company or any Material Subsidiary
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having an aggregate fair market value, individually or in the aggregate, of
at least $5,000,000 or shall have otherwise taken ownership of such assets
pursuant to any right under applicable law or applicable security documents
in lieu of foreclosure.
The Indenture provides that upon the happening of any Event of Default
specified in the Indenture, the Trustee may, or the holders of at least 25% in
principal amount of outstanding Notes may, declare the principal amount of,
and accrued but unpaid interest, if any, on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice") and upon such declaration the same shall become
immediately due and payable, notwithstanding anything contained in the Notes,
or the Indenture to the contrary. If an Event of Default with respect to
bankruptcy or similar proceedings relating to the Company occurs and is
continuing, then such amount will ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
holder of the Notes. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitation,
holders of not less than a majority in aggregate principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or
power. If a Default or an Event of Default occurs and is continuing and is
known to the Trustee, Trustee shall mail to each holder of the Notes notice of
the Default or Event of Default within 30 days after obtaining knowledge
thereof. The Trustee may withhold from holders of the Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest or a failure to comply with
the covenants and provisions described under "--Change of Control," "--Certain
Covenants--Limitation on Asset Sales" and "--Merger, Consolidation and Sale of
Assets" above) if it determines that withholding notice is in their interest.
The Indenture provides that, at any time after a declaration of acceleration
with respect to the Notes as described in the preceding paragraph but before a
judgment or decree of money due in respect of the Notes has been obtained, the
holders of not less than a majority in principal amount of the Notes then
outstanding by written notice to the Company and the Trustee may rescind such
declaration and its consequences if (a) the Company has paid or deposited with
the Trustee a sum sufficient to pay (i) all sums paid or advanced by the
Trustee under the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, (ii) all
overdue interest on all Notes (iii) the principal of and premium, if any, on
any Notes, which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Notes, and (iv) to
the extent that payment of such interest is lawful, interest upon overdue
interest and overdue principal at the rate provided for in the Notes, which
has become due otherwise than by such declaration of acceleration; (b) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction; and (c) all Events of Default, other than the non-
payment of principal of, premium, if any, and interest on the Notes, as the
case may be, that have become due solely by such declaration of acceleration,
have been cured or waived. Prior to the declaration of acceleration of the
Notes, the holders of not less than a majority in principal amount of the
Notes, may waive any existing Default or Event of Default under the Indenture,
and its consequences, except a default in the payment of the principal of or
interest on any Notes, or any default in respect of any covenant which cannot
be amended without the consent of each holder affected.
The Indenture provides that no holder of any of the Notes has any right to
institute any proceeding with respect to the Indenture or the Notes or any
remedy thereunder, unless the holders of at least 25% in aggregate principal
amount of the outstanding Notes, have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as Trustee
under the Notes, and the Indenture, the Trustee has failed to institute such
proceeding within 30 days after receipt of such notice, request and offer of
indemnity and the applicable Trustee, within such 30-day period, has not
received directions inconsistent with such written request by holders of not
less than a majority in aggregate principal amount of the outstanding Notes.
Such limitations do not apply, however, to a suit instituted by a holder of a
Note for the enforcement of the payment of the principal of, premium, if any,
or interest on such Note on or after the respective due dates expressed or
provided for in such Note.
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During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, whether or not an Event of Default shall occur and be continuing, the
Trustee under the Indenture is not under any obligation to exercise any of its
rights or powers under such Indenture at the request or direction of any of
the holders unless such holders shall have offered to the Trustee reasonable
security or indemnity. Subject to certain provisions concerning the rights of
the Trustee, the holders of not less than a majority in aggregate principal
amount of the outstanding Notes, have the right to direct the time, method and
place of conducting any proceeding for any remedy available to such Note, or
exercising any trust or power conferred on such Trustee under the Indenture.
The Company is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company of its obligations under the
Indentures and as to any default in such performance. The Company is also
required to notify the Trustee within ten days of any event which is, or after
notice or lapse of time or both would become, an Event of Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Indenture provides that the Company may, at its option and at any time,
terminate the obligations of the Company with respect to the outstanding
Notes, ("defeasance"). Such defeasance means that the Company shall be deemed
to have paid and discharged the entire Indebtedness represented by the
outstanding Notes, except for (i) the rights of holders of outstanding Notes
to receive payment in respect of the principal of, premium, if any, and
interest on such Notes, when such payments are due, (ii) the Company's
obligations to issue temporary Notes, register the transfer or exchange of any
Notes, replace mutilated, destroyed, lost or stolen Notes and maintain an
office or agency for payments in respect of the Notes, (iii) the rights,
powers, trusts, duties and immunities of the Trustee and (iv) the defeasance
provisions of the Indenture. In addition, the Company may, at its option and
at any time, elect to terminate the obligations of the Company with respect to
certain covenants that are set forth in the Indenture, some of which are
described under "--Certain Covenants" above (including the covenant described
under "--Change of Control" above) and any subsequent failure to comply with
such obligations shall not constitute a Default or Event of Default with
respect to the Notes or ("covenant defeasance").
The Indenture provides that in order to exercise either defeasance or
covenant defeasance, (i) the Company must irrevocably deposit with the
Trustee, in trust, for the benefit of the holders of the Notes, cash in United
States dollars, U.S. Government Obligations (as defined in the Indenture), or
a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the outstanding Notes, to
redemption or maturity (except lost, stolen or destroyed Notes, which have
been replaced or paid); (ii) the Company shall have delivered to the Trustee
an opinion of counsel to the effect that the holders of the outstanding Notes,
will not recognize income, gain or loss for federal income tax purposes as a
result of such defeasance or covenant defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance or covenant defeasance
had not occurred (in the case of defeasance, such opinion must refer to and be
based upon a ruling of the Internal Revenue Service or a change in applicable
federal income tax laws); (iii) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default
or Event of Default relating to the incurrence of Indebtedness to finance such
defeasance); (iv) such defeasance or covenant defeasance shall not cause the
Trustee to have a conflicting interest with respect to any securities of the
Company; (v) such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, any material agreement
or instrument to which the Company is a party or by which it is bound (other
than the Indenture); (vi) the Company shall have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the
deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; and (vii) the Company shall have delivered to the Trustee an
officers' certificate and
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an opinion of counsel, each stating that all conditions precedent under the
Indenture to either defeasance or covenant defeasance, as the case may be,
have been complied with.
SATISFACTION AND DISCHARGE
The Indenture provides that such Indenture will be discharged and will cease
to be of further effect (except as to surviving rights or registration of
transfer or exchange of the Notes, as expressly provided for in the Indenture)
as to all outstanding Notes, when (i) either (a) all the Notes, theretofore
authenticated and delivered (except lost, stolen or destroyed Notes, which
have been replaced or repaid, Notes for whose payment money has theretofore
been deposited in trust or segregated and held in trust by the Company and
thereafter repaid to the Company or discharged from such trust) have been
delivered to the Trustee for cancellation or (b) all Notes such not
theretofore delivered to the Trustee for cancellation (except lost, stolen or
destroyed Notes, which have been replaced or paid) have been called for
redemption pursuant to the terms of the Notes, or have otherwise become due
and payable and the Company has irrevocably deposited or caused to be
deposited with the Trustee funds in an amount sufficient to pay and discharge
the entire indebtedness on the Notes, not theretofore delivered to the Trustee
for cancellation, for principal of, premium, if any, and interest on the Notes
to the date of deposit together with irrevocable instructions from the Company
directing the Trustee to apply such funds to the payment thereof at maturity
or redemption, as the case may be; (ii) the Company has paid all other sums
payable under such Indenture by the Company; (iii) there exists no Default or
Event of Default under such Indenture; and (iv) the Company has delivered to
the Trustee an officers' certificate and an opinion of counsel stating that
all conditions precedent under such Indenture relating to the satisfaction and
discharge of such Indenture have been complied with.
REPORTS TO HOLDERS
The Indenture provides that the Company shall deliver to the Trustee, within
15 days after it files them with the Commission, copies of its annual report
and of the information, documents and other reports (or copies of such
portions of any of the foregoing as the Commission may by rules and
regulations prescribe) which the Company is required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act within the time
periods prescribed under such rules and regulations. Notwithstanding that the
Company may not be required to remain subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act or otherwise report on an annual and
quarterly basis on forms provided for such annual and quarterly reporting
pursuant to rules and regulations promulgated by the Commission, the Indenture
requires the Company, following consummation of the Exchange Offer
contemplated by the Registration Rights Agreement to file with the Commission
and provide to the Trustee such annual and interim reports on Forms 10-K and
10-Q, respectively, as the Company would be required to file were it subject
to such reporting requirements within the time periods prescribed under such
rules and regulations. Upon qualification of the Indenture under the TIA, the
Company shall also comply with the provisions of TIA Sec. 314(a). The Company
shall not be obligated to file any such reports with the Commission if the
Commission does not permit such filings but shall remain obligated to provide
such reports to the Trustee and the holders within the periods of time
referred to in the preceding sentence. The Company shall provide to any holder
of Notes, any information reasonably requested by such holder concerning the
Company (including financial statements) consistent with the requirements of
Rule 144A(d)(4) promulgated under the Securities Act necessary in order to
permit such holder to sell or transfer Notes, in accordance with Rule 144A
promulgated under the Securities Act.
MODIFICATION OF THE INDENTURE
The Indenture provides that the Company, when authorized by a Board
Resolution, and the Trustee may amend, waive or supplement the Indenture or
the Notes without notice to or consent of any holder: (a) to cure any
ambiguity, defect or inconsistency; (b) to comply with "--Certain Covenants--
Merger, Consolidation, and Sale of Assets" above; (c) to provide for
uncertificated Notes in addition to certificated Notes; (d) to comply with any
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the TIA; (e) to provide for issuance of
the Exchange Notes (which will have terms substantially identical in all
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material respects to the Notes except that the transfer restrictions contained
in the Notes will be modified or eliminated, as appropriate), and which will
be treated together with any outstanding Notes, as a single issue of
securities; or (f) to make any change that would provide any additional
benefit or rights to the holders or that does not adversely affect the rights
of any holder. Other modifications, amendments and waivers of each Indenture
or the Notes may be made with the consent of the holders of not less than two-
thirds in aggregate principal amount of the then outstanding Notes except
that, without the consent of each holder of the Notes affected thereby, no
modification, amendment or waiver may, directly or indirectly: (i) reduce the
amount of Notes whose holders must consent to any amendment, modification or
waiver; (ii) reduce the rate of or change the time for payment of interest,
including defaulted interest or special interest, additional interest, on any
Notes; (iii) reduce the principal amount outstanding of, or change the fixed
maturity of, any Notes or change the date on which any Notes may be subject to
redemption, or reduce the redemption price therefor; (iv) make any Notes
payable in money other than that stated in the Notes; (v) make any change in
provisions of such Indenture protecting the right of each holder of a Note to
receive payment of principal of, premium, if any, or interest on such Note on
or after the date thereof or to bring suit to enforce any payment on or with
respect to the Notes; (vi) waive a default in the payment of the principal of,
premium, if any, or interest on, or redemption with respect to, any Note
(except a rescission of acceleration of the Notes by two-thirds of the holders
for non-payment defaults and a waiver of the consequences of such
acceleration); (vii) subordinate in right of payment, or otherwise
subordinate, the Notes to any other Indebtedness or obligation of the Company;
(viii) upon or following the occurrence of a Change of Control, amend, alter,
change or modify the obligation of the Company to make and consummate a Change
of Control Offer with respect to such Change of Control or waive any Default
in the performance of any such offer or modify any of the provisions or
definitions with respect to any such offer; or (ix) directly or indirectly
release the liens on the Escrow Collateral except as permitted by the Escrow
Agreement.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee thereunder will perform only such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred
and is continuing, the Trustee will exercise such rights and powers vested in
it under such Indenture and use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee thereunder, should it become a creditor of the Company, to obtain
payment of claims in certain cases or to realize on certain property received
by it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions; provided, however, that if it
acquires any conflicting interest (as defined in such Act) it must eliminate
such conflict or resign.
GOVERNING LAW
The Indenture, the Notes and the Escrow Agreement will be governed by the
laws of the State of New York, without regard to the principles of conflicts
of law.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
or at the time it merges or consolidates with the Company or any Restricted
Subsidiary or assumed in connection with the acquisition of assets from such
Person, including any such Indebtedness incurred by such Person in connection
with, or in anticipation or contemplation of, such Person's becoming a
Restricted Subsidiary or such acquisition, merger or consolidation.
"Affiliate" means a Person who, directly or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under common control
with, the Company or any Restricted Subsidiary. The term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise. Notwithstanding the
foregoing, the term "Affiliate" shall not, with respect to the Company,
include any Restricted Subsidiary of the Company.
"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary in any other Person pursuant to which such Person shall become a
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary, (b) the acquisition by the Company or any Restricted
Subsidiary of the assets of any Person which constitute all or substantially
all of the assets of such Person, (c) the acquisition by the Company or any
Restricted Subsidiary of any division or line of business of any Person or (d)
any other asset acquisition by the Company or a Restricted Subsidiary which
permits or requires pro forma financial information prepared in accordance
with Rule 11-01 under Regulation S-X promulgated under the Securities Act.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease, assignment or other transfer or disposition for value (for
purposes of this definition, each, a "disposition") by the Company or any
Restricted Subsidiary (including, without limitation, pursuant to any Sale and
Leaseback Transaction or any merger or consolidation of any Subsidiary of the
Company with or into another Person (other than the Company or any Restricted
Subsidiary of the Company) whereby such Subsidiary shall cease to be a
Restricted Subsidiary) to any Person of (i) any Capital Stock of any
Restricted Subsidiary (other than in respect of director's qualifying shares
or investments by foreign nationals mandated by applicable law); (ii) all or
substantially all of the properties and assets of any division or line of
business of the Company or any Restricted Subsidiary; or (iii) any other
properties or assets of the Company or any Restricted Subsidiary, other than
in the ordinary course of business; provided, however, that for purposes of
the covenant described under "--Certain Covenants--Limitation on Asset Sales"
above, Asset Sales shall not include: (a) a transaction or series of related
transactions for which the Company or the applicable Restricted Subsidiary
receives aggregate consideration of less than $1,000,000 in any fiscal year;
(b) transactions complying with the covenant described under "--Certain
Covenants--Merger, Consolidation and Sale of Assets" above; (c) any
disposition to the Company; (d) any disposition to a Restricted Subsidiary of
the Company; (e) any Lien securing Indebtedness to the extent that such Lien
is granted in compliance with the covenant described under "--Certain
Covenants--Limitation on Liens" above; (f) any Restricted Payment (or
Permitted Investment) permitted by the covenant described under "--Certain
Covenants--Limitation on Restricted Payments" above; and (g) any disposition
of assets or property in the ordinary course of business and on ordinary
business terms to the extent such property or assets are obsolete, worn out or
no longer useful in the Company's or any Restricted Subsidiary's business.
"Attributable Value" means, as to any particular lease under which any
Person is at the time liable other than a Capitalized Lease Obligation, and at
any date as of which the amount thereof is to be determined, the total net
amount of rent required to be paid by such Person under such lease during the
initial term thereof as determined in accordance with GAAP, discounted from
the last date of such initial term to the date of determination at a rate per
annum equal to the discount rate which would be applicable to a Capitalized
Lease
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Obligation with a like term in accordance with GAAP. The net amount of rent
required to be paid under any such lease for any such period shall be the
aggregate amount of rent payable by the lessee with respect to such period
after excluding amounts required to be paid on account of insurance, taxes,
assessments, utility, operating and labor costs and similar charges. In the
case of any lease which is terminable by the lessee upon the payment of a
penalty, such net amount shall also include the amount of such penalty, but no
rent shall be considered as required to be paid under such lease subsequent to
the first date upon which it may be so terminated. "Attributable Value" means,
as to a Capitalized Lease Obligation under which any Person is at the time
liable and at any date as of which the amount thereof is to be determined, the
capitalized amount thereof that would appear on the face of a balance sheet of
such Person in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated) of capital stock, including each class of common stock and
Preferred Stock of such Person and (ii) with respect to any Person that is not
a corporation, any and all partnership or other equity interests of such
Person.
"Capitalized Lease Obligation" means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real,
personal or mixed) that is required to be classified and accounted for as a
capital lease obligation under GAAP, and, for purposes of the Indenture, the
amount of any such obligation at any date shall be the capitalized amount
thereof at such date, determined in accordance with GAAP.
"Cash Equivalents" means, at any time, (i) any evidence of Indebtedness with
a maturity of 180 days or less issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality
thereof (provided that the full faith and credit of the United States of
America is pledged in support thereof); (ii) certificates of deposit or
acceptances with a maturity of 180 days or less of any financial institution
that is a member of the Federal Reserve System having combined capital and
surplus and undivided profits of not less than $500,000,000; (iii)
certificates of deposit with a maturity of 180 days or less of any financial
institution that is organized under the laws of the United States, any state
thereof or the District of Columbia that are rated at least A-1 by S&P or at
least P-1 by Moody's or at least an equivalent rating category of another
nationally recognized securities rating agency; (iv) repurchase agreements and
reverse repurchase agreements relating to marketable direct obligations issued
or unconditionally guaranteed by the government of the United States of
America or issued by any agency thereof and backed by the full faith and
credit of the United States of America, in each case maturing within 180 days
from the date of acquisition; provided that the terms of such agreements
comply with the guidelines set forth in the Federal Financial Agreements of
Depository Institutions With Securities Dealers and Others, as adopted by the
Comptroller of the Currency on October 31, 1985.
"Change of Control" means the occurrence of one or more of the following
events:
(i) any sale, lease, exchange, transfer or other disposition (in one
transaction or a series of related transactions) of all or substantially
all of the assets of the Company and the Restricted Subsidiaries, taken as
a whole, to any Person or group of related Persons for purposes of Section
13(d) of the Exchange Act (a "Group") (whether or not otherwise in
compliance with the provisions of the Indenture) other than a Permitted
Holder, in any such event pursuant to a transaction in which, immediately
after the consummation thereof the Person or Persons owning a majority of
the voting power of the Voting Stock of the Company immediately prior to
the consummation of such transaction, shall not own directly or indirectly,
a majority of the voting power of the Voting Stock of the Person to whom
such sale, lease, exchange, transfer or other disposition has been made; or
(ii) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors who were nominated by a Permitted Holder
or whose election to such Board of Directors or whose nomination for
election by the stockholders of the Company was approved by a vote of a
majority of the directors of the Company then still in office who were
either directors at the beginning of such period or whose election or
nomination
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for election was previously so approved) cease for any reason to constitute
a majority of the Board of Directors of the Company then in office; or
(iii) any Person or Group (other than a Permitted Holder) is or becomes,
by purchase, tender offer, exchange offer, open market purchases, privately
negotiated purchases or otherwise, the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, whether or not applicable,
except that a Person shall be deemed to have "beneficial ownership" of all
securities that such Person has the right to acquire, whether such right is
exercisable immediately or after the passage of time only), directly or
indirectly, of more than 50% of the total then outstanding voting power of
the Voting Stock of the Company (for the purpose of this clause (iii), such
Person or Group will be deemed to "beneficially own" (determined as
aforesaid) the voting power of the Voting Stock of a corporation (the
"specified corporation") held by any other corporation (the "parent
corporation") if such Person or Group "beneficially owns," directly or
indirectly, a majority of the voting power of the Voting Stock of such
parent corporation); or
(iv) the Company consolidates with or merges into another Person and the
stockholders immediately prior to such merger or consolidation hold less
than a majority of the voting power of the Voting Stock of the resulting
entity.
"Closing Price" means on any Trading Day with respect to the per share price
of any shares of Capital Stock the last reported sale price regular way or, in
case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if such shares of Capital Stock are not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on Nasdaq
or, if such shares are not listed or admitted to trading on any national
securities exchange or quoted on such automated quotation system but the
issuer is a Foreign Issuer (as defined in Rule 3b-4(b) under the Exchange Act)
and the principal securities exchange on which such shares are listed or
admitted to trading is a Designated Offshore Securities Market (as defined in
Rule 902(a) under the Securities Act), the average of the reported closing bid
and asked prices regular way on such principal exchange or, if such shares are
not listed or admitted to trading on any national securities exchange or
quoted on such automated quotation system and the issuer and principal
securities exchange do not meet such requirements, the average of the closing
bid and asked prices in the over-the-counter market as furnished by any New
York Stock Exchange member firm that is selected from time to time by the
Company for that purpose.
"Consolidated EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of (i) Consolidated Net Income of such Person, plus
(ii) to the extent such Consolidated Net Income has been reduced thereby, (A)
all income taxes of such Person and its Restricted Subsidiaries paid or
accrued in accordance with GAAP for such period (other than income taxes
attributable to extraordinary or nonrecurring gains or losses), (B)
Consolidated Interest Expense of such Person and (C) without duplication of
any amount included in subclause (A) or (B) of this clause (ii), Consolidated
Non-Cash Charges of such Person, all as determined on a consolidated basis for
such Person and its Restricted Subsidiaries in conformity with GAAP, less
(iii) (A) all non-cash items increasing such Consolidated Net Income for such
period and (B) all cash payments during such period relating to non-cash
charges that were added back in determining Consolidated EBITDA in any prior
period, all as determined on a consolidated basis for such Person and its
Restricted Subsidiaries in conformity with GAAP.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication, the sum of (i) the interest expense of such
Person and its Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP, including, without limitation, (a)
any amortization of debt discount, (b) the net cost under Interest Swap
Obligations (including any amortization of discounts), (c) the interest
portion of any deferred payment obligation, (d) all commissions, discounts and
other fees and charges owed with respect to letters of credit, bankers'
acceptance financing or similar facilities, and (e) all accrued interest and
(ii) the interest component of Capitalized Lease Obligations paid or accrued
by such Person and its Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP.
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"Consolidated Net Income" means, with respect to any Person, for any period,
the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided, however, that there shall be excluded therefrom, without
duplication, (a) gains and losses from sales or other dispositions of assets
of such Person or any Restricted Subsidiary of such Person or of Capital Stock
of any Restricted Subsidiary of such Person or abandonments or reserves
relating thereto and the related tax effects according to GAAP, (b) items
classified as extraordinary or nonrecurring gains and losses, and the related
tax effects according to GAAP, (c) the net income of any Unrestricted
Subsidiary and Persons (other than Restricted Subsidiaries) accounted for by
such Person using the equity method of accounting, except to the extent of
cash dividends or distributions actually paid in cash to such Person or any
Restricted Subsidiary (in the case of any such payment to a Restricted
Subsidiary, subject to the limitations set forth in clause (e) of this
definition), (d) the net income (or loss) of any Person acquired in a "pooling
of interests" transaction accrued prior to the date it becomes a Restricted
Subsidiary of such first referred to Person or is merged or consolidated with
such Person or any of its Restricted Subsidiaries, (e) the net income (but not
loss) of any Restricted Subsidiary of such Person for such period to the
extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is restricted by charter, contract (other
than, for purposes of the "Limitation on Incurrance of Additional
Indebtedness" covenant, any such payment restrictions set forth in any Vendor
Financing Arrangement permitted to be incurred under the Indenture), operation
of law or otherwise (regardless of any waiver), and (f) any gain or loss
realized upon the termination of any employee benefit plan, on an after-tax
basis.
"Consolidated Net Worth" means, with respect to any Person, at any date, the
consolidated stockholders' equity of such Person and its Restricted
Subsidiaries, as determined on a consolidated basis in accordance with GAAP,
less any amounts attributable to Disqualified Capital Stock of such Person and
any Preferred Stock of any of its Restricted Subsidiaries (other than to the
extent held by such Person or any of its Restricted Subsidiaries).
"Consolidated Non-Cash Assets" means, with respect to any Person on any date
of determination, the total assets of such Person and its Restricted
Subsidiaries less all cash and Cash Equivalents (including restricted cash) of
such Person and its Restricted Subsidiaries on such date determined on a
consolidated basis in accordance with GAAP. For purposes of the preceding
sentence, the "date of determination" shall be the last day of the fiscal
quarter immediately preceding the date of determination.
"Consolidated Non-Cash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization and other non-cash expenses
of such Person and its Restricted Subsidiaries reducing Consolidated Net
Income of such Person and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP (excluding any such
charges constituting an extraordinary or nonrecurring item and net of any cash
payments made in such period in respect of any such non-cash expense).
"Consolidated Total Indebtedness" means, with respect to any Person, on any
date, without duplication, the aggregate outstanding principal amount of
Indebtedness of such Person and its Restricted Subsidiaries.
"Contingent Warrants" means warrants issued to the holders of the Notes,
exercisable for 8.0% of the Common Stock of the Company on a fully-diluted
basis as of the date of such issuance after giving effect to the issuance of
such Contingent Warrants in the event that the Company does not effect a
primary underwritten public offering (excluding any offering pursuant to Form
S-8 under the Securities Act or any other publicly registered offering
pursuant to the Securities Act pertaining to an issuance of shares of Common
Stock or securities exercisable therefor under any benefit plan, employee
compensation plan, or employee or director stock purchase plan) of Common
Stock of the Company pursuant to an effective registration statement under the
Securities Act on or prior to September 1, 1999 resulting in gross proceeds to
the Company of at least $35.0 million, issued pursuant to the terms of the
Warrant Agreement.
"Cumulative EBITDA" means the cumulative Consolidated EBITDA of the Company
from and after the first day of the first fiscal quarter beginning after the
Issue Date to the end of the fiscal quarter immediately
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preceding the date of determination ending not more than 135 days prior to the
date of determination, or, if such cumulative Consolidated EBITDA for such
period is negative, minus the amount by which such cumulative Consolidated
EBITDA is less than zero.
"Cumulative Interest Expense" means the aggregate amount of Consolidated
Interest Expense of the Company paid or accrued by the Company from and after
the first day of the first fiscal quarter beginning after the Issue Date to
the end of the fiscal quarter immediately preceding the date of determination
ending not more than 135 days prior to the date of determination.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of
Default.
"Determination Date" shall have the meaning set forth in the definition of
Leverage Ratio.
"Disqualified Capital Stock" means any Capital Stock which, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures (excluding any
maturity as the result of an optional redemption by the issuer thereof) or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof (except, in each case,
upon the occurrence of a Change of Control), in whole or in part, on or prior
to the final maturity date of the Notes.
"Electronic Messaging Business" shall have the meaning set forth in the
"Limitations on Line of Business" covenant.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent
in foreign currency, whose debt is rated "A" (or higher) according to S&P or
Moody's at the time as of which any investment or rollover therein is made.
"Equity Offering" means an underwritten primary public offering of Qualified
Capital Stock of the Company pursuant to a registration statement filed with
and declared effective by the Commission in accordance with the Securities
Act.
"Exchange Notes" means the Series B 14% Senior Notes due 2004 of the Company
issued in exchange for the Notes pursuant to the Notes Registration Rights
Agreement.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for
cash, between an informed and willing seller and an informed and willing and
able buyer, neither of whom is under undue pressure or compulsion to complete
the transaction. Except as provided in the TIA, and except with respect to
non-cash Investments not exceeding $5,000,000, fair market value shall be
determined (I) with respect to any Asset Sale involving consideration of less
than $5,000,000, by management of the Company and (II) in all other cases
(whether or not involving an Asset Sale), by the Board of Directors of the
Company acting in good faith and shall be evidenced by a board resolution
(certified by the Secretary or Assistant Secretary of the Company) delivered
to the Trustee; provided, however, that if (A) the aggregate non-cash
consideration to be received by the Company or any Restricted Subsidiary from
any Asset Sale shall reasonably be expected to exceed $25,000,000 or (B) if
the net worth of any Restricted Subsidiary to be designated as an Unrestricted
Subsidiary shall reasonably be expected to exceed $25,000,000, then fair
market value shall be determined by a nationally recognized investment banking
firm.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States of America, which are applicable from time to
time and are consistently applied.
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"guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of
any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of)
such Indebtedness or other obligation of such other Person (whether arising by
virtue of partnership arrangements, or by agreement to keep-well, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part) (but if in part, only to the extent
thereof); provided, however, that the term "guarantee" shall not include
(A) endorsements for collection or deposit in the ordinary course of business
and (B) guarantees (other than guarantees of Indebtedness) by the Company in
respect of assisting one or more Subsidiaries in the ordinary course of their
respective businesses, including without limitation guarantees of trade
obligations and operating leases, on ordinary business terms. The term
"guarantee" used as a verb has a corresponding meaning.
"incur" shall have the meaning set forth in "--Certain Covenants--Limitation
on Incurrence of Additional Indebtedness" above; and "incurrence" and
"incurred" shall have meanings correlative to the foregoing.
"Indebtedness" means with respect to any Person, without duplication, any
liability of such Person or such Person's Restricted Subsidiaries (i) for
borrowed money, (ii) evidenced by bonds, debentures, notes or other similar
instruments, (iii) constituting Capitalized Lease Obligations, (iv) incurred
or assumed as the deferred purchase price of property, or pursuant to
conditional sale obligations and title retention agreements (but excluding
trade accounts payable arising in the ordinary course of business), (v) for
the reimbursement of any obligor on any letter of credit, banker's acceptance
or similar credit transaction, (vi) for Indebtedness of others guaranteed by
such Person, (vii) for Interest Swap Obligations, (viii) for the higher of the
voluntary liquidation preference, involuntary liquidation preference, fixed
redemption price or repurchase price of all Disqualified Capital Stock and
(ix) for Indebtedness of any other Person of the type referred to in clauses
(i) through (viii) which is secured by any Lien on any property or asset of
such first referred to Person, whether or not such Indebtedness is assumed by
such Person or is not otherwise such Person's legal liability; provided,
however, that if the obligations so secured have not been assumed by such
Person or are otherwise not such Person's legal liability, the amount of such
Indebtedness for the purposes of this definition shall be limited to the
lesser of the amount of such Indebtedness secured by such Lien or the fair
market value of the assets or property securing such Lien. The amount of
Indebtedness of any Person at any date shall be the outstanding principal
amount of all unconditional obligations described above, to the extent that
such amount would be reflected on a balance sheet prepared in accordance with
GAAP, and the maximum liability at such date of such Person for any contingent
obligations described above. For purposes of this definition, the issuance of
any Warrants shall not constitute the incurrence of Indebtedness.
"Interest Swap Obligations" means the obligations of any Person under any
interest rate protection agreement, interest rate future, interest rate
option, interest rate swap, interest rate cap or other interest rate hedge or
arrangement.
"Investment" by any Person means any direct or indirect (i) loan, advance or
other extension of credit or capital contribution (by means of transfers of
cash or other property (valued at the fair market value thereof as of the date
of transfer) to others or payments for property or services for the account or
use of others, or otherwise), (ii) purchase or acquisition of Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness
issued by any other Person (whether by merger, consolidation, amalgamation or
otherwise and whether or not purchased directly from the issuer of such
securities or evidences of Indebtedness) and (iii) guarantee or assumption of
the Indebtedness of any other Person (except for an assumption of Indebtedness
for which the assuming Person receives consideration with a fair market value
at least equal to the principal amount of the Indebtedness assumed).
Investments shall exclude extensions of trade credit and advances to customers
and suppliers to the extent made in the ordinary course of business on
ordinary business terms. The amount of any non-cash Investment shall be the
fair market value of such Investment, as determined conclusively in good faith
by management of the Company unless the fair market value of such Investment
exceeds
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$5,000,000, in which case the fair market value shall be determined
conclusively in good faith by the Board of Directors of the Company at the
time such Investment is made. Notwithstanding the foregoing, the purchase or
acquisition of any securities of any other Person to the extent effected with
Qualified Capital Stock of the Company shall not be deemed to be an
Investment. The amount of any Investment shall not be adjusted for increases
or decreases in value, or write-ups, write-downs or write-offs with respect to
such Investment.
"Issue Date" means the actual date of original issuance of the Notes.
"Leverage Ratio" means, as to any Person, the ratio of (i) the Consolidated
Total Indebtedness of such Person as of the date of the transaction or event
giving rise to the need to calculate the Leverage Ratio (the "Determination
Date") on a consolidated basis in accordance with GAAP to (ii) the product of
(A) the Consolidated EBITDA of such Person for the full fiscal quarter for
which financial information is available ending immediately prior to the
Determination Date (such fiscal quarter, the "Measurement Period") and
(B) four.
For purposes of this definition, the Consolidated Total Indebtedness of the
Person as of the Determination Date shall be adjusted as if the Indebtedness
giving rise to the need to perform such calculation had been incurred and the
proceeds therefrom had been applied on the first day of the Measurement
Period. For purposes of calculating Consolidated EBITDA of the Company for the
Measurement Period immediately prior to the relevant Determination Date, (I)
any Person that is a Restricted Subsidiary on such Determination Date (or
would become a Restricted Subsidiary on such Determination Date in connection
with the transaction that requires the determination of such ratio) will be
deemed to have been a Restricted Subsidiary at all times during such
Measurement Period, (II) any Person that is not a Restricted Subsidiary on
such Determination Date (or would cease to be a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such ratio) will be deemed not to have been a Restricted
Subsidiary at any time during such Measurement Period and (III) if the Company
or any Restricted Subsidiary shall have in any manner (x) acquired (including
through an Asset Acquisition or the commencement of activities constituting
such operating business) or (y) disposed of (including by way of an Asset Sale
or the termination or discontinuance of activities constituting such operating
business) any operating business during the Measurement Period or after the
end of such Measurement Period and on or prior to the Determination Date, such
calculation will be made on a pro forma basis in accordance with GAAP as if,
in the case of an Asset Acquisition or the commencement of activities
constituting such operating business, all such transactions had been
consummated on the first day of such Measurement Period and, in the case of an
Asset Sale or termination or discontinuance of activities constituting such
operating business, all such transactions had been consummated prior to the
first day of such Measurement Period.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other
title retention agreement, any lease in the nature thereof and any option or
other agreement to sell, and any filing of or any agreement to give, any
security interest).
"Material Subsidiary" means, at any date of determination, any one or more
Restricted Subsidiaries that, (i) for the most recent fiscal year of the
Company accounted for more than 10% of the consolidated revenues of the
Company (exclusive of all Unrestricted Subsidiaries) or (ii) as of the end of
such fiscal year, was the owner of more than 10% of the consolidated assets of
the Company (exclusive of all Unrestricted Subsidiaries), all as set forth on
the most recently available consolidated financial statements of the Company
and its consolidated Restricted Subsidiaries for such fiscal year prepared in
conformity with GAAP.
"Measurement Period" shall have the meaning set forth in the definition of
Leverage Ratio.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents (including payments in respect of
deferred payment obligations when received in the form of cash
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or Cash Equivalents) received by the Company or any Restricted Subsidiary from
such Asset Sale net of (i) reasonable out-of-pocket expenses and fees relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions, recording fees, title insurance
premiums, appraisers' fees and costs reasonably incurred in preparation of any
asset or property for sale), (ii) taxes paid or reasonably estimated to be
payable (calculated based on the combined state, federal and foreign statutory
tax rates applicable to the Company or the Restricted Subsidiary consummating
such Asset Sale), (iii) repayment of Indebtedness secured by assets subject to
such Asset Sale, (iv) appropriate amounts to be provided by the Company or any
Restricted Subsidiary as a reserve, in accordance with GAAP against any
liabilities associated with such assets and retained by the Company or any
Restricted Subsidiary after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities and liabilities related
to environmental matters and the after-tax cost of any indemnification
payments (fixed or contingent) attributable to the seller's indemnities to the
purchaser undertaken by the Company or any Restricted Subsidiary in connection
with any such Asset Sale (but excluding any payments which, by the terms of
the indemnities will not, under any circumstances, be made during the term of
the Notes) and (v) all distributions and other payments required to be made to
minority interests holders in Restricted Subsidiaries or joint ventures as a
result of such Asset Sale; provided, however, that if the instrument or
agreement governing such Asset Sale requires the transferor to maintain a
portion of the purchase price in escrow (whether as a reserve for adjustment
of the purchase price or otherwise) or to provide for indemnification of the
transferee for specified liabilities in a maximum specified amount, the
portion of the cash or Cash Equivalents that is actually placed in escrow or
segregated and set aside by the transferor for such indemnification
obligations shall not be deemed to be Net Cash Proceeds until the escrow
terminates or the transferor ceases to segregate and set aside such funds, in
whole or in part, and then only to the extent of the proceeds released from
escrow to the transferor or that are no longer segregated and set aside by the
transferor.
"Payment Restriction" shall have the meaning set forth in "--Certain
Covenants--Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries" above.
"Permitted Holder" means any of (i) Douglas J. Ranalli, any spouse or lineal
descendant thereof, any trust the beneficiaries of which are any of the
foregoing or any affiliate of any of the foregoing, and (ii) SingTel and its
affiliates.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) the Notes, and the Exchange Notes;
(ii) Indebtedness of a Restricted Subsidiary of the Company owed to and
held by the Company or another Restricted Subsidiary of the Company, in
each case which is not subordinated in right of payment to any Indebtedness
of such Restricted Subsidiary, except that (x) any transfer of such
Indebtedness by the Company or a Restricted Subsidiary of the Company
(other than to the Company or to a Restricted Subsidiary of the Company)
and (y) the sale, transfer or other disposition by the Company or any
Restricted Subsidiary of Capital Stock of a Restricted Subsidiary of the
Company which is owed Indebtedness of another Restricted Subsidiary of the
Company such that it ceases to be a Restricted Subsidiary of the Company
shall, in each case, be an incurrence of Indebtedness by such Restricted
Subsidiary subject to the other provisions of the covenant described under
"--Certain Covenants--Limitation on Incurrence of Additional Indebtedness"
above;
(iii) Refinancing Indebtedness;
(iv) Interest Swap Obligations; provided, however, that such Interest
Swap Obligations are entered into to protect the Company from fluctuations
in interest rates of its Indebtedness, to the extent the notional principal
amount of such Interest Swap Obligations do not exceed the principal amount
of the Indebtedness to which such Interest Swap Obligations relate;
(v) Indebtedness of the Company or any Restricted Subsidiary incurred
under Vendor Financing Arrangements in an aggregate principal amount at any
one time outstanding not to exceed the lesser of (x) $40,000,000 or (y)
100% of the cost of the goods purchased from the vendor;
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(vi) Indebtedness of Fax International Japan, Inc. not to exceed
$5,000,000 principal amount in the aggregate at any one time outstanding;
(vii) Indebtedness incurred by the Company, not to exceed $25,000,000
principal amount in the aggregate at any one time outstanding provided that
such indebtedness is unsecured and subordinated, pursuant to a written
agreement, to the Company's obligations under the Indenture and the Notes;
(viii) Indebtedness of the Company or any Restricted Subsidiary
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance or similar requirements in the ordinary course of business
pursuant to ordinary business terms;
(ix) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except
in the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within two business days of incurrence;
(x) Indebtedness outstanding on the Issue Date less any prepayments or
repayments in respect thereof including any indebtedness issued in lieu of
interest in respect of any indebtedness outstanding on the Issue Date;
(xi) Acquired Indebtedness of any corporation that becomes a Restricted
Subsidiary after the Issue Date which Indebtedness is existing at the time
such corporation becomes a Restricted Subsidiary; provided, however, that
(A) immediately after giving effect to such corporation becoming a
Restricted Subsidiary the Company could incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in accordance with the
Leverage Ratio of the covenant described under "--Certain Covenants--
Limitation on Incurrence of Additional Indebtedness" above, (B) such
Indebtedness is without recourse to the Company or to any Restricted
Subsidiary or to any of their respective properties or assets other than
the Person becoming a Restricted Subsidiary or its properties and assets
and (C) such Indebtedness was not incurred as a result of or in connection
with or in contemplation of such entity becoming a Restricted Subsidiary;
(xii) Indebtedness of the Company or any of its Restricted Subsidiaries
in an aggregate principal amount (or accreted value, as applicable) not to
exceed $15.0 million as of the date of any incurrence; and
(xiii) Indebtedness of the Company not to exceed (A) the aggregate cash
proceeds received by the Company after the Issue Date from the sale or
issuance of Qualified Capital Stock less (B) the portion of such proceeds
utilized to make, or anticipated to be used to make, Restricted Payments or
Permitted Investments described in clauses (iv), (x) or (xi) of the
definition of "Permitted Investments", after the Issue Date; provided that
(x) such Indebtedness shall have a final maturity which is later than the
final maturity of the Senior Notes and (y) the Weighted Average Life to
Maturity of such Indebtedness is greater than the Weighted Average Life to
Maturity of the Notes.
"Permitted Investment" means, without duplication, each of the following:
(i) Investments by the Company or any Restricted Subsidiary of the
Company in any Restricted Subsidiary of the Company (whether existing on
the Issue Date or created thereafter) or any Person that after such
Investment and, as a result thereof, becomes a Restricted Subsidiary of the
Company and Investments in the Company by any Subsidiary of the Company;
(ii) Cash and Cash Equivalents;
(iii) Loans or advances to directors, officers and employees made in the
ordinary course of business;
(iv) Investments by the Company or any Subsidiary of the Company for
which the sole consideration provided is Qualified Capital Stock;
(v) Investments arising as a result of the receipt by the Company or any
Restricted Subsidiary of non-cash consideration for an Asset Sale effected
in compliance with "--Certain Covenants--Limitation on Asset Sales" above;
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(vi) Investments in an aggregate amount (with each such Investment being
valued as of the date made and without giving effect to subsequent changes
in value) not to exceed the aggregate net proceeds, including the fair
market value of property other than cash (as determined in good faith by
the Board of Directors), received by the Company after the Issue Date from
the issuance and sale of its Capital Stock (other than Disqualified Stock)
to a Person who is not a Restricted Subsidiary of the Company, or from the
issuance to a Person who is not a Restricted Subsidiary of the Company of
any options, warrants or other rights to acquire Capital Stock of the
Company (in each case, exclusive of any Disqualified Stock or any options,
warrants or other rights that are redeemable at the option of the holder,
or are required to be redeemed prior to the Stated Maturity of the Notes,
less the aggregate net proceeds used to make or committed to be used to
make any Restricted Payments or any other Permitted Investments);
(vii) advances to customers made in the ordinary course of business;
(viii) Investments in Currency Agreements and Interest Rate Agreements;
(ix) Investments in evidences of Indebtedness, securities or other
property received by the Company or any Restricted Subsidiary from another
Person in connection with any bankruptcy proceedings or by reason of a
composition, restructuring or readjustment of debt or a reorganization of
such Person or as a result of foreclosure, perfection or enforcement of any
Lien;
(x) Investments in WorldVoice, Inc. (or any successor thereof) in an
aggregate amount not to exceed (A) $5,000,000 million and (B) an additional
$10,000,000 from and after April 1, 1997, in each case on a basis
consistent with the letters of intent relating thereto in effect as of the
Closing Date; and
(xi) other Investments (with each such Investment being valued as of the
date made and without giving effect to subsequent changes in value) in an
aggregate amount not to exceed $15,000,000 at any one time outstanding;
provided that not more than $5,000,000 of the Investments pursuant to this
clause (xi) is invested directly or indirectly within any one country.
"Permitted Liens" means, without duplication, each of the following:
(i) Liens in favor of the Trustee in its capacity as trustee for the
Holders;
(ii) Liens existing on the Issue Date as in effect on such date;
(iii) Liens on property of the Company or a Restricted Subsidiary
securing Indebtedness incurred pursuant to (A) the Leverage Ratio to the
extent the Indebtedness is incurred pursuant to a Vendor Financing
Agreement, (B) clauses (v), (vi) or (xii) of Permitted Indebtedness, and
(C) Liens on Capital Stock of Unrestricted Subsidiaries;
(iv) Liens on property existing on the date of acquisition thereof;
provided, however, that such Liens are not incurred as a result of, or in
connection with or in anticipation of, such transaction and such Liens
relate solely to the property so acquired;
(v) Liens to secure the payment of all or a part of the purchase price or
construction cost of acquired or constructed property which is to be used
by the Company exclusively in the Electronic Messaging Business, including
related activities and services, after the Issue Date; provided, however,
that the Indebtedness secured by such Liens shall not exceed 100% of the
cost of such property and such Liens shall not extend to any other property
or assets of the Company or of any Restricted Subsidiary other than the
property or assets so acquired;
(vi) Liens for taxes, assessments and governmental charges to the extent
not required to be paid under the Indenture;
(vii) statutory Liens of landlords and carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen or other like Liens to the extent not
required to be paid under the Indenture;
(viii) pledges or deposits to secure lease obligations or nondelinquent
obligations under workers' compensation, unemployment insurance or similar
legislation (other than the Employee Retirement Income Security Act of
1974, as amended from time to time ("ERISA"));
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(ix) Liens to secure the performance of public statutory obligations that
are not delinquent, performance bonds or other obligations of a like nature
(other than for borrowed money), in each case incurred in the ordinary
course of business pursuant to ordinary business terms;
(x) easements, rights-of-way, restrictions, minor defects or
irregularities in title and other similar charges or encumbrances incurred
in the ordinary course of business pursuant to ordinary business terms not
interfering in any material respect with the business of the Company or any
Restricted Subsidiary;
(xi) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of letters of
credit or bankers' acceptances issued or created for the account of such
Person to facilitate the purchase, shipment or storage of such inventory or
other goods in the ordinary course of business pursuant to ordinary
business terms;
(xii) judgment and attachment Liens not giving rise to an Event of
Default;
(xiii) leases or subleases granted to others in the ordinary course of
business pursuant to ordinary business terms and consistent with past
practice not interfering in any material respect with the business of the
Company or any Restricted Subsidiary;
(xiv) any interest or title of a lessor in the property subject to any
lease, whether characterized as capitalized or operating other than any
such interest or title resulting from or arising out of a default by the
Company or any Restricted Subsidiary of its obligations under such lease;
(xv) Liens arising from filing UCC financing statements for precautionary
purposes in connection with true leases of personal property that are
otherwise permitted under the Indenture and under which the Company or any
Restricted Subsidiary is a lessee;
(xvi) Liens with respect to Acquired Indebtedness incurred in accordance
with the covenant described under "--Certain Covenants--Limitation of
Incurrence of Additional Indebtedness" above; provided, however, that (A)
such Liens secured such Acquired Indebtedness at the time of and prior to
the incurrence of such Acquired Indebtedness by the Company and were not
granted as a result of, in connection with, or in anticipation of, the
incurrence of such Acquired Indebtedness by the Company and (B) such Liens
do not extend to or cover any property or assets of the Company or of any
Restricted Subsidiary other than the property or assets that secured the
Acquired Indebtedness prior to the time such Indebtedness became Acquired
Indebtedness of the Company and are no more favorable to the lienholders
than those securing the Acquired Indebtedness prior to the incurrence of
such Acquired Indebtedness by the Company;
(xvii) Liens to secure Capitalized Lease Obligations to the extent
arising from transactions consummated in compliance with "--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness" and "--
Limitation on Sale and Leaseback Transactions" above; provided, however,
that such Liens do not extend to or cover any property or assets of the
Company or of any Restricted Subsidiary, other than the property or assets
subject to such Capitalized Lease Obligation;
(xviii) any Lien to secure the refinancing of any Indebtedness described
in the foregoing clauses; provided, however, that to the extent any such
clause limits the amount secured or the asset subject to such Liens, no
refinancing shall increase the assets subject to such Liens or the amount
secured thereby beyond the assets or amounts set forth in such clauses;
(xix) Liens securing Indebtedness under the Steelcase Financing Documents
as in effect on the Issue Date and replacements thereof as permitted by the
Steelcase Financing Documents as in effect on the Issue Date; and
(xx) any Lien arising by operation of law.
"Person" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a
governmental agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
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"Productive Assets" means assets of a kind used or usable by the Company and
the Restricted Subsidiaries in Electronic Messaging Business or businesses
reasonably related thereto.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"refinance" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part; "refinanced" and "refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means any refinancing by the Company of
Indebtedness of the Company or of any Restricted Subsidiaries existing on the
Issue Date or incurred in accordance with "--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness" above (other than pursuant to clauses
(ii), (iv), (v), (vi), (viii) and (ix) of the definition of Permitted
Indebtedness); provided, however, that such Indebtedness so incurred to
refinance such other Indebtedness (the "Existing Indebtedness") (1) is not in
an aggregate principal amount as of the date of the consummation of such
proposed refinancing in excess of (or if such Indebtedness being incurred to
refinance the Existing Indebtedness is issued with original issue discount, at
an original issue price not in excess of) the sum of (i) the aggregate
principal amount outstanding of the Existing Indebtedness (provided that (a)
if such Existing Indebtedness was issued with original issue discount, in
excess of the accreted amount of such Existing Indebtedness (as determined in
accordance with GAAP) as of the date of such proposed refinancing, (b) if such
Existing Indebtedness was incurred pursuant to a revolving credit facility or
any other agreement providing a commitment for subsequent borrowings, with a
maximum commitment under the agreement governing the Indebtedness proposed to
be incurred not in excess of the maximum commitment amount under such Existing
Indebtedness and (c) any amount of such Existing Indebtedness owned or held by
the Company or any of its Subsidiaries shall not be deemed to be outstanding
for the purposes hereof) as of the date of such proposed refinancing, plus
(ii) the amount of any reasonable premium paid with respect to such Existing
Indebtedness and plus (iii) the amount of reasonable expenses incurred by the
Company in connection with such refinancing and (2) does not have (I) a
Weighted Average Life to Maturity that is less than the Weighted Average Life
to Maturity of the Existing Indebtedness or (II) a final maturity earlier than
the final maturity of the Existing Indebtedness; provided, further, however,
that (y) if such Existing Indebtedness is subordinate or junior to the Notes,
then such Indebtedness proposed to be incurred to refinance the Existing
Indebtedness shall be subordinate to the Notes at least to the same extent and
in the same manner as the Existing Indebtedness and (z) such Indebtedness
proposed to be incurred to refinance the Existing Indebtedness is not incurred
more than three months prior to the complete retirement or defeasance of the
Existing Indebtedness with the proceeds thereof. With respect to any
Refinancing of Indebtedness under the SingTel Credit Agreement and the SingTel
Equipment Financing Agreement, in addition to the foregoing, no Indebtedness
incurred to refinance such SingTel Indebtedness shall provide for any payment
of interest or other amounts thereon prior to the times at which, and not in
excess of the amount of, interest and other amounts are payable on the SingTel
Indebtedness.
"Restricted Payment" shall have the meaning set forth in the covenant
described under "--Certain Covenants--Limitation on Restricted Payments"
above.
"Restricted Subsidiary" means any present or future Subsidiary of the
Company which, as of the determination date, is not an Unrestricted
Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether
owned by the Company or any Restricted Subsidiary at the Issue Date or later
acquired, which has been or is to be sold or transferred by the Company or
such Restricted Subsidiary to such Person or to any other Person from whom
funds have been or are to be advanced by such Person on the security of such
property.
"SingTel" means Singapore Telecommunications Limited, its successors and
assigns.
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"SingTel Credit Agreement" means the Credit Agreement dated as of April 10,
1995 between the Company and SingTel N.V. (as amended) as in effect on the
issue date.
"SingTel Documents" means each of the agreements between SingTel or any of
its affiliates, on the one hand, and the Company or any Restricted Subsidiary,
on the other hand, in each case as in effect on the Closing Date.
"SingTel Equipment Financing Agreement" means the Term Loan Agreement--
Equipment dated as of April 10, 1995 between the Company and SingTel N.V. (as
amended) as in effect on the Issue Date.
"Stated Maturity," when used with respect to a Note or any installment of
interest thereon, means the date specified in such Note as the fixed date on
which the principal of such Note or such installment of interest is due and
payable.
"Subsidiary," with respect to any Person, means (i) any corporation of which
at least a majority of the outstanding Voting Stock shall at the time be
owned, directly or indirectly, by such Person or (ii) any other Person of
which at least a majority of the outstanding Voting Stock is at the time,
directly or indirectly, owned by such Person.
"Surviving Entity" shall have the meaning set forth in the covenant
described under "--Certain Covenants--Merger, Consolidation and Sale of
Assets."
"Trading Day" means with respect to a securities exchange or automated
quotation system, a day on which such exchange or system is open for a full
day of trading.
"Unrestricted Subsidiary" means a Subsidiary of the Company so designated by
a resolution adopted by the Board of Directors of the Company in accordance
with the covenant described under "--Certain Covenants--Limitation on
Restricted and Unrestricted Subsidiaries" above.
"U.S. Government Securities" means securities that are (x) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America, the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either case,
are not callable or redeemable at the option of the issuer thereof, and shall
also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act) as custodian with respect to any such U.S.
Government obligation or a specific payment of principal of or interest on any
such U.S. Government obligation held by such custodian for the account of the
holder of such depository receipt; provided that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government obligation or the specific payment
of principal of or interest on the U.S. Government obligation evidenced by
such depository receipt.
"Vendor Financing Arrangements" means any Indebtedness (including
Indebtedness under any credit facility entered into with any vendor or
supplier or any financial institution acting on behalf of such vendor or
supplier); provided that such Indebtedness is incurred solely for the purpose
of financing the cost (including the cost of design, development, improvement,
construction or integration) of assets used or usable in the Electronic
Messaging Business.
"Voting Stock" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or only so long as no senior class of stock has voting power by
reason of any contingency) to vote in the election of members of the Board of
Directors of such Person.
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"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or Preferred Stock at any date, the number of years obtained by dividing (a)
the then outstanding aggregate principal amount or liquidation preference of
such Indebtedness or Preferred Stock into (b) the total of the product
obtained by multiplying (i) the amount of each then remaining installment,
sinking fund, serial maturity or other required payment of principal or
liquidation preference, including payment at final maturity, in respect
thereof, by (ii) the number of years (calculated to the nearest one-twelfth)
which will elapse between such date and the making of such payment.
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BOOK-ENTRY; DELIVERY AND FORM
Except as set forth in the next paragraph, the Notes will be represented by
one or more permanent global certificates in fully registered form (each a
"Global Note" or a "Global Certificate"). Each Global Note will be deposited
with, or on behalf of, DTC and registered in the name of a nominee of DTC.
Notes (i) originally purchased by or transferred to Institutional
"Accredited Investors" (as defined in Rule 501(a)(1), (2), (3) or (7)
promulgated under the Securities Act) who are not QIBs or (ii) held by QIBs
who elect to take physical delivery of their certificates instead of holding
their interest through the Global Certificates (and which are thus ineligible
to trade through DTC) (collectively referred to herein as the "Non-Global
Purchasers") will be issued, in registered form, without interest coupons,
"Certificated Notes" ("Certificated Securities"). Upon the transfer to a QIB
of such Certificated Securities initially issued to a Non-Global Purchaser,
such Certificated Securities will, unless the transferee requests otherwise or
the Global Certificates have previously been exchanged in whole for such
Certificated Securities, be exchanged for an interest in the applicable Global
Certificates.
THE GLOBAL CERTIFICATES
The Company expects that pursuant to procedures established by DTC (i) upon
deposit of the Global Notes, DTC or its custodian will credit, on its internal
system, portions of the Global Notes to the respective accounts of persons who
have accounts with such depository and (ii) ownership of the Notes will be
shown on, and the transfer of ownership thereof will be effected only through,
records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). Such accounts initially will be designated
by or on behalf of the Initial Purchaser and ownership of beneficial interests
in the Global Notes will be limited to persons who have accounts with DTC
("participants") or persons who hold interests through participants. QIBs may
hold their interests in the Global Certificates directly through DTC if they
are participants in such system, or indirectly through organizations which are
participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee will be considered the sole owner or holder of the
Notes represented by the applicable Global Certificate for all purposes under
the Indenture. No beneficial owner of an interest in the Global Certificates
will be able to transfer such interest except in accordance with DTC's
applicable procedures in addition to those provided for under the Indenture
with respect to the Exchange Notes.
Payments of the principal of, premium (if any) and interest (including
Additional or Special Interest) on, the Global Notes will be made to DTC or
its nominee, as the case may be, as the registered owner thereof. None of the
Company, the Trustee or any paying agent will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the Global Notes or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of, premium (if any) and interest (including Additional on
Special Interest) on, the Global Notes, will credit participants' accounts
with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note, as shown on the records
of DTC or its nominee. The Company also expects that payments by participants
to owners of beneficial interests in any such Global Certificates held through
such participants will be governed by standing instructions and customary
practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such
payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Security for any reason,
including to sell Units, Notes, or Warrants to persons in states which require
physical delivery of
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such securities or to pledge such securities, such holder must transfer its
interest in the applicable Global Certificate in accordance with the normal
procedures of DTC, and including, with respect to the Exchange Notes and the
Warrants, in accordance with the procedures set forth in the Indenture.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of Notes, (including the presentation of Notes for exchange
as described below) only at the direction of one or more participants to whose
account the DTC interests in the applicable Global Certificate is credited and
only in respect of such portion of Notes, the aggregate principal amount of
Notes, as to which such participant or participants has or have given such
direction. However, if there is an Event of Default under the Indenture, DTC
will exchange the applicable Global Certificate for Certificated Securities,
which it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Certificates among participants of DTC,
it is under no obligation to perform such procedures, and such procedures may
be discontinued at any time. None of the Company or the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED SECURITIES
If DTC is at any time unwilling or unable to continue as a depository for
any Global Certificate and a successor depository is not appointed by the
Company within 90 days, the Company will issue Certificated Securities in
exchange for the Global Certificates.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with the resales of Exchange Notes received in exchange for
Private Notes where such Private Notes were acquired as a result of market-
making activities or other trading activities. The Company has agreed that for
a period of up to 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer that
requests such document in the Letter of Transmittal for use in connection with
any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive
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compensation in the form of commissions or concessions from any such broker-
dealer and/or the purchasers of any such Exchange Notes. Any broker-dealer
that resells Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
Exchange Notes and any commissions or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Private Notes (including any broker-dealers), and
certain parties related to such holders, against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the Exchange Notes offered hereby will
be passed upon for the Company by Latham & Watkins, New York, New York.
EXPERTS
The Financial Statements of the Company included in this Prospectus have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports appearing herein.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the Exchange Notes offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information, exhibits and undertakings contained in
the Registration Statement. For further information with respect to the
Company and the Exchange Notes offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules filed as a part thereof. As a result of the
Exchange Offer, the Company will become subject to the informational
requirements of the Exchange Act. The Registration Statement (and the exhibits
and schedules thereto), as well as the periodic reports and other information
filed by the Company with the Commission, may be inspected and copied at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Room 1400, 75 Park Place, New York, New York 10007 and
Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 6061-2511. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference facilities in
New York, New York and Chicago, Illinois at the prescribed rates. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made
to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
Pursuant to the Indenture, the Company has agreed to furnish to the Trustee
and to registered holders of the Exchange Notes, without cost to the Trustee
or such registered holders, copies of all reports and other information that
would be required to be filed by the Company with the Commission under the
Exchange Act, whether or not the Company is then required to file reports with
the Commission. As a result of this Exchange Offer, the Company will become
subject to the periodic reporting and other informational requirements of the
Exchange Act. In the event that the Company ceases to be subject to the
informational requirements of the
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Exchange Act, the Company has agreed that, so long as any Notes remain
outstanding, it will file with the Commission (but only if the Commission at
such time is accepting such voluntary filings) and distribute to holders of
the Private Notes or the Exchange Notes, as applicable, copies of the
financial information that would have been contained in such annual reports
and quarterly reports, including a "Management's Discussion and Analysis of
Financial Condition and Results of Operations," that would have been required
to be filed with the Commission pursuant to the Exchange Act. The Company will
also furnish such other reports as it may determine or as may be required by
law.
The principal address of the Company is 900 Chelmsford Street, Lowell
Massachusetts, and the Company's telephone number is (508) 551-7500.
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<PAGE>
GLOSSARY OF TERMS
Account Executive--UNIFI employee responsible for selling the UNIFI service
to the customer.
Account Manager--UNIFI employee responsible for maintaining the relationship
with the customer after the sale has been consummated.
Analog--A transmission method employing a continuous (rather than pulsed or
digital) electric signal that varies in amplitude or frequency in response to
change in sound impressed upon a transducer in the sending device.
Beta test--A test period during which a new product or service is utilized
by a group of select customers to test quality, reliability, and other
features or qualities before being released to the general public.
bit--A bit, representing the binary digits 0 or 1, is the smallest quantity
of information processed by a computer.
bps--An abbreviation for bits per second, it represents an information flow
rate.
Broadcast Fax--A fax document which is transmitted to a network once, and is
then sent to a number of destinations.
Churn--The lost revenue associated with lost customers, expressed as a
percent of total revenue for the measurement period.
Circuit-Switched Network--The type of circuit used by the PSTN that permits
a real-time connection necessary for voice traffic. A call placed on a
circuit-switched network results in an end-to-end connection which remains
linked for the duration of the call.
Country Unit--With respect to each country, the UNIFI sales and service
force in that country.
Customer--A billing entity. A single company may have two subsidiaries which
are billed separately, in which case it would be represented as two customers.
Customer Action Report--A report faxed to a customer which details delivery
status of a fax document as well as actions taken by UNIFI to resolve
difficulties encountered in attempting to deliver a fax document.
Dedicated Lines--Telecommunication lines dedicated or reserved for use
exclusively by particular subscribers along predetermined routes.
Delivery Expert System--Proprietary software developed by the Company which
automatically resolves a wide range of common fax document delivery obstacles.
Digital--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission/switching technologies employ a
series of discrete distinct pulses to represent information, as opposed to the
continuously variable analog signal.
Document Delivery Staff--The Company's 24-hour, multi-lingual staff of
analysts based in a centralized facility at corporate headquarters that is
responsible for resolving obstacles that prevent the delivery of a fax
document.
FaxLink--The Company's device that is attached to each customer's fax
machine and transparently routes appropriate fax traffic to the UNIFI network.
FCC--Federal Communication Commission.
105
<PAGE>
Fiber Optics--Fiber optic cable is the medium of choice for the
telecommunication and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wire and satellite
transmissions. Fiber optic technology involves sending laser light pulses
across glass strands in order to transmit digital information.
Frame Relay--Frame relay is a high-speed data packet switching service used
to transmit data between computers. Frame relay supports data packets of
variable lengths at access speeds ranging from 56 kbps to 1500 kbps.
Intelligent Delivery Network--The Company's transmission network and value-
added customer support services that consist of nodes, leased fiber optic
cables and satellite links connecting the nodes, the Delivery Expert System
software and the Document Delivery Staff.
kbps--An abbreviation representing 1000 bits per second flow rate.
LAN--Local Area Network, a mechanism to provide connectivity and allow
communication among a number of personal computers. Typically a LAN
encompasses a single building or small group of buildings.
LAN-to-Fax Service--Fax service whereby the sender transmits the fax from a
desktop PC over a LAN to a fax server, which then transmits the fax over a
PSTN or a specialized network such as the Company's.
Local Exchange--A telephone switching center, operated by a local telephone
company, which provides for the connection of all telephones in the vicinity
to the PSTN.
Local Loop--The telephone circuits used to connect customer premise
equipment (e.g., a telephone) to the regional local exchange of the PSTN.
Long-haul Circuit--Long distance communication links that carry information
between and among local exchanges and other telephone switching centers.
Network Efficiency--The relative cost associated with the transport of
information from one location to another.
Node--A group of specially configured microcomputers and associated
telecommunications equipment that provides the interface between a PSTN and
the Company's network.
Off-net--Traffic which enters the Company's network but is transferred to a
third party carrier for delivery because the Company does not have a node in
the destination country.
On-net--Traffic carried over the Company's network to a destination country
in which the Company has a node.
One-Way Node--A network node capable of delivering a fax document to the
destination customer. One-way nodes cannot accept fax documents for delivery
to another destination.
Packet-Switched Network--A network which transmits digital information that
has been arranged into packets, each containing a header which includes the
address of the destination. Typically, the network provides for a variety of
paths to reach the destination. As each packet encounters a node, the address
header is evaluated to determine the optimum path to a destination.
personal delivery service--The Delivery Expert System and the Document
Delivery Staff.
PSTN--The Public Switched Telephone Network (i.e., ordinary telephone
lines).
106
<PAGE>
PTT--Authorities (usually government) which control postal, telephone and
telegraph services within a country.
real-time connection--A circuit which allows continuous interaction between
the source and the destination, as required in voice calls.
Store-and-Forward Network--A transmission network in which the data is
uploaded and briefly stored before being transmitted to the destination.
Because of the information storage mechanism, such networks do not support
real-time interactive sessions (i.e., voice traffic).
Two-Way Node--A network node capable of both delivering a fax document to
the destination customer and accepting fax documents for delivery to another
destination.
X.400--A telecommunications network standard designed to facilitate the flow
of messaging traffic.
107
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of UNIFI Communications, Inc.
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and March
31, 1997 (Unaudited)................................................... F-3
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1996 and for the Three-Month Periods Ended
March 31, 1996 and 1997 (Unaudited).................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for Each of
the Three Years in the Period Ended December 31, 1996 and for the
Three-Month Periods Ended March 31, 1997 (Unaudited)................... F-5
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1996 and for the Three-Month Period Ended
March 31, 1997 (Unaudited)............................................. F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Unifi Communications, Inc. and
Subsidiaries:
We have audited the accompanying consolidated balance sheets of Unifi
Communications, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1995 and 1996, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Unifi
Communications, Inc. and subsidiaries as of December 31, 1995 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 24, 1997
F-2
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
MARCH 31,
1995 1996 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................ $11,123,620 $ 4,538,343 $104,163,282
Short-term restricted cash............... -- 1,091,484 24,360,351
Accounts receivable, less reserves of
approximately $18,000, $184,000 and
$256,000 at December 31, 1995, 1996 and
March 31, 1997, respectively............ 1,801,044 4,700,403 4,972,989
Accounts receivable from principal stock-
holder.................................. 100,343 -- --
Prepaid expenses and other current as-
sets.................................... 411,900 811,374 889,137
----------- ----------- ------------
Total current assets................... 13,436,907 11,141,604 134,385,759
----------- ----------- ------------
Property and Equipment, net............... 7,765,337 24,824,329 22,810,158
----------- ----------- ------------
Long-term restricted cash................. -- -- 22,344,374
----------- ----------- ------------
Minority Interest in Fax Japan............ 51,690 1,000,000 1,000,000
----------- ----------- ------------
Deferred Financing Costs, net............. 2,844,593 2,764,152 8,998,748
----------- ----------- ------------
Other Assets, net......................... 1,279,656 1,454,323 1,867,127
----------- ----------- ------------
$25,378,183 $41,184,408 $191,406,166
=========== =========== ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of notes payable.... $ 484,121 $ 2,776,753 $ 2,615,134
Current portion of note payable to
principal stockholder.............. -- 4,232,348 4,609,057
Current portion of capital lease ob-
ligations.......................... 1,731,973 1,483,413 1,143,344
Advances from principal stockhold-
er................................. -- 4,317,563 4,137,618
Accounts payable.................... 2,435,030 13,659,604 3,604,108
Accrued expenses.................... 2,153,200 10,608,224 12,395,557
------------ ------------ ------------
Total current liabilities......... 6,804,324 37,077,905 28,504,818
------------ ------------ ------------
LONG-TERM DEBT:
Senior notes payable................ -- -- 164,875,105
Capital lease obligations, net of
current portion.................... 620,796 1,821,074 1,585,137
Notes payable, net of current por-
tion............................... 532,533 3,433,020 3,611,431
Notes payable to principal stock-
holder............................. 8,549,616 41,359,176 40,348,523
------------ ------------ ------------
Total long-term debt.............. 9,702,945 46,613,270 210,420,196
------------ ------------ ------------
COMMITMENTS (Note 11)
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock, $1.00
par value-
Authorized--24,715,500 shares
Issued and outstanding--13,515,030
shares at December 31, 1995 and
1996 and March 31, 1997
(preference in liquidation of
$41,029,394 at March 31, 1997)..... 13,515,030 13,515,030 13,515,030
Common stock, $.01 par value--
Authorized--50,000,000 shares
Issued and outstanding--3,697,289
shares at December 31, 1995,
3,786,025 shares at December 31,
1996 and 3,798,440 at March 31,
1997............................... 36,973 37,856 37,980
Additional paid-in capital.......... 25,993,484 23,664,373 35,584,736
Accumulated deficit................. (31,373,582) (80,286,448) (97,074,062)
Cumulative translation adjustment... 699,009 562,422 417,468
------------ ------------ ------------
Total stockholders' equity (defi-
cit)............................. 8,870,914 (42,506,767) (47,518,848)
------------ ------------ ------------
$ 25,378,183 $ 41,184,408 $191,406,166
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED
--------------------------------------- -----------------------
MARCH 31, MARCH 31,
1994 1995 1996 1996 1997
----------- ------------ ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................ $ 6,952,406 $ 10,664,913 $ 25,217,766 $4,043,379 $ 9,237,321
COSTS AND EXPENSES:
Cost of revenues...... 4,655,995 7,839,687 27,598,721 4,097,842 9,395,538
Sales and customer
service.............. 8,326,013 11,837,635 25,706,514 4,228,368 8,691,763
Research and
development.......... 1,655,776 4,810,459 11,620,245 1,720,839 2,429,757
General and
administrative....... 1,800,554 2,676,369 4,165,170 422,397 992,811
Information systems... 289,787 802,847 3,526,542 611,963 905,633
----------- ------------ ------------ ---------- -----------
Total costs and
expenses........... 16,728,125 27,966,997 72,617,192 11,081,409 22,415,502
----------- ------------ ------------ ---------- -----------
Loss from
operations......... (9,775,719) (17,302,084) (47,399,426) (7,038,030) (13,178,181)
INTEREST INCOME......... 16,093 720,746 154,812 -- 829,818
INTEREST EXPENSE........ (601,711) (411,287) (2,498,807) (62,231) (4,277,713)
OTHER INCOME (EXPENSE).. 76,287 (144,438) (117,755) (168,352) (161,538)
----------- ------------ ------------ ---------- -----------
Loss before minority
interest........... (10,285,050) (17,137,063) (49,861,176) (7,268,613) (16,787,614)
MINORITY INTEREST IN FAX
JAPAN.................. 1,524,607 2,479,955 948,310 402,148 --
----------- ------------ ------------ ---------- -----------
Net loss................ $(8,760,443) $(14,657,108) $(48,912,866) (6,866,473) (16,787,614)
=========== ============ ============ ========== ===========
NET LOSS PER COMMON
SHARE.................. $ (2.64) $ (4.26) $ (13.04) (1.84) (4.43)
=========== ============ ============ ========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING..... 3,328,800 3,437,464 3,752,089 3,726,335 3,789,899
=========== ============ ============ ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
----------------------- -------------------
ADDITIONAL CUMULATIVE
NUMBER $.01 NUMBER $.01 PAID-IN ACCUMULATED DEFERRED TRANSLATION
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL DEFICIT COMPENSATION ADJUSTMENT
---------- ----------- --------- --------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31,
1993............ 4,294,038 $ 4,294,038 3,323,800 $33,238 $ 469,909 $ (7,956,031) $(14,427) $ --
Compensation
expense from
vesting of
restricted
stock.......... -- -- -- -- -- -- 12,377 --
Sale of Series D
convertible
preferred
stock, net of
issuance costs
of $685,348.... 2,013,157 2,013,157 -- -- 4,995,318 -- -- --
Increase in
cumulative
translation
adjustment..... -- -- -- -- -- -- -- 360,524
Gain related to
sale of Fax
Japan stock.... -- -- -- -- 3,660,573 -- -- --
Net loss........ -- -- -- -- -- (8,760,443) -- --
---------- ----------- --------- ------- ----------- ------------ -------- --------
BALANCE,
DECEMBER 31, 1994.. 6,307,195 6,307,195 3,323,800 33,238 9,125,800 (16,716,474) (2,050) 360,524
Compensation
expense from
vesting of
restricted
stock.......... -- -- -- -- -- -- 2,050 --
Sale of Series G
convertible
preferred
stock, net of
issuance costs
of $74,700..... 8,570,000 8,570,000 -- -- 21,350,300 -- -- --
Repurchase of
convertible
preferred stock
and common
stock
warrants....... (1,738,440) (1,738,440) -- -- (5,647,398) -- -- --
Conversion of
subordinated
debentures to
stockholders... 376,275 376,275 -- -- 1,037,794 -- -- --
Exercise of
stock options.. -- -- 373,489 3,735 126,988 -- -- --
Increase in
cumulative
translation
adjustment..... -- -- -- -- -- -- -- 338,485
Net loss........ -- -- -- -- -- (14,657,108) -- --
---------- ----------- --------- ------- ----------- ------------ -------- --------
BALANCE,
DECEMBER 31, 1995.. 13,515,030 13,515,030 3,697,289 36,973 25,993,484 (31,373,582) -- 699,009
Exercise of
stock options
and warrants... -- -- 88,736 883 64,173 -- -- --
Deemed dividend
on acquisition
of SingCom from
principal
stockholder.... -- -- -- -- (2,393,284) -- -- --
Decrease in
cumulative
translation
adjustment..... -- -- -- -- -- -- -- (136,587)
Net loss........ -- -- -- -- -- (48,912,866) -- --
---------- ----------- --------- ------- ----------- ------------ -------- --------
BALANCE,
DECEMBER 31, 1996.. 13,515,030 13,515,030 3,786,025 37,856 23,664,373 (80,286,448) -- 562,422
Exercise of
stock options.. -- -- 12,415 124 8,600 -- -- --
Warrants on
Senior Notes... -- -- -- -- 10,211,763 -- -- --
Warrants on
SingTel Note... -- -- -- -- 1,700,000 -- -- --
Decrease in
Cumulative
Translation
Adjustment..... -- -- -- -- -- -- -- (144,954)
Net Loss........ -- -- -- -- -- (16,787,614) -- --
---------- ----------- --------- ------- ----------- ------------ -------- --------
BALANCE, MARCH
31, 1997
(Unaudited).... 13,515,030 $13,515,030 3,798,440 $37,980 $35,584,736 $(97,074,062) $ -- $417,468
========== =========== ========= ======= =========== ============ ======== ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
--------------
<S> <C>
BALANCE,
DECEMBER 31,
1993............ $ (3,173,273)
Compensation
expense from
vesting of
restricted
stock.......... 12,377
Sale of Series D
convertible
preferred
stock, net of
issuance costs
of $685,348.... 7,008,475
Increase in
cumulative
translation
adjustment..... 360,524
Gain related to
sale of Fax
Japan stock.... 3,660,573
Net loss........ (8,760,443)
--------------
BALANCE,
DECEMBER 31, 1994.. (891,767)
Compensation
expense from
vesting of
restricted
stock.......... 2,050
Sale of Series G
convertible
preferred
stock, net of
issuance costs
of $74,700..... 29,920,300
Repurchase of
convertible
preferred stock
and common
stock
warrants....... (7,385,838)
Conversion of
subordinated
debentures to
stockholders... 1,414,069
Exercise of
stock options.. 130,723
Increase in
cumulative
translation
adjustment..... 338,485
Net loss........ (14,657,108)
--------------
BALANCE,
DECEMBER 31, 1995.. 8,870,914
Exercise of
stock options
and warrants... 65,056
Deemed dividend
on acquisition
of SingCom from
principal
stockholder.... (2,393,284)
Decrease in
cumulative
translation
adjustment..... (136,587)
Net loss........ (48,912,866)
--------------
BALANCE,
DECEMBER 31, 1996.. (42,506,767)
Exercise of
stock options.. 8,724
Warrants on
Senior Notes... 10,211,763
Warrants on
SingTel Note... 1,700,000
Decrease in
Cumulative
Translation
Adjustment..... (144,954)
Net Loss........ (16,787,614)
--------------
BALANCE, MARCH
31, 1997
(Unaudited).... $(47,518,848)
==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss.............. $(8,760,443) $(14,657,108) $(48,912,866) $(6,866,473) $(16,787,614)
Adjustments to
reconcile net loss to
net cash used in
operating
activities--
Loss on sale of
property and
equipment............ -- -- -- -- 161,188
Depreciation and
amortization......... 1,717,539 2,229,789 6,377,569 1,200,252 2,346,153
Amortization of
discount of senior
notes and notes
payable to
stockholder.......... -- -- -- -- 109,298
Minority interest in
Fax Japan............ (1,524,607) (2,479,955) (948,310) (402,140) --
Compensation expense
from issuance of
common stock......... 12,377 2,050 -- -- --
Changes in assets and
liabilities, net of
effects from the
acquisition of
SingCom--
Accounts
receivable......... (171,769) (1,092,533) (2,459,448) (1,336,347) (433,654)
Accounts receivable
from stockholder... -- (100,343) 100,343 100,343 --
Prepaid expenses and
other current
assets............. (224,670) (173,897) 323,521 (274,074) (87,419)
Accounts payable.... 1,149,378 431,811 10,249,072 (778,917) (10,015,441)
Accrued expenses.... 25,457 1,428,043 8,424,359 3,835,647 2,235,405
Advances from
stockholder........ -- -- 4,317,563 -- (179,945)
----------- ------------ ------------ ----------- ------------
Net cash used in
operating
activities....... (7,776,738) (14,412,143) (22,528,197) (4,521,709) (22,652,029)
----------- ------------ ------------ ----------- ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property
and equipment........ (1,941,191) (5,153,314) (20,137,531) (4,110,108) (761,640)
Proceeds from sale of
fixed assets......... -- -- -- 104,930
Cash acquired in
purchase of SingCom.. -- -- 162,004 -- --
Increase in other
assets............... (773,190) (803,943) (680,433) (195,078) (520,852)
----------- ------------ ------------ ----------- ------------
Net cash used in
investing
activities....... (2,714,381) (5,957,257) (20,655,960) (4,305,186) (1,177,562)
----------- ------------ ------------ ----------- ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Payments on capital
lease obligations.... (1,087,747) (1,309,143) (1,468,647) (393,441) (576,006)
Proceeds from issuance
of convertible
subordinated
debentures to
stockholders......... 718,400 810,000 -- -- --
Repayment of
convertible
subordinated
debentures to
stockholders......... (325,000) (1,777,579) -- -- --
Proceeds from notes
payable to
stockholders......... 5,000 1,000,000 -- -- --
Repayments on notes
payable to
stockholders......... -- (1,010,000) -- -- --
Proceeds from issuance
of notes payable..... 200,000 3,057,802 6,785,551 1,410,570 307,130
Repayments on notes
payable.............. (536,690) (2,241,148) -- -- (57,488)
Proceeds from
borrowings under
notes payable with
principal
stockholder.......... -- 8,357,480 32,809,560 1,898,864 1,043,626
Deferred financing
costs................ -- (2,844,592) -- -- --
Proceeds from
borrowings under line
of credit with a
bank................. -- 350,000 -- -- --
Repayment on revolving
line of credit with a
bank................. -- (350,000) -- -- --
Payments for
repurchase of
convertible preferred
stock and common
stock warrants....... -- (7,385,838) -- -- --
Proceeds from the
exercise of stock
options and
warrants............. -- 130,723 65,056 10,662 8,724
Proceeds from issuance
of senior notes...... -- -- -- -- 175,000,000
Deferred senior note
offering costs....... -- -- -- -- (6,503,798)
Proceeds from sale of
convertible preferred
stock................ 7,008,475 29,920,300 -- -- --
Proceeds from
sale/leaseback of
property and
equipment............ 800,883 -- -- -- --
Proceeds from sale of
Fax Japan stock...... 7,613,444 -- -- -- --
----------- ------------ ------------ ----------- ------------
Net cash provided
by financing
activities....... 14,396,765 26,708,005 38,191,520 2,926,655 169,222,188
----------- ------------ ------------ ----------- ------------
NET EFFECT OF FOREIGN
CURRENCY TRANSLATION.. 360,524 338,485 (501,156) 100,269 (154,417)
----------- ------------ ------------ ----------- ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... 4,266,170 6,677,090 (5,493,793) (5,799,971) 145,238,180
CASH AND CASH
EQUIVALENTS, BEGINNING
OF YEAR............... 180,360 4,446,530 11,123,620 11,123,619 5,629,827
----------- ------------ ------------ ----------- ------------
CASH AND CASH
EQUIVALENTS, END OF
YEAR.................. $ 4,446,530 $ 11,123,620 $ 5,629,827 $ 5,323,648 $150,868,007
=========== ============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS
Unifi Communications, Inc. (formerly Fax International, Inc.) and
subsidiaries (the Company) was incorporated on September 20, 1990. The Company
provides international enhanced facsimile transmission and delivery services.
The Company is subject to a number of risks common to companies in similar
stages of development, including dependence on key individuals, competition
from substitute services and larger companies, the need for adequate financing
to fund future operations, the continued successful development and marketing
of its services and the attainment of profitable operations. Although the
Company has completed a significant financing as described in Note 17, the
Company continues to fund significant operating losses while seeking
additional capital.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described below and elsewhere in
the notes to consolidated financial statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company, its wholly owned subsidiaries and majority-owned Fax
International Japan, Ltd. (FIJ) (51% owned). All material intercompany
accounts and transactions of the consolidated companies have been
eliminated in consolidation.
(b) Minority Interest
In March 1994, the Company sold 196 shares of the common stock of its
subsidiary, FIJ, to two Japanese corporations for approximately $7,600,000.
These shares represent 49% of the voting interest of FIJ, and as long as
the Company owns greater than 50% of the voting interest of FIJ, the
Company has control of the Board of Directors. The accounts of FIJ are
consolidated, and the 49% ownership is treated as a minority interest.
Accordingly, the accompanying consolidated balance sheets and statements of
operations reflect 49% of FIJ's loss as a minority interest. At December
31, 1995 and 1996, the cumulative losses allocated to the minority interest
exceeded the minority interest's investment. The minority interest has
agreed to fund losses up to an additional $1,000,000 through the guarantee
of debt. Therefore, the minority interest balance as of December 31, 1995
and 1996 is presented as an asset to the extent cumulative losses allocated
to the minority interests exceed the basis of their investments. The debt
will not be repaid until the minority interests basis is recovered. For the
year ended December 31, 1996, and the three months ended March 31, 1997,
the 49% loss of FIJ exceeded the $1,000,000 guaranteed debt; therefore, the
Company recorded an additional minority loss of approximately $148,000 and
$199,000, respectively, in the consolidated statement of operations in such
periods.
The Company also entered into an operating agreement with FIJ that
requires the Company to perform certain services for FIJ in exchange for a
management fee equal to 5% of FIJ's gross revenues. A stockholders'
agreement was also executed with the two Japanese corporations. The
agreement requires the two Japanese corporations to provide loans of up to
approximately $2,000,000 to FIJ, if requested by FIJ. In connection with
this financing, the Company issued warrants to purchase 125,000 shares of
the Company's $.01 par value common stock at an exercise price of $.40 per
share to the two Japanese corporations. No value was ascribed to these
warrants as the amount would not be material to the financial statements.
The stockholders' agreement provides the Company with four of seven Board
of Directors' seats. Certain significant transactions, such as borrowings
greater than $100,000, issuance of equity securities,
F-7
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
consolidations and mergers, liquidations and other events, as defined,
require a 2/3 Board approval. This agreement also provides the two Japanese
corporations that own 49% of FIJ with special stockholder rights, including
appointment of the President; commissions with respect to new customers
sold by the respective stockholder, as defined; right of first refusal on
asset-based lease financings for FIJ; right of first refusal on equity
financings for FIJ; and certain rights in the event the Company has a
change in control, including a put option to the Company and a call option
by the Company, as defined in the stockholders' agreement. The agreement
also restricts the sale of FIJ's stock by all stockholders and provides a
special exit right to the 49% stockholder group to sell all, but not less
than all, of the stock owned to the other stockholders pro rata, as
defined.
On May 27, 1997, the Company was notified by ORIX Corporation, a member
of the 49% FIJ stockholder group, that it had elected to exercise its
special exit right under the stockholders agreement. Pursuant to the terms
of such special exit right, ORIX Corporation shall sell to the Company and
the other minority stockholder, and the Company and such other minority
stockholder shall purchase pro rata according to their respective interests
in FIJ, all of the issued and outstanding shares of FIJ capital stock held
by ORIX Corporation and its affiliates (80 shares) for an aggregate
purchase price of approximately $1.00. Upon consummation of such sale by
ORIX Corporation, the Company shall own approximately 63%, and the
remaining minority stockholder shall own approximately 37%, of the issued
and outstanding capital stock of FIJ. This will result in a write off of
approximately $500,000 of the minority interest in the quarter ended June
30, 1997.
(c) Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates market.
The Company considers highly liquid investments purchased with original
maturities at the date of acquisition of three months or less to be cash
equivalents. Cash equivalents consist primarily of money market funds that
are readily convertible to cash.
(d) Depreciation and Amortization
The Company provides for depreciation and amortization by charges to
operations in amounts estimated to allocate the cost of property and
equipment over their estimated useful lives on the straight-line basis, as
follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -------------
<S> <C>
Equipment.................................................... 3-6 Years
Equipment under capital lease................................ Life of lease
Furniture and fixtures....................................... 3-15 Years
Leasehold improvements....................................... Life of lease
</TABLE>
The Company charged to operations depreciation and amortization of
$1,655,000, $2,153,000 $5,721,000, $1,028,000 and $2,039,000 for the years
ended December 31, 1994, 1995, 1996 and the three month periods ended March
31, 1996 and 1997, respectively.
Effective January 1, 1996, the Company changed the estimated useful life
of certain equipment from five to three years. This change in estimate,
which has been recorded prospectively, increased depreciation expense by
approximately $1,553,000 in the year ended December 31, 1996.
F-8
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(e) Deferred Financing Costs
Deferred financing costs consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Deferred financing costs................. $3,282,222 $3,282,222 $3,282,222
Deferred senior note offering costs...... -- 576,004 7,079,803
---------- ---------- ----------
3,282,222 3,858,226 10,362,025
Less--Accumulated amortization........... 437,629 1,094,074 1,363,277
---------- ---------- ----------
$2,844,593 $2,764,152 $8,998,748
========== ========== ==========
</TABLE>
Deferred financing costs resulted from securing the Singapore
Telecommunications financing described in Note 3. Deferred Senior Note
offering costs resulted from the Senior Note offering described in Note 17.
These costs are being amortized over five years and seven years,
respectively, using the effective interest rate method.
(f) Revenue Recognition
Revenues are recorded in the period in which the related service is
provided.
(g) Research and Development Costs
The Company charges research and development costs to operations as
incurred.
(h) Foreign Currency Translation
Assets and liabilities of foreign subsidiaries were translated using the
exchange rate in effect at the balance sheet date in accordance with
Statement of Financial Standards (SFAS) No. 52, Foreign Currency
Translation. Revenue and expense accounts were translated using a weighted
average of exchange rates in effect during the year. The resulting
translation adjustments are excluded from net income and are accumulated as
a separate component of stockholders' equity. Foreign currency transaction
gains or losses are reflected in operations and are not material.
(i) Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(j) Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure about fair value of financial instruments. Financial
instruments consist of cash equivalents, accounts receivable and notes
payable. The estimated fair value of these financial instruments
approximates their carrying value.
(k) Net Loss per Common Share
Net loss per common share is based on the weighted average number of
common shares outstanding. Shares of stock issuable pursuant to stock
options, warrants and upon the conversion of the subordinated debentures
have not been considered, as their effect would be antidilutive.
F-9
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(l) Concentrations of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk, requires disclosure of any significant off-balance-sheet and
credit risk concentrations. Financial instruments, which potentially
subject the Company to concentrations of credit risk, are principally cash
and cash equivalents and accounts receivable. The Company places its
investments in highly rated institutions. Concentrations of credit risk
with respect to accounts receivable are limited to certain customers to
whom the Company makes substantial sales. To reduce risk, the Company
routinely assesses the financial strength of its customers and, as a
consequence, believes that its accounts receivable credit risk exposure is
limited. The Company maintains an allowance for potential credit losses but
historically has not experienced any significant losses related to
individual customers or groups of customers in any particular industry or
geographic area.
(m) Postretirement Benefits
The Company has no obligations under SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, as it does not currently
offer such benefits.
(n) Noncash Investing and Financing Activities
The following table summarizes the supplemental disclosures of the
Company's noncash transactions for the periods indicated below:
<TABLE>
<CAPTION>
MARCH 31
-------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES
OF NONCASH
TRANSACTIONS:
In connection with the
acquisition certain
assets of SingCom
(Australia) (Note 15)-
Fair value of assets
acquired.............. $ -- $ -- $(1,255,032) $ -- $ --
Deemed dividend........ -- -- (2,393,285) -- --
Liabilities assumed.... -- -- 1,060,721 -- --
Issuance of promissory
note.................. -- -- 2,749,600 -- --
---------- ---------- ----------- ------- -----------
Cash acquired.......... $ -- $ -- $ 162,004 $ -- $ --
========== ========== =========== ======= ===========
Conversion of advances
from
stockholder to senior
notes................. $ -- $ -- $ -- $ -- $ 5,000,000
========== ========== =========== ======= ===========
Discount on senior
notes and notes
payable to
stockholder........... $ -- $ -- $ -- $ -- $11,911,763
========== ========== =========== ======= ===========
Conversion of
convertible
subordinated
debentures to Series D
and Series F
convertible preferred
stock................. $ -- $1,414,069 $ -- $ -- $ --
---------- ---------- ----------- ------- -----------
Conversion of accrued
interest to
convertible
subordinated
debentures to
stockholders.......... $ 39,000 $ -- $ -- $ -- $ --
========== ========== =========== ======= ===========
Gain related to sale of
Fax Japan stock....... $3,660,573 $ -- $ -- $ -- $ --
========== ========== =========== ======= ===========
Acquisition of property
and equipment under
capital lease
obligations........... $2,544,576 $ 729,752 $ 2,420,365 $ -- $ --
========== ========== =========== ======= ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for inter-
est................... $ 387,208 $ 570,037 $ 351,803 $91,260 $ 556,696
========== ========== =========== ======= ===========
</TABLE>
F-10
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(o) Restricted Cash
The Company has approximately $1,091,000 of restricted cash at December 31,
1996. The restricted cash consists of cash equivalents, which FIJ and the
Company's China subsidiary is required to maintain as a condition of certain
loans that mature during 1997.
At March 31, 1997 the Company had approximately $47 million of restricted
cash held in escrow which represents the first four interest payments required
under the Senior Notes (see Note 17).
(p) New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of, which is effective for fiscal years beginning after
December 15, 1995. The Company elected early adoption of SFAS No. 121,
effective January 1, 1996. The adoption of this standard did not have a
material effect on the Company's financial position or results of operations.
The Company evaluated its long-lived assets and determined that no material
adjustment was required.
In 1997, the FASB issued SFAS No. 128, Earnings per Share. SFAS No. 128
establishes standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common stock.
This statement is effective for fiscal years ending after December 15, 1997
and early adoption is not permitted. When adopted, the statement will require
restatement of prior years' earnings per share. The Company will adopt this
statement for its fiscal year ended December 31, 1997. The Company believes
that the adoption of SFAS No. 128 will not have a material effect on its
financial statements.
(q) Reclassifications
Certain prior-year account balances have been reclassified to be consistent
with the current year's presentation.
(3) SINGAPORE TELECOMMUNICATIONS FINANCING
On April 10, 1995, the Company sold to SingTel Global Services Pte Ltd.
(SingTel Global) 8,570,000 shares of Series G convertible preferred stock for
$3.50 per share for aggregate gross proceeds of approximately $30,000,000. The
rights, preferences and privileges of the Series G Preferred Stock are
described in Note 10(a). As part of a stockholders' agreement, SingTel Global
has the right to initiate a call offer for certain outstanding shares of the
Company's capital stock, prior to the fifth anniversary of the stockholders'
agreement, as defined. The call price, as defined, shall not exceed $20.00 per
share. The founder and major stockholder of the Company has agreed to sell his
shares in the event of such a call offer. In addition, in the event of a call
offer, SingTel Global has the obligation to purchase all shares offered for
sale under this call option.
In connection with the sale of Series G convertible preferred stock and debt
financing, certain third-party individuals were issued options to purchase
90,000 shares of common stock at $.35 per share. No value was ascribed to
these options as the amount would not be material to the financial statements.
In conjunction with the Series G preferred stock investment, SingTel
(Netherlands Antilles) Pte N.V. (SingTel NA) provided the Company with a five-
year credit facility, under which the Company may borrow up to a maximum of
$25,000,000. All amounts drawn under the credit facility are due five years
after the final drawdown date or, if earlier, a final maturity date of April
10, 2003. The Company paid a facility fee of $1,968,750 upon execution of this
credit facility. This amount has been capitalized as a deferred financing cost
F-11
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(3) SINGAPORE TELECOMMUNICATIONS FINANCING--(CONTINUED)
and is being amortized over five years. Borrowings will accrue interest at 1%
over the five-year benchmark U.S. Treasury bond rate, as defined, and will be
compounded annually. After a 30-month interest payment moratorium period,
measured from the date of the first drawdown, interest will be due on a
quarterly basis. At SingTel NA's option, 50% of the debt, up to $12,500,000,
and accrued interest may be converted into the Company's Series H preferred
stock at a price of $10.50 per share. In the event of a public offering,
SingTel NA has the option to convert all principal and accrued interest into
common stock at the public offering price. At December 31, 1996, the Company
had reached the maximum borrowing capacity of $25,000,000 and approximately
$1,360,000 of accrued interest was also payable.
SingTel NA has also provided the Company with $15,000,000 of financing to
purchase certain types of fixed assets at an interest rate equal to the six-
month LIBOR rate. Principal payments are due three years subsequent to the
financing drawdown date, as defined, with interest payable quarterly. The
equipment financing availability expires on April 10, 2000. In consideration
of the asset-based financing, the Company has paid a $1,181,250 facility fee
upon execution of the agreement. This amount has been capitalized as a
deferred financing cost and is being amortized over five years. The Company
had $15,000,000 of principal and approximately $200,000 of accrued interest
outstanding at December 31, 1996 under this facility.
On February 14, 1997, the Company entered into a debt restructuring
agreement with SingTel (the Debt Restructuring Agreement). Under the terms of
the Debt Restructuring Agreement, the Company's credit facility and asset
facility with SingTel NA were amended to provide for a final maturity under
each of such facilities on the later of (i) March 1, 2005, or (ii) the date on
which the Senior Notes discussed in Note 17, are paid, defeased, redeemed or
otherwise satisfied in full (the Senior Note Payment Date) (provided that if
the Senior Note Payment Date is prior to March 1, 2005, borrowings under the
credit and asset facilities will become due 91 days after the Senior Note
Payment Date). The interest rate under the credit facility was also increased
to 3% over the five-year benchmark U.S. Treasury bond rate, as defined, on the
applicable drawdown date. Interest under the credit facility shall accrue and
be added to the outstanding principal balance on a quarterly basis until the
Senior Note Payment Date. Thereafter, interest shall be paid quarterly, in
arrears. Under the Debt Restructuring Agreement, the borrowings under the
credit facility will no longer be convertible into the Company's Series H
preferred stock. The amendment to the asset facility provides for a new
interest rate equal to the six-month LIBOR rate on the applicable drawdown
date plus 2%. Interest under the asset facility shall accrue and be added to
the outstanding principal balance on a quarterly basis until the Senior Note
Payment Date. Thereafter, interest shall be paid quarterly, in arrears.
Pursuant to the Debt Restructuring Agreement, SingTel NA's commitments under
the credit facility and asset facility have expired. The Company had
$25,000,000 of principal and approximately $1,900,000 of accrued interest
payable under the credit facility and $15,000,000 of principal and
approximately $123,000 of accrued interest payable under the equipment
facility at March 31, 1997.
Also, as part of the Debt Restructuring Agreement, the Company granted
SingTel Global a warrant to purchase 2,000,000 shares of the Company's common
stock at a price of $1.83 per share. The value of these warrants, as computed
using the Black-Scholes valuation formula is approximately $0.85 per warrant,
which resulted in discounting the related debt and in additional interest
expense being charged to operations over the remaining life of the debt of
approximately $1,700,000.
(4) RELATED PARTY TRANSACTIONS
The Company has entered into agreements with certain stockholders, which
provide debt financing and provide for license fees, royalties and
transmission and management fees to be paid to the Company. The Company
believes that the terms of these transactions are on terms no less favorable
to the Company than could
F-12
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(4) RELATED PARTY TRANSACTIONS--(CONTINUED)
be obtained from unaffiliated third parties. In addition, the Company has
issued warrants to certain stockholders in connection with certain debt and
equity financing. See Notes 2b, 3, 6 and 15 for the terms of these
transactions.
During 1995, the Company initiated a Stock Buyback Program, whereby the
Company purchased various preferred stock and warrantholders rights for $3.50
per share (see Note 10).
The Company has licensed the rights to its technology for use in Singapore
to SingTel in exchange for a license fee based upon a percentage of the future
gross revenue generated in Singapore. SingTel also has the right to purchase
49% of the equity in companies to be established by the Company in Australia
and the Philippines based on defined terms and conditions.
The Company has entered into a letter of intent to acquire certain of the
assets of SingCom, a wholly owned subsidiary of SingTel (see Note 15).
(5) ADVANCES FROM PRINCIPAL STOCKHOLDER
Pursuant to a series of letter agreements, SingTel has made advances to the
Company of $11.8 million under the Company's intercompany operating agreement
with SingTel through February 6, 1997 of which $4,317,563 was outstanding as
of December 31, 1996 and approximately $7.5 million was advanced subsequent to
December 31, 1996. Each such advance bears interest at a rate per annum equal
to the sum of (i) the one-year United States Treasury rate in effect at the
time the advance was made plus (ii) 5%. All such interest is payable in cash
monthly in arrears. Such advances will be applied to the fees and other
amounts payable by SingTel to the Company under the intercompany operating
agreement. SingTel has canceled approximately $6.8 million of such
indebtedness in exchange for 5,000 Senior Note units and the payment of $1.8
million in cash upon the closing of the Senior Note offering discussed in Note
17. At March 31, 1997, approximately $4,138,000 of principal and approximately
$128,000 of accrued interest are outstanding under these letter agreements.
(6) NOTES PAYABLE
On August 2, 1996, the Company entered into a promissory note for $1,500,000
with its landlord for the financing of leasehold improvements. The note bears
interest at 13%, payable monthly beginning December 1996. Principal shall be
paid monthly beginning on December 1, 1996, based on a seven-year
amortization. All outstanding principal and interest is payable in full on
June 1, 1998. At December 31, 1996, the outstanding balance was approximately
$1,446,000. The Company has the option of extending the maturity of the note
by an additional six months. If the Company elects this extension, the Company
agrees to sell to the lessor 10,000 shares of common stock at $.01 per share.
In addition, the Company issued to the landlord a warrant to purchase 30,000
shares of common stock at $.01 per share, which was exercised immediately. No
value was ascribed to these warrants as the amount would not be material to
the financial statements.
On December 31, 1996, the Company entered into a note payable for $2,000,000
with a company. The note bears interest at 10% per annum. All outstanding
principal and accrued interest is due on December 31, 1998. The noteholder has
the right to convert all of the entire unpaid principal and accrued interest
into shares of common stock at a conversion price of $15.00 per share. Upon
the closing of the Senior Note offering (see Note 17), the note payable holder
shall have the right to demand payment of all outstanding principal and
accrued interest thereon and has the right to convert the unpaid principal and
accrued interest into Senior Notes. During 1996, the Company purchased $2.6
million of equipment from this company. The equipment has been capitalized and
will be depreciated over three years. In April, 1997, this note payable was
converted into a Senior Note similar to the Senior Notes described in Note 17.
F-13
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) NOTES PAYABLE--(CONTINUED)
In September 1995, the Company issued notes payable totaling $3,057,802 to
two Japanese banks. The notes are guaranteed by the minority interest of FIJ
and certain cash investments of the Company. Principal and interest are
repayable in Japanese yen. The notes mature through June 1998 and bear
interest at rates ranging from 1.06% to 1.6%. At December 31, 1996, there is
approximately $2,764,000 in notes payable outstanding.
The maturities of notes payable as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.............................................................. $2,776,753
1998.............................................................. 3,433,020
----------
$6,209,773
==========
</TABLE>
(7) CAPITAL LEASES
The Company has certain capital leases for property and equipment. The lease
terms are for two to three years and expire at various dates through December
1999. The future minimum lease payments under capital lease obligations for
respective years ending at December 31 are as follows:
<TABLE>
<S> <C>
1997............................................................. $1,517,346
1998............................................................. 959,176
1999............................................................. 912,458
----------
Total minimum payments......................................... 3,388,980
Less--Amount representing interest............................... 84,493
----------
Present value of minimum lease payments........................ 3,304,487
Less--Current portion of capital lease obligations............... 1,483,413
----------
Long-term capital lease obligations, net of current portion.... $1,821,074
==========
</TABLE>
In connection with certain capital leases, the Company has issued warrants,
to the lessors, exercisable for 10 years for the purchase of common stock. The
Company granted warrants for the purchase of 200,781 shares of common stock at
prices of $1.50 and $3.50 per share in 1994. In 1995 and 1996, no warrants
were issued relating to capital leases. No value was ascribed to these
warrants as the amount would not be material to the financial statements.
(8) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1996 and March 31, 1997
consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
1995 1996 1996
---------- ----------- -----------
<S> <C> <C> <C>
Equipment............................... $5,924,116 $23,900,524 23,946,902
Equipment under capital lease........... 5,158,993 7,572,083 7,391,783
Furniture and fixtures.................. 415,446 693,064 704,152
Leasehold improvements.................. 518,583 2,639,745 2,636,665
---------- ----------- -----------
12,017,138 34,805,416 34,679,502
Less--Accumulated depreciation and amor-
tization............................... 4,251,801 9,981,087 11,869,344
---------- ----------- -----------
$7,765,337 $24,824,329 $22,810,158
========== =========== ===========
</TABLE>
F-14
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(9) INCOME TAXES
The Company follows SFAS No. 109, Accounting for Income Taxes, by providing
for income taxes under the liability method. Deferred taxes are determined
based on the difference between the financial statement and tax bases of
assets and liabilities, as measured by the current tax rates. The principal
differences between assets and liabilities for financial reporting and tax
return purposes result primarily from the timing of certain expenditures for
income tax purposes.
At December 31, 1996, the Company has available net operating loss
carryforwards in the United States of approximately $55,200,000 for financial
reporting purposes, expiring at various dates through 2010. Prior to August
21, 1991, the Company was a Subchapter S corporation under the Internal
Revenue Code. Accordingly, the net operating losses generated prior to this
date cannot be utilized and is therefore not included in the Company's net
operating loss carryforwards by the Company. The Company also has available
United States federal tax credit carryforwards of approximately $263,000
expiring through the year 2010.
In addition, FIJ has available net operating loss carryforwards of
approximately $8,200,000 for Japanese tax purposes at December 31, 1996,
expiring at various dates through 2002. The Company also has foreign net
operating loss carryforwards in France, Germany, United Kingdom, Hong Kong,
China and Korea of approximately $2,500,000, $2,700,000, $2,600,000,
$3,300,000, $280,000 and $1,200,000, respectively, at December 31, 1996.
The United States Tax Reform Act of 1986 contains provisions that may limit
the Company's net operating loss and credit carryforwards available to be used
in any given year in the event of significant changes in the ownership
interests of significant stockholders. As a result of the changes in ownership
caused by the Company's issuance of Series G convertible preferred stock in
1995, approximately $15,000,000 of the Company's federal and state net
operating loss is subject to an annual limitation of approximately $1,245,000.
The components of the deferred tax asset are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Depreciation....................................... $ 17,000 $ 793,000
Accrued expenses................................... 125,000 888,000
Bad debt loss carryforwards........................ 7,000 39,000
Net operating loss carryforwards................... 10,400,000 30,100,000
Credit carryforwards............................... 187,000 263,000
----------- -----------
10,736,000 32,083,000
----------- -----------
Less--Valuation allowance.......................... (10,736,000) (32,083,000)
----------- -----------
Net deferred tax asset........................... $ -- $ --
=========== ===========
</TABLE>
The Company has recorded a full valuation allowance against its deferred tax
asset due to uncertainties surrounding the realization of this asset.
F-15
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Convertible Preferred Stock
<TABLE>
<CAPTION>
PAR VALUE
----------------------- MARCH 31,
1995 1996 1997
----------- ----------- ----------
<S> <C> <C> <C>
Series A, $1,00 par value--authorized--
975,500 shares issued and outstanding--
743,000 in 1995 and 1996............... $ 743,000 $ 743,000 743,000
Series B, $1.00 par value--authorized--
2,700,000 shares issued and
outstanding--1,381,038 in 1995 and
1996................................... 1,381,038 1,381,038 1,381,038
Series C, $1.00 par value--authorized--
650,000 shares issued and outstanding--
481,560 in 1995 and 1996............... 481,560 481,560 481,560
Series D, $1.00 par value--authorized--
2,600,000 shares issued and
outstanding--2,145,220 in 1995 and
1996................................... 2,145,220 2,145,220 2,145,220
Series F, $1.00 par value--authorized--
500,000 shares issued and outstanding--
194,212 in 1995 and 1996............... 194,212 194,212 194,212
Series G, $1.00 par value--authorized--
8,570,000 shares issued and
outstanding--8,570,000 in 1995 and
1996................................... 8,570,000 8,570,000 8,570,000
----------- ----------- ----------
$13,515,030 $13,515,030 13,515,030
=========== =========== ==========
</TABLE>
The Company has authorized the issuance of up to 24,715,500 shares of
convertible preferred stock (the Preferred Stock), $1.00 par value.
The rights, preferences and privileges of the Series A, Series B, Series C,
Series D, Series F, Series G and Series I Preferred Stock are listed below.
CONVERSION
The Preferred Stock is convertible into common stock at the rate of
one share of common stock for each share of Preferred Stock, adjustable
for certain dilutive events. Conversion is at the option of the
preferred stockholder and may be required by the Company upon the
closing of an initial public offering of the Company's common stock, as
defined.
VOTING RIGHTS
The holders of the Preferred Stock shall be entitled to vote on all
matters and shall be entitled to the number of votes equal to the
number of shares of common stock into which the Preferred Stock is
convertible.
DIVIDENDS
The holders of the Preferred Stock shall be entitled to receive
dividends when and if declared by the Board of Directors. In addition,
the holders of the Preferred Stock shall be entitled to receive a
dividend equal to any dividend paid on common stock.
LIQUIDATION PREFERENCE
The holders of the Preferred Stock have preference in the event of
any voluntary or involuntary liquidation, dissolution or winding up of
the Company. The holders of the Series A and Series B
F-16
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10) STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
Preferred Stock are entitled to a preference of $1.00 per share
($2,124,038 in aggregate at December 31, 1996) plus any declared but
unpaid dividends. The holders of the Series C Preferred Stock are
entitled to a preference of $1.50 per share ($722,340 in aggregate at
December 31, 1996) plus any declared but unpaid dividends. The holders
of the Series D, Series F, Series G and Series I Preferred Stock are
entitled to a preference of $3.50 per share ($38,183,016 in aggregate
at December 31, 1996, plus any declared but unpaid dividends). Each
series of Preferred Stock ranks in parity with regard to liquidation
preference.
REVOCABLE VOTING PROXY
The Series C preferred stockholders have signed a revocable proxy
whereby the president of the Company votes on all matters on the Series
C preferred stockholders' behalf. The proxy has a five-year term, which
began on May 31, 1993.
(b) Common Stock
At December 31, 1996, 24,912,275 shares of common stock were reserved for
the conversion of the Company's Preferred Stock based on a conversion ratio
of one share of Preferred Stock in exchange for one share of common stock,
the exercise of common stock options and warrants.
(c) Stock Options
In 1994, the Company established the 1993 Stock Option Plan (the Plan),
which provides for the granting of incentive stock options and nonqualified
stock options. Options granted under the Plan vest over various periods and
upon the achievement of certain milestones, as defined, and expire no later
than 10 years from the date of grant. The number of shares of common stock
reserved for issuance under the Plan is 4,325,000 shares.
During 1994, the Company adopted an executive compensation plan whereby
the officers of the Company may receive up to 900,000 incentive stock
options based on the increase in the Company's per share value, as defined.
In 1994, 900,000 options were granted to certain officers under this plan
at an exercise price of $.35 per share, the then fair market value of the
Company's common stock as determined by the Board of Directors.
F-17
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10) STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
Stock option activity is summarized as follows for the three years ended
December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF OPTION AVERAGE
SHARES PRICE OPTION PRICE
--------- ----------- ------------
<S> <C> <C> <C>
Outstanding, December 31, 1993........... -- $ -- $ --
Granted................................ 1,585,863 .35 .35
Canceled............................... (31,243) .35 .35
--------- ----------- -----
Outstanding, December 31, 1994........... 1,554,620 .35 .35
Granted................................ 1,271,584 .35-1.05 .51
Canceled............................... (116,714) .35 .35
Exercised.............................. (373,489) .35 .35
--------- ----------- -----
Outstanding, December 31, 1995........... 2,336,001 .35-1.05 .38
Granted................................ 425,590 1.05 -2.25 1.34
Canceled............................... (176,856) .35-2.25 .95
Exercised.............................. (53,236) .35-1.05 .48
--------- ----------- -----
Outstanding, December 31, 1996........... 2,531,499 .35-2.25 .81
Granted................................ -- -- --
Canceled............................... (59,082) .35-1.05 1.39
Exercised.............................. (12,415) .35-1.05 .70
--------- ----------- -----
Outstanding, March 31, 1997.............. 2,460,002 $ .35-$2.25 $ .74
========= =========== =====
Exercisable, March 31, 1997.............. 808,648 $ .35-$2.25 $ .90
========= =========== =====
</TABLE>
In April 1997, the Company granted options for the purchase of 411,455
shares of common stock at $2.15 per share which will become exerciseable
over a three year period.
During 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to continue to
measure compensation cost for those plans using the method of accounting
prescribed in APB No. 25. Entities electing to remain with the accounting
required by APB No. 25 must make pro forma disclosures of net income and,
if presented, earnings per share, as if the fair value based method of
accounting defined in the statement had been applied.
The Company has elected to continue to account for its stock-based
compensation plans under APB No. 25. However, the Company has computed, for
pro forma disclosure purposes only, the value of all options granted during
1995 and 1996 using the Black-Scholes option-pricing model as prescribed by
SFAS No. 123, using the following weighted average assumptions for grants
in 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Risk-free interest rate............................ 5.63%-6.95% 5.63%-6.95%
Expected dividend yield............................ -- --
Expected life...................................... 7 Years 7 Years
Expected volatility................................ -- --
Weighted average value of grants................... $.32 $.36
Weighted average remaining contractual life of
options outstanding............................... 8.09 Years 8.70 Years
Weighted average exercise price of 562,855 and
960,172 options exercisable at December 31, 1995
and 1996, respectively............................ $.54 $.62
</TABLE>
F-18
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10) STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
The total value of options granted during 1995 and 1996 would be
amortized on a pro forma basis over the vesting period of the options.
Options generally vest equally over three years. If the Company had
accounted for these plans in accordance with SFAS No. 123, the Company's
net loss and net loss per share would have increased as reflected in the
following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
NET LOSS--
As reported...................................... $(14,657,108) $(48,912,966)
Pro forma........................................ (14,781,417) (49,088,786)
NET LOSS PER COMMON SHARE--
As reported...................................... (4.26) (13.23)
Pro forma........................................ (4.30) (13.28)
</TABLE>
(d) Warrants to Purchase Common Stock
The Company issues warrants pursuant to the 1994 Investor Incentive Stock
Option Plan (the Warrant Plan). The Company has outstanding warrants for
the purchase of common stock that vest immediately and are exercisable for
a five- to ten-year period. The following table summarizes warrant activity
for the three-year period ended December 31, 1996:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
NUMBER PRICE AVERAGE
OF SHARES PER SHARE PRICE
--------- --------- --------
<S> <C> <C> <C>
Outstanding, December 31, 1993................. 573,205 $.30-1.00 .71
Warrants issued.............................. 615,887 .35-3.50 1.04
--------- --------- -----
Outstanding, December 31, 1994................. 1,189,092 .35-3.50 .88
Warrants issued.............................. 286,552 .35 .35
Warrants canceled............................ (574,149) .30-1.50 1.04
--------- --------- -----
Outstanding, December 31, 1995................. 901,495 .30-3.50 .50
Warrants issued.............................. 30,000 .01 .01
Warrants exercised .......................... (35,500) .01-.35 .29
Warrants canceled............................ (20,000) 1.00 1.00
--------- --------- -----
Outstanding, December 31, 1996................. 875,995 $.30-3.50 .59
Warrants issued.............................. 6,816,818 .25-1.83 .71
--------- --------- -----
Outstanding, March 31, 1997.................... 7,692,813 $.30-3.50 $ .70
========= ========= =====
</TABLE>
The warrants may be exercised at any time after issuance and expire at
various dates through 2007. The warrants are subject to certain
antidilution provisions that allow the holders of these warrants to
participate in property and security dividends issued by the Company to
common stockholders and to participate in any common stock dividends or
splits.
In addition to the warrants granted under the Warrant Plan described
above, on February 14, 1997, the Company granted a warrant to purchase
2,000,000 shares of common stock at a price of $1.83 per share to SingTel
in connection with the Debt Restructuring Agreement, as described in Note 3
(the SingTel Warrant).
F-19
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10) STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
Also, on February 14, 1997, the Company granted a warrant for the
purchase of 4,816,818 shares of common stock at an exercise price of $.25
to the senior noteholders in connection with the Senior Note offering, as
described in Note 17 (the Senior Note Warrant).
The Company has valued both the SingTel and the Senior Note Warrants
using the Black-Scholes method and is recording additional interest expense
for the value of these warrants.
(e) Stock Buyback
Subsequent to the SingTel financing described in Note 3, the Company
initiated a stock buyback program. In connection with this program, the
Company repurchased 1,738,440 shares of the Company's Series A, B, C and D
Preferred Stock for $3.50 per share and 543,149 warrants to purchase common
stock at $3.50 per warrant. The cash paid for the buyback was $7,385,838.
The shares and warrants repurchased in the stock buyback program were
subsequently canceled.
(11) COMMITMENTS
The Company and its subsidiaries lease office facilities under operating
leases that expire at various dates through 2003. Rent expense for all
operating leases charged to operations in the years ended December 31, 1994,
1995 and 1996 amounted to approximately $690,000, $838,000 and $2,600,000,
respectively.
The minimum rental payments under the lease agreements for respective years
ending December 31 are approximately as follows:
<TABLE>
<S> <C>
1997............................................................ $ 4,037,000
1998............................................................ 4,030,000
1999............................................................ 1,849,000
2000............................................................ 1,679,000
2001............................................................ 1,584,000
Thereafter...................................................... 2,341,000
-----------
Total minimum payments........................................ $15,520,000
===========
</TABLE>
(12) ACCRUED EXPENSES
Accrued expenses consisted of the following as of December 31, 1995 and
1996:
<TABLE>
<CAPTION>
MARCH 31,
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Accrued payroll and related costs....... $ 567,247 $ 1,765,283 $ 3,071,514
Accrued telecommunications costs........ -- 3,211,231 2,812,455
Accrued equipment costs................. -- 1,675,181 355,318
Accrued interest........................ -- -- 2,764,062
Accrued other expense................... 1,585,953 3,956,529 3,392,208
---------- ----------- -----------
Total................................. $2,153,200 $10,608,224 $12,395,557
========== =========== ===========
</TABLE>
On October 10, 1991, the Company adopted an employee benefit plan under
Section 401(k) of the Internal Revenue Code. The Fax International 401(k) Plan
(the 401(k) Plan) allows employees to make pretax
F-20
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(13) EMPLOYEE BENEFIT PLAN
contributions up to the maximum allowable amount set by the Internal Revenue
Service. Under the 401(k) Plan, the Company may match a portion of the
employee contribution up to a defined maximum. The Company made no
contributions to the 401(k) Plan for the years ended December 31, 1994, 1995
and 1996. The Company may, but is not obligated to, provide profit sharing to
employees. No profit sharing contributions were awarded in 1994, 1995 or 1996.
(14) GEOGRAPHIC SEGMENT INFORMATION
A summary of the Company's operations by geographic location for the years
ended December 31, 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
UNITED STATES EUROPE PACIFIC RIM ELIMINATIONS TOTAL
------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
December 31, 1994
Revenues.............. $ 6,952,406 $ -- $ -- $ -- $ 6,952,406
============= ============ ============ ============= =============
Loss from operations.. $ (6,633,276) $ -- $ (3,142,443) $ -- $ (9,775,719)
============= ============ ============ ============= =============
Identifiable assets... $ 5,152,583 $ -- $ 5,902,139 $ (1,073,904) $ 9,980,818
============= ============ ============ ============= =============
December 31, 1995
Revenues.............. $ 8,092,916 $ 1,313 $ 2,570,684 $ -- $ 10,664,913
============= ============ ============ ============= =============
Loss from operations.. $ (11,811,935) $ (371,366) $ (5,118,783) $ -- $ (17,302,084)
============= ============ ============ ============= =============
Identifiable assets... $ 25,318,584 $ 441,820 $ 3,054,992 $ (3,437,213) $ 25,378,183
============= ============ ============ ============= =============
December 31, 1996
Revenues.............. $ 21,799,184 $ 1,272,647 $ 10,260,331 $ (8,114,396) $ 25,217,766
============= ============ ============ ============= =============
Loss from operations.. $ (31,782,016) $ (7,206,450) $ (8,410,960) $ -- $ (47,399,426)
============= ============ ============ ============= =============
Identifiable assets... $ 64,385,911 $ 3,136,134 $ 8,299,699 $ (34,637,336) $ 41,184,408
============= ============ ============ ============= =============
March 31, 1997
(unaudited)
Revenues.............. $ 7,773,141 $ 1,260,965 $ 4,169,638 $ (3,966,423) $ 9,237,321
============= ============ ============ ============= =============
Loss from operations.. $ (8,301,769) $ (2,625,619) $ (2,232,858) $ (17,935) $ (13,178,181)
============= ============ ============ ============= =============
Identifiable assets... $ 220,934,527 $ 4,768,773 $ 8,741,400 $ (43,038,534) $ 191,406,166
============= ============ ============ ============= =============
</TABLE>
(15) ACQUISITION OF SINGCOM (AUSTRALIA)'S FACSIMILE BUSINESS
Under the terms of an agreement with the Company's principal stockholder,
SingTel Global, the Company acquired certain assets and liabilities of SingCom
(Australia), a wholly owned subsidiary of SingTel Global, including certain
computer and office equipment and the right to service SingCom's existing
customer base, effective April 1, 1996. The aggregate purchase price for these
assets is approximately $3.5 million (Australian), payable two-thirds in cash
at closing and the remaining one-third in a non-interest bearing promissory
note. In addition, SingTel Global loaned to SingCom (Australia) operating
capital through March 31, 1997. The Company will repay in full, the
outstanding principal balance and all accrued but unpaid interest thereon
under the working capital line of credit provided by SingTel Global at the
closing of the acquisition. The total unpaid principal and interest that will
be outstanding under this credit arrangement as of the closing date will be
approximately $2.7 million (Australian) (approximately $1.98 million at
December 31, 1996). At December 31, 1996, the total amount due to SingTel
Global for the acquisition of SingCom (Australia) is approximately $4,230,000
and is
F-21
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(15) ACQUISITION OF SINGCOM (AUSTRALIA)'S FACSIMILE BUSINESS--(CONTINUED)
included in current portion of notes payable to principal stockholder in the
accompanying balance sheet. The Company obtained effective control of the
operations of SingCom (Australia) as of April 1, 1996, and therefore, the
operations of SingCom (Australia) are included in the consolidated financial
statements beginning April 1, 1996. The purchase has been accounted for on a
book value basis due to the related party nature of the transaction, and is
consistent with entities under common control. The excess of the purchase
price over the book value of the assets acquired has been charged to
stockholders equity as a deemed dividend to the Company's principal
stockholder, SingTel Global. Pro forma financial information has not been
presented as such information is not material.
(16) LOANS TO WORLDVOICE
The Company has made unsecured loans to WorldVoice Inc. (a development stage
company) for the funding of operations of WorldVoice of $450,000 as of
December 31, 1996. The Company will account for the loans to WorldVoice as
development funding, and accordingly, the Company will charge to operations
the loans to WorldVoice as the funds are utilized by WorldVoice. Included in
research and development expenses for the year ended December 31, 1996 is the
$450,000.
(17) SENIOR NOTE OFFERING
On February 14, 1997, the Company sold 175,000 units each consisting of
$1,000 principal amount of 14% Senior Notes due March 1, 2004 for
$175,000,000. Attached to each unit is one warrant to purchase 27.52 shares of
common stock at $.25 per share. A total of 4,816,818 warrants were issued.
Interest is due semiannually on March 1 and September 1 beginning September 1,
1997. The notes represent general unsecured senior obligations of the Company.
The offering resulted in net proceeds to the Company of approximately
$105,000,000, after offering expenses and the payment of certain obligations
including approximately $46 million, which has been escrowed for certain
senior note interest payments.
The notes are redeemable, in whole or in part, at the option of the Company
at any time on or after March 1, 2001 at the redemption price, as defined,
plus any accrued interest. Upon a change of control, each noteholder will have
the right to require the Company to repurchase the notes at 101%, plus accrued
interest. The notes contain certain restrictive operating covenants including
precluding the payment of dividends, additional indebtedness, mergers and sale
of the Company and its assets.
The Company is required to file a registration statement with the SEC to
offer to exchange the notes for senior notes with terms substantially
identical to the notes within 60 days of the issue date. In addition, the
Company must use its best efforts to cause the registration statement to
become effective under the Securities Act within 90 days after the initial
filing.
Each warrant is exercisable at a price of $.25 per share and becomes
exercisable on or after the earlier of (i) one year from the date of issuance
and (ii) the occurrence of another exercise event, as defined. Unless
exercised, the warrants will automatically expire in 10 years on March 1,
2007. In addition, in the event that the Company does not consummate an
initial public offering (IPO) with gross proceeds of at least $35 million, by
September 1, 1999 the Company will be obligated to issue additional warrants
to the noteholders exercisable for 8% of the common stock of the Company on a
fully diluted basis. If an IPO has not occurred on or prior to March 1, 2002,
the Company will be required to repurchase the warrants at the then fair
market value, as determined by an independent third-party. The Company has
valued these warrants using the Black-Scholes method and has reduced the face
carrying amount of the Senior Notes by $10,211,763, which represents the
aggregate fair value of these warrants. The Company will record additional
interest expense of $10,211,763 over the term of the Senior Notes.
F-22
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECU-
RITIES DESCRIBED HEREIN BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SO-
LICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. UNDER NO CIRCUMSTANCES SHALL THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE MADE PURSUANT TO THIS PROSPECTUS, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 12
The Exchange Offer....................................................... 24
Use of Proceeds.......................................................... 32
Capitalization........................................................... 33
Selected Consolidated Financial Data..................................... 34
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 36
Business................................................................. 45
Acquisition of Fax Business of SingCom (Australia)....................... 56
Management............................................................... 57
Principal Stockholders................................................... 62
Certain Relationships and Related Transactions........................... 63
Description of Certain Indebtedness...................................... 67
Certain Federal Income Tax Considerations................................ 69
Description of Exchange Notes............................................ 70
Book-Entry; Delivery and Form............................................ 101
Plan of Distribution..................................................... 102
Legal Matters............................................................ 103
Experts.................................................................. 103
Available Information.................................................... 103
Glossary of Terms........................................................ 105
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$175,000,000
UNIFI COMMUNICATIONS, INC.
OFFER TO EXCHANGE ITS
14% SENIOR NOTES DUE 2004
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS
AMENDED, FOR ANY AND ALL OF
ITS OUTSTANDING 14% SENIOR NOTES
DUE 2004
-----------------
PROSPECTUS
-----------------
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The By-Laws of the Company provide for the indemnification by the Company of
each director, officer, employee and agent of the Company to the fullest
extent permitted by the Delaware General Corporation Law, as the same exists
or may hereafter be amended. Section 145 of the Delaware General Corporation
Law provides in relevant part that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that such person is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such person's conduct
was unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery
or the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper. Delaware law further provides that nothing in the
above-described provisions shall be deemed exclusive of any other rights to
indemnification or advancement of expenses to which any person may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.
The Certificate of Incorporation of the Company further provides that a
Director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for any breach of fiduciary duty as a
Director. Section 102(b)(7) of the Delaware General Corporation Law provides
that a provision so limiting the personal liability of a director shall not
eliminate or limit the liability of a director for, among other things: breach
of the duty of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; unlawful payment of
dividends; and transactions from which the director derived an improper
personal benefit.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
+3.1 --Certificate of Incorporation, as amended, of UNIFI Communications,
Inc.
+3.2 --By-Laws of UNIFI Communications, Inc.
+4.1 --Indenture, dated as of February 21, 1997, between UNIFI
Communications. Inc. and Fleet National Bank, as trustee, relating to
$175,000,000 in aggregate principal amount of 14% Senior Notes due
2004.
+4.2 --Specimen Certificate of 14% Senior Notes due 2004 (the "Private
Notes") (included in Exhibit 4.1 hereto).
+4.3 --Specimen Certificate of 14% Senior Notes due 2004 (the "Exchange
Notes") (included in Exhibit 4.1 hereto).
+4.4 --Registration Rights Agreement, dated as of February 21, 1997,
between UNIFI Communications, Inc. and Smith Barney Inc.
+4.5 --Unit Agreement, dated as of February 21, 1997, between UNIFI
Communications, Inc. and Fleet National Bank, as unit agent.
+4.6 --Escrow Agreement, dated as of February 21, 1997, between UNIFI
Communications, Inc. and Fleet National Bank, as escrow agent.
**5.1 --Opinion of Latham & Watkins regarding the validity of the Exchange
Notes.
+10.1 --Credit Agreement, dated as of April 10, 1995, among UNIFI
Communications, Inc. and SingTel (Netherlands Antilles) Pte N.V.
+10.2 --Amendment, dated as of February 21, 1997, to the Credit Agreement,
dated as of April 10, 1995, among UNIFI Communications, Inc. and
SingTel (Netherlands Antilles) Pte N.V.
+10.3 --Term Loan Agreement-Equipment, dated as of April 10, 1995, among
UNIFI Communications, Inc. and SingTel (Netherlands Antilles) Pte
N.V.
+10.4 --Amendment, dated as of February 21, 1997, to the Term Loan
Agreement-Equipment, dated as of April 10, 1995, among UNIFI
Communications, Inc. and SingTel (Netherlands Antilles) Pte N.V.
*10.5 --Intercompany Operating Agreement, dated as of April 10, 1995,
between UNIFI Communications, Inc. and Singapore Telecommunications
Limited, as amended by Amendment No. 1 dated as of September 30, 1996
(the "Intercompany Operating Agreement").
*10.6 --Amendment, dated as of February 21, 1997, to the Intercompany
Operating Agreement, dated as of April 10, 1995, among Unifi
Communications, Inc. and Singapore Telecommunications Limited.
+10.7 --Series G Convertible Preferred Stock Purchase Agreement, dated as of
April 10, 1995, among UNIFI Communications, Inc., SingTel Global
Services Pte Ltd.
**10.8 --First Amendment, dated as of February 5, 1997 to the Series G
Convertible Preferred Stock Purchase Agreement, dated as of April 10,
1995, between UNIFI Communications, Inc. and SingTel Global Services
Pte Ltd.
+10.9 --Second Amendment, dated as of February 21, 1997, of the Series G
Convertible Preferred Stock Purchase Agreement, dated as of April 10,
1995, among UNIFI Communications, Inc., SingTel Global Services Pte
Ltd, as amended.
+10.10 --Amended and Restated Registration Rights Agreement, dated as of
April 10, 1995 among UNIFI Communications, Inc. and various investors
named therein.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
+10.11 --Amendment, dated as of February 21, 1997, to the Amended and
Restated Registration Rights Agreement, dated as of April 10, 1995
among UNIFI Communications, Inc. and various investors named
therein.
+10.12 --Consent and Waiver, dated as of February 20, 1997, of the Amended
and Restated Registration Rights Agreement, dated as of April 10,
1995 among UNIFI Communications, Inc. and various investors named
therein.
*10.13 --Stockholders Agreement, dated as of April 10, 1995, among UNIFI
Communications, Inc. and the stockholders named therein.
**10.14 --First Amendment to the Stockholders Agreement, dated February 21,
1997, among UNIFI Communications, Inc., SingTel Global Services Pte
Ltd and certain stockholders named therein
**10.15 --Employment Agreement, dated as of April 10, 1995, among UNIFI
Communications, Inc. and Douglas J. Ranalli.
+10.16 --Warrant to purchase 2,000,000 shares of the Company's Common Stock,
issued to SingTel Global Services Pte Ltd, dated February 21, 1997.
+10.17 --Warrant Agreement, dated as of February 21, 1997, between UNIFI
Communications. Inc. and Fleet National Bank, as warrant agent.
+10.18 --Specimen Warrant Certificate (included in Exhibit 10.24 hereto).
+10.19 --Warrant Shares Registration Rights Agreement, dated as of February
21, 1997, between UNIFI Communications. Inc. and Smith Barney Inc.
+10.20 --Lease dated August 2, 1996 between UNIFI Communications, Inc. and
Cross Point Limited Partnership.
+10.21 --Agreement dated August 2, 1996 between UNIFI Communications, Inc.
and Cross Point Limited Partnership (included in exhibit 10.20
hereto).
+10.22 --Subordination Agreement dated August 2, 1996 between UNIFI
Communications, Inc., Cross Point Limited Partnership and SingTel
(Netherland Antilles) Pte N.V. (included in exhibit 10.21 hereto)
*10.23 --Software License and Service Agreement dated September 20, 1996
between UNIFI Communications, Inc. and Control Data Systems, Inc.
+10.24 --$ 2,049,315 Convertible Term Note, dated as of April 1, 1997, of
UNIFI Communications, Inc. in favor of Control Data Systems, Inc.
+10.25 --Warrant to purchase up to 56,406 shares of Common Stock of UNIFI
Communications, Inc., dated as of April 1, 1997, issued to Control
Data Systems, Inc.
**12.1 --Statement of Computation of Ratio of Earnings to Fixed Charges.
+21.1 --Subsidiaries of UNIFI Communications, Inc.
*23.1 --Consent of Latham & Watkins (included in their opinion filed as
Exhibit 5.1).
+23.2 --Consent of Arthur Anderson L.L.P.
+24.1 --Power of Attorney of UNIFI Communications, Inc. (included on
signature page to this Registration Statement on Form S-4).
**25.1 --Statement of Eligibility and Qualification (Form T-1) under the
Trust Indenture Act of 1939 of Fleet National Bank.
**27.1 --Financial Data Schedule.
**99.1 --Form of Letter of Transmittal and related documents to be used in
conjunction with the Exchange Offer.
</TABLE>
(b) Financial Statement Schedules:
Schedule II. Valuation of Qualifying Accounts.
- --------
* Confidential treatment request pending.
** To be filed by amendment.
+ Previously filed.
II-3
<PAGE>
SCHEDULES OMITTED
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the information required
by such omitted schedules is set forth in the financial statements or the
notes thereto.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "Act"), may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim of
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred by the Registrant in the successful defense of
any action, suit paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into this prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) (1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement; (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration Statement; (iii) to
include any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material change to
such information in the Registration Statement;
(2) That, for purposes of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOWELL,
COMMONWEALTH OF MASSACHUSETTS ON JUNE 11, 1997.
UNIFI COMMUNICATIONS, INC.
/s/ Douglas J. Ranalli
By: _________________________________
DOUGLAS J. RANALLI
CHAIRMAN OF THE BOARD OF
DIRECTORS, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND AS OF THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Douglas J. Ranalli Chairman of the
- ------------------------------------- Board of Directors, June 11, 1997
DOUGLAS J. RANALLI President and Chief
Executive Officer
(Principal
Executive Officer)
/s/ Paula P. Litscher Vice President of
- ------------------------------------- Corporate Finance June 11, 1997
PAULA P. LITSCHER (Principal
Financial and
Accounting Officer
/s/ Thomas P. Sosnowski Director
- ------------------------------------- June 11, 1997
THOMAS P. SOSNOWSKI
Director
*/s/ Chua Sock Koong June 11, 1997
- -------------------------------------
CHUA SOCK KOONG
/s/ Lim Eng Director
- ------------------------------------- June 11, 1997
LIM ENG
Director
*/s/ John Beinecke June 11, 1997
- -------------------------------------
JOHN BEINECKE
- --------
* Signed by Q. Ellis Telford pursuant to a power of attorney dated April 18,
1997 included on the signature page to a Registration Statement (File No.
333-25521) filed on April 21, 1997.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Unifi Communications, Inc.
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Unifi Communications, Inc. included
in this registration statement and have issued our report thereon dated
February 24, 1997. Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedule listed in Item
16(b) is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein, in relation to
the basic financial statements taken as a whole.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 24, 1997
S-1
<PAGE>
SCHEDULE II
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND FROM END OF
OF PERIOD EXPENSES RESERVES PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
December 31, 1994................ $ 23,000 $ -- $ -- $ 23,000
December 31, 1995................ 23,000 -- 5,000 18,000
December 31, 1996................ 18,000 166,000 -- 184,000
March 31, 1997 (unaudited)....... 184,000 72,000 -- 256,000
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1- Certificate of Incorporation, as amended, of UNIFI Communications, Inc.
3.2- By-Laws of UNIFI Communications, Inc.
4.1- Indenture, dated as of February 21, 1997, between UNIFI Communications.
Inc. and Fleet National Bank, as trustee, relating to $175,000,000 in
aggregate principal amount of 14% Senior Notes due 2004.
4.2- Specimen Certificate of 14% Senior Notes due 2004 (the "Private Notes")
(included in Exhibit 4.1 hereto).
4.3- Specimen Certificate of 14% Senior Notes due 2004 (the "Exchange Notes")
(included in Exhibit 4.1 hereto).
4.4- Registration Rights Agreement, dated as of February 21, 1997, between
UNIFI Communications, Inc. and Smith Barney Inc.
4.5- Unit Agreement, dated as of February 21, 1997, between UNIFI
Communications, Inc. and Fleet National Bank, as unit agent.
4.6- Escrow Agreement, dated as of February 21, 1997, between UNIFI
Communications, Inc. and Fleet National Bank, as escrow agent.
*5.1- Opinion of Latham & Watkins regarding the validity of the Exchange Notes.
10.1- Credit Agreement, dated as of April 10, 1995, among UNIFI Communications,
Inc. and SingTel (Netherlands Antilles) Pte N.V.
10.2- Amendment, dated as of February 21, 1997, to the Credit Agreement, dated
as of April 10, 1995, among UNIFI Communications, Inc. and SingTel
(Netherlands Antilles) Pte N.V.
10.3- Term Loan Agreement-Equipment, dated as of April 10, 1995, among UNIFI
Communications, Inc. and SingTel (Netherlands Antilles) Pte N.V.
10.4- Amendment, dated February 21, 1997, to the Term Loan Agreement-Equipment,
dated April 10, 1995, among UNIFI Communications, Inc. and SingTel
(Netherlands Antilles) Pte N.V.
*10.5-Intercompany Operating Agreement, dated as of April 10, 1995, between
UNIFI Communications, Inc. and Singapore Telecommunications Limited.
*10.6-Letter Agreement, dated February 5, 1997, among UNIFI Communications,
Inc. Singapore Telecommunications Limited & SingTel Global Services Pte
Ltd. and certain individuals named therein, providing, and among other
things for a $4,000,000 advanced payment under the Intercompany Operating
Agreement and an amendment to the Series G Convertible Preferred Stock
Purchase Agreement, dated as of April 10, 1995, between UNIFI
Communications, Inc. and SingTel Global Services Pte Ltd.
*10.7-Amendment, dated February 21, 1997, to the Intercompany Operating
Agreement, dated April 10, 1995, among Unifi Communications, Inc. and
Singapore Telecommunications Limited
10.8- Series G Convertible Preferred Stock Purchase Agreement, dated as of
April 10, 1995, among UNIFI Communications, Inc., SingTel Global Services
Pte Ltd.
*10.9-Amendment, dated as of February 5, 1997 to the Series G Convertible
Preferred Stock Purchase Agreement, dated as of April 10, 1995, between
UNIFI Communications, Inc. and SingTel Global Services Pte Ltd.
(contained within Letter Agreement dated February 5, 1997 filed as
Exhibit 10.6 to this Registration Statement).
10.10-Second Amendment, dated as of February 21, 1997, of the Series G
Convertible Preferred Stock Purchase Agreement, dated as of April 10,
1995, among UNIFI Communications, Inc., SingTel Global Services Pte Ltd,
as amended.
10.11-Amended and Restated Registration Rights Agreement, dated as of April 10,
1995 among UNIFI Communications, Inc. and various investors named
therein.
<PAGE>
10.12-Amendment, dated as of February 21, 1997, to the Amended and Restated
Registration Rights Agreement, dated as of April 10, 1995 among UNIFI
Communications, Inc. and various investors named therein.
10.13-Consent and Waiver, dated as of February 20, 1997, of the Amended and
Restated Registration Rights Agreement, dated as of April 10, 1995 among
UNIFI Communications, Inc. and various investors named therein.
*10.14-Stockholders Agreement, dated as of April 10, 1995, among UNIFI
Communications, Inc. and the stockholders named therein.
*10.15-First Amendment to the Stockholders Agreement, dated February 21, 1997,
among UNIFI Communications, Inc., SingTel Global Services Pte Ltd and
certain stockholders named therein
*10.16-Employment Agreement, dated as of April 10, 1995, among UNIFI
Communications, Inc. and Douglas J. Ranalli.
10.17-Warrant to purchase 2,000,000 shares of the Company's Common Stock,
issued to SingTel Global Services Pte Ltd, dated February 21, 1997.
10.18-Warrant Agreement, dated as of February 21, 1997, between UNIFI
Communications. Inc. and Fleet National Bank, as warrant agent.
10.19-Specimen Warrant Certificate (included in Exhibit 10.18 hereto).
10.20-Warrant Shares Registration Rights Agreement, dated as of February 21,
1997, between UNIFI Communications. Inc. and Smith Barney Inc.
10.21-Lease dated August 2, 1996 between UNIFI Communications, Inc. and Cross
Point Limited Partnership.
10.22-Agreement dated August 2, 1996 between UNIFI Communications, Inc. and
Cross Point Limited Partnership (included in Exhibit 10.21 hereto).
10.23-Subordination Agreement dated August 2, 1996 between UNIFI
Communications, Inc., Cross Point Limited Partnership and SingTel
(Netherland Antilles) Pte N.V. (included in Exhibit 10.21 hereto).
*10.24-Software License and Service Agreement dated September 20, 1996 between
UNIFI Communications, Inc.and Control Data Systems, Inc.
10.25-$2,049,315 Convertible Term Note, dated as of April 1, 1997, of UNIFI
Communications, Inc. in favor of Control Data Systems, Inc.
10.26-Warrant to purchase up to 56,406 shares of Common Stock of UNIFI
Communications, Inc., dated as of April 1, 1997, issued to Control Data
Systems, Inc.
*10.27-Amendment No. 1 to the Intercompany Operating Agreement dated September
30, 1996 between UNIFI Communications, Inc. and Singapore
Telecommunications Limited.
*12.1 -Statement of Computation of Ratio of Earnings to Fixed Charges.
21.1 -Subsidiaries of UNIFI Communications, Inc.
*23.1 -Consent of Latham & Watkins (included in their opinion filed as Exhibit
5.1).
23.2 -Consent of Arthur Anderson L.L.P.
24.1 -Power of Attorney of UNIFI Communications, Inc. (included on signature
page to this Registration Statement on Form S-4).
*25.1 -Statement of Eligibility and Qualification (Form T-1) under the Trust
Indenture Act of 1939 of Fleet National Bank.
*27.1 -Financial Data Schedule.
*99.1 -Form of Letter of Transmittal and related documents to be used in
conjunction with the Exchange Offer.
______________
* To be filed by amendment
